Learning the history of banking and its role in trade is the key to understanding the world-changing potential of Bitcoin.
The story of modern banking starts here in Kaylan mosque, Uzbekistan. This was the gateway between the East and the west in the famous “silk route.”
The ancient silk road has two routes, the land route and the sea route.
The land route passed through central Asia (China, Uzbekistan, Tajikistan & Kazakhstan).
The sea-route passed through China, South East Asia, India, Arabia, and Europe.
As silk passed through each of the towns/ports, the value of silk increased, often dramatically, by the time silk reached the shores of Europe, the price would often be about 10 times the cost in China.
The primary reason being trade piracy, pirates both on sea and land. Traders had to fight piracy constantly, and as a result, trading wares got very expensive.
Hawala- Mother of modern Banking
You see, when traders sell their wares in distant lands and head back home with gold in their hands, pirates would attack them to steal their gold. Protecting your gold means you need armed guards all the time.
An ingenious system called HAWALA was developed to overcome this “transporting gold” problem.
So you, a trader, just finished trade in Turkey and need to head back to Arabia. Instead of carrying the gold with you and braving pirates, you simply hand over the gold to a local hawala dealer. The hawala dealer gives you an asymmetrically torn piece of paper with a secret code on it.
Once the hawala dealer receives your gold and gold from other traders, he will have a courier transport all the gold in high-security detail along with the other half of paper with secret codes to your destination in Arabia, etc.
So once you reach your home town in Arabia (after 15 days of partying in Turkey), your money would have arrived securely.
The Turkish hawala dealer and his counterpart in Arabia would square off the ledgers at their convenience.
This mechanism freed traders from maintaining costly security guards and cut down the cost of trading significantly (The rise of Ghengis Khan also decreased the cost of trade as well).
This system, however, has one major weakness:
Trusting your Hawala Dealer and his counter-party to protect your gold and delivering it to you or your counter-party securely.
The hawala dealers realized that the gold that you deposited to them could be put to use and acting as a money lender in the local economy, often making some quick income on the side.
These hawala dealers slowly morphed into the Banks that we see today.
As a result of the lending, there used to be an occasional bankruptcy of these hawala dealers, and traders who deposited their money lost everything.
As you can see, The system as it’s Trust based fails occasionally.
To mitigate failures and ensure better customer protection, Govts/ Nation-states got in the game. The rest is a history of Modern Banking.
Even though Gold is considered money the real value lies in the information on who owns what.
So improving the speed, safety, and immutability of this information is at the heart of banking. Maintaining these ledgers always involves centralized & trusted third-parties ( aka Banks and Govts) and remains the method for the last 2000 years.
You see, most gold bugs (people who only trust gold) hate governments for creating fiat currencies and debasing them constantly (rightfully so) and believe the return of the gold standard is inevitable.
However, they don’t realize that the abandonment of the gold standard was inevitable.
Traders need an effective means of protecting themselves from pirates, and having a secret piece of information over a paper is much safer than carrying a brick of gold.
Modern banking runs on Trust. Trust-based systems centralize, which gives them economies of scale. Once they become large and powerful, corruption is inevitable.
As you know, Absolute power corrupts, Absolutely
To mitigate these risks, central banks were created and have legislated innumerable regulations to prevent bank failures, which centralized banking further and further so much now we have banks that are so large that they are deemed too-big-to-fail.
Most Banks across the globe are so large and so integral to the global economy, failure of even a medium sized bank can have ripple effects across the economy. As a result of this, every banker worth his money know that govt’s won’t let the banks fail and will always bail them out, and this creates massive moral hazard and risky lending practices like in the case of sub-prime mortgages and massive real-estate bubbles across the world.
In a fiat currency economy, Govts and banks have an incestual relationship, which ultimately messes up the true economic potential.
Govts across the globe use banks as their tax collection, and law enforcement agencies employing unconstitutional mass surveillance over their customers.
Bitcoin is the first decentralized system that is able to achieve both “information scarcity” & “ledger sanctity” without a central point of control. In this sense, bitcoin actually serves the job of Both gold & modern payment networks and
That is arguably the biggest revolution in human history.
Bitcoin is an ideal tool for facilitating trade as it fixes the TRUST issue, obviating the need for a third party.
Bitcoin has achieved this amazing feat thanks to technologies like HTTP protocol, public-key cryptography, and the internet.
Bitcoin obviates the need for trusting a third-party, which changes the power dynamic of business, banking, and governments forever!