Another Week of Dollar Weakness
Last week we laid out an archetype for government money and showed you how it results in short and long-term debt cycles. This week we intend to show you how this happens in practice by highlighting the rise and fall of the last three major world powers.
A Brief History of the Last Three Empires
As the age-old adage goes, history doesn’t repeat itself, but it surely rhymes. The money society uses changes. If one takes a moment and starts to look back on history, it becomes very obvious how often it does change. When a new money is adopted or used it often results in massive economic expansion. These cycles coincide with the amount of trust that countries have between one another. The following is a high-level overview of the cycle it follows:
The history of money is a vast and complex subject that predates any form of recorded history. To better understand exactly how the above cycle unfolds we will use the last three global reserve currencies as an example. Over the next three weeks, we will discuss the rise and fall of the Dutch Republic and British Empire and their money and then go into more detail as to how the dollar and America got to where it is today.
The Dutch Republic
The Dutch essentially invented capitalism as we know it today. They did this by leveraging double-entry bookkeeping and for the first time humans had the ability to coordinate a large group of people to lend/borrow money and buy ownership in (hopefully) profit-generating entities.
The first significant outcome of this was the founding of the Dutch East Indian Company in 1602, a company which dominated world trade for almost 150 years and made the Dutch Republic the world’s powerhouse. Secondly, the Bank of Amsterdam was founded in 1609, this was the first attempt by the Dutch to standardise their money as previously, privately owned mints could create gold and silver coins that were recognised as legal tender. This was also done because there was little control over the coins that these unregulated mints were creating and often were being debased on their face value.
The Bank of Amsterdam managed to standardise and issue coins successfully for several decades as the Dutch East India Company rose to power and the Dutch Republic rapidly extended its reach. This was the hard money phase of the Dutch guilder.
Coincidently or not in the 1670s both the Bank of Amsterdam and the Dutch East India Company started running into problems. The Dutch East India Company’s trade with Japan started to decline (they were the only foreign company or power with permission to have a trading post there) and they suffered the loss of a very significant outpost on the island of Taiwan which was their access to the Chinese market. The Bank of Amsterdam had a problem in that it started seeing a drop in their reserves and the flow of money into the bank was slowing.
In 1676 a merchant by the name of Johannes Phoonsen made several recommendations to the bank on how to improve its business. One of the recommendations adopted was that “the Bank ended the right of traditional withdrawal, meaning people could no longer demand coin because they had an account balance. Instead, people needed an account balance to pay for the coin and a receipt granting the right to buy the coin”. This essentially made the bank guilder a fiat medium of exchange, however, it was still backed by the reserves held by the bank on a 1:1 basis. The bank now resembled the modern central bank as we know them, the money they issued was transferable but not inherently convertible. The deposits quickly sped up and people started using these “bills of receipt” for payments and settling of debts.
The reach of the bank guilder became far and wide and started to assert itself as the worlds reserve currency. However, the cost of financing this continuous expansion meant that the banks in the Dutch Republic and The Dutch East India Company started overextending themselves by incurring large debt burdens to the Bank of Amsterdam.
To add to this, as with any empire that rises to power they were challenged by an incumbent. The British Empire and its allies soon started competing with the Dutch for dominance over trade, this led to many wars and other additional costs that started weighing heavily on the current superpower. The start of the Dutch banking systems decline can be considered the failure of the bank de Neufville in 1763. Although the Bank of Amsterdam managed to stabilise the fallout in the Dutch Republic, banks across Europe and Asia started to lose faith in the Dutch banking system and credit market. This can be seen by the swift reduction in deposits held at the bank.
By the end of the Fourth Anglo-Dutch War in 1784, the British had blockaded Holland and had taken many Asian colonies from the Dutch East India Company. This put huge pressure on the Bank of Amsterdam and consequently, they changed policies to extend substantial loans to the company and the surrounding cities.
This put considerable pressure on the banks’ balance sheet and there was now a discrepancy between their reserves and balances. People began to try to claim their gold back with the notes they had been issued, which resulted in a bank run.
As their banking system failed to keep the peg between bank guilders and precious metals (now being a true fiat currency), people lost trust in the system even further and the Dutch Republic began to falter. This placed both Britain and France (who were also enemies at the time) firmly in the racing seat to become the global superpower. However, in 1815 Britain and its allies come out victorious in the Napoleonic Wars and ensured the foundation of a new world order at the Congress of Vienna. During this meeting, the victorious allies laid down the terms for a new monetary, debt and geopolitical system, all set in stone in what was called the Treaty of Paris. This laid the foundation for Britain to become the powerhouse it did.
In our next weekly update, we will expand on the rise and fall of the British Empire and show how it followed a very similar pattern to the Dutch Republic.
Notable Articles and News Stories This Week:
BlackRock’s Fink Says Bitcoin Can Possibly ‘Evolve’ Into Global Asset
BlackRock is the world’s largest asset manager with around $7.4 trillion in assets under management. This week their CEO Larry Fink stated that he believes bitcoin could ‘evolve’ into a global market asset. This comes on the back of several other large asset managers who have recently stated that they believe that bitcoin and digital assets are starting to assert themselves as a viable asset class.
Read the story here
Dollar plummets on U.S. stimulus hopes; bitcoin hits all-time peak
This week bitcoin hit an all-time high. This happened the same week that the dollar hit a two and a half year low. This was a reaction to the proposed stimulus bill which if approved would see almost $1 trillion being injected into the system between now and March 2021. This year alone the new dollars that have found themselves in the American financial system through stimulus equates to 22% of the total supply.
Read about it here
Pizza Hut to accept Bitcoin for pies in Venezuela
Several currencies across the globe have lost value this year due to the coronavirus, one that has been losing value significantly is the Venezuelan bolívar. Foreign companies have had to change their strategy in some of these countries, bitcoin has so far been a solution. The Etherbridge team published an article on the evolution of money, where we present the idea that a currency is only used as a medium of exchange if the opportunity cost of using it outweighs just holding it. In Venezuela, the cost of using their bitcoin is lower than the cost they may incur by using and holding their money in the Venezuelan bolívar.
Read the full article here
S&P Dow Jones Indices to Launch Crypto Indexes in 2021
The major financial data firm S&P Dow Jones Indices will dip its toes into the digital asset market. Peter Roffman, their global head of innovation and strategy stated: “We’ve been watching [the digital asset space] and we feel it’s at a point of institutional interest in maturity, where companies such as ours wants to get in and contribute to the transparency of the marketplace”. This marks a big step forward as it will signal to other financial institutions that this asset class is something worth taking note of.
Read the report here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge we aim to lower the barriers of understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.