In the Middle Ages, a group of men attempted to turn base metals into gold; they were known as alchemists and they were unsuccessful in their endeavors. We’re lucky they didn’t. Why? Consider the alternative.
If the alchemists had found a way to transmute base metals such as lead into the monetary unit of the day, a race would have started. A race to find as many metals as possible to turn into gold.
The first users of this newly created gold would have enjoyed enormous wealth, but as it circulated throughout the economy – a much smaller sphere of opportunity in the Middle Ages – calamity would have ensued.
Those who had fewer personal or political ties to the alchemists would have found themselves outside of any market economy. They would no longer be able to bid on goods and services. The gold price would simply be too high.
This would have created the ultimate boom and bust cycle. Given where economic development was at the time, this could have extended the Dark Ages by hundreds of years.
Although considered part of the tradition of the Middle Ages, the work of alchemists in experimenting and documenting their results paved the way for the scientific method of discovery. In other words, they failed in their main objective, but they found something that would be far more valuable to humanity.
Where the alchemists failed in trying to create value out of something less valuable, a group of people in the 20th century succeeded. These modern alchemists are known as central bankers.
The current era of financial alchemy
The early 1970s saw a spike in inflation and commodity prices, much like today. Dollar printing had persisted for years, just as it does today. With the end of money having any tied to relatively limited gold, any claims of liability have gone out the window. Price hikes were the name of the game and Americans, able to own precious metals again, did so in droves. They took the price of gold from $268 an ounce to over $2,400. More accessible money has gone from $9 to over $130.
The purchase of shares in a silver trading company, Bache, was discontinued in 1980 to curb rising silver prices. (If the Hunt billionaire brothers hadn’t used leverage to buy their last silver holdings, it’s unclear how much the price might have gone up.)
The era of financial alchemy reached its peak in the early 1990s. Inflation was brought under control by a sharp rise in interest rates and a necessary recession. Federal Reserve Chairman Alan Greenspan – a former Ayn Rand sidekick and gold bug – has become the face of the managed economy.
In one of his many appearances before Congress, he once said, “I know you think you understand what you thought I said, but I’m not sure you realize what you heard is not what I meant.”
Policy makers loved the Greenspan era. It was a time of relatively easy money, relatively little currency turbulence, and it was easy to promise ever-growing government programs at no apparent long-term cost. All of this added up to easy re-elections.
It wasn’t supposed to last forever.
Greenspan created market risk in his first year as Fed chairman. There was a massive rally in early 1987, but there was a sharp correction in October. On October 22, 1987, the Dow fell 22% in a single day.
Unsurprisingly, Greenspan came out to note that the Fed was ready to keep capital markets running smoothly. Markets interpreted this as a green light to assume the Fed would intervene if a market decline was large enough.
With programs like 401k plans on the rise, it was no surprise that such a backstop was needed — even if it launched the mother of all bubbles for several decades in the process.
Greenspan kept interest rates low throughout the late 1990s. Tech stocks formed a huge bubble and burst. Then the housing broke. The “Greenspan put” has changed names as new Fed chairs have taken office. As Greenspan retired in 2006, the seeds had been sown for a housing bubble to begin bursting, but it was also a time when a number of technologies were coming in that could liberate the world from the boom-and-bust. -bust cycle exacerbated by central bankers.
Bitcoin and the emergence of the financial dark ages
The last 50 years of a global fiduciary system have had a poor record. Boom, bubble, collapse. Boom, bubble, collapse.
Central bankers, armed with higher degrees, have shown that they can only do two things: print money or print less money.
Attempts to moderate the Fed’s balance sheet slightly in 2019 had to be quickly reversed when financial markets began to show strain — even months before the world heard of COVID-19.
The last 51 years have been a financial dark age of quantitative easing, currency depreciations and the financialization of the economy at the expense of other sectors. Added to the rest of the gold standard before that, most of humanity has been at the whim of a small, unelected number of power-holders based on academic benchmarks and theories, rather than market consent. .
As a result, it was a worldwide free-for-all.
Some countries, such as Argentina and Zimbabwe, experienced a hyperinflationary collapse. Others, like Japan, have tried stimulus programs to get their economy moving, only to find that they’re pulling a string. Still other countries, like El Salvador, were pegged to the US dollar and found relative stability, but without the freedom to control their own financial destiny.
At the end of 2008, the Bitcoin white paper was published. The timing of the article was inspired by the plan to inject hundreds of billions of dollars to “stabilize” the bubble rather than let it collapse. Those numbers now seem strange in the age of trillion-dollar stimulus packages… just 14 years later.
But bitcoin is hope.
It is hope for the unbanked in the world. It is hope for those whose wealth has been confiscated by government officials, either directly through force or through the indirect theft of inflation and hyperinflation.
The Bitcoin protocol guarantees that only 21 million will be mined. The 19 millionth Bitcoin was recently mined and many millions may have already been lost due to a misunderstanding of the value of the asset. Whatever the “final” number, the key is immutability.
We now live in a world where the printing press has given way to direct deposit stimulus checks, and the possibility of robots mining asteroids could send the price of precious metals plummeting in just a few decades.
Clearly, no other asset class can truly be said to have a cap on its scarcity.
Already, a thriving community has grown around Bitcoin, exploring its potential in areas such as art, philosophy, and human rights. Because what has simply been described as a “peer-to-peer electronic payment system” has much more to offer than meets the eye.
Welcome to the financial renaissance. The era of financial alchemy will not end without a fight, but with Bitcoin, the opportunity to build a new system exists while letting the old one wither on its own.
This is a guest post by Andrew Packer. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.