Even when the entire world started selling off their gold to the US in the 30s and 40s it became obvious by the 70s that there wasn’t enough gold mining capacity on earth to sustain a global asset-backed currency.
Even when the entire world started selling off their gold to the US in the 30s and 40s it became obvious by the 70s that there wasn’t enough gold mining capacity on earth to sustain a global asset-backed currency.
You might think about the long game where no more bitcoin is issued and only transaction fees are awarded to the miners. How much energy will bitcoin consume then? There will be an equilibrium somewhere between energy prices and transaction fees.
I'm not even saying we should abolish fiat currency, or that the USD has to be fully backed by a hard asset. Individuals will hold whatever asset/currency/whatever they think will be the best choice for them.
Although I don't think I agree. Wouldn't a currency shortage be another way to say deflation? If your economy is producing more value than your currency represents, then your currency is more valuable.
I have also heard people say deflationary currencies inevitably lead to a catastrophic spiral where liquidity dries up because no one wants to spend (or loan) today what can be more valuable tomorrow. There's even a page on the Bitcoin wiki about it that has been there since 2010.
Also, a quick google brings me to the "Price revolution" page on Wikipedia (https://en.wikipedia.org/wiki/Price_revolution) where it says: "Generally it is thought that this high inflation was caused by the large influx of gold and silver from the Spanish treasure fleet from the New World; including Mexico, Peru, Bolivia and the rest of the Spanish Empire."
In the end... I don't really know. I appreciate you sharing your thoughts.
First, if your money supply is the actual asset (and not just backed by it) then it’s even worse, since fluctuations in overall supply of that asset can cause very large valuation changes of the money you own. E.g. if we find a silver deposit 4x bigger than all the silver we already have, then suddenly all the coins people are carrying around are worth 1/5 their previous value. So it makes the currency unattractive to hold. On the other hand, if you run out of coins then as your economy or even just population grows then everything has to get cheaper because there’s only the same amount of coins to buy more stuff. And that encourages hoarding. These two things together make for financial disaster because nothing can really be relied on. And, this wasn’t as much of a problem before countries like the UK industrialized, which led to population explosions across the major powers.
Then again after WW2, when globalized markets became a thing, we saw another wave of industrialization and accompanying population growth, to the point that even asset-backed paper currency became problematic. There’s just not enough gold on the planet to back every other economic output. There’s only about 400 million pounds of the stuff worldwide. Assuming you could even get ahold of it all, you could only use it to back about $200 billion. Between 1950 and 1971 global trade expanded by a trillion dollars. And the global population nearly doubled. And we couldn’t just say “gold is worth more now”. There were treaties in place that defined the price of gold as $35 per ounce (which led to countries like France to try and destabilize our currency by buying up a bunch of our gold, but that’s another story).
But in a fiat system by adopting the currency you add your economic output to the overall system and your currency stability is now tied up in that economic output, so—your output goes down, your people’s belief in your ability to pay also goes down. This works super well in a rapidly-growing economy. There’s always more! More money-printing, more economic output, more debt… but the problem with this is—what happens in a world where things stop growing all the time? We have a few small examples and they aren’t pretty (Greece, COVID, and coming soon—China).