It’s happening in El Salvador. It’s happening in Texas. It’s happening in Wyoming. It’s even happening in the Kingdom of Bhutan. To combat inflation, states and entire sovereign nations are beginning to create strategic Bitcoin reserves. Moreover, their rationale for doing so is simple.
In the sixteen years since Bitcoin first hit exchanges, its value has done nothing but skyrocket. At the same time, the purchasing power of fiat currencies like the U.S. dollar has done nothing but diminish. Some people, therefore, see sovereign nations investing long-term in Bitcoin as a way to offset inflation. Doing so, these same people argue, might one day even help pay off some of some sovereign countries’ spiraling national debt obligations. (Everyone’s looking at you, USA.)
What if I told you, though, that we don’t need a high-tech digital solution to spiraling debt and inflation? In fact, what if I told you that a tried-and-tested low-tech solution to inflation already exists in the form of the Bradbury Pound?
What’s the Deal with Strategic Bitcoin Reserves Anyway?
In the case of Western countries like the USA, the declining value of the dollar is exacerbated year on year by constant government borrowing and intermittent bouts of quantitative easing. (This is where governments instruct cental banks to print money out of thin air whenever a financial crisis strikes.)
To demonstrate, let’s look at eggs. For a dozen Grade A eggs in 2010, consumers might have expected to pay just $2.60. Today, however, a dozen of the same Grade A eggs costs on average $5.90. This is because the true purchasing power of the dollar is far less than it was 15 years ago.
By comparison, one Bitcoin in 2010 was worth just $0.39, whereas at the time of writing, one Bitcoin trades at around $100,000. – That’s a lot of eggs.
Bitcoin is also a deflationary asset. This means that until the last Bitcoin enters circulation (estimated to occur in 2140), people expect Bitcoin to only increase in value as the total supply diminishes. Given these numbers, it’s easy to appreciate why there’s such a buzz about countries like the USA creating strategic Bitcoin reserves.
Let’s remember, though, that with great financial optimism comes great intellectual responsibility.
Let’s Put the Buzz About Bitcoin Under Some Real Scrutiny
Can strategic Bitcoin reserves really save countries like the U.S. from hyperinflation and spiraling national debt obligations? In the short term, the simple answer is maybe. However, a lot can change between now and 2140, when the last Bitcoin will enter circulation.
Let’s remember, for example, that 115 years ago, the horse and cart were still most people’s primary mode of transport. Let us also recall that on The Crypto Con, I’ve already gone to lengths to expose just a few unsettling truths about cryptocurrency overall. These include:
- The fact that control over the supply, price, and ongoing development of Bitcoin is increasingly being consolidated among a handful of players in the legacy financial system. (Think big companies like BlackRock.)
- The fact that all modern CPUs from 2008 onward have built-in backdoors, which make it possible for three-letter government agencies (and hackers with enough resources) to undermine the security of even the best-protected cryptocurrency wallets.
- The fact that Bitcoin itself was likely created by a three-letter U.S. government agency like the CIA to condition people to accept the idea of a cashless society one day.
- The fact that Bitcoin specifically has only 3–10 years (possibly just 3–5 years) to become quantum-computing resistant before the encryption securing the Bitcoin blockchain and all Bitcoin transactions becomes obsolete.
These are just a few major risks to consider when pinning long-term hopes of financial prosperity on any cryptocurrency.
We also need to remember that mass adoption of cryptocurrency threatens to unbank and exclude millions of people from the financial system as we know it. Physical cash, after all, is inherently inclusive. In the midst of a power outage, you can still use the change in your pocket to buy essentials. However, in a cashless, crypto future, you will essentially be decoupled from society the moment you misplace your smartphone.
Need a dozen Grade A eggs in 2030, after a week of no power because China exploited backdoors to shut down your Shenzhen-built local solar farm? Well, you’d better hope you have something worthwhile to barter with.
That’s right. In a real world with real electronic risks, neither Bitcoin nor any other cryptocurrency has any real intrinsic value. Thankfully, alternative, low-tech monetary solutions like the Bradbury Pound do.
What Is the Bradbury Pound?
In 1914, when Great Britain declared war on Germany, the financial order of the UK was strikingly similar to that of the U.S. today.
The Bank of England, a private bank like the Federal Reserve is today, was the only authority in the country that could issue currency. If the UK government needed cash, it had to borrow this from the Bank of England and agree to repay any amount borrowed back with interest. There was just one problem.
The outbreak of war sent the UK’s private and public sectors into a panic. This led to a subsequent run on banks as people attempted to withdraw savings and liquidate investments. Soon, gold-backed banknotes issued by the Bank of England were in short supply. Worse, continued withdrawals would see the Bank of England’s stock of bullion backing those notes begin to diminish.
To stop this from happening, the UK government quickly passed the Bank Notes and Currency Act. This Act made it possible for the UK government to issue legal tender independently of the Bank of England, with all notes issued being backed by the “wealth and labor potential of the country.”
Going into print immediately, the new Bradbury Pound had the same value as pounds issued by the Bank of England. However, unlike Bank of England banknotes, the Bradbury Pound was issued free of debt or interest. It was also accepted anywhere regular Bank of England notes were and played a crucial role in stabilizing the UK economy between 1914 and 1917.
What Happened in 1917?
Despite the Bradbury Pound being created to save the Bank of England from potential collapse, the privately owned Bank of England quickly realized that the Bradbury Pound was doing more harm than good (at least to itself). After all, the Bank of England was no longer collecting interest on new money entering circulation. In 1917, the UK government, therefore, ceased issuing new Bradbury Pounds and reverted back to borrowing cash from the Bank of England whenever new cash injections into the economy or additional government borrowing was necessary. However, let’s make one thing abundantly clear.
The two full years during which the Bradbury Pound was the de facto currency of the United Kingdom saw the country undertake massive infrastructure projects vital for preparing for war. The Bradbury Pound was not, therefore, some kind of baseless IOU. It was a real currency with real value, which created real value.
Would a Currency Concept Like the Bradbury Pound Still Work Today?
At present, the national debt of the U.S. tops $37 trillion. Worse, debt is mounting by the second and is forecast to only increase as the U.S. borrows more money from the Federal Reserve. Each time this happens, inflation ramps up, meaning the cost of living for average Americans increases.
As a high-tech solution to this problem, many U.S. states are creating strategic Bitcoin reserves. However, low-tech solutions like introducing a U.S. equivalent of the Bradbury Pound are more future-proof and practical to implement. There is also already precedent for this.
During the 2008 financial crisis in Europe, the European Central Bank bailed out several member states’ central banks and several other so-called “too big to fail” private banks. However, bailouts came with conditions, such as EU member states agreeing to hike taxes exponentially. In Iceland, though, something altogether different happened.
Rather than accept EU funds to bail out struggling Icelandic banks, Iceland decided to let its debt-stricken banks fail. The Icelandic government then guaranteed the safety of Icelandic citizens’ deposits and established new banks to take over all domestic operations. This meant that foreign investors in Icelandic banks were forced to take major losses. However, at the same time, there were no major foreclosures on Icelandic businesses or Icelandic people’s homes, as was happening in Europe and the United States.
In response, the value of the Icelandic Krona fell sharply on international markets. However, the Icelandic economy later returned to growth faster than any other economy in Europe. To demonstrate, at the time of the 2008 financial crisis, Iceland had a debt-to-GDP ratio of 92%. By 2018, this had been reduced to just 35%.
In short, while Iceland didn’t reissue its currency in 2008, it did take back sovereign control of its currency, similar to how the UK once did with the Bradbury Pound. More importantly, doing so resulted in several net positives for Icelandic people and the overall Icelandic economy.
The Bradbury Pound vs. Bitcoin
Are Bitcoin strategic reserves or reserves of any digital assets that will presumably appreciate in value for the next 115 years the answer to current global sovereign debt crises? They could be if you’re looking for a magical solution to decades of rampant mismanagement of the economy. In reality, though, adopting something like a Bitcoin strategic reserve will likely only get countries like the U.S. into more trouble eventually.
Cryptocurrency is electronic. If a hacker doesn’t take it out, a solar flare or someone with a backdoor into your power grid or Federal data centers will one day.
Put simply, if a currency is not tangible and available to exchange even when the lights go out, it has nothing near the intrinsic value of low-tech prior solutions to inflation like the Bradbury Pound. In fact, you could argue that any currency that you can’t hold in your hand is extraordinarily perishable and intrinsically worthless already.
Sadly, the vast majority of people at present are altogether ignorant when it comes to understanding how currencies have value, not to mention how the current financial system currently works. This, however, is a topic for an altogether different blog post.