Is Crypto part of the natural evolution of historical trade networks?
In his book, “A History of Money,” Glyn Davies talks about how humans have associated value with various items throughout history. Money is an identifiable object of value that is commonly accepted as payment for goods and services, repayment of debts within a market and is a legal tender within a country. Everything from corals to livestock to sacks of grains has been treated as a medium of exchange over the past millennia. In other words, money is any object or entity we assign a value to as part of a consensus reality. To have a better understanding of whether cryptocurrencies are a fad or a long term trend, we decided to review a long-time series of data & analyze the history of money.
In our study of economic and monetary history we realized that with the exception of the last 300 years, India and China contributed 80% of the world’s GDP through most of recorded history. Immense depth of resources and knowledge drew businessmen, traders and scholars from around the world to visit China and India. Historic archives have detailed descriptions of flourishing civilizations in accounts from Megasthenes & Marco Polo. Alas, the “new world” was discovered when Columbus left Europe in search of India. These regions were a hotbed for advanced manufacturing process, architecture, agriculture, textiles, and resources. The rest of the world was keen to establish a medium of exchange to facilitate trade with these nations. Most monarchs & traders in Asia, valued gold as a medium of exchange for its inertness, density & ease of transport in siege situations.
Digging deeper into historic trends we noticed that what started as a contribution based trading system between Europe and Asia, soon turned into a violence-based system, driven by conquest. At one point in time, the tiny islands of the United Kingdom controlled close to 80% of the world using this logic of violence and technology. It is during these last 300 years that we saw a shift in GDP from Asia to the western world. However, gold continued to maintain its stature as the leading commodity of exchange & store of value for doomsday scenarios. Geopolitical strategy, industrial growth, infrastructure development and the world’s leading modern economies have been built on this premise. After World War II, the US had the largest gold reserves in the world, by far. Along with winning the war, this lets the United States reconstruct the global monetary system around the dollar. But, things start taking an interesting turn post Bretton Woods.
Gold is tangible, what backs crypto?
My dollar is backed by a sovereign, what backs crypto? This would have been entirely valid if we were living in a pre-Nixon, Bretton Woods era. Between 1913, when the Federal Reserve Act was created, and the mid-1960s, if a $100 note was deposited to Fort Knox, the sovereign was obliged to give gold metal in return. The Bretton Woods system made the US dollar the world’s premier reserve currency. It effectively forced other countries to store dollars for international trade, becoming the currency of choice for global trade networks.
Within the US, spending on defense, welfare and healthcare caused the government to pump more dollars into the system, than the gold backing it. Reserves were almost halved between WWII & 1970. During his presidency, Nixon took the USD off of the gold standard, and all global currency became free floating or pegged to the US dollar. What was meant to be a temporary suspension of the gold standard, exists till this day. The fact that the USD is backed by gold is now a hypothetical construct. Milton Freedman does an excellent job explaining the gold standard and Keynesian Economic theory in this video.
With an understanding that the USD & other currencies are free floating, a deeper question to contemplate is around the fundamental value of gold itself. Might it be possible that we are stuck in an archaic consensus reality we have accepted because that is the only framework we know? Is gold really a great store of value in modern trading markets and central banking controls? If the dollars crashes for whatever reason, can gold buy groceries or dinner?
What does this mean?
● All global currency is free floating
● The amount of global cash in circulation is at an all-time high
● Purchasing power has gone down while taxation has remained stagnant or gone up
● Central banking manipulation has caused situations of hyperinflation or demonetization in extreme cases
● Each country is trying to push its own agenda to further strengthen its trade network
● Our approach is driven by a logic of violence & conquest ingrained by the last 300 years of history. We see this as part of the zero-sum game approach.
How does all this relate to Crypto Tokens?
Since Nixon took the USD off the gold standard and all global currency became free-floating, what created demand for the USD?
Post the collapse of the Bretton Woods system, the oil economies started demanding gold instead of the depreciating USD. However, the US was able to create another compelling reason for foreign economies to hold & use the USD — the petro dollar economy. From 1972 to 1974, the US government made a series of agreements with Saudi Arabia(OPEC/ARAMCO) that created the petrodollar system. These ties remain very strong to this day.
In order to understand the huge shift crypto networks present, it is essential to understand the evolution of money & the value of a single “token” like the USD. In our journey to study the potential future trends of currency, it is important to detach from the current matrix we operate in.
A network is defined as a group or system of interconnected people or machines. Each network operates within the framework of a certain set of rules. Nodes within the network may unite to create a new set of rules as a subset of the network, defining new processes.
A crypto token is simply an API key to access a specific network. For example, Bitcoin is a token/ API Key one needs to access the Blockchain network. As the value of the network increases, the value of the token that provides access to that network increases. We can now draw a direct analogy to the USD. As the value of the petro-dollar economy increased over the last 40 years, the value of the USD increases. So what exactly is USD, if not a token to access one of the most valuable trade networks?? The SGD, INR, RMB, JPY, Sterling, Euro are all nothing, but tokens to access their geographical trade networks. However, controlling the single token to access one of the most valuable commodities in the world has given the US great geo-strategic advantage globally.
If we zoom out of the current framework we operate in, it becomes clear that within certain geographical constraints, we are all nodes in local and global trade networks. Each operating within a framework of rules set by third-party enforcers.
The DNA for 3rd party enforcement rules have been built from a “logic of violence”. Central banks apply their set of rules to this network; the legislatures apply their own rules and additional 3rd parties manage and maintain these rules. A large amount of time & resources are needed to maintain these 3rd party enforcement rules.
Aha, so tokens are not a radically new concept! The value associated with crypto tokens is linked to the fundamental value of the blockchain network. The blockchain successfully solved the Byzantine General’s problem, which allows for the creation of trust-less networks. New networks are now being built on top of this foundation. If there is interest in accessing the network, it can be done by owning a token of that network. As the network increases in value, the token will increase in value as well. Stay tuned for a separate post on the process of valuing these networks.
We recently met some of the leading central bankers and noticed that this is where the divide starts emerging. While some see this innovation as a threat, others realize the fundamental power the technology presents. Cryptocurrencies do not necessarily need to be a threat to central institutions, but are in fact powerful opportunities to take the lead in creating global trade networks.
You can connect with Aditya Mishra on LinkedIn for more frequent posts.
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