Gold and silver were money long before the founding of America. People pushed gold across the counter to a bank teller, in exchange for paper currency. Currency was not money, but merely evidence of money owed. People used it because it was convenient for daily commerce. The bank was obligated to return the money to anyone who presented its currency. Currency has a life cycle. It is born when money is deposited, and it dies when money is redeemed.
Banks did not want gold deposits just to hoard metal in their vaults. They invested it in commercial bills, which paid a yield and matured into gold in 90 days. These commercial bills backed the bank notes.
Unfortunately, currency has been progressively adulterated.
In the 19th century, big-spending state governments forced banks to buy state government bonds. Those bonds paid gold, but they were hardly equivalent to commercial bills. At times of state bond market illiquidity, much less state government default, banks could not redeem their notes on demand; they were bankrupt.
Later, the federal government got in on the game, forcing banks to back currency with Treasury bonds. However, government debt was shrinking after the Civil War which reduced currency in circulation. Perversely, budget discipline harmed borrowers, giving rise to a rubbish school of economics which promotes deficit spending.
In 1913, the Federal Reserve was given exclusive rights to issue legal tender currency. Now both the quantity of currency and the interest rate became subject to central planning. The Fed first drove 10-year Treasury bond yields up 50%, and then down into a nosedive. Falling interest caused a great boom in the 1920’s, and then the crash of 1929.
President Roosevelt reacted by looting bank deposits, reducing a dollar from 1.56 grams of gold to 0.89 grams. He also made the dollar irredeemable to Americans. Redeemability keeps currency issuers honest, lest they trigger mass redemptions—a run on the bank. Roosevelt freed the government from this constraint, and of course it began to abuse its credit.
Foreign governments, however, could and did redeem. By the late 1960s it grew into a crisis. President Nixon closed the gold window entirely in 1971. Since then, the dollar is backed only by bonds, which are payable only in dollars. Nixon’s monetary scheme is circular, and dishonest. The dollar was degraded into a purely irredeemable promise to pay, that is, a promise which promises that it will not be honored.
After decades of reeducation, people happily believe that this is money. And make no mistake, government propaganda which begins in elementary school is a key part of this progressive process. If the people let the government get away with irredeemable currency backed by bonds, what else might they allow?
Bitcoin is based on a radical new technology, called the blockchain. The blockchain moves the currency ledger from a closed server to the open Internet. This has some interesting advantages, but it does not change the nature of currency.
An honest currency was, and is, the liability of its issuer. Even the dollar is the liability of the Fed.
Bitcoin advocates argue that there is no issuer, and therefore nothing is owed. But even if bitcoin’s issuer is ambiguous or disavowed entirely, it does not change the nature of currency. The dollar, though irredeemable, is backed by bonds. Bitcoin dispenses with backing altogether. Consider that bitcoin forked in July.
If you had a bitcoin before the fork, then after the fork you had your bitcoin plus a bitcoin cash (worth about $3,000 today). Bitcoin cash began with a copy of the bitcoin ledger. Copying is impossible with a real bank ledger, because there are both assets and liabilities. Assets cannot be copied, of course, whether gold or bonds. In bitcoin forks, liabilities can be copied and multiplied as many times as buyers will tolerate.
Bitcoin is the next logical step in the progression of stripping the money and everything else of value from our once gold-redeemable currency.