In the Middle Ages, a group of men attempted to turn base metals into gold; They were known as alchemists and were unsuccessful in their endeavours. We’re lucky they didn’t. Why? Consider the alternative.
Had the alchemists found a way to turn base metals like lead into the currency of the time, a race would have broken out. A race to find as many metals as possible to turn them into gold.
The first users of this newly created gold would have enjoyed enormous wealth, but when it circulated in the economy – a much smaller realm of opportunity in the Middle Ages – calamity would have ensued.
Those with less personal or political ties to alchemists would have found themselves outside of any market economy. You could no longer bid on goods and services. The price in gold would simply be too high.
It would have created the ultimate boom and bust cycle. Given the economic development at the time, that could have extended the Middle Ages by hundreds of years.
Considered part of the lore 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 missed their primary goal, but they found something that would be far more valuable to humanity.
Where the alchemists failed in trying to create value from something inferior, a group of people in the 20th century found success. These modern day alchemists are known as central bankers.
The current age of financial alchemy
The early 1970s saw inflation and commodity prices rise, much like today. Dollar pressures have been persistent for years, also similar to today. With the end of money tied to relatively limited gold, any semblance of responsibility flew out the window. Price increases were the order of the day, and Americans who could once again own precious metals did so in droves. They sent gold prices from $268 an ounce to over $2,400. The more accessible silver rose from $9 to over $130.
Buying shares in the silver trading company Bache stopped in 1980 to curb the rising silver price. (Had the billionaire Hunt brothers not used leverage to buy their eventual silver holdings, there’s no telling how high the price could have gone up.)
The age of financial alchemy peaked in the early 1990s. Inflation was curbed by a sharp rise in interest rates and a necessary recession. Federal Reserve Chairman Alan Greenspan – a former supporter of Ayn Rand and Goldbug – became the face of managed economics.
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 that what you heard that’s not what I meant.”
Politicians loved the Greenspan era. It was a time of relatively easy money, relatively little monetary turmoil, and it made it easy to promise ever-expanding government programs with no apparent long-term cost. All of this led to easy re-elections.
It shouldn’t last forever.
Greenspan created market risk in his first year as Fed chairman. There was a massive rally in early 1987, but a brutal correction occurred in October. On October 22, 1987, the Dow fell 22% in a single day.
Unsurprisingly, Greenspan noted that the Fed stands by to ensure capital markets run smoothly. Markets took this as a green light for the Fed to step in if the market slump was severe enough.
With programs like 401,000 plans on the rise, it was no surprise that such a backstop would be needed — even if it had unleashed the mother of all bubbles for several decades.
Greenspan kept interest rates low in the late 1990s. Tech stocks formed a massive bubble and burst. Then housing burst. The “Greenspan Put” changed its name when new Fed Chairmen took over the role. By the time Greenspan retired in 2006, the seeds had been planted for a housing bubble to burst, but it was also a time when a number of technologies were emerging that could pull the world out of the boom-and-bust cycle , which is being tightened by central bankers.
Bitcoin and the Emergence from the Dark Age of Finance
The past 50 years of a global fiat system have had a poor track record. Boom, bubble, bust. Boom, bubble, bust.
Central bankers, armed with advanced degrees, have shown they can only do two things: print money, or print less money.
Attempts to lightly rein in the Fed’s balance sheet in 2019 had to be quickly reversed as financial markets began to show tension — even months before the world heard of COVID-19.
The last 51 years have been a financial dark age of quantitative easing, currency devaluation and the financialization of the economy at the expense of other sectors. Added to the remnants of the gold standard before it, most of humanity was at the whim of a few unelected leaders based on academic testimony and theory, rather than market approval.
As a result, it was a global free-for-all.
Some countries, like Argentina and Zimbabwe, experienced a hyperinflationary collapse. Others, like Japan, have tried to boost their economies with stimulus plans only to find they are pulling together. Still other countries, like El Salvador, are pegged to the US dollar and have 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 paper’s timing was inspired by the plan to inject hundreds of billions of dollars to “stabilize” the bubble rather than collapse it. Those numbers seem odd now in the age of trillion-dollar stimulus plans…just 14 years later.
But Bitcoin is hope.
It is hope for the world’s unbanked people. It is a hope for those whose wealth has been confiscated by government officials, whether directly by force or through the indirect theft of inflation and hyperinflation.
The Bitcoin protocol guarantees that only 21 million will ever be mined. The 19 millionth Bitcoin was recently mined and several millions may already have been lost through a poor understanding of the asset’s value. Whatever the “final” number is, the key is immutability.
We now live in a world where the printing press has given way to direct deposit stimulus checks, and where the possibility of robots mining asteroids could skyrocket the price of precious metals in just a few decades.
It’s clear that no other asset class can really be said to have a ceiling on its scarcity.
A thriving community has already grown around Bitcoin, exploring its potential in areas such as art, philosophy and human rights. Because what has been dubbed simply “peer-to-peer electronic payment system” offers a lot more than meets the eye.
Welcome to the financial renaissance. The age of financial alchemy will not go down without a fight, but with Bitcoin there is an opportunity to build a new system and let the old wither away by itself.
This is a guest post by Andrew Packer. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.