World Reserve Currencies: What They Tell Us About Inflation
The concept of money is complicated — knives, beads, metals, and paper have all counted as money at various places and various times. Money also comes and goes — beads and knives are cool, but you can’t use them to buy a burger. So what makes money widely accepted, and why does this acceptance come and go?
Starting in the 15th century, the most popular forms of money began to achieve a global reserve currency status. Today, the world reserve currency is the one most popularly held at central banks, and historically this status had more do to with global trade and empire-building. All major currencies were backed by either gold or silver at the time, so the more a nation mined and traded, the wealthier it could become.
A brief overview of global reserve currencies over the years
The Start of Conquest
The Portuguese and Spanish were the first nations to achieve reserve currency status thanks to their plundering of the New World. When the Spanish discovered a literal mountain of silver in 1545 at Cerro Del Potosi, global inflation soared. Having enough hard money to impact international inflation rates back in the 1500s is serious business, but nothing lasts forever.
After the Netherlands sent Spain a nasty breakup letter, the two had an eighty-year spat that led to the Dutch holding the world’s reserve currency. The Dutch West India Company helped this process along — exotic spices were all the rage, and Holland’s near-monopoly was nothing shy of impressive. This monopoly ticked off the British, who began throwing stones across the channel, kicking off the Anglo-Dutch Wars.
France knew an opportunity when it saw one. With colonies across the New World, France leveraged its position in global affairs to support both the American Revolution and make its currency accepted worldwide. The concept of new ideas for the New World saw the first experimentation with unbacked paper money. In 1718, John Law founded the Mississippi Company with the French government’s blessing and began to issue paper currency that could be used to buy shares.
Law issued ever-more paper currency to fund the purchase of shares in the company, an effort that capitalized his ventures for a short time. However, when investors sought to redeem those shares for gold, chaos broke out. Monthly inflation topped 23% in January 1720, highlighting the folly of France’s foray into unbacked fiat currency.
The ever-valuable government-issued piece of paper
Governments around the world observed the economic chaos and avoided unbacked money from that point forward…
Yeah right.
During the French revolution, the nation found itself heavily indebted, so the new revolutionary government took another swing at paper money. Each subsequent issuance led to more inflation — the poor and working classes eventually controlled most worthless paper notes. Meanwhile, the wealthy and well-connected purchased real assets such as factories and mines for steep discounts thanks to the rampant inflation.
It was a massive inflationary transfer of wealth which marked the end of France’s reign as the world reserve currency.
Across the channel, another great empire was brewing — despite losing their colonial holdings in the New World, the British Empire was well into its heyday with holdings in India, all of Australia, an island across the globe. With their main European rival now reeling from extreme inflation brought on by revolution, it was the British pound sterling’s time to shine.
For around a century, the Bank of England in London was the center of the financial world. Industrialization continued to accelerate global commerce and more deeply interconnect global markets. Estimates suggest that in 1860 Britain was absorbing around 30% of the world’s exports, with all transactions settled in sterling. The Victorian era was booming, and top hats were all the rage.
The World Wars
The economic success of industrialization comes with heightened military prowess. Unfortunately, the global economic winners began to look for ways to flex their excess power. The military stalemate in Europe suddenly jolted into action in 1914 with the outbreak of the First World War. Investors around the world quickly realized that the European continent was no longer a haven for commerce. As the sterling began to wane, the United States was fast becoming interested in international affairs.
The sterling gave way to dollars following the First World War.
With a shiny new central bank (the Federal Reserve), the US dollar stepped up to the plate as the world’s reserve currency. Today, the dollar still reigns supreme as the currency of choice for global reserves and payments. However, as history has demonstrated time and time again, this can’t possibly last forever, especially given that the dollar is a purely fiat-based currency system with no material backing.
Inflation is already significantly understated, and the dollar has lost over 97% of its purchasing power since 1913. The synthetic commodity of Bitcoin is gaining more traction on the world stage, while governments worldwide have launched an unchecked monetary stimulus. Much like the diminishing returns of revolutionary France, more stimulus is yielding fewer results over time.
It’s for this reason that Ramifi tracks the inflation-adjusted purchasing power of the US dollar. It’s doubtful that the dollar-based, unbacked fiat currency system will somehow escape the crushing force of inflation. Synthetic commodities like Bitcoin and Ramifi stand ready to shield individuals from the inevitable economic fallout of this historic shift.
Ramifi Protocol is the solution for tracking dollar inflation.
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Note: This article is the first in a series of articles exploring the history of inflation and its relation to today’s modern economic quandaries. Stay tuned for the next installment in the series!
Check out our blog for the release of future articles in this series: ramifitoken.medium.com