For centuries, humans across the globe turned to gold as a trusted form of money, primarily because of its unique properties—scarcity, durability, and costly to forge. Gold was mined, refined, and minted into coins by private parties and rulers alike. Kings, in particular, would imprint their images on coins as a symbol of their reign and authority.
But how did we transition from using gold, a scarce and valuable commodity, to relying on paper money that holds no intrinsic worth?
Gold, while highly valuable, was not easily portable, divisible, or convenient for everyday transactions specially when you have an economy that is growing and wants to scale. To solve this problem, people began storing their gold with goldsmiths and early bankers, who issued paper certificates—IOUs—representing the gold held in their vaults. These certificates allowed for easier exchange, as they were more practical than carrying physical gold.
However, the system had a centralized trust problem and soon became vulnerable to abuse. Many custodians realized they could issue more paper certificates than the actual gold they held, assuming that not everyone would demand redemption at the same time. They betrayed the trust the customer placed with them. This practice worked—until it didn’t. During economic downturns or moments of panic, when too many people attempted to withdraw their gold at once, the custodians couldn’t meet the demand. The result? Bank runs became a recurring crisis, exposing the fragility of a system built on trust rather than full backing.
Governments saw an opportunity to establish central banks and become the sole issuers and distributors of money. They enacted laws ensuring that only the government could print currency. Additionally, they mandated that all merchants accept this money and that taxes could only be paid using the government-issued currency. Regardless of whether a state is a monarchy or a democracy, the ruling class’s primary objective has always been to maintain and consolidate power. Historically, governments that exert absolute control over their citizens tend to remain in power longer. Governments maintain control by regulating three key areas: information, money, and weapons.
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