Reserves

A sound currency must be redeemable in a fixed stock of base money to rein in excessive currency supply. Without base money redemption the system lacks a stable anchor value. Whenever governments suspended gold redeemability to fund warfare or wasteful policy, the value of money declined steeply, and only when redeemability was reinstated did price levels normalise over the following years.

So the question is why the gold standard failed, why it was abandoned, and how politicians could replace it with an inferior fiat money they can create at will. The popular explanation was that money was scarce and that trade and industry needed an elastic supply. The regulation politicians wrote in response threw out the baby with the bathwater. Here is the theory of that perceived scarcity, and how Bitcredit resolves it.

Volatile value, unstable purchasing power

Before gold-redeemable credit money there were redeemable gold certificates. When banks began creating credit money as banknotes and deposits, people perceived those notes as equivalent to certificates: claims to base money. Normally they were. But the mismatch between present gold and future claims to gold created a timing problem whenever too many depositors wanted to redeem at once: a bank run. Under fractional reserve banking that liquidity risk is insurmountable.

This practice concealed a systemic problem. As the population grew and technological progress lengthened production and supply chains, demand for credit money rose. Creating more money required banks to hold more gold reserves, which drew the gold stock out of the non-financial sector and created a growing sense of scarcity. By economic law the value of gold rose, and prices generally declined. Deflation.

The return of inelasticity

That rise in the value of gold accelerates over time, as a rising reserve requirement meets an ever dwindling stock of reserves held outside the monetary system. The elasticity of gold credit money progressively declined and the banking system lost the leeway to adjust supply to the needs of the real economy.

Entrepreneurial frustration (growth held back by credit money that simply was not available) became the pressure that abandoned the gold standard for fiat. There is obviously no scarcity of “reserves” when a central bank can create them at will, and that suits politicians: new money printing expands the capacity for deficits and debt.

The Bitcredit solution

For bitcoin to be adopted by the real economy its value must be stable, which means money supply must match money demand. To avoid the inelasticity problem of a pure bitcoin reserve, the protocol secures the system with a dedicated digital asset: the e‑IOU reserve token. When mints need more or fewer reserves, that demand does not move bitcoin’s value: only the price of e‑IOU rises or falls.

The result is a virtuous circle. When one mint’s purchase lifts the price of e‑IOU, every other holder’s reserves rise in value with it. As adoption grows, that positive feedback keeps the whole bitcoin credit money system elastic, ever more stable and more secure, exactly where the gold standard grew more inelastic and more fragile.