In the early 1900s, many countries struggled to pay for the Great War. Germany was no exception. By November 1918, reparations payments had pushed the country’s debt to about $25 billion — nearly half its Gross Domestic Product (GDP). Faced with growing national debt and a shrinking GDP, policymakers in Germany turned to another resource abundant in their country: its central bank, the Bank Deutscher Länder (the “Banking League of Cities”). As a result, between 1910 and 1923, German monetary authorities debased their currency at an unprecedented pace. In 1912 alone, they reduced the amount of gold in their coins by 20%. Understanding why this happened helps to understand how central banks operate. A central bank is essentially a commercial bank with one primary objective: keeping inflation low. Commercial banks lend money to businesses and consumers on-demand; if they don’t have enough cash on hand to make those loans, they get a loan from a lender like a securities broker or insurance company that has more cash than they need. The commercial bank expects to be paid back with interest within six months to a year — not so for a central bank lending money through its own operations. The result? A scarcity of cash for everyday transactions — and thus higher prices for goods and services — as people spend more of their money paying off existing debts instead of buying things outright.
The role of central banks in financial stability
Central banks are the primary regulator of financial institutions, managing the money supply to maintain an environment in which banks have confidence in each other’s assets and liabilities. This is important because if banks don’t trust each other, they don’t make loans. Instead, they pull money out of the system, resulting in a credit crunch. Central banks are also responsible for monitoring and responding to systemic financial risks, and as such many central banks run financial stability operations that focus on monitoring and managing systemic risk. These include managing systemic liquidity and risk, such as monitoring for signs of financial stress in the real economy and, if appropriate, intervening in the financial system to provide liquidity.
The Causes of the German Monetary Crisis
By the end of the 19th century, Germany was the dominant economic power in Europe. Its rapid industrialization and modernization have made it one of the world’s leading manufacturers and economic powers. By 1914, however, it was also the leading military power, having developed the world’s first modern army. All these factors, combined with an over-ambitious foreign policy, had led Germany to become a global economic powerhouse. As a result, by 1914, it had the world’s highest GDP and the largest foreign debt. Unfortunately for Germany, the war, which was fought using the latest technology, was expensive. The direct cost of the war was estimated to be $513 billion in 2017 dollars. The cost of the Great Depression, which followed the war, was estimated at $2.5 trillion in 2017 dollars. Due to its heavy debts, Germany was in a weakened state when the war ended in 1918, and it fell behind on the repayments of its debts. As a result, it was forced to begin negotiations with the other Central Powers and Allied Powers to settle its debts. By 1923, Germany’s debt stood at $300 billion, and unemployment was high.
The Central Bank Response to Currency Devaluation
In response to the monetary crisis, the German Central Bank, the Bank Deutscher Länder (BDL), which controlled the country’s main currency, the Reichsmark, began to debase the currency dramatically. To do this, the BDL bought billions of Reichsmarks in gold from the Federal Reserve and other central banks and then flooded the market with unlimited amounts of Reichsmarks, which caused the price of the currency to decline. In fact, the BDL printed so much money that it became nearly worthless. The BDL also began to introduce a system of interest rates that would cut the value of the Reichsmark even further, causing a vicious cycle of currency devaluation and inflation. The BDL aimed to keep the inflation rate below 10%, but as the Reichsmark constantly declined against other currencies, the money supply grew, and the inflation rate went up. This system is known as an “unstable currency regime,” which was a major contributor to German inflation.
The war contributes to Currency Devaluation
The Central Bank of Germany was in a difficult position. The war had taken a toll on the country’s economy. The war caused the price of goods such as food and steel to increase, which meant that the Reichsmark did not have the value it once did. Therefore, the Central Bank of Germany decided to implement a deflationary policy to bring down the price of goods to keep the value of the Reichsmark the same. It bought up foreign currencies and sold them to the public. This created a demand for foreign currencies, which devalued the Reichsmark as more and more money was printed.
The Effect of Currency Devaluation on Prices and Inflation
The BDL’s policy of debasing the currency led to the hyperinflation of the 1920s and ’30s. Because the Reichsmark became nearly worthless, people began to hoard it, and businesses stopped accepting it as a form of payment. People found that it was more convenient to pay for things in commodities such as bread, which had become scarce as demand skyrocketed. As the price of bread skyrocketed, people began to stockpile it, which led to widespread bread shortages. This, in turn, led to riots, looting, and violence against the government as people demanded food. The government did little to feed its citizens and was forced to shut down public services, like transportation and gas stations, as people refused to pay for them.
Why is constant devaluation bad for prices?
One of the problems with constant devaluation is that it makes it harder for businesses to obtain loans and other forms of investment financing. This negatively affects the economy and causes the prices of goods and services to rise. As more things cost more money, people find it more difficult to live, and firms find it more difficult to remain competitive. Without loans and investments, businesses find it more difficult to grow and increase their profits. Without profits, companies can’t repay the government for taxes and government services, which puts them at a disadvantage as they struggle to keep up with competition from other businesses that do have the funding to invest in new technologies and products that people want to buy.
How crypto can play its role in the debasement process
Crypto can play a major role in the debasement process by allowing people to store their wealth outside of the banking system. This allows them to protect their wealth from devaluation and inflation, even if the government tries to debase its currency. By storing their wealth in a crypto wallet, people can keep their money outside of the government’s control, even if it decides to go down the path of constant devaluation. It creates an alternative path to help people pay for goods and services while preventing the downward spiral of existing currency devaluation.
The German monetary crisis of the 20th century provides a cautionary example of the dangers of constant currency debasement. In their quest to repay foreign debts and fund the Great War, German policymakers went to great lengths to weaken their currency, leading to disastrous inflation that destroyed the value of ordinary people’s savings. In the end, widespread hyperinflation forced people to make it harder to survive. Perhaps, cryptocurrencies will offer an alternative route when currency debasement happens.
The Future of Machine War II
In late 2021, I wrote an article about A.I. vs. Blockchain. I realized it was closer than I expected.
Web2 is leading a future of technological centralism.
The way we see the world in ancient is what we saw became what we believed. Later, the enlightenment process helped humans realize what they had seen was disguised by the nature principle. Once we tested our assumption and received accurate results, we thought we had mastered the nature principles. Yet, we did not make the world better than we thought we could.
We are living in a world in which companies know more than you than yourself. Companies can likely tell you what you should believe without letting you know.
The secret weapon that companies like Google invented is A.I. or Artificial Intelligence.
If A.I. can think like a person, it can easily replace you! Since companies got all your data, you freely offer them by using their free services, and they can replace you one day without you realizing it.
Without all conspiracy theories behind what Google may or will secretly develop, A.I. reaching consciousness is … impossible.
If it does, Google has successfully made a human – dumb!
The most advanced A.I. – Tesla Autopilot Program cannot distinguish objects between humans and other moving objects during driving.
Using technology makes people dumber than they think because it takes away your consciousness – the ability to think uniquely!
Blockchain is the future of decentralization.
We need a peer-to-peer system to regain consciousness and break the chain from Web2.
It gives individuals the power to rethink information.
Think about today’s media; all information is filtered to offer readers without any surprise. News is data that Web2 selected specifically for you to read.
We need a decentralized system so that you can receive unfiltered information and gives you a surprise that sparks ideas of imagination.
Web2 is afraid of the blockchain because they are too big to fail.
They mimic the blockchain by creating a centralized node system – social media network.
It is a net growing outward through a single point. Only the problem is that connection is facilitated by technology. And the biggest failure is such technology has a single point of failure problem.
And they cannot escape the law of economics – the law of diminishing. So we will see Web2 grow slower due to the law of diminishing that they require more data with few increments of advancement through A.I. without any breakthrough because A.I. is a deterministic system that works with a lack of randomness.
In Web2, they assumed everyone was stupid, and they offered solutions to everyone.
In Web3, everyone is good and should anticipate solving a problem together.
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Financial sanction to mixers
Have you heard about financial sanctions from the US on virtual currency? At least, I have not yet. But the US Department of Treasury has issued sanctions on two crypto services: Blender.io and Tornado Cash.
To clarify, the US sanctions on tools but not target specific entities or groups of people.
So why bother to sanction something that the government probably won’t be able to sanction in the first place?
What is a mixer?
A cryptocurrency mixer, sometimes referred to as a tumbler, is a tool for money laundering. The sole purpose of the invention is to make transactions untraceable.
How to mix?
Even crypto is pseudo-anonymous, but it is traceable through your wallet address. A mixer is a black box service to filter your traceable wallet address into the untraceable wallet address.
How to wash your money clean in the traditional way?
The assumption is you will not get caught at each stage, and then you place your dirty money in a bank through companies and use the funds to purchase legal goods like houses or luxury goods.
There are mature regulations and rules to stop you from putting your dirty money into banks.
Digtial money landury
A Crypto mixer or tumbler is a service to pool dirty digital currency in their favor and redistribute it into designated wallet addresses or addresses randomly generated.
It is a challenge to stop transactions because there is no entry point for law enforcement to stop at each stage.
Tornado Cash is the king of the mixer. Unfortunately, there is just no way to trace transactions anymore. It is a smart contract with zk-SNARKs (zero-knowledge proofs) that does not require revealing a wallet address during transactions and ghostly distributed funds without leaving any traces.
This tool is the ultimate weapon that the government has to shut down, or there is no way to prevent transactions.
Let’s change the future – legally.
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Why there is not crypto banking exist
We have always heard about cryptocurrencies, crypto exchange, banking, and trading platforms, but we do not really grasp the idea of crypto banking. Crypto banking is a contradicted idea. If crypto is to replace banks and give users full control of digital money, why do you put your crypto into the bank? The new research paper argued that there are risks for banks to adopt crypto, but they did it anyway.
Banks want crypto
Cryptocurrency has a rough road at the beginning and continues to experience a bumpy road ahead. The institutional investors were watching its performance. In early 2017, institutional investors had opportunities to adopt crypto, but they found out the return of the investments was less than traditional financial assets. Regulations were not a concern for some individual institutional owners, but banks were conservative at the time. As a result, some investors adopted it in early 2018 than banks did. Then suddenly, the crypto market took off in 2020, leaving many banks to regret their decision in 2017. Many banks set up their digital investment group to rush into the market and increase prices. Of course, many of their investment positions are instead of shadow positions. It is unclear how much they have been invested in and what vehicles they took to invest in cryptos.
Crypto exchange is a bank-like platform for crypto. Banks offered a place to purchase fiat currency. Crypto exchange did the same duty as traditional banks did. Since there was a gap between the crypto and banks, the crypto exchange took responsibility and offered crypto services. The crypto exchange took off after 2020, and they left banks in the dust. Then, crypto winter came in early 2022, and banks again hesitated to enter the crypto and started denouncing crypto usage, particularly in the Defi area. But interestingly, they tried to find ways to get into crypto without being directly exposed to cryptocurrencies—hint: through hedge funds.
How much banks exposure to crypto
We do not know how much banks have been exposed to crypto. We learned that the big Wall Street players were exposed to the services of the digital asset through State Street of their $41.7 trillion assets. Some have been exposed due to Luna’s collapse and 3AC bankruptcy. But again, no specific dollar amount was provided.
Since the crypto winter, institutional investors have been cautious about crypto exposure. However, crypto exchanges are the winner again. They are exposed to crypto and take risks more than banks do. As a result, they likely will weather the uncertainty. Furthermore, there is no need for crypto banking to handle your crypto assets since many such services will not survive long in the crypto environment.
Crypto is resilience
Despite its fluctuating price and unsecured assets, crypto is resilient to phase out any bad business ideas and bad actors in the economy who wants to or try to dominate the market but who transfers risks to users to believe they are the one who should take responsibility for their carelessness. Unfortunately, those business models will not survive long.
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