In our Blocktrainer 1×1 series, we have already discussed money per se, its history and the properties of good money and which problems it solves (keyword: barter/"double coincidence of needs"). We also discussed the fact that gold is a relatively good form of money, as it has all the important properties. It is therefore hardly surprising that economies have at some point started to use gold as money or to peg their currencies to gold. However, for reasons that will be discussed later in this article, this so-called "gold standard" was abolished. As Prof. Dr. Saifedean Ammous describes in his book "The Bitcoin Standard", from today's perspective, it no longer makes sense to return to a monetary system backed by gold if an economy wants to use good money as its national currency again. It makes no sense because in today's world we have a kind of digital gold in the form of Bitcoin, which has several other advantages over the physical precious metal.

So even though (gold) coins had been around for a long time, it was not until the 18th, 19th and 20th centuries that the link between gold and money really became significant. These centuries were characterized by rapid progress in the areas of communication and transport. Technologies such as the telegraph and the railroad made it easier than ever for people and goods to get from A to B. This in turn resulted in the need for more convenient payment options such as checks or invoices. The difficulty, however, was convincing both merchants and consumers that the paper they now held in their hands actually had value. So how do you tackle this problem?
The answer from governments around the world was to issue paper money backed by valuable metals - especially gold. Britain was one of the pioneers and introduced the "gold standard" in 1717. Under this system, printed paper could be exchanged for physical gold at a bank. It was therefore to be seen as a kind of gold voucher. By 1900, more than 50 other nations had already adopted this standard, which meant that the value of gold continued to rise over time as more and more economies used it to back their money. This form of money is referred to as "hard/solid/good money".

As mentioned above, early coins were not really forgery-proof and could be used by fraudsters to shovel money into their own pockets. However, paper money also had a major flaw during the gold standard, because the gold, which was actually used as collateral, was hidden in the vaults of the (central) banks.

While this facilitated the exchange of paper money for gold, it also created a highly centralized system in which governments controlled the value of paper money. If they wanted to, they could increase the money supply at any time without increasing the corresponding amount of gold. In other words, the real value of paper money was completely at their mercy.

With the start of the First World War in 1914, almost all the major European powers decided to exploit this fact to finance their war machine. To finance the war, the belligerent countries simply printed new money. The catch, however, was that while the printing presses were humming, the corresponding amount of gold was not deposited in the vaults at the same time. Within a few weeks, this led to the countries involved in the First World War prohibiting the exchange of paper money for gold and abolishing the gold standard.

This had two effects:
Firstly, this source of cash allowed governments to fund their war efforts for another four years, thus shedding four more years of blood.
The second result of this money printing was that the value of existing currencies was greatly depreciated. The Austro-Hungarian crown, for example, fell by almost 70% against the Swiss franc - a currency that remained pegged to gold thanks to Switzerland's decision to remain neutral and sit out the war. Both factors would continue to play an important role in shaping economic life in post-war Europe.

The basic idea of the Bretton Woods system was to link all the different currencies to the US dollar at fixed exchange rates, which in turn would be linked to the price of gold at a fixed exchange rate. The IMF (International Monetary Fund) was established to set and monitor these exchange rates. In addition, all participating countries were required to transport all their gold reserves to the USA so that they could be stored there to serve as collateral for the dollar.

In theory, the Bretton Woods system was therefore something of an extended copy of the gold standard that existed until 1914, as - supposedly - all currencies could have been exchanged for gold. Unfortunately, this only worked to a limited extent in practice. The US relaxed the self-imposed rules and inflated its own currency against gold, while other nations inflated their currencies against the dollar to finance economic expansion. Eventually, this hypocrisy and false pretense was completely dropped and gold was completely abandoned as the standard for the US dollar, as it was impossible to peg a rapidly inflating currency to gold. On August 15, 1971, President Nixon announced that dollars would no longer be convertible into gold. From now on, the value of currencies would be freely determined by the interplay of the world's major fiat currencies - with sometimes dire consequences brought about by this unhealthy/unsound monetary system...

Monetary policy based on unhealthy (fiat) money is associated with two major problems in particular: recessions and the endless accumulation of debt. Government interference in the market takes the form of central planning. And this is where the problem lies. No single person, agency, department or government ever has access to all the information necessary to understand the vast and ever-changing web of preferences, choices, costs and resources that make up an economy. And if you don't have that information, you're bound to make bad decisions - and that's exactly what governments do when they manipulate the money supply. Their interventions distort the markets, especially the capital markets, and in this way create so-called "boom and bust" cycles, i.e. cycles of steep upswings and rapid crashes. The boom is caused by artificially low interest rates or an inflation of the money supply, which incentivizes people to invest more and save less. A bubble follows and as soon as this bursts, the economy goes into recession.
The response of governments or economies to recessions is usually to use the theories of John Maynard Keynes, one of the most influential economists. He assumed that recessions only occur when spending within an economy is too low. If you want to counteract the recession, you have to get the population to spend more money.
To achieve this, you could either lower taxes or pump more money into the market. As it is usually the case that people do not necessarily immediately invest the money they would receive through tax savings in the purchase of (consumer) goods, governments usually decide to expand the money supply and flood the market with newly created money. As a result, saving becomes less attractive and leads to unwise and opportunistic investments by the population, which in turn leads to an increase in debt within the economy.

Ultimately, an unhealthy monetary system that can be manipulated by individual entities leads to recessions that are counteracted with the wrong measures, resulting in never-ending mountains of debt. As of today (October 2020), global debt amounts to more than $250,000,000,000,000 (= $250 trillion) - and rising.