Welcome, and thank you for being part of the MyZucoins community! Dive deep into some important history of finance and the emergence of crypto.
From Fiat to Crypto: A Whirlwind Through Past Major Currency Fails
Fiat currencies, the type of currency that is not backed by a physical commodity such as gold or silver but relies on the trust and faith of the country’s government, have become the standard in modern economies.
However, their history is fraught with crises, failures, and eventual downfalls. This has led to an increasing search for a reliable alternative, which has manifested in the form of assets such as gold and more recently, cryptocurrencies.
A Historical Overview of Fiat Currency Failures
While not strictly a fiat currency, a background example is the Roman Empire’s spiraling debts that caused excessive currency issuing, leading to the Roman Empire’s excessive inflation and the seeds of their eventual collapse, which we covered here. The growing complexity and rising debts of Rome’s Empire placed strain on their military, politics, economic productivity, traditional cultural values (causing cultural breakdown), excessive government admin, and disease breakouts, which in turn caused population decline. As always, the debts exceed a nation’s productivity and get out of hand.
The first known “fiat currency”, as we know it today, existed in China during the Tang Dynasty in the 7th century. It was used to fund military campaigns and gained widespread usage during the Song Dynasty. As the use of fiat currencies spread across Europe and the rest of the world, so did the problems associated with them.
One of the most notable crises resulting from the use of fiat currencies was the German hyperinflation of the 1920s. After World War I, the German government began printing massive amounts of paper money to meet its financial obligations. This led to hyperinflation, with prices doubling every two days, rendering the German mark worthless and leading to the economy’s collapse.
Similarly, the collapse of the Soviet Union in 1991 was another major crisis resulting from the misuse of fiat currency. The Soviet Union’s centrally planned economy heavily relied on fiat currency. However, the government’s inability to manage the economy led to hyperinflation and the ultimate collapse of the Soviet Union.
In modern times, fiat currencies have led to massive government debt, inflation, and economic instability. Governments continue to sell bonds to institutions and central banks in order to keep issuing more debt to fund more government expenses, leading to more inflation and devaluation of the currency. For almost the last 2,000 years, this has been a commonplace trajectory for every empire that grew to dominate global economics.
The Origins of Fiat Currency in China
The first known fiat currency, or paper money as we know it, is believed to have been developed in China during the Tang Dynasty (618-907 AD). The Tang government issued paper notes known as “flying money” due to its lightweight and ease of transport, especially compared to the heavy and cumbersome copper coins of the time1.
The use of paper money in China was initially a response to a shortage of copper for minting coins and was primarily used by the government to fund military expeditions. However, their use was limited, controlled and they were often redeemable for gold, silver, or silk, making them more of a form of representative money than true fiat currency1.
During the Song Dynasty (960-1279 AD), paper money became widespread and took on the characteristics of a true fiat currency. The Song government took over the production of paper money, issuing it in large amounts and demanding that all merchants and citizens accept it. This paper money was not backed by gold or silver but was supported by the government’s promise to accept it for tax payments2.
Spread to Europe and the Rest of the World
The concept of paper money spread slowly to the rest of the world. The Mongol Empire, which ruled most of Asia, Eastern Europe and the Middle East in the 13th century, was instrumental in spreading the use of paper money. The Mongols issued their own paper currency, backed by the wealth of the conquered lands3.
Sweden, the first European country to issue paper money, established the Stockholm Banco in 1661. However, the bank collapsed just a few years later due to the over-issuance of bank notes4.
The use of fiat currencies became more widespread during the 19th and 20th centuries, especially during times of war when governments needed to fund their military expenditures. However, this often led to inflation and economic instability as governments would print more money to meet their needs.
Examples Over the Last Century of Fiat Currency Failures
Germany (1920s): After World War I, the German government began printing vast amounts of paper money to pay for its war reparations, as the Treaty of Versailles dictated. This led to hyperinflation, with prices doubling approximately every two days at its peak in late 1923. This rendered the German Mark virtually worthless and led to severe economic and societal upheaval5.
Zimbabwe (2000s): Zimbabwe experienced extreme hyperinflation in the late 2000s. In a bid to offset a severe economic crisis and pay its debts, the Zimbabwean government printed excessive amounts of money. This resulted in hyperinflation, reaching an astronomical monthly inflation rate of 89.7 sextillion percent in November 2008. The Zimbabwean dollar was eventually abandoned in 20096.
Venezuela (2010s): Similar to Zimbabwe, Venezuela also fell into a hyperinflationary spiral in the 2010s. The Venezuelan government printed massive amounts of money to offset falling oil prices, leading to severe inflation. By 2018, the inflation rate had reached 1.35 million percent, causing widespread economic hardship7.
Argentina (1980s to present): Argentina has experienced recurring economic crises and bouts of high inflation. The 1980s saw hyperinflation, with an annual inflation rate peaking at more than 5000% in 1989. Despite numerous attempts at economic reform, Argentina continues to grapple with high inflation and economic instability8.
Yugoslavia (1990s): Before its breakup, Yugoslavia experienced one of the worst episodes of hyperinflation in history. The government’s decision to finance large fiscal deficits through money creation led to extreme hyperinflation, peaking at a monthly rate of over 300 million percent in January 19949.
Turkey (2000-2001): While not a case of hyperinflation, Turkey experienced a severe financial crisis in 2000-2001, partly due to the mismanagement of its fiat currency. The crisis was precipitated by concerns over large fiscal deficits, a weak banking sector and the government’s monetary policy decisions. The Turkish Lira depreciated dramatically and inflation surged10.
Iran (2010s): Iran has struggled with high inflation and currency depreciation for several years, particularly after the re-imposition of international sanctions in 2018. The Iranian Rial has significantly lost value, leading to a surge in inflation and economic hardship for the Iranian population11.
Lebanon (2020s): Lebanon entered a severe economic crisis in the late 2010s, which was exacerbated by political instability and the COVID-19 pandemic. Mismanagement of the Lebanese pound and a large public debt burden have led to rapid currency depreciation, hyperinflation and widespread economic distress12.
These examples demonstrate the potential risks and challenges of managing fiat currencies, particularly when a nation’s economic productivity fundamentals are weak, fiscal deficits are large and confidence in the government’s economic management is low.
The Emergence of Cryptos as an Alternative
These historical failures and the ongoing issues with fiat currencies have led many to seek alternatives. Historically, the most prominent of these have been assets like gold. In recent years, another asset class has risen: cryptocurrencies. These are digital currencies that use cryptography for security and operate independently of a central bank.
Cryptocurrencies like Bitcoin and Zucoins offer several advantages over traditional fiat currencies.
Firstly, they are decentralized and capped at a limited supply of coins, thus free from government control and interference from central banks issuing more of the currency, causing a loss of buying power.
Secondly, they offer transparency in transactions, reducing the risk of fraud and corruption, while also complying with increasingly strict government regulations.
Thirdly, it’s also easier to move your crypto wallet around. As is the case with Zucoins, the wallet is just a file (when backed-up from the Zucoins wallet app). Portability is a big issue, not only with fiat, but with other assets kept in storage by a holding company, such as paper notes representing physical gold or foreign currency reserves. If you don’t “hold the keys”, someone can control your access, as we saw most prominently at the start of the Russian-Ukrainian war.
The history of fiat currencies is a tale of economic excess spending, followed by instability and collapse. While they have become the norm in modern economies, their reliance on government trust, faith or even other nations to pickup the bill, has led to numerous crises and wars throughout history.
The never-ending debt-printing machines of today’s central banks continue to devalue fiat currencies, leading many people to seek alternative forms of value. Cryptocurrencies offer a promising alternative with their decentralized, transparent and inflation-resistant nature. As we look toward the future, it is clear that the evolution of money is far from over and a shift toward digital currencies and assets might be one of paths the future follows.
Zucoins Embraces Past Lessons for a Brighter Crypto Future
Zucoins, a crypto project, offers a compelling alternative in the face of central banks’ continuous devaluation of fiat currencies. With a capped supply of 100 million Zucoins, this model offers protection against the common financial terror of devaluation by creating more coins—a challenge that has consistently plagued fiat currencies.
Unlike fiat currencies, decentralized digital assets operate independently without bowing to a central authority. This autonomy, borrowed from Bitcoin’s playbook, places the power back in the owner’s hands, offering a viable alternative to the pitfalls of fiat currencies, where poor decisions by central banks can lead to economic disasters.
References
1: Ferguson, N. (2008). The Ascent of Money: A Financial History of the World. Penguin Press.
2: Hanke, S. H., & Kwok, A. K. (2009). On the Measurement of Zimbabwe’s Hyperinflation. Cato Journal, 29(2), 353-364.
3: Rodriguez, F., & Morales, J. (2020). An Empty Debate: The Hyperinflation Thesis of Venezuela. World Development, 127, 104749.
4: Gerchunoff, P., & Llach, L. (2003). The Argentine Paradox: Microexplanations and Macropuzzles. Latin American Research Review, 38(1), 183-196.
5: Šoškić, Dejan. “Dinarization and Inflation: East European Post WWII Experience and its Lessons.” Economic Annals 54, no. 181 (2009): 93-120.
6: Onis, Ziya, and Barry Rubin, eds. “The Turkish Economy in Crisis.” (2003): 1-6.
7: Salehi-Isfahani, Djavad, and Mohammad H. Mostafavi-Dehzooei. “Poverty and living standards in Iran after the nuclear deal.” International Journal of Iranian Studies 51, no. 1 (2018): 47-68.
8: Hanieh, Adam. “Money, markets and mandates: finance capital and the global politics of austerity.” In The Politics of Austerity. Palgrave Macmillan, London, 2021. 69-92.
9: Williams, S. (2014). The Book of Tang, Cambridge University Press.
10: Kuroda, A. (2008). “What is the Complement to the Money in an Economic Exchange?”. In A. Kuroda (ed.), The Origins of Economic Systems in China: The Formation and Evolution. Routledge.
11: Weatherford, J. (2004). Genghis Khan and the Making of the Modern World. Crown Publishers.
12: Edvinsson, R. (2010). “The multiple currencies of Sweden-Finland 1534–1803” in Edvinsson, R., Jacobson, T., Waldenström, D. (eds), Historical Monetary and Financial Statistics for Sweden, Volume II: House Prices, Stock Returns, National Accounts, and the Riksbank Balance Sheet, 1620–2012. Sveriges Riksbank and Ekerlids förlag.
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