The gold standard
There was a time when you didn’t have to worry about the impact of inflation on your finances. We are talking about the late 19th and early 20th centuries – when most national currencies were tied to a certain amount of gold.
In the past, the governments of most countries set a fixed exchange rate between their currencies and gold. This meant that you could go into a bank with a bunch of cash and leave with a solid gold distribution, and you could do it again the next day and the next, and get the exact same amount of gold every time as opposed to today, where you would have to face a different exchange rate every day.
This system was effective for two main reasons. Firstly, gold is hard to find. Not only is the supply limited to the number of known gold deposits, but it is also difficult to mine, refine, and transport – meaning a lot of work had to be done to make it usable. It also cannot be tampered with, as it cannot be manufactured, and it is incredibly easy to check whether the gold is real or not.
This system was known as the gold standard and has been abolished for half a century. Where currencies in the past were supported by a fixed gold distribution, which is no longer the case! Instead, they are simply supported by the will of the government that prints/cuts it.
And as we’ll soon learn, changes in economic conditions over the past century have forced governments to print more currency than ever before, with the result that something we all face but many of us don’t recognize is how much damage it does to our finances.
The move from gold
Before we get to how inflation sucks, we first need to take a look at how legal money came about, or fiat, that’s the kind of money we have today, not backed up by gold or anything else anywhere.
When countries had to adhere to the gold standard, they had to maintain a significant gold reserve to match the amount of currency in availability.
In other words, they couldn’t print money unless they had enough gold in reserves to back it up — that is, unless they changed exchange rates (which they did, many times).
But as countries had to increase their spending because World War I, they found that they were limited by the availability of gold. So, they simply suspended the convertibility of gold or changed its exchange rate to increase cash flow.
But the gold standard didn’t stop completely until the 1970s, when the United States broke up something known as the Bretton Woods agreement, which saw other currencies pegged to the U.S. dollar (USD), which was pegged to gold.
With this, the US dollar became what is now known as “fiat currency”, that is, a currency that has its value to be imposed by the government that issues it and is based on the constant loyalty of its users.
This is the kind of money we generally use today, it has no intrinsic value like commodity money and there is no limit to how much of it can be printed, as it is not limited by the availability of resources. In other words, governments can essentially print money as and when needed and for whatever reason!
About a fifth of all US dollars to be printed in 2020 alone.
The rapidly growing money supply, combined with other factors such as rising wages and production costs, has caused the purchasing power of currencies to collapse over time. This means that it costs more and more, over time, to buy the same things.
In other words, inflation is the reason why everything seems to get more expensive over time!
How inflation affects you
Like most things, the value of a fiat currency largely depends on changes in supply and demand.
When supply increases and demand decreases or remains the same, the value of this currency tends to fall while the opposite is true if demand increases while supply falls or remains the same. This is supply and demand in a nutshell.
But with fiat currencies, this balance is almost always skewed towards oversupply. This oversupply is where the problems begin when thereare simply too many currencies available.
With too much money in circulation, its value tends to decrease over time, making it less and less valuable. This is not very noticeable when measured from day to day or even from month to month, but when you compare it with the decade, the damage becomes clear.
If you’ve been around for several decades, you may have already noticed how money doesn’t go as far as it used to be due to inflation. Overall, the purchasing power of the U.S. dollar (USD) has declined by more than 90 percent over the past 100 years and more than 30 percent over the past twenty years.
To put it into perspective, $100 in 2021 will bring you less than one-tenth of what it would have been 100 years ago, or just two-thirds of what would have come out in 2001. That’s why the price of a McDonald’s Big Mac has risen from $0.45 in the 1960s to $5.66 in 2021.
For example, if we see how the price of coffee has been affected by inflation in 1970 you could get a coffee for $0.25 while until 2019 it cost $ 1.59.
As you can imagine, keeping money in the bank or simply holding cash for long periods of time can lead to a dramatic loss of purchasing power this is certainly true if the interest rate you receive (the money you earn to have your money in a bank) does not cover inflation.
And that’s if your bank is generous enough to even pay interest that many don’t. And some even impose negative interest rates, which means you’re actually losing money on keeping your funds in a bank!
This is not only a problem affecting the US dollar (USD), almost every modern currency suffers from inflation, while some even suffer from “hyperinflation” due to extremely rapid increases in the cost of goods.
Why crypto funds are against inflation
In recent years, cryptocurrencies have emerged as one of the most popular counterweights against inflation, as some of their properties can make them resistant to the decline in purchasing power that fiat currencies typically experience over time.
Many cryptocurrencies, including Bitcoin (BTC), Litecoin (LTC), and Cardano (ADA) have a fixed maximum supply that cannot be easily exceeded unlike most fiat currencies that do not have a maximum supply limit.
This means that you can always be sure exactly how many units of a cryptocurrency there will ever be – whereas for fiat currencies, you’re essentially on the whim of the government. With cryptocurrencies, on the other hand, only the community can decide whether any changes should be implemented by strengthening the many rather than the few.
In addition, they also have a well-known, predictable rate of inflation that does not depend on the surrounding economic environment, but is instead made at the protocol level. In many cases, this rate of inflation (new currencies entering circulation every year) actually decreases over time, making the coin deflationary.
Some would also argue that unlike fiat currencies that have no supply limit and are not backed by any commodity, the scarcity of many cryptocurrencies is what gives them at least part of their value.
They look a bit like gold in this regard, which is why some people call Bitcoin “digital gold.”
As you’ve probably heard by now, most cryptocurrencies have seen their value skyrocket against fiat currencies like the US dollar (USD), the pound (GBP), and the Chinese yuan (CNY) with Bitcoin only climbing 340% against the USD last year.
This growth may be a simple byproduct of their increasing use as a hedge against inflation, as more and more people begin to recognize the damage caused by inflation.
Looking to the future
Inflation is a problem we all face, but we often don’t recognize how problematic it can be especially when measured over years and decades.
But thanks to cryptocurrencies, it is now possible to regain control of our finances and avoid seeing our money’s value gradually erode over time.
As such, cryptocurrencies are often hailed as the potential “future of money,” protect against economic decline, and have seen tremendous growth in both their value and adoption as people make the transition.