Money and Banking
The modern financial system, built on centralized fiat currencies and fractional reserve banking, erodes savings and concentrates wealth, but decentralized solutions like Bitcoin offer a transparent, permissionless alternative to empower individuals and connect the world.
Money is the backbone of our global economy, a shared ledger that facilitates trade, stores value, and shapes our financial futures. Yet, for all its importance, the modern monetary system is fundamentally flawed, eroding trust and creating inequities that affect billions of people worldwide. From persistent inflation to centralized control, the way money works today often undermines the very people it’s meant to serve. This article explores why our financial system is broken and considers pathways toward a more equitable and resilient monetary future, drawing on broad economic principles.
The Roots of a Broken System
At its core, money is a tool for simplifying trade and storing value. Historically, societies relied on barter, which was inefficient due to the challenge of matching needs—someone with extra spears might struggle to find another with furs who wants spears. Early solutions included commodity money, like shell beads or gold coins, which were durable, divisible, and widely accepted. These systems worked because they were grounded in scarcity and trust in the physical properties of the medium.
Over time, however, money evolved into more abstract forms. The introduction of paper-based credit systems, like the medieval hawala network, allowed for faster, safer long-distance trade by relying on trusted intermediaries. By the Renaissance, double-entry bookkeeping and negotiable financial instruments, such as banknotes, further streamlined commerce but introduced new risks. Banks began practicing fractional reserve banking, lending out more money than they held in reserves, creating a system where claims on money often exceeded actual assets. This set the stage for instability, as seen in periodic bank runs and financial crises.
The Modern Financial Era: Centralization and Abstraction
The modern financial system, shaped by three major transformations since 1871, has grown increasingly centralized and detached from tangible value. The international gold standard (1871–early 20th century) tied currencies to gold, but the telegraph’s ability to enable instant transactions outpaced physical gold settlements, creating opportunities for banks to expand credit. This led to a system where claims on gold far exceeded actual reserves, a fragility exposed during World War I when governments printed money to finance wars, breaking gold pegs and devaluing currencies.
The Bretton Woods system (1944–1971) pegged global currencies to the U.S. dollar, which was tied to gold, but fractional reserve practices and U.S. deficits eroded trust, culminating in President Nixon’s 1971 decision to end gold redeemability. The subsequent petrodollar system, where oil trade was denominated in dollars, cemented the U.S. dollar’s dominance but further abstracted money from physical backing. Today, over 160 fiat currencies exist, each controlled by a central bank with the power to expand money supply, often at the expense of ordinary people’s savings and wages.
The Consequences of a Broken System
The flaws in this system are stark. Central banks’ inflation mandates ensure prices rise over time, eroding purchasing power. In wealthy nations, this happens subtly, concentrating wealth among those with access to credit or assets that outpace inflation. In developing countries, the impact is more severe—hyperinflation in places like Zimbabwe, Venezuela, and Argentina has wiped out savings and destabilized economies. For example, Egypt’s currency devaluations in 2016 and 2022, driven by external pressures, halved the value of citizens’ wages and savings overnight.
Fractional reserve banking exacerbates these issues. By lending out more money than they hold, banks create a fragile system prone to crises when depositors demand their funds. Governments and central banks often respond by printing more money, diluting its value further. This process, less transparent than taxation, funnels wealth to those closest to money creation—bankers, corporations, or corrupt officials—while ordinary people bear the cost.
Capital controls and currency silos add another layer of dysfunction. In many countries, citizens face restrictions on accessing foreign currencies, trapping them in devaluing systems. Even in developed nations, negative-yielding bonds and mounting public debt (like the $8 trillion U.S. debt increase from 2020–2022) distort incentives, punishing savers and rewarding speculation.
A Path Toward Fixing Money
The core issue is centralization. Money, governed by banks and nation-states, is subject to manipulation and inefficiency. However, emerging technologies offer hope for a more decentralized, transparent, and equitable system. Bitcoin, introduced in 2009 by Satoshi Nakamoto, represents a radical alternative. Built on cryptography and proof-of-work, it allows peer-to-peer transactions without intermediaries, settling in a matter of minutes. Its fixed supply of 21 million coins prevents dilution, and its open-source nature ensures no single entity can control it.
Bitcoin’s decentralized ledger, maintained by nodes and miners, empowers individuals to hold and transfer value across borders without permission. For those in authoritarian regimes or high-inflation economies, it offers a way to protect savings and bypass restrictive capital controls. While volatile, Bitcoin’s adoption has grown steadily, proving its resilience and potential as a global monetary network.
Other innovations, like stablecoins, provide dollar-based alternatives for those in unstable economies, though they remain centralized. Central bank digital currencies (CBDCs), while digitally native, risk entrenching state control, potentially enabling surveillance and further dilution of value. The choice is clear: one path leads to greater centralization, while the other, exemplified by Bitcoin, prioritizes individual sovereignty and transparency.
A Call for a New Monetary Future
Money is a shared ledger, and the question of who governs it is critical. Today’s system, fragmented into 160 fiat currencies, is centralized, opaque, and prone to abuse. It punishes savers, concentrates wealth, and traps billions in unstable economies. To fix it, we need a system that is decentralized, open, and resistant to manipulation—one that empowers individuals rather than institutions.
By embracing technologies like Bitcoin, we can break down financial silos, connect people across borders, and create a monetary system that serves everyone. The future of money depends on our willingness to rethink what it means to trust and trade in a globalized world. Let’s build a system that works for all, not just the few.
To explore these ideas further, check out Lyn Alden’s book:
Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better
A Comprehensive Overview of the Past, Present, and Future of Money
Broken Money explores the history of money through the lens of technology. Politics can affect things temporarily and locally, but technology is what drives things forward globally and permanently. The book's goal is for the reader to walk away with a deep understanding of money and monetary history, both in terms of theoretical foundations and in terms of practical implications.
This is an affiliate link, and I may earn a commission at no extra cost to you.
