26 Nov

This is how gold became debt money – Can this happen to Bitcoin?

“Those who do not know the past are forced to repeat it,” said the Spanish philosopher George Santayana in the 19th century. It is important to know some basic features of the history of money. This is why today we are dealing with an important but relatively unknown interface in money history: How could it happen that a pure gold currency became a monetary system of gold-backed promissory notes? Why was the long-prevailing precious metal cover softened in the end and above all: This time our journey through time takes us from the fading Middle Ages to the modern age and ends with the Bitcoin, specifically: the Lightning Network.

Could this also happen to digital gold, the Bitcoin formula?

In the fading High Middle Ages towards the end of the 15th century, the monetary system became increasingly unstable. After more than 300 years of economic prosperity, the princes of Europe apparently lost their temper. Many sovereigns, however, exaggerated with the regular renewal of the metal coins of that time. The only form of tax was the regular exchange of “old” into “new” money. In many regions this was exchanged at a ratio of ten to eight: for ten old coins, eight new ones were obtained. In this way the money remained in flux and the princes made a profit of 20 percent. Read more about Bitcoin formula: Is The Bitcoin Formula a Scam? Beware, Read our Review First

When the sovereigns began to exchange money in ever worse proportions, about six to ten or even four to ten, the people no longer accepted the money that had become almost worthless. There were calls for new, more valuable money. The solution was the so-called “eternal penny” and precious metals, which in many places were increasingly traded as currency.

The monetary system of that time was strongly regional and its characteristics were somewhat different in each region. However, it is clear that the first gold coins of this epoch were minted in Italy in the 13th century. From there they spread, just like silver coins, bit by bit all over Europe. Crusades in the East and later the discovery of America in the West also opened up new sources of gold for Europe, which further boosted people’s greed for gold.

Why did gold become paper money?

The advantage of the precious metal currencies gradually establishing themselves was obvious: it consisted in the intrinsic value of the money earned. But the increasingly popular form of money also had disadvantages: On the one hand, it was impractical to spend because gold was not only very difficult to divide, but also complicated. To pay smaller sums with the precious metal turned out to be difficult. On the other hand, the money supply of gold could not be inflated at will. To finance wars, for example, this turned out to be a disadvantage. Paper money had better characteristics: It was easier to divide it into smaller units (and thus represented a better unit of account and a better medium of exchange, two other important core functions for money), it was easier to transport and, due to its gold coverage, it was as good a value store as gold. Originally paper money was only a receipt for the possession of “real” money, i.e. precious metals.