Money is the engine of all our exchanges, yet its actual inner workings remain misunderstood by most of us. What we use today has little to do with the money of past centuries.
In 1971, we left the gold standard behind to enter the era of fiat money: a system where money is no longer backed by gold, but relies solely on trust and debt creation by banks. Today, the vast majority of money in circulation is not printed by central banks, but created ex nihilo by commercial banks when granting loans. This "debt-money" mechanism ensures the fluidity of exchanges but generates structural inflation that erodes purchasing power over the long term.
In this context of monetary fragility and geopolitical tensions, it becomes crucial to analyze the mechanisms of traditional finance to grasp the value proposition of programmatically scarce assets. Why is the current system built on infinite expansion? And how can technology restore a form of monetary sovereignty?
The Foundations of Modern Money (Fiat)
From the Gold Standard to the Fiat System
For centuries, money was linked to a physical underlying asset, primarily gold. This principle was carved in stone in 1944 by the Bretton Woods system, which stabilized the global economy: the dollar was convertible into gold (at a fixed rate of $35 per ounce) and all other currencies were pegged to the dollar. At that time, a greenback was nothing more than a property title to a tangible asset.
Everything changed on August 15, 1971. Faced with the depletion of their gold reserves due to spending related to the Vietnam War, the United States found themselves unable to meet their international commitments. President Richard Nixon then made the decision to suspend the convertibility of the dollar.
This "shock" radically changed the very nature of money. The global system shifted from a currency backed by gold to a fiat currency (from the Latin fiat, meaning "let it be done"), which exists by mere decree of the State. From then on, a banknote was no longer a ticket exchangeable for a piece of precious metal kept in a vault. It became a proof of trust. Its value no longer rested on gold, but on the solidity of the issuing institution and the guarantee that this money would still be accepted by everyone to buy goods or pay taxes tomorrow.
The Three Functions of Money
To be recognized and accepted by all, a currency must fulfill three inseparable economic functions:
- Unit of account: it serves as a common measure to price goods and services. It allows the value of an object to be translated into a number that everyone understands.
- Medium of exchange: it facilitates buying and selling. By being accepted by all economic actors, it avoids the constraints of barter (the double coincidence of wants constraint) and fluidifies daily transactions.
- Store of value: it allows you to preserve the fruits of your labor. It is a reserve that must remain intact to guarantee that the sum earned today will allow you to buy the exact same thing in the future.
It is on this third point that the current monetary system falters. While fiat money perfectly fulfills its role for daily consumption, it struggles to protect savings over the long term. The constant expansion of the money supply dilutes the value of each unit in circulation: with the same amount of money, purchasing power decreases over the years.
Trust as the Sole Underlying Asset
Without gold to guarantee its value, money relies entirely on a collective promise. It is no longer supported by a precious metal, but solely by the credibility of the institutions that issue it.
In Europe, the European Central Bank (ECB) is the sole guarantor of this trust. It decides the quantity of money in circulation and ensures the stability of the system.
However, this centralization carries a major risk for the individual: the value of your savings now depends on political and monetary decisions over which you have no control. If the ECB chooses to massively create money to respond to a crisis, the value of your past labor is mechanically diluted.
The Engine of Money Creation: "Credit is King"
The Role of Commercial Banks
In our monetary system, money is born from a signature. When a bank grants you a loan, it does not take money from another customer to give it to you: it creates it. Through a simple accounting ledger entry, it credits your account with a sum that did not exist a second before. This is the mechanism where "loans make deposits": each new credit injects additional money into the economy. Money is therefore not a pre-existing reserve, but a digital debt generated out of thin air.
The Central Bank, Lender of Last Resort
While commercial banks create money drop by drop via credit, the Central Bank controls the overall flow of the tap. By adjusting interest rates, it makes credit more or less expensive to encourage or slow down money creation.
In times of crisis, it uses Quantitative Easing: its "printing press." This means it creates billions of euros through simple accounting entries to buy back state and bank debts. This allows massive amounts of money to be instantly injected into the financial system to avoid a freeze. But this power allows it to manipulate the money supply according to its own political objectives, which ultimately dilutes the real value of the money you hold.
Inflation: An Invisible Tax?
Inflation is not an accident; it is a mathematical consequence. There is a direct link between the money supply (M2) and what you actually have in your pocket: the more "new" money banks inject into the system, the more the value of each euro in circulation decreases.
This is why it is called the invisible tax. No one comes to take money from you directly, but your savings silently lose their purchasing power. In short, if the quantity of money increases faster than the actual wealth produced, you can buy fewer and fewer things with the same amount.
Sovereignty Stakes and Limits of the Current System
The Verticality of the Financial System
In our monetary system, money flows through a chain of intermediaries (banks, payment providers). This organization is vertical: every transaction depends on the approval of these institutions to be validated. While this structure ensures a legal framework, it also technically enables censorship. An institution can, by administrative or political decision, block a transfer or freeze your accounts. Ultimately, your money never completely belongs to you: you merely possess a right of use subject to the rules and permissions of these intermediaries.
The Digital Euro and Programmable Currencies
The European Central Bank is currently studying the digital euro. This project aims to create a currency issued directly by the public institution, which would operate alongside traditional bank accounts.
The difference between the digital euro and the traditional euro? The digital euro relies on a technology that makes it programmable. Unlike current bank deposits, this money can integrate automatic features defined by the Central Bank: for example, the management of holding limits or the automation of certain types of payments. While this innovation modernizes exchanges and makes them faster, it also raises technical questions regarding personal data management and transaction traceability.
The Emergence of an Alternative: "Hard" Money
Alongside the traditional system, an alternative vision appeared with Bitcoin. It is what we call a "Hard" money, because its rules are fixed and cannot be altered.
- Discretionary bank money: Experts decide the quantity of money to create according to the needs of the economy. The system is flexible, but the rules can change based on the decisions of leaders.
- Algorithmic code money: With Bitcoin, there is no leader. It is a computer program that manages everything. The total quantity of money is mathematically limited to 21 million, and no one can create more. The rules are the same for everyone and never change.
It is therefore a shift from a system based on trust in institutions to a system based on the rigor of mathematics.
Toward a New Wealth Paradigm
In the face of inflation and central bank decisions, diversification allows individuals to no longer depend solely on the banking system. The goal is to hold assets whose quantity is scarce by nature, unlike fiat currencies which can be created to absorb debt.
In this context, Bitcoin offers an alternative: it allows a shift from a mere promise from the bank to true ownership. By self-custodying your money, you no longer depend on the decisions of a financial intermediary to access and use your savings.
FAQ
Who decides the quantity of money in circulation?
In our current system, Central Banks (such as the European Central Bank for Europe) steer money creation. They adjust the quantity of money to influence the economy, for example by easing credit or combating a crisis.
What is the difference between central bank money and commercial bank money?
Central bank money is the "ultimate" money issued by the State (banknotes and central bank digital currency). Commercial bank money is the money created by private banks when they grant a loan to an individual or a business.
Why does inflation seem permanent?
Inflation is often the result of an increase in the quantity of money that occurs faster than the production of real wealth. As there is more and more money in circulation for the same quantity of goods, each unit of currency loses a bit more of its value over time.
How does Bitcoin differ radically from the Euro?
The Euro is a political currency: its quantity and rules of use depend on the decisions of leaders. Bitcoin is a mathematical currency: its rules are embedded in a computer code that no one can modify, and its total supply is limited to 21 million units forever.
