by guest columnist Lucie Komárková
Freedom is one of my life’s priorities. There are countless means which I use to acquire it. I do this by simply cutting myself away from the mechanisms, platforms, structures, and relationships which would limit me.
One such mechanism of limitation is the current state-controlled financial system. Let’s ask ourselves: “How does current fiat money work? What problems exist within the fiat monetary system?”
Because this question is worrying many people, society has begun to look for possibilities of escaping from the state-run monetary system. One variant is the most popular cryptocurrency—Bitcoin.
The origins of money
In order to assess the usefulness of Bitcoin as a means of exchange, we must ask ourselves a simple question: What is money? And what qualities does Bitcoin have compared to current money issued and controlled by states? Money is a generally recognized equivalent, the language, through which people express value. Money is the conserved value of labor and the memory of society. Money also often reflects the entrepreneurial risk taken and not just labor. Therefore, the pursuit of an expression of value is as old as society itself.
The first historically preserved documents that are available are primitive book entries on clay plates. With the coming of division of labor and specialization, barter trade began to take over, i.e. the exchange of goods for goods. People exchanged fish for wheat, weapons for skin, pastry for ceramics. Some raw materials are perishable, and you don’t always find someone to offer the raw material you just need. So, people were looking for a solution.
The solution was therefore to use rare and durable items as a means of exchange. That is, stones, shells or linen. You could sell your five fish for shells or precious stones. After some time, they became known as a means of exchange, so you could buy a ceramic bowl for them and avoid losing time during multiple exchanges. These precious objects were later replaced by precious metals, especially gold and silver.
Gold is rare, does not perish, but is impractical for carrying over long distances. It is too heavy and difficult to split in more parts. Some people began realized this and offered a solution. The first “bankers” appeared, offering to deposit gold for a small fee. Proof of ownership of the gold was a paper bill. Using this credit bill, the customer could later withdraw his gold back. Gradually, trust in these bills increased among people and they exchanged credit bills instead of taking gold from banks. This has made credit bills into banknotes.
Since the 20th century, fiat money has been the dominant system. Fiat currencies are defined as money with forced circulation. Their establishment and circulation are mostly governed by a country’s Parliament and administered by their Central Bank. In other words, fiat currencies are state-ordered national currencies such as the crown or the euro. They are one of the attributes of a sovereign state. Even if we had perfect central bankers in one country, we would still be affected by the erroneous actions by central banks of other countries.
This happened when, in 1971, the gold standard in the U.S. was definitively revoked by President Nixon. From that action, it followed that the Czech Republic (for example) changed its policy so that its own money is now only covered by the fact that the state legislatively forces people to accept, account, and pay taxes using it. It is therefore not linked to any commodity. And the quantity of it is gradually increasing, with wealth increasing much more slowly.
This results in inflation. The Austrian School of economic thought defines inflation as an increase in money supply, while the mainstream economic sources define inflation as a phenomenon that causes currency to lose its value in the market and reduce its purchasing power. Basically, the inflation rate tells the rate at which money loses its purchasing power over a given period of time due to an increase in the total amount of money in circulation. Thus, inflation will not increase wealth, it will only increase the amount of money supplies, because wealth is, by its very nature, a commodity and money is the means to acquire it.
Inflation alone would not be a problem if it were merely a steady increase in the monetary supply. It would not be a problem, that is, if my liabilities and receivables balanced on my account and my personal monetary supply increased proportional to inflation, with a similar effect for my neighbors and everyone else. However, that is not the case. Banks create new money, but this money is unevenly distributed. Those who get the new money first are able to disproportionately benefit from it. The market has not yet managed to reflect the new amount of money, and so the value of new money is higher; this is because those who first get this new money can use it when the market has not yet managed to reflect it through an increase in prices. (Now, for example, banks create new money by offering new mortgages – that’s why the construction industry is thriving.)
Inflation is reported as a figure at the end of the year. But this number has a structure. In some sectors it can amount to tens of percent. This means that if the figure is 2% at the end of the year, some sectors may have inflation of 3% and others may have 1.5%. So, it depends more on the choice of the consumer’s basket than on how prices as a whole actually increase.
This invisible phenomenon has, besides the above-mentioned unfair redistribution, another negative impact on individuals. States tax their citizens not only using taxes, but also through inflation. Traders who make profit from goods—which they had bought cheaply and sold for higher price—often do not even realize that (in addition to taxes) they lose their profits through the stealthy but very real phenomenon of inflation. The longer you wait for the sale, the lower your profit becomes. If inflation is 4% (which varies between countries and sectors), you will not see the big picture of how much value you are actually paying in taxes, since 4% is lost due to inflation created by a central bank .
To sum it up, while inflation hurts most people by depreciating their money, there are those who benefit from this process. This is usually the banks and people who first get the newly printed money. In a very simplified example, where we have only three apartments in the whole economy and buyers do not need to hold money, we can show the principle: If we have three apartments for sale for the price of 2,000,000, and the bank prints a new 1,500,000 of mortgages, we will not suddenly have 4 new apartments, but still 3 apartments, only with a price difference, which will probably rise to 2,500,000 over time (of course we cannot know exactly, we take this with a grain of salt). The first to access the new money will, at old prices (still 2,000,000 per apartment), trade with new money as the market has not yet managed to reflect the new money supply, so its value is higher. We still have the same number of commodities, but the money supply is increasing, which increases the price as well. The price increase will affect not only the houses but will slowly affect all other sectors as well. This process is repetitive, favoring the first users of newly printed money and constantly decreasing the fair value of money in the long run.
Both World War I and World War II were financed through inflation (already the Napoleonic Wars were financed through inflation).
Fiat currencies are managed by central authorities. These institutions can arbitrarily reduce your money’s value, even though it supposedly already belongs to you. We have been convinced of this several times in the case of currency reforms in Cyprus, Venezuela, Argentina and also with annual inflation.
And not everyone is allowed to open a bank account. This is particularly true of developing countries and of Islamic countries, where women have less rights. In our country, this applies to people who have problems with the law, which can result in their account being suspended. It can also apply to organizations that are deprived of the right to receive money, as happened with WikiLeaks.
Centralization of the current financial system often has a negative impact on payments. Banks and payment gateway institutions are subject to state regulations. It is so easy for states to exert pressure and censor, block, or confiscate payments and collect information about them. Not only are states nowadays not capable to protect their citizens’ information from possible hacker attacks, but they can also abuse it at any time. Payments censorship was applied, for example, in the case of Wikileaks. In 2010, the US government ordered companies such as Visa, Mastercard and Pay Pal to ban Wikileaks donations. (And here comes the role of cryptocurrencies, which I will mention further.) And this is where one of the story lines begins to take on real contours.
Indirectly, people were heading in the direction of cryptocurrencies since the first money and first efforts to protect information (the first known encryption effort is about 3,500 years old). Every failed attempt at a new currency shaped the direction people took in creating alternatives to state money. Some alternatives were even successful, but always short-lived. Most of them were ruined in different ways by centralization or by double spending.
E-gold was an electronic payment system that made it possible to hold an account with balances expressed in grams of gold, silver, platinum and palladium. The coverage was 100%. In May 2008, the service had more than 5 million accounts and managed several tons of gold. However, on the pretext of money laundering, E-gold was canceled after it lost with the courts.
E-Bullion was a digital currency established by payza.inc. From 2001 to 2008, you could instantly convert your gold and silver online with e-Bullion. E-Bullion had over a million users and managed approximately 50,000 ounces of gold. E-Bullion was founded by Mr. and Mrs. Pamela and James Fayed. After problems in marriage and subsequent divorce, Pamela Fayed was assassinated and James Fayed was sentenced to death. This resulted in the demise of e-Bullion. And it was the centralization which caused failure of e-Bullion, E-gold, Liberty Dollar and QQ. If you have a central point that controls the currency, the currency is dependent on its central point, which can die, run away with the funds deposited, or a single government intervention to destroy the currency is enough.
Liberty Dollar was a currency that competed directly with the US dollar. The Liberty Dollar was intended to return to the original US dollar with a gold standard. It was coined with a metal content of 999/1000. And it had exactly the same fate as E-gold, but the justification was far more absurd. The Liberty Dollar was canceled on the pretext of currency counterfeiting. However, this was totally misleading because the Liberty Dollar not only looked different than the US dollar, but was mainly much higher in value.
Liberty Reserve was a service that made it possible to transfer money online. It differed from traditional banks in that it required its users name, date of birth and e-mail. However, it no longer verified this information. This resulted in uncontrollable anonymous transactions. The Liberty Reserve creator, Arthur Bukovsky, was then sentenced to 20 years in prison for “money laundering”.
Naturally, people have been trying to cope with the problems above for a long time. People needed a different means than the fiat currencies. But they always followed the same path, just changing shoes for better in the form of alternative currencies. But changing shoes is not enough – if there is a central authority in the system, it is very easy to destroy the system. But with the onset of cryptocurrencies, not only shoes have changed. The path has changed. Suddenly we find ourselves in a decentralized and distributed environment and there is no need for central authority.
Cypherpunks to the rescue!
The second storyline took place at a time when the Internet freed itself from the military network. However, it blended very closely with the first part. The Bitcoin creator (or rather the group using the Satoshi Nakamoto pseudonym) was not an enlightened programmer. He merely materialized what the Cypherpunks group had been trying for years. The Cypherpunks, community of cryptographers, mathematicians and hackers, not only predicted the arrival of cryptocurrencies, but also laid their foundations. The Cypherpunks believed that the Internet has the potential to change society, virtualizing some of people’s daily tasks. HTTPS, PGP and GPG are the results of their work. They realized that the development and use of cryptography was the only means of combating state censorship, preserving private information, protecting private messages, anonymous trading and freedom of speech, not only in a virtual environment. Cryptology was widely used and improved especially during the wars.
Already in the first century AD invisible ink was used. A resin sap was used. When it was dry, it was transparent, but turned slightly charred and turned brown when warmed up. In the fifteenth century came an even more sophisticated method. With melted alum in vinegar, reports were written on the shell of a hard-boiled egg. The solution went through the shell and stained the solid white. The message could be read after peeling the egg. In England, deciphering of ciphers led to the execution of Mary Stuart. In the early Middle Ages, frequency analysis developed in the Arab countries. Arab scholars first discovered that the cipher in which we replace each letter with a different one can be deciphered. It is sufficient to calculate the frequency of not only individual letters, but also their pairs and triplets. In France, the deciphering of a cipher led to the fall of the Huguenot Fortress of La Rochelle during religious wars. Capturing and deciphering Zimmerman’s telegram led to US involvement in the First World War. In the 1920s, the US government denounced the problem of deciphering as immoral. It did not detect a message that could have prevented the attack on Pearl Harbor.
This is just a small account of how encryption has changed the world.
Modern cryptography exchanged paper and pencil for computer technology. The classical ciphers used by cryptology cease to be enough, and ciphers that are almost unbreakable in polynomial time, even with low-value smartphones.
Free-thinking people turned into a community called the Cypherpunks.
The Cypherpunks were people who gathered on the predecessors of the discussion forums and mailing lists. They discussed how to use Internet technology to gain more individual freedom and detachment from the state and governments. They believed in the use of exponential technologies. They knew that these were weapons that could serve both to oppress freedom and to achieve it. But they did everything they could to use technology to their advantage.
We already have the technology to achieve freedom, now we just need to learn how to use it.
[Edited by Jonathan McCormick]