- The Gold Standard is a system designed to protect the value of paper money by tying it to gold
- The problem with the Gold Standard is we must trust that regardless of the perceived value of paper money, we’ll always be able to swap it for gold
- An example of this system failing spectacularly is the events leading up to the Great Depression, culminating in the US Dollar losing 70% of its value against gold in 1933
- Crypto tech has the potential to solve this problem by creating a different way of exchanging money for virtual gold (aka Bitcoin) that doesn’t involve a bank: a crypto vending machine that no one owns, can’t be shut down, and everyone can access
- Today, speculative investing drives crypto prices massively up or down on a whim, but much like the internet has evolved over the past 10-20 years, as the world becomes more comfortable with this technology, cryptocurrencies could eventually be far more stable and reliable than traditional money
Maybe you’ve asked yourself “Why Bitcoin?” or “Why create this strange digital currency when our existing financial system seems to work just fine?” That’s a fair question often dismissed by the crypto community. We need to stop treating healthy skepticism as “naysaying,” which alienates people and makes cryptocurrency feel more like a cult than a technology.
Here, we’re going to get down to the basics and make a case for why cryptocurrency should exist in simple terms. Each chapter in this series will focus on a single topic.
Let’s get to it.
Many of you have probably heard of the gold standard. It was a system that essentially allowed people to exchange money for gold. This was designed to protect the value of paper money by tying it to one of the most ancient and reliable stores of value.
Think about that for a second.
Say you want to buy a cow from farmer Sally. Maybe she is worried about the government printing too much money, causing inflation. But she is confident that the amount of available gold in the world will grow at a slow, predictable rate. Because of this, she only accepts gold as payment. No problem, you go to the bank and swap your cash for gold in order to buy the cow. As long as people trust gold, money has value.
The problem with the gold standard is not the idea. It’s a very elegant solution to back a currency with a stable and reliable asset. The problem is trust. You have to trust that no matter what happens to the perceived value of your paper money, you’ll always be able to swap it for gold.
Let’s look at history to show why this is a problem.
In 1933, a series of events in the US caused the US Dollar to lose 70% of its value versus gold. This caused panic. People started swapping cash for gold en masse. In response, Franklin D. Roosevelt closed banks in a desperate attempt to stop the bleeding.
This was not a good outcome for anyone involved. The government lost trust by betraying the people. Banks were on the verge of collapse. And citizens had to passively stand by and watch their life savings go down the drain.
The gold standard worked when times were good but was doomed to fail under the strain of a crisis. Why honor a social contract that requires you to trade something (i.e., gold) for nothing (i.e., paper money)?
Crypto tech has the potential to solve this problem.
Imagine a different way of exchanging money for gold. This new system doesn’t involve a bank or even person to facilitate the transaction. Instead, imagine a vending machine with the following properties:
- Nobody owns it
- Everyone has access to it
- It can’t be shut down
- It has been preloaded with a reserve of gold
- The only way to take gold out of the reserve is to deposit a proportional amount of cash
It might sound crazy, but a “crypto vending machine” isn’t some futuristic idea. It exists today. It is commonly called a “smart contract.” Exchanging cash for actual gold is a little challenging. But we can make a vending machine to dispense virtual gold, aka Bitcoin.
We can even take it a step further. The vending machine reserve could be loaded with different types of assets so people have more options when exchanging cash. Incentives could be created for governments and/or individuals to contribute to the reserve. There are so many things we could do with a crypto reserve that are just not feasible with traditional finance.
Cryptocurrencies could be far more stable and reliable than traditional money.
This all might seem at odds with what you’ve heard about in the crypto world. Today, speculative investing drives crypto prices massively up or down on a whim. Nothing about that is stable or reliable. I believe this is primarily due to us collectively learning an entirely new technology.
Take a minute to think about an analogous piece of technology, the internet. Do you remember how crazy the internet was 10 years in? We were experiencing the dot-com bubble and worried about Y2K sending us back to the stone age. Fast forward 10 years and compare that with the internet we experience today. It’s not perfect. But the internet has become a far more reliable tool we all depend on daily.
In 10 years, crypto could be as reliable as the internet is today. Maybe we dismiss the idea of a crypto gold standard and build something even better. Or maybe crypto and the internet merge into this crazy thing called web3. Predicting the future is always a messy business. I am certain the future of cash is digital. The most obvious and direct path to that future is through crypto.
In summary, the gold standard was a good idea but ultimately failed due to an unreasonable promise that couldn’t be enforced. Crypto technology has equipped us with tools to create a much better alternative. It’s up to all of us to come together and make that a reality.
I’m sure you still have questions such as “Who maintains this magical invisible vending machine that nobody owns?” We’ll continue exploring crypto and do our best to answer questions along the way. Stay tuned!
Co-founder of Coin Field Guide
I’m a software engineer by trade. I got my first taste of crypto in 2010 mining LTC. Most recently, I led the product team at Hackernoon. I’m currently building the Field Guide and Raster.ly.