Disclaimer*** This post does not necessarily represent the personal view of the author on what the global monetary system should look like…the author believes that there should be multiple competing currencies accepted as legal tender, government notes, bills of credit, gold and silver and cryptocurrencies****
One claim made by economists about the gold standard and pre-Fed era was that the gold supply was inelastic and this created periods of deflation.
Ben Bernanke explaining this phenomenon quotes from Barry Eichengreen’s paper The Gold-Exchange Standard and the Great Depression stating:
“structural flaws of the interwar gold standard, in conjunction with policy responses dictated by the gold standard’s “rules of the game,” made an international monetary contraction and deflation almost inevitable.”
These periods of deflation were especially hard on the agricultural sector. Due to a myriad of factors, such as overproduction and global competition, prices for farm goods declined precipitously in the post Civil war years.
This lead to farmers having to borrow money to stay afloat and in a deflationary period the debt burden grew in real terms and versus the value of their crops. This lead to populist farmer movements that demanded the printing of currency and the unlimited coinage of silver.
The below chart shows the volatility in the price of wheat from before the US Civil War to the beginning of the Great Depression. Note the Y axis is in percent and is marked in 10’s of percent, not single digits.
The elite fearing unrest, especially from the farmers, as farmers lead revolutions (google peasant revolt to see what I mean), the decision was made to introduce an elastic currency to the United States (some may argue a more conspiratorial view of the creation of the FED and I have read books those views as well, but both views agree that the upper class was in self preservation mode.)
The harbinger of an elastic currency is that it needs to expand and contract with the economy (the FED has been less successful with the contraction part). Over time as the US Dollar became the global reserve currency with trade priced in USD and Dollars began to be held outside the FED expanded the money supply by larger amounts.
The below chart divides the total percentage change in the value of US currency in circulation by percentage change in global GDP. This ratio has been remarkable stable.
This leads me to my question and it applies to more than just Bitcoin. The goldbugs would also argue that there will always be enough gold.
However, if the supply of BTC or gold increases at a slower rate than the growth rate of the economy the price of BTC or gold would have to increase to keep this ratio stable.
Now this would be a bullish reason to own BTC or gold because their growth rates in supply, especially once BTC hits its maximum issuance, would be almost assuredly lower than the global GDP growth rate outside periods of recession.
However, unless there was a debt jubilee, the periods of deflation would be painful for those who have borrowed the most versus their income. In the western world, that is the lower income groups and this would likely lead to a repeat of the peasant revolts that were common under the gold standard leading to cries to expand the issuance of BTC, which would then violate the limited supply maxim.
Further there have been articles circulating discussing how a very large percentage of BTC is owned by a very small percentage of the investors. I cannot verify the numbers so I will not quote them, but if this is true this would create inequality like the world has not seen since the middle ages and have the potential to usher in a modern feudal society.
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