Origin of Banknotes and Fiat Currency

Origin of Banknotes

Banknotes were started to be printed and issued in 1661 by Stockholms Banco , These banknotes became popular because  they were easy to carry than copper coins. These banknotes carried a promise to pay the bearer in terms of copper coin any time bearer demands. This popularity was exploited by the bank to issue more banknotes than copper coins it had and earn interest on money which did not exist. This idea became hit among banks and all banks started printing more banknotes than copper coins they were having and earning interest on money they did not have.  This lead to bankruptcy of  many banks when people demanded copper coins. Big banks used to collect banknotes of smaller banks in large quantity and produce suddenly one day and force bankruptcy of smaller banks. It left only large players in market.

Origin of Central Banks 

Banknotes became so popular and printed so much that total number of banknotes became 5-6 times of total number coins. When wars started happening people wanted coins instead of banknotes and banks started getting bankrupt because they were unable to pay the coins as per promise. They went to government for protection. Government created central banks and replaced private banknotes with central banknotes. Private banks were made to borrow central banknotes from central bank to meet their obligations and pay interest to government on that. It was a new source of earning for government. It was origin of paper currency. Now government could create any amount of money without needing to procure precious metal like gold or silver.

De-linking of paper currency from Gold

The governments wanted to print large amount of money to finance their expanses but as per law it was required to keep 20% reserve in precious metal of amount of currency printed. Many governments devalued their currency in terms of gold many times. In 1973 USA de-linked dollar from gold now dollar did not have any fixed value in terms of gold. USA could print as many dollar as it want without keeping any gold reserve. All other countries followed same idea because they will not have to devalue their currency again and again to print more currency. It made all currencies Fiat currencies.

Dollar dominance as reserve currency

Initially five currencies British Pound, USA Dollar, Rubal, Yen and German Mark dominated reserves in which countries kept their surplus money. Countries wanted to keep their reserve in currencies which will not get devalued with time. The above five currencies were considered to be secure. Other option was to keep surplus money and Gold and convert Gold to money whenever you need money. Over the period of time Rubal lost its value because of fall of USSR and people stopped keeping Rubal reserve because people no longer considered it a secure currency. People considered USA Dollar as secure currency because of its dominance in whole world because of its technical and military strength. Because of this USA was export Dollar to other countries and get real assets like Gold in return of that. According to one report two third (66%) of Dollars are outside USA. This gives a big advantage to USA compared to other countries because  it can print more Dollars and get any real assets from the world in return of that. But other countries like Italy can't do that because its currency is not accepted outside. Printing more Dollars will depreciate value but 66% impact of it will be beard by people outside USA and 100% of profit will come to USA. Currently inflation of USA Dollar is 2.35% it means countries keeping Dollar reserves are loosing 2.35% of their money every year.

Emergence of EURO

The problem of loosing money because of Dollar reserves was felt most by European countries. They had to keep Dollar reserve in their countries and due to inflation in Dollar loose 2.35 % every year. They came up with idea of having a common currency all over Europe and eliminate Dollar reserve in Europe and export EURO outside Europe to acquire real wealth like Gold in return of that. It was very successful and as of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. Inflation in EURO is 2.1% as of September 2018. Wealth gained by issuing new banknotes is shared by all member countries.

Efforts in other areas to remove dependence on USA Dollar

Talks have been going on in Asia and Middle East to come up with alternative to USA Dollar a payment currency. In middle east people are talking about using gold as payment medium and South Asia India, China and some other countries came up with idea of BRICS Development Bank.

Emergence of Cryptocurrency

Cryptocurrency is one more fiat currency in ongoing currency war. Every country want to expand the area where its currency is accepted so that it can export its currency there and get real wealth like Gold in return of that. Cryptocurrency is a photographically signed prime number which is registered in a distributed ledger. New prime numbers are discovered using CPU computational power and registered in ledger to the owner. As more prime numbers are getting discovered CPU cycles which are needed to discover new prime numbers is increasing because you need to scan more numbers to find a prime number which is not already registered with some other owner. Some early starters have registered a large number of prime numbers in their names at very cheap cost say 0.001 $ and want to sell them at high price. They have rigged price of Bitcoin to  $4250 as of today 24 November 2018. USA government would like these USA citizens to be able to sell these prime numbers to non USA citizens because it brings wealth to USA and at the same time don't want citizens of USA to buy prime numbers from outside USA because it moves wealth outside USA. But USA government knows that if it does not allow Cryptocurrencies in USA then no one outside USA will buy Cryptocurrencies from USA citizens. Aim of USA government will be to export all Cryptocurrencies outside USA but that can't achieved but it can surely achieve target of exporting 66% of Cryptocurrencies outside USA. In this process USA will make a lot of money (66% of total worth of Cryptocurrencies)  in this process 34% of money will get invested in something as useless as prime numbers but out of this 34% cryptocurrencies 95% will be supplied by USA citizens only so total loss will very low compared to gain. So USA and other countries where people have bought or created large amount of cryptocurrencies at a very small cost will encourage cryptocurrencies and countries where people don't have cryptocurrencies would not like their people to spend billions of Dollars for buying something as worthless as prime number.

Real value of Cryptocurrencies

Value of any commodity is based on two factors:

1. Production cost of that commodity.
2. Usefulness of that commodity.

If production cost of some commodity is low but usefulness is very high then price of that commodity will be high but surely fall when monopoly of the producer is broken. If production cost of some commodity is high but usefulness of that commodity is low and there is no real consumer of that commodity and no one buy that commodity and consume (destroy it in this process) then that commodity's price can become  zero at any point of time. Cryptocurrencies which are prime numbers registered with some registrar is a commodity which don't have any use and even if it is impossible to find new prime numbers then also price of one prime number can fall any day from $4250 to $0 any day.