The U.S. Monetary System: Can it be fixed?
Kevin Bowie
ENGL1301-ONL1 English Composition
February 5th, 2024
Professor Emeritus Mitch Land, Ph.D.
WHERE DID WE GO WRONG?
It might not take much to convince people that the monetary system in the U.S. is broken. In 2024, we’re living in an era of high inflation coupled with a cost of living that is difficult for many people to manage. The increases in housing prices and goods and services have outpaced the income increases for average Americans according to probuilder.com.
Unfortunately, the government-established solution to this problem is arguably part of the problem itself. Usdebtclock.org shows the country is $34 trillion in debt, which is constantly increasing. People who can’t manage a budget probably shouldn’t oversee monetary policy.
Governments tend to be fundamentally inefficient. If a department doesn’t use the totality of its budget, it is then subject to a budget cut the following year. However, if it spends all the money that has been allocated to it, that department now has reason to request a budget increase. So, this becomes the goal of each department. To max out its budget, whether or not the money is being spent on something productive. Keep in mind, that this is negative growth. Because the government is not making any money, as it continues to grow, it is a bigger draw on the economy. It’s easy to see how a growing government needed more money to sustain itself.
Potentially not coincidentally, both the federal income tax and the Federal Reserve were established the same year. The United States of America didn’t simply survive, it thrived for 137 years without the so-called benefits of federal taxes or a separate entity that was purportedly designed to stabilize the economy through optimizing monetary policy. They were implemented in 1913, and notably, 16 years later the U.S. fell into the Great Depression. The Federal Reserve is a central bank that is in charge of the money supply and has the power to change interest rates to manipulate the economy.
For most of history, currencies have been backed by physical assets, often precious metals. The U.S. dollar was no different. For most of its existence, dollar bills were redeemable for metals such as gold and silver. But in 1933, President Franklin D. Roosevelt declared private ownership of gold illegal, except in the case of jewelry. You could say this was the beginning of the end of the gold standard for the USD. U.S. Federal Reserve notes have not been redeemable for gold since 1934, and they haven’t been redeemable for silver since the 1960s.
With the intent to bring stability to a post-WWII global economy, the Bretton Woods system was established in July 1944. The concept was to set the dollar at a constant value of $35 per troy ounce of gold, and then peg international currencies at a constant rate respective to the dollar. The USD became the global reserve currency, and foreign governments were able to buy USD at a rate of $35 per ounce of gold traded in. This enabled them to conduct trade in global markets in USD and hold USD reserves that would stabilize their national currency. The Bretton Woods System ended, and President Richard Nixon ended trading USD for gold in 1971.
With the end of Bretton Woods, and the US now holding most of the the world’s supply of gold, 1971 ushered in the current era of fiat currencies. Fiat money is not backed by a commodity. There is no substantive value to it, other than that people agree to use it as a transfer of value. Fiat currency is not a good store of value because it loses value over time, through inflation.
Without any concern of people trying to trade in their dollars for gold, the Federal Reserve now had free reign to create as many dollars as they pleased. When you flood the market with new dollars, it devalues the ones that existed previously. This is what creates inflation, also known as the invisible tax. With a cumulative inflation rate over the last 110 years (1913-2023) at 3,030.06%, the purchasing power of $1 in January 1913 would require $31.30 in December 2023. Using the same calculator, we can see that in roughly the last 16 years we’ve lost more than 50% of the purchasing power we once had.
Fractional reserve banking is another way to increase liquidity and expand the money supply. It allows banks to ‘borrow’ money from their depositors to use as loans for others. Yet, the depositors retain full access to their money. The shocking part about this is, as of 2020, there is no limit to how much of their deposits can be loaned out. For example, Bob puts $10,000 in an account. Then Tom comes to Bob’s bank looking for a car loan. Based on the money in Bob's account, the bank can give Tom a $10,000 loan. Then Bob could still withdraw all of his money, essentially meaning we have just cloned those dollars and used them for 2 purposes at the same time.
Prior to 2020, it was generally accepted that the federal minimum requirement was for banks to hold cash reserves of at least 10% of the value reflected in their accounts. Meaning that it would only take 10% of their depositors to come in requesting cash for the bank branch to potentially run out of money. Now the 10% reserve is no longer required.
We have a corrupt, crony capitalist government that has the propensity to overspend. The government has morphed from something that was designed to serve the people, to something that strives to serve itself. It established a monetary system that perfectly serves this purpose, as well as benefitting the elitists who influence the government. The money itself is now worthless, and the entire banking empire that was built upon it is a house of cards waiting to topple. The issues described above are not meant to be an exhaustive compilation of all the problems presented by the current monetary system, but represent with some context, a brief overview of some of the core problems that need to be addressed when evaluating potential solutions.
As more people become aware that they were born into a system that is more accurately described as working against them than for them, there have been some efforts made to work around and/or resolve the aforementioned problems. Now it’s time to explore some of those possibilities.
Due to the complexity of this topic, it truly deserves its own deep dive. To skim over it lightly, Bitcoin is a digital currency invented in 2008. Its cryptographic nature is part of what provides security, and what spawned the name of the category of digital currencies that have been subsequently created crypto, or cryptocurrencies. Bitcoin provides advantages over the current monetary system in multiple ways. It was created with a hard cap, so that unlike the Federal Reserve having no limit to the number of dollars it can create, a maximum of 21 million BTC can ever exist. This makes it a much better store of value than fiat currencies.
Additionally, BTC opened the door to sidestepping the extremely inefficient banking system. In a digital age when people are accustomed to things happening quickly and for free, banks are still taking days to process transactions and they continue to tag people with unnecessary fees. At this point, Bitcoin is far from the fastest or most efficient crypto, but it proved the concept and paved the way for others to build upon its concepts. It was created to give people power over their money, and it has so far proven to be a major success compared to legacy systems.
The next major evolution in blockchain technology came from the advent of smart contracts originating on the Ethereum network. Instead of a simple digital ledger that can only express transactional values, which is what Bitcoin offered, Ethereum was built with bigger blocks in mind. Bigger blocks can store more data, and that data was designed to be further encoded to be responsive to conditions, rather than just record data. If Bitcoin’s blockchain could be described as a decentralized public database, Ethereum’s would be a decentralized public computer, because it can be programmed for various functions.
Since Ethereum first went live nearly a decade ago, it sparked a major race to create the fastest, most secure, most capable smart contract blockchain there is. Competition has led to collaboration, as now many of these chains have created bridges between themselves and started working towards interoperability. Collectively, they are building the next generation of internet, referred to as Web3, with which we are just scratching the surface of its capabilities.
What is apparent already is that this emerging “world computer” is revolutionizing finance, asset custody and management, investing, banking, gaming, entertainment, and even art - just to get started. The speed and efficiency that it offers when it comes to what we think about how money should work, is truly astounding. Just consider that all of the overhead that a bank requires - property, buildings, utilities, payroll, etc. - can essentially be eliminated and replaced by computer code that doesn’t require as much as a coffee break.
Making your money work for you can now lead to benefits that were previously unthinkable, and it doesn’t require huge amounts of capital. Being that this industry is still relatively in its infancy, the general population has a tremendous amount of influence over how it develops. This is highlighted through decentralized autonomous organizations (DAOs) which give people voting power and new levels of governance over how these projects develop and change. It is the closest thing we have seen to a truly free market available to the majority of people on earth and can serve everyone equally.
While crypto presents an exciting future with tremendous potential, nothing is without a downside. Many of the common detractors are merely talking points. The energy-hungry computation-intensive proof-of-work consensus mechanism isn’t as terrible as it’s made out to be. It fails to account for the fact that existing banking infrastructure also utilizes a lot of power. Additionally, a fair portion of BTC mining is conducted by renewable energy.
Beyond that, the power-intensive proof-of-work consensus mechanism is giving way in favor of a much more efficient proof-of-stake consensus, operating networks on a small fraction of the energy that the proof-of-work networks use.
Security is somewhat of a valid concern, but it is stabilizing quickly. Losses due to hacks reduced by more than 50% from 2022 to 2023. While the cumulative damage from these hacks resulted in $1.8 billion in losses in 2023, considering the global market cap is currently nearly $2 trillion. Considering this, the hacks have truly affected only a small percentage of people. Historically, a significant number of losses have been self-inflicted. These generally are a result of people forgetting passwords that grant them access to their funds or falling for scams and get-rich-quick schemes.
As far as financial networks go, the new Web3 variety are very robust. Geographically, their points of operation are spread across the globe throughout diverse locations. Whether it be miners or nodes, a large percentage of them can go down while the network remains unaffected. But if there were to be an event that compromised the global internet simultaneously, that could prove to be catastrophic. However, realistically, this problem is something that exists within our existing banking infrastructure as well.
Sound money is a term to refer to money that is backed by something of value. It is basically the opposite of fiat money. Going back to biblical times, people were using silver and gold coins as currency. This could be considered the epitome of sound money. The money itself is made of the commodity that gives it value. Today, these precious metals hold more inherent value than they did historically. Recent technological advances are driving demand for these metals to produce goods used around the world.
The trend of abuse of fiat currencies has led to increased interest in the collection of gold and silver from people who are looking to diversify their investment portfolios and protect themselves against inflation and market collapse. The obvious advantages to reverting to sound money and dealing directly with silver or gold are that they are easily verifiable and impossible to be stolen by hackers or lost to technological mishaps.
Disadvantages include difficulty dividing the high-value metals into small denominations. Small denominations could be physically exceedingly small and easy to lose. Carrying a significant amount of money could also prove to be burdensome due to the weight. Knowing there is something of value carried by most people could lead to more muggings and robberies, considering many people now don’t carry cash and credit cards can be canceled easily, limiting financial damage incurred by such incidents. The primary disadvantage to moving to a system exclusively using sound physical money would be the lack of ability to make online purchases or transfer funds electronically.
Ideally, we could create a hybrid of crypto and precious metals. Something that offers the convenience and utility of crypto, with the security of holding physical commodities. Some cryptos are designed to serve as sound money, backed by other assets such as other cryptos, stocks, currencies, precious metals, and combinations of these and other things. As with anything though, proving the validity of these backings is subject to audits and certain levels of trust. Even outside of the crypto space, gold and silver certificates have been sold which ended up representing nothing at all. Much the same, holding a representation of an asset is never as secure as holding the asset itself.
Considering the pros and cons of each, cryptocurrencies serve as a superior form of money compared to gold and silver. Gold and silver still have their place as a store of value and diversity of investment, but they can’t compete as a functional currency. Cryptocurrencies offer far more utility and convenience with reasonably limited downside, barring government interference and overregulation.
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