2013/11/21/the-enduring-tale-of-bitcoin.

Thursday,November 21, 2013

[Editor’s Note: The following post is by TDV Managing Editor, Redmond Weissenberger]

Bitcoin has taken off lately, and so have the cryptocurrency's detractors. The same talking heads who trash gold-bugs now have their new target: a currency not reliant on the government. Should Bitcoin succeed in establishing itself as a means of exchange people can trust, the dollar's demise won't be far away. What we are witnessing right now is the rise of totally state-less currency that threatens the normal working order. The is why the Fed and fiat lovers are scared - they know central banking all over the globe is losing legitimacy.

So where exactly does Bitcoin have its roots? We know the mysterious creator (Satoshi Nakamoto) had some kind of affinity for Austrian economic theory. Even the European Central Bank recognized that the "theoretical roots of Bitcoin can be found in the Austrian school of economics" in a recent study. But knowing theory is not enough to incentivize someone into action - there was something more.

Here is my thought: There were three events in the last one hundred years that laid the groundwork for Bitcoin's rise. First was the confiscation of gold under Franklin Roosevelt. By forcefully robbing the American people of their gold holding, Roosevelt and his communist-leaning economic team devalued the dollar against the metal overnight and lowered the purchasing power for everyone. It was a strictly deceitful move that both bolstered the Treasury's specie holdings while allowing for the creation of more dollars to finance more government spending.

That was strike one. Strike two came when Dick Nixon closed America's gold window after the flawed Bretton Woods global monetary system broke down. The initial agreement between nations was supposed to hold government deficits in check by keeping some resemblance to the gold standard. What happened was every Western state continued to inflate and spend like drunken sailors, including Uncle Sam. Since the dollar was still technically redeemable in gold, Washington's belligerent spending had other government clamoring for the precious metal. On August 15th, 1971, Nixon told the rest of the world to take a hike and that the dollar was henceforth backed by nothing.

The last event which triggered Bitcoin's rise was the great bank bailouts of September 2008. After nearly three decades of continual credit expansion, the bursting of a large housing bubble at the tail end of 2007 left many financial institutions in dire straits. For too many years, the Fed had printed money and created credit to juice the economy. When the whole thing began to collapse, politicians did what they do best: threw money at the problem. Needless to say, this was deliberate bailout of the big guy over the little guy.

These three events, combined with the massive monetary inflation we see going on today, are what withered away trust in government's stewardship over money. They lead the way for Bitcoin's rise and a real alternative to the Old Guard of currency authorities. At this point, the days of fiat money are numbered. It's only a matter of time until we see something take its place - and it could very well be Bitcoin.

[Editor's Note: Redmond's commentary regularly appears in the TDV subscription newsletter