Money (II): From Central Banking to a Decentralized Paradigm Shift
Evolving money to... wait, what—is that Bitcoin thing hard money!?
As we touched on in Money (I), the history of money is basically a series of overlapping, chaotic systems popping up all over the place, in different regions and under different governments. Everyone just kind of doing their own thing. These systems evolved because of the usual suspects—natural resources, politics, and of course, whatever was going on with the economy at the time. But eventually, everything converges and starts to look the same—people love shiny metals and hate lugging sacks of barley to pay for things.
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Gold and silver—these were the main stars of the show, the converging forms of commodity money. Naturally, governments joined in, centralizing the metals into official standardized coinage, which, sure, sounds like a great idea for collecting taxes—until private goldsmiths and banks thought, “hey, we can make its portability even more efficient”. They took the gold, stuck it in a vault, and handed out pieces of paper promising you could come back and claim the gold anytime. That was a representation of the underlying money (known as representative money), which eventually paved the way for fractional reserve banking. Banks essentially said, “Well, we've got this gold, but we can issue more claims on it than we actually have. As long as claim holders don't freak out and ask for their gold back all at once, we’re good”. This was all a delicate balancing act of trust—everyone had to believe they could redeem their paper 1:1 for gold, even though, behind the scenes, there wasn’t enough gold to go around.
Then, of course, central banks had to come along and spoil the fun, because it turns out when too many people issue their own money, things get messy. Enter Stockholms Banco in 1656, the first real attempt at corralling all this freewheeling money creation under one government-backed institution in the West. China, by the way, had already figured this out in the Song Dynasty, around 600 years ago in 1024, so Sweden was kind of playing catch-up. Still, Stockholms Banco marked the Western world’s big leap toward centralizing the power to issue money under state control, with paper representative money, but fractionally backed by reserves of precious metals, gradually converging toward gold.
But the story doesn’t end with central banking—far from it! That’s where the fun begins, watching how the idea of centralizing power over money has been simmering for 350 years, culminating in the ultimate centralization: total control over money through the current global fiat system—a system so ripe for abuse that it’s laid all the groundwork and incentives for the rise of a lever for change: Bitcoin, as the foundational and most important first step toward a new monetary paradigm.
1. Centralizing representative money
Stockholms Banco didn’t exactly have a fairytale ending, but its nearly 12-year run was a pretty big deal. Sure, it collapsed, but it also kicked off a grand tradition in modern money: centralizing representative money in Europe, which paved the way for even greater concentrations of power—an opportunity governments definitely didn’t miss. Central banks began to spring up, and if you want to talk about success stories, look no further than the Bank of England. It not only became the world’s go-to institution for issuing currency but also managed to turn itself into the model for central banks everywhere. You know you’ve made it when your currency becomes the world’s reserve, the one others want in their vaults.
Of course, centralizing monetary power wasn’t just about making life easier for traders. It had a lot to do with wars and politics—because when you're fighting the French and running out of representative money, you need a better system. Enter the Bank of England in 1694, during the Nine Years' War. The Bank’s creation was to help England keep up the fight, which meant raising money fast. King William III, needing cash, got a wealthy merchant named William Paterson to pitch in and voilà—£1.2 million in government borrowing later, the Bank was born under the Tonnage Act1. To sweeten the deal, they issued banknotes backed by the shareholders’ own private money. It wasn’t a monopoly—yet—but it was a start, and they even kept things classy with a bimetallic standard: silver and gold at a nice, neat 15.5 to 1 ratio.
The Bank of England quickly became the government’s favorite lender and bond manager, a crucial role when wars and debt were constant. But its real monopoly power came in stages, like any good power grab. In 1708, Parliament passed a law that basically said, “If your bank has more than six partners, effective shareholders, you can’t issue notes in England and Wales”. This ensured that only small private banks or the Bank of England (with its special charter) could issue notes, making the Bank of England the big fish dominant note-issuing institution.
Things got really interesting in 1720, when the South Sea Bubble burst2. The South Sea Company had tried to pull off a classic maneuver: swap national debt for company shares, let everyone speculate on those, and hopefully cash in big. It was going well until, predictably, company profits didn’t show up. Investors panicked, the stock market crashed, and the company collapsed. As usual, the government reacted by making more rules—specifically, the Bubble Act, which banned joint-stock companies without royal charters and made the Bank of England the go-to institution for managing sovereign debt.
By 1749, the Bank had officially taken over the national debt game, consolidating various government-issued debts into single loans at lower interest rates under the “Consolidation Act of 1749”. However, this did not yet lead to the Consolidated Fund, which was created later in 1787. At this point, the Bank wasn’t just issuing notes—it was running the government’s debt machine—making interest payments, issuing securities, the whole nine yards. In short, the Bank of England had quietly cornered the market on money and solidified its control over the nation's finances.
All of this set the stage for the next big step in monetary evolution: the move to a purely fiat system. Forget gold and silver—“fiat”, from the Latin for “let it be done”, means money, or more accurately, fiduciary media, backed only by trust in the government. There’s no redemption option, no neutral shiny metal without a central issuer stored in a vault somewhere; just faith that your government won’t screw things up too badly. It's a lot like telling and binding the citizens to comply with, “Trust me, I got this”, and hoping they don't start asking too many questions.
2. From early fiat failures to the Gold Standard's inception
So, way before anyone in Europe thought of messing around with paper money, China was already deep in the game. Back in the Song Dynasty (960-1279), they came up with this clever idea: let’s back our paper notes with copper coins. It seemed reasonable at first, but, as these things tend to go, it eventually morphed into a full-on fiat system. You can probably guess what happened next—runaway inflation, economic chaos, and then, just to cap things off, the Mongols came along and smashed the dynasty to bits in the 13th century. Turns out, when your money is backed by nothing and your military isn’t doing so hot, things fall apart fast.
Europe took over 500 years before anyone dared to attempt something similar: the first local fiat experiment. But, as always, nothing centralizes monetary power faster than a good political crisis with a state of emergency or a war—or both. When the French Revolution kicked off in 17893, the new government needed cash to pay for all the chaos. Enter the assignats, a cute little experiment in paper money backed by confiscated church property. But, as happens with these things, the government couldn’t resist printing more of them, which predictably resulted in hyperinflation. By 1796, the assignats were dead, and France went crawling back to metallic currency—this time the franc, pegged to 4.5 grams of fine silver. Hard times? Meet hard money accompanied by a period of deflation.
In Britain, they were dealing with their own cash crunch thanks to the Napoleonic Wars. Gold was in short supply, and in 1797, the Bank of England decided, “You know what? Let’s just stop redeeming notes for gold”. Thus began the Bank Restriction Period, where Britain operated on a temporary (read: 22-year-long) fiat currency. The goal was to help finance the war, and, hey, it worked—until it didn’t. In 1819, after the dust settled, Britain sheepishly returned to the gold standard, locking the pound to £3 17s 10½d (3 pounds, 17 shillings, and 10 and a half pence)4, per troy ounce of gold, the same rate as before. And with that, the classical gold standard era began, a time when the whole world agreed that shiny metal was better than just trusting the governments.
In 1844, Britain decided to double down on its gold-backed currency, passing the Bank Charter Act, which basically gave the Bank of England a monopoly on issuing banknotes in England and Wales. The idea was to centralize and keep things under control by linking note issuance to the Bank’s gold reserves, combining the discipline of the gold standard with the Bank’s control over the fractional reserve system. It was a neat trick—combine the gold standard with fractional reserve private banking, and voilà, retain monetary supply control.
Meanwhile, over in America, the Civil War had its own financial fallout. In 1862, the Union government needed money fast, so they issued non-convertible paper currency—”Greenbacks”. They made these notes legal tender for everything except import duties and interest on government bonds, because even in a crisis, you need some limits. The Greenback era lasted until 1879, when the U.S. reframed it to the gold standard, setting the price at the pre-war rate of $20.67 per ounce of gold. This decision caused some deflationary pain in the 1870s, but in the end, it established a level of monetary stability that would last for years.
3. The Gold Standard's rise and collapse to today's fiat
By the late 18th century, central banks were busy consolidating power, and fiat money systems were, well, not exactly going great. Without any shiny metal backing and heavily subject to political whims, fiat money started to lose its purchasing power value pretty quickly. Countries that tried it found themselves in a bit of a mess: rampant inflation, currency devaluation, and a general sense that perhaps, just perhaps, relying solely on trust in the government’s monetary authority wasn't the best foundation for a monetary system. So, naturally, everyone decided to hit reset and go back to a commodity-backed currency. Enter gold, stage left.
The Industrial Revolution was revving up, with steam engines transforming productivity, trade, and global commerce. Suddenly, everyone realized they needed a common, stable anchor for their currencies to keep exchange rates and discretionary monetary policies in check, supporting the booming trade. The consensus solution in the late 19th century? The gold standard: simple, shiny, and much harder to manipulate than a bunch of unbacked paper promises, redeemable for nothing.
The real driver behind all of this was, of course, Great Britain. By this time, it was the dominant economic power, running an empire and setting trends. Britain had been informally on a gold standard since the 18th century, thanks to Isaac Newton—yes, the gravity guy—who, while running the Royal Mint, set the silver-to-gold exchange rate way too low. This accidentally made selling silver while hoarding gold super trendy. By 1819, after a quick flirtation with fiat money and its inevitable consequences, Britain decided to make things official and went all-in on the gold standard, cementing the metal’s role as the global monetary benchmark.
Other countries had been experimenting with bimetallism—using both gold and silver as currency bases—but the problem is that the market value of gold and silver doesn't stay still. The bimetallic standard fixes their exchange rate, but when the real-world prices of the metals start to diverge, you get all sorts of headaches. So, one by one, nations ditched silver and embraced gold. Britain was ahead of the curve, and, thanks to its global influence and the appealing scarcity of gold, the rest of the world followed suit. Of course, the gold rushes of California (1848) and Australia (1851) complicated things by flooding the market and causing some short-term devaluation shocks. But hey, no system’s perfect, right?
Soon enough, everyone wanted in. Germany, fresh off its Franco-Prussian War victory, jumped on the gold bandwagon in 1871. The U.S. followed with the Coinage Act of 1873—despite a bunch of heated political fights between gold fans and silver advocates. By the 1870s, the gold standard was all the rage, with around 50 countries—representing about 40% of the world's population—linking their currencies to gold. This was the Classic Gold Standard era, often nostalgically remembered as a time of perfect monetary stability. Spoiler: it wasn’t quite that simple.
3.1 Classic Gold Standard: from glory to collapse in 1914
The Classical Gold Standard was a pretty elegant system, at least in theory. Each country’s currency was pegged to a fixed amount of gold, which kept exchange rates stable around the mint-parity floor, as long as everyone upheld the promise of redeeming paper money for gold. David Hume nailed it back in 17525 with his price-specie flow mechanism: if a country ran a trade deficit, it would weaken its purchasing power, increasing demand for gold redemption, shrinking the money supply, lowering prices, and making exports competitive again. This, in theory, would naturally correct the trade imbalance. And if you ran short on gold? No problem—central banks could just lend to each other.
Of course, the system worked well as long as everyone played nice, and by “played nice,” I mean didn’t start massive wars. But, spoiler alert: they did. World War I came along in 1914 and completely wrecked the whole Classical Gold Standard. Most countries, faced with the small problem of financing a war, suspended the convertibility of their currencies to gold. They figured, “Why keep exchanging paper for gold when we can just print more paper to pay for bullets?” Naturally, this led to inflation.
The U.S., being late to the war party, got to be the Allies' favorite supplier of food, materials, and pretty much everything else. As an exporter with payments settled in gold and running a trade surplus, the U.S. ended up hoarding a massive chunk of the world’s gold reserves, while other countries were slapping on capital controls left and right just to keep their economies from sinking. By the time the war was over, the gold-based system was in shambles, weakened by political interference and military strategy. Could we really go back to a gold standard after everyone already broke the rules of the classical system?
3.2 Interwar turbulence and the uncoordinated Gold Exchange Standard
So, when the Classical Gold Standard was tossed out in 1914, things didn’t exactly go smoothly. The global economy was left in shambles, with war debts and reparations piling up thanks to the Treaty of Versailles. The Allies demanded huge payments from Germany, while, in a fun twist, they themselves owed giant debts to the U.S. The result? The U.S. walked out of the war stronger being payed in gold, with gold reserves galore, while Europe struggled to keep it together—Germany, especially, which decided the best way to handle reparations was to print so much money that they ended up with hyperinflation.
Countries tried to claw their way back to the gold standard, but not everyone agreed on how to do it. Enter the Gold Exchange Standard, which was basically the budget version of the Classical system—because, well, a lot of countries had blown through their gold reserves. This time around, central banks weren’t just limited to gold; they could also hold foreign currencies like the U.S. dollar and the British pound as reserves (those same currencies that were big on hoarding gold themselves). Sounds simple enough, right?
With the U.S. swimming in gold after WWI, it was the first economic powerhouse to reinstate the gold standard in 1919 at the pre-war rate of $20.67 per ounce. Tight monetary policy followed, with rates hitting 7% by 1920, triggering a depression to kick off the decade, but keeping the gold reserves well-stocked! Britain, the pre-war hegemon and ever the optimist, also maintained restrictive policy but went all-in on restoring the pound to its pre-war gold value of £4.86 by 1925. This meant embracing deflationary policies, raising interest rates, and enduring economic pain, but the pound remained overvalued. Predictably, gold reserves drained, and Britain abandoned the gold standard in 1931 to stop the bleeding. France, meanwhile, played a more strategic game by devaluing its franc to a lower parity in 1928, from 3,100 francs per ounce to 12,500, and accumulating gold reserves. This shift pushed deflationary pressure onto others. When Britain finally devalued in 1931, France panicked, cashed in its sterling for gold, and exacerbated the global gold crunch.
The U.S., hoarding gold post-war, powered the Roaring Twenties with easy credit, loose monetary policy, and a surging stock market. But the 1929 crash wasn’t random—it came from too much leverage, rampant speculation, and banks loaning to anyone with a dream. When the bubble burst, the Fed’s tightening worsened things, triggering bank runs and a massive credit contraction in a deflationary spiral that deepened the recession into the Great Depression. In 1933, Roosevelt's gold grab—forcing Americans to sell their gold to the government, suspending gold convertibility and exports—centralized U.S. reserves. By 1934, he devalued the dollar to $35 per ounce, pulling in almost four times as much gold by 1944. With Europe in ruins after WWII, the U.S. controlled two-thirds of the world’s gold, positioning itself to shape the postwar financial order.
3.3 Bretton Woods and its lasting powers today
The Bretton Woods system6—named after a picturesque little town in New Hampshire where 44 Allied nations gathered in 1944—was the grand plan to reshape the global monetary order after World War II. The logic was straightforward: the U.S. is sitting on a mountain of gold, so let's keep it that way. Make the U.S. dollar the global reserve currency, peg it to gold at $35 an ounce, and have every other currency owe its existence to the dollar—which, of course, was still tethered to gold. A Gold Exchange Standard 2.0, pretty neat, right?
To keep the power structure intact and lock in global demand for the dollar, they set up two institutions. First, the IMF, to lend dollars short-term and make sure no one was sneaking into devaluations or trade restrictions, keeping exchange rates stable. Then there was what eventually became the World Bank, designed to keep countries in reconstruction and development primarily tied to longer term dollar-denominated debt. And for a while, it worked! The 1950s and early 1960s saw massive economic growth, and people thought they had finally nailed the sweet spot between stability and flexibility.
But, surprise, it wasn’t all rainbows and butterflies. The U.S. started running persistent balance of payments deficits, which, in plain terms, means the dollars kept being lent, flying out, while gold stayed locked up. The problem? Confidence in the dollar’s gold backing started to wobble. European countries, especially France, decided to cash in their dollar reserves for gold, triggering the infamous Triffin Dilemma7: the more dollars the U.S. pumped into the global system, the shakier the trust in its gold backing became. It was like an economic game of musical chairs, and the music was about to stop.
That all went down in 1971 when President Nixon, realizing the jig was up and using the excuse of a system (Bretton Woods) that was already broken by design, reshaped modern monetary history by suspending the dollar’s convertibility to gold—what we now call the “Nixon Shock”. This shock essentially told those who hold centralized power over regulating sovereign currency—the central banking crew:
“Relax, no more worrying about pesky policy constraints! No need to stress over how you manage the policy of your sovereign currency or how disciplined your partners are in distributing it, pocketing the seigniorage—whether it’s the State government handing it out to cronies with political agendas or your banking buddies bundling up toxic, non-performing assets and selling them off to shadow banks. They are happily pocketing the bubble they’re inflating—because, hey, why not gamble with exotic financial products in this giant casino we call the bull market that we can prop up?
When the casino bubbles pop, just print more central bank reserves and bail out the banks, keeping your partners’ pockets full—make the average normie foot the bill and take their collateral (house, car, or anything else). In the end, who cares if it’s detached from the real economy or doesn’t boost productivity?
Discipline like redeeming currency for neutral commodity(s)? That’s ancient history.”
And just like that, the world plunged into the wild, unpredictable era of fiat currencies, giving central banks free rein over monetary policy and letting exchange rates float wherever the market took them. Sound familiar? Welcome to the new normal: a monetary system where we all just kind of agree to trust central banks because, well, what choice do we have?
4. Fiat: “Trust me bro, I got this...”
The journey from commodity-backed money to today’s global fiat system? Yeah, it’s been a bit of a mess. What started with gold and silver as the backbone of monetary stability has now morphed into a world where monetary power is centralized, disciplined policies are tossed out the window, and governments prioritize political survival over, you know, actual economic stability and the common good. Bretton Woods gave us the dollar-gold link, but it all fell apart thanks to the Triffin Dilemma and, let’s be honest, a general lack of commitment to keeping the system in check.
So here we are, living in the delightful chaos of fiat—the first global fiat experiment with all currencies in history. No gold safety net, no neutral anchor with an exit option to fall back on. Instead, we’ve got a system driven by the whims of those allowed into the financialization casino game and the egos of nation-state governments with imperialist ambitions, handing out corrupt favors and money to their buddies while funding lucrative wars the rest of us don’t want.
Currencies now just float in a zero-sum global competition to see who can print more, locking everyone else’s demand into their currency policy game. It’s like building a house of cards with the global economy—everything looks stable until someone pulls the wrong piece, and then it all comes crashing down. But hey, we’re all playing, like it or not.
History’s been pretty clear on this: fiat regimes tend to be shaky, prone to inflation, and constantly at the mercy of political manipulation. The end result? Economic collapses, widening inequality, and a system that benefits the few while extracting purchasing power from everyone else who can’t play catch up with price level imbalances, mainly inflation. Just look at the French assignats, the Greenbacks—all local fiat currencies, as history has shown, have a knack for imploding and reverting to representative money backed by some commodity. But hey, this time it’s different—this experiment is global, and we never seem to learn. How long can this global experiment hold up?
Which brings us to Bitcoin in 2008. Yep, that’s right, Bitcoin. It wasn’t born out of nowhere—it’s the first step required to address the inherent flaws in fiat money. We’re already on this runaway fiat train, and unless we find a way to stop it, the ride’s only going to get bumpier. History is pushing us toward a decision, whether we like it or not. So let’s dig into what’s really at stake here…
The Tonnage Act (1694) was a piece of legislation passed by the English Parliament to raise funds for King William III's war against France. It authorized the establishment of the Bank of England, allowing it to issue notes and lend money to the government in exchange for exclusive rights. The name comes from taxes levied on ship tonnage, which were pledged as security for the loans provided by the Bank.
Dale, R., 2014. The first crash: lessons from the South Sea Bubble.
White, E.N., 1995. The French Revolution and the politics of government finance, 1770–1815. The Journal of Economic History, 55(2), pp.227-255.
£3 17s 10½d represents an old British currency system used before decimalization in 1971. It breaks down as follows: £3 means 3 pounds. 17s means 17 shillings (there were 20 shillings in 1 pound). 10½d means 10 and a half pence (there were 12 pence in 1 shilling).
Hume, D., 1752. Of Balance of Trade. Essays Moral. Political and Literacy, 1.
Bordo, M.D., 1993. The Bretton Woods international monetary system: a historical overview. In A retrospective on the Bretton Woods system: Lessons for international monetary reform (pp. 3-108). University of Chicago Press.
The Triffin Dilemma, named after economist Robert Triffin, refers to the inherent conflict in a system where a national currency, such as the U.S. dollar, serves as the global reserve currency. To meet global demand for liquidity, the issuing country must run persistent trade deficits, increasing the supply of its currency abroad. However, over time, these deficits erode confidence in the currency’s value, as they imply the issuing country may be unable to maintain its currency's peg to a real asset, such as gold. This creates a tension between short-term global liquidity needs and long-term confidence in the currency's stability.