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On November 1, 2008, a computer programmer going by the pseudonym Satoshi Nakamoto sent an email to a cryptography mailing list to announce that he had produced a “new electronic cash system that's fully peer-to‐peer, with no trusted third party.” He copied the abstract of the paper explaining the design, and a link to... | 02787029-44b1-4f66-b323-08234fddb9d8 |
While a clever and neat design, there wasn't much to suggest that such a quirky experiment would interest anyone outside the circles of cryptography geeks. For months this was the case, as barely a few dozen users worldwide were joining the network and engaging in mining and sending each other coins that began to acqui... | 5064163b-7b72-4cc6-a456-9946f662231f |
But in October 2009, an Internet exchange2 sold 5,050 bitcoins for $5.02, at a price of $1 for 1,006 bitcoins, to register the first purchase of a bitcoin with money. The price was calculated by measuring the value of the electricity needed to produce a bitcoin. In economic terms, this seminal moment was arguably the m... | eaaeb27d-ad28-44d5-8027-ad3e3a1ebe9c |
Since then, the Bitcoin network has grown in the number of users and transactions, and the processing power dedicated to it, while the value of its currency has risen quickly, exceeding $7,000 per bitcoin as of November 2017. After eight years, it is clear that this invention is no longer just an online game, but a tec... | fb9744f9-d7d9-4426-8d92-0d3284bcecd2 |
Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programmi... | 12e8c20a-a1b5-45ed-bf41-c9d1f4a14b68 |
History can foreshadow what's to come, particularly when examined closely. And time will tell just how sound the case made in this book is. As it must, the first part of the book explains money, its function and properties. As an economist with an engineering background, I have always sought to understand a technology ... | c5bfdfff-44a2-4ee0-af71-9946ba925dd8 |
The second part of the book discusses the individual, social, and global implications of sound and unsound forms of money throughout history. Sound money allows people to think about the long term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and t... | 69edcdde-2895-4116-b594-f28c352c1a20 |
The third section of the book explains the operation of the Bitcoin network and its most salient economic characteristics, and analyzes the possible uses of Bitcoin as a form of sound money, discussing some use cases which Bitcoin does not serve well, as well as addressing some of the most common misunderstandings and ... | ee75dad6-f766-4db6-9d1b-37098691febf |
This book is written to help the reader understand the economics of Bitcoin and how it serves as the digital iteration of the many technologies used to fulfill the functions of money throughout history. This book is not an advertisement or invitation to buy into the bitcoin currency. Far from it. The value of bitcoin i... | 20773f2b-8378-4af4-9bf1-0e496ea58d86 |
Only with such an understanding, and only after extensive and thorough research into the practical operational aspects of owning and storing bitcoins, should anyone consider holding value in Bitcoin. While bitcoin's rise in market value may make it appear like a no-brainer as an investment, a closer look at the myriad ... | 6f1b74c7-fe3b-4ae4-beb3-6c6fdf3c4c7b |
Bitcoin is the newest technology to serve the function of money—an invention leveraging the technological possibilities of the digital age to solve a problem that has persisted for all of humanity's existence: how to move economic value across time and space. In order to understand Bitcoin, one must first understand mo... | 340b99e0-687c-4af4-a2d6-4a2e0621363e |
The simplest way for people to exchange value is to exchange valuable goods with one another. This process of direct exchange is referred to as barter, but is only practical in small circles with only a few goods and services produced. In a hypothetical economy of a dozen people isolated from the world, there is not mu... | 37cf389e-df37-4f01-9680-4e336bebdbb5 |
In a more sophisticated and larger economy, the opportunity arises for individuals to specialize in the production of more goods and to exchange them with many more people—people with whom they have no personal relationships, strangers with whom it is utterly impractical to keep a running tally of goods, services, and ... | ba62cb66-3e10-43c0-a7cb-d38592fa8bd3 |
First, there is the lack of coincidence in scales: what you want may not be equal in value to what you have and dividing one of them into smaller units may not be practical. Imagine wanting to sell shoes for a house; you cannot buy the house in small pieces each equivalent in value to a pair of shoes, nor does the home... | c9920b4c-90ea-4b5c-8889-d16b109fae2d |
The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell. That intermediary good is a medium of exchange, and while any good could serve as the medium of exchange, as the scope and size ... | c3eb92d1-0334-4485-a0ff-2b4777a36e72 |
Being a medium of exchange is the quintessential function that defines money— in other words, it is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods. While investm... | bc768a49-1e72-4b77-8e0c-547f69e32542 |
From examining such human choices in market situations, Carl Menger, the father of the Austrian school of economics and founder of marginal analysis in economics, came up with an understanding of the key property that leads to a good being adopted freely as money on the market, and that is salability—the ease with whic... | 1a7f9735-2263-4313-96ff-08ef4e5ee15c |
There is nothing in principle that stipulates what should or should not be used as money. Any person choosing to purchase something not for its own sake, but with the aim of exchanging it for something else, is making it de facto money, and as people vary, so do their opinions on, and choices of, what constitutes money... | 6069e584-fea9-4fbd-9f3d-7cb3be28d3f6 |
The relative salability of goods can be assessed in terms of how well they address the three facets of the problem of the lack of coincidence of wants mentioned earlier: their salability across scales, across space, and across time. A good that is salable across scales can be conveniently divided into smaller units or ... | 1d22ee00-981e-4dae-82f1-393b26b998c7 |
A good's salability across time refers to its ability to hold value into the future, allowing the holder to store wealth in it, which is the second function of money: store of value. For a good to be salable across time it has to be immune to rot, corrosion, and other types of deterioration. It is safe to say anyone wh... | 66560a35-9110-4fe7-935c-33bdb754a165 |
We can understand money's hardness through understanding two distinct quantities related to the supply of a good: (1) the stock, which is its existing supply, consisting of everything that has been produced in the past, minus everything that has been consumed or destroyed; and (2) the flow, which is the extra productio... | e438a892-1c37-4e7c-9e7d-b8673baba3b5 |
If people choose a hard money, with a high stock-to‐flow ratio, as a store of value, their purchasing of it to store it would increase demand for it, causing a rise in its price, which would incentivize its producers to make more of it. But because the flow is small compared to the existing supply, even a large increas... | a5e2b5a1-9f66-4c6a-ac83-62ab20c17f16 |
I like to call this the easy money trap: anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value. The corollary to this trap is that anything that is successfully used as money will have some nat... | e1e44e7b-40cb-49e8-858f-f2e79a375145 |
Whenever a natural, technological, or political development resulted in quickly increasing the new supply of a monetary good, the good would lose its monetary status and be replaced by other media of exchange with a more reliably high stock-to‐flow ratio, as will be discussed in the next chapter. Seashells were used as... | 5fb26aed-fbc8-46be-8ecb-50a51a0c8c59 |
When modern technology made the importation and catching of seashells easy, societies that used them switched to metal or paper money, and when a government increases its currency's supply, its citizens shift to holding foreign currencies, gold, or other more reliable monetary assets. The twentieth century provided us ... | 08f52323-ae67-44cf-9a58-d35815424181 |
While people are generally free to use whichever goods they please as their media of exchange, the reality is that over time, the ones who use hard money will benefit most, by losing very little value due to the negligible new supply of their medium of exchange. Those who choose easy money will likely lose value as its... | c3647464-1461-4755-a326-001d0933a6ed |
The full individual and societal implications of hard and easy money are far more profound than mere financial loss or gain, and are a central theme of this book, discussed thoroughly in Chapters 5 , 6 , and 7 . Those who are able to save their wealth in a good store of value are likely to plan for the future more than... | c795b9e5-8c5c-4e7b-8947-fee54eb9cb5a |
Beyond the stock-to‐flow ratio, another important aspect of a monetary medium's salability is its acceptability by others. The more people accept a monetary medium, the more liquid it is, and the more likely it is to be bought and sold without too much loss. In social settings with many peer-to‐peer interactions, as co... | bb79a638-9a78-4e19-960c-101598d989d0 |
Further, wide acceptance of a medium of exchange allows all prices to be expressed in its terms, which allows it to play the third function of money: unit of account. In an economy with no recognized medium of exchange, each good will have to be priced in terms of each other good, leading to a large number of prices, m... | bcb70f2c-b33f-43aa-ac0e-5b073242e245 |
Having a single medium of exchange allows the size of the economy to grow as large as the number of people willing to use that medium of exchange. The larger the size of the economy, the larger the opportunities for gains from exchange and specialization, and perhaps more significantly, the longer and more sophisticate... | 2f936d58-eb6c-4164-94d5-396ec7506049 |
The history of money's evolution has seen various goods play the role of money, with varying degrees of hardness and soundness, depending on the technological capabilities of each era. From seashells to salt, cattle, silver, gold, and gold backed government money, ending with the current almost universal use of governm... | ab1725ab-ae66-4225-8454-abe421b7f83e |
Of all the historical forms of money I have come across, the one that most resembles the operation of Bitcoin is the ancient system based on Rai stones on Yap Island, today a part of the Federated States of Micronesia. Understanding how the large circular stones carved from limestone functioned as money will help us ex... | 161b306d-c96e-4f58-8e22-2019267b2112 |
The Rai stones that constituted money were of various sizes, rising to large circular disks with a hole in the middle that weighed up to four metric tons. They were not native to Yap, which did not contain any limestone, and all of Yap's stones were brought in from neighboring Palau or Guam. The beauty and rarity of th... | f1c94e34-ed8a-4fae-b73c-e56e9d4718d6 |
For centuries, and possibly even millennia, this monetary system worked well for the Yapese. While the stones never moved, they had salability across space, as one could use them for payment anywhere on the island. The different sizes of the different stones provided some degree of salability across scales, as did the ... | 0d7bd6cf-36cc-402e-95fe-31d66aebe110 |
O'Keefe saw a profit opportunity in taking coconuts from the island and selling them to producers of coconut oil, but he had no means to entice the locals to work for him, because they were very content with their lives as they were, in their tropical paradise, and had no use for whatever foreign forms of money he coul... | 0a18d2d1-3b45-4d44-a0fc-ed71e7906901 |
While O'Keefe's story is highly symbolic, he was but the harbinger of the inevitable demise of Rai stones' monetary role with the encroachment of modern industrial civilization on Yap and its inhabitants. As modern tools and industrial capabilities reached the region, it was inevitable that the production of the stones... | 02a17466-2540-4f3b-a72c-b0ac784b0de0 |
The details may differ, but the underlying dynamic of a drop in stock-to‐flow ratio has been the same for every form of money that has lost its monetary role, up to the collapse of the Venezuelan bolivar taking place as these lines are being written. | 05aad527-101c-4f34-8212-9df5d875c59f |
A similar story happened with the aggry beads used as money for centuries in western Africa. The history of these beads in western Africa is not entirely clear, with suggestions that they were made from meteorite stones, or passed on from Egyptian and Phoenician traders. What is known is that they were precious in an a... | 1bd724a8-f504-4bb2-a344-d001b0f5fced |
When European explorers and traders visited West Africa in the sixteenth century, they noticed the high value given to these beads and so started importing them in mass quantities from Europe. What followed was similar to the story of O'Keefe, but given the tiny size of the beads and the much larger size of the populat... | 46799751-c05e-432b-b80c-b03ce3daafbc |
Seashells are another monetary medium that was widely used in many places around the world, from North America to Africa and Asia. Historical accounts show that the most salable seashells were usually the ones that were scarcer and harder to find, because these would hold value more than the ones that can be found easi... | c23087db-331f-4878-8be0-13854a09d164 |
This was not just the fate of seashell money in North America; whenever societies employing seashells had access to uniform metal coins, they adopted them and benefited from the switch. Also, the arrival of industrial civilization, with fossil-fuel‐powered boats, made scouring the sea for seashells easier, increasing t... | 0e36cfbf-b07a-42d0-b4bc-5a8fadc43dbe |
Other ancient forms of money include cattle, cherished for their nutritional value, as they were one of the most prized possessions anyone could own and were also salable across space due to their mobility. Cattle continue to play a monetary role today, with many societies using them for payments, especially for dowrie... | cb08d7d5-5aae-4beb-b95f-d0cb6aeb6300 |
As technology advanced, particularly with metallurgy, humans developed superior forms of money to these artifacts, which began to quickly replace them. These metals proved a better medium of exchange than seashells, stones, beads, cattle, and salt because they could be made into uniform, highly valuable small units tha... | e67690d3-6621-410e-8361-6ab61a46234e |
As human technical capacity for the production of goods became more sophisticated, and our utilization of metals and commodities grew, many metals started getting produced at large enough quantities and were in large enough demand to make them highly salable and suited for being used as monetary media. These metals' de... | c5254f4b-7110-408a-8b03-b64a156135e5 |
Due to their durability and physical properties, as well as their relative abundance in earth, some metals were more valuable than others. Iron and copper, because of their relatively high abundance and their susceptibility to corrosion, could be produced in increasing quantities. Existing stockpiles would be dwarfed b... | 15da4545-fa33-42d7-9b0e-ac1b229efbce |
Initially, metals were bought and sold in terms of their weight, but over time, as metallurgy advanced, it became possible to mint them into uniform coins and brand them with their weight, making them far more salable by saving people from having to weigh and assess the metals every time. The three metals most widely u... | 9bd4da76-7b8f-4e69-9094-5205a7de4a01 |
By the nineteenth century, however, with the development of modern banking and the improvement in methods of communication, individuals could transact with paper money and checks backed by gold in the treasuries of their banks and central banks. This made gold-backed transactions possible at any scale, thus obviating t... | 1da92811-2d08-45cb-837e-610907bebe24 |
To understand how commodity money emerges, we return in more detail to the easy money trap we first introduced in Chapter 1 , and begin by differentiating between a good's market demand (demand for consuming or holding the good for its own sake) and its monetary demand (demand for a good as a medium of exchange and sto... | 5aa70df7-7a36-4aa4-8e19-d264e7cef273 |
But even if more people join him in monetizing copper, our hypothetical copper obsessed billionaire is in trouble. The rising price makes copper a lucrative business for workers and capital across the world. The quantity of copper under the earth is beyond our ability to even measure, let alone extract through mining, ... | be892548-892d-4bc8-bca7-74e9214e8c35 |
After the monetary demand subsides, all else being equal, the copper market would go back to its original supply-and‐demand conditions, with 20 million annual tons selling for $5,000 each. But as the holders begin to sell their accumulated stocks of copper, the price will drop significantly below that. The billionaire ... | 77da9369-20d6-41fa-a5ae-e4f0579b28f6 |
This model is applicable for all consumable commodities such as copper, zinc, nickel, brass, or oil, which are primarily consumed and destroyed, not stockpiled. Global stockpiles of these commodities at any moment in time are around the same order of magnitude as new annual production. New supply is constantly being ge... | 2d2563eb-7349-4c60-9fe9-0f6db0721a4b |
This is the anatomy of a market bubble: increased demand causes a sharp rise in prices, which drives further demand, raising prices further, incentivizing increased production and increased supply, which inevitably brings prices down, punishing everyone who bought at a price higher than the usual market price. Investor... | a50c903f-d9a5-4bd0-a5fb-73fd1276dfd8 |
For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down. Such an asset will reward those who choose it as their store of va... | 24838076-f4ae-4a49-a46e-bce9925e83a8 |
The clear winner in this race throughout human history has been gold, which maintains its monetary role due to two unique physical characteristics that differentiate it from other commodities: first, gold is so chemically stable that it is virtually impossible to destroy, and second, gold is impossible to synthesize fr... | 4b815170-7cdc-4c31-9ce5-1ab99ae60425 |
The chemical stability of gold implies that virtually all of the gold ever mined by humans is still more or less owned by people around the world. Humanity has been accumulating an ever-growing hoard of gold in jewelry, coins, and bars, which is never consumed and never rusts or disintegrates. The impossibility of synt... | 846987f9-180d-4fd9-abde-b836c1cfc84e |
To understand the difference between gold and any consumable commodity, imagine the effect of a large increase in demand for it as a store of value that causes the price to spike and annual production to double. For any consumable commodity, this doubling of output will dwarf any existing stockpiles, bringing the price... | 47bbd4ee-65bd-4c38-9dcd-df10c946812c |
Only silver comes close to gold in this regard, with an annual supply growth rate historically around 5–10%, rising to around 20% in the modern day. This is higher than that of gold for two reasons: First, silver does corrode and can be consumed in industrial processes, which means the existing stockpiles are not as la... | 5979816d-4311-407e-8e71-c7cc1e72056e |
This explains why the silver bubble has popped before and will pop again if it ever inflates: as soon as significant monetary investment flows into silver, it is not as difficult for producers to increase the supply significantly and bring the price crashing down, taking the savers' wealth in the process. The best-know... | 7816ecd1-23cc-4688-9089-e34c816aa0f2 |
It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history, a role it continues to hold today as central banks continue to hold significant supplies of gold to protect their paper currencies. Official central bank reserves are at around... | 9917595e-17eb-4437-9053-adfba2afffb3 |
As the production of metals began to proliferate, ancient civilizations in China, India, and Egypt began to use copper, and later silver, as money, as these two were relatively hard to manufacture at the time and allowed for good salability across time and space. Gold was highly prized in these civilizations, but its r... | 7785170c-c47f-4660-9619-2bd44a5d2c5d |
The denarius was the silver coin that traded at the time of the Roman Republic, containing 3.9 grams of silver, while gold became the most valuable money in the civilized areas of the world at the time and gold coins were becoming more widespread. Julius Caesar, the last dictator of the Roman Republic, created the aure... | ddb147ab-704f-45a7-8afd-7565e2c5f49d |
For as long as Rome could conquer new lands with significant wealth, its soldiers and emperors could enjoy spending their loot, and emperors even decided to buy themselves popularity by mandating artificially low prices of grains and other staples, sometimes even granting them for free. Instead of working for a living ... | c0d5af43-f7b8-4d26-95be-327e049f4d22 |
The aureus coin was reduced from 8 to 7.2 grams, while the denarius's silver content was reduced from 3.9 to 3.41g. This provided some temporary relief, but had set in motion the highly destructive self-reinforcing cycle of popular anger, price controls, coin debasement, and price rises, following one another with the ... | b29b51a5-2739-45b4-b5be-1313dba92a26 |
Under the reign of Caracalla (AD 211–217), the gold content was further reduced to 6.5 grams, and under Diocletian (AD 284–305) it was further reduced to 5.5g, before he introduced a replacement coin called the solidus, with only 4.5 grams of gold. On Diocletian's watch, the denarius only had traces of silver to cover ... | 9cc94104-e88b-4973-a46b-1e4ce1e3ddd7 |
With this fall in the value of its money, the long process of terminal decline of the empire resulted in a cycle that might appear familiar to modern readers: coin clipping reduced the aureus's real value, increasing the money supply, allowing the emperor to continue imprudent overspending, but eventually resulting in ... | 4e56bfb3-89cb-4b0d-8111-83b9973d70e2 |
The long-term consequences for the Roman Empire were devastating. Although Rome up until the second century AD may not be characterized as a full-fledged free market capitalist economy, because it still had plenty of government restraints on economic activity, with the aureus it nonetheless established what was then th... | 856859be-0d8c-4cd2-9457-3d895a510648 |
The emperor Diocletian has forever had his name associated with fiscal and monetary chicanery, and the Empire reached a nadir under his rule. A year after he abdicated, however, Constantine the Great took over the reins of the empire and reversed its fortunes by adopting economically responsible polices and reforms. Co... | 2dcd3640-acc5-479e-a01e-c8e07132344d |
The legacy of Constantine in maintaining the integrity of the solidus made it the world's most recognizable and widely accepted currency, and it came to be known as the bezant. While Rome burned under bankrupt emperors who could no longer afford to pay their soldiers as their currencies collapsed, Constantinople thrive... | 16ec4b5d-e431-49f8-9c40-1ee6d83a8cb4 |
Even after it was debased and its empire fell, the bezant lived on by inspiring another form of sound money that continues to circulate widely to this day in spite of not being the official currency of any nation anymore, and that is the Islamic dinar. As Islam rose during the golden age of Byzantium, the bezant and co... | 44a8fe25-eb07-40e1-9da2-cec9f54853c4 |
After the economic and military collapse of the Roman Empire, feudalism emerged as the prime mode of organizing society. The destruction of sound money was pivotal in turning the former citizens of the Roman Empire into serfs under the mercy of their local feudal lords. Gold was concentrated in the hands of the feudal ... | dde9b2a7-2ead-4796-bd25-b8267a45239a |
Taxation and inflation had destroyed the wealth and savings of the people of Europe. New generations of Europeans came to the world with no accumulated wealth passed on from their elders, and the absence of a widely accepted sound monetary standard severely restricted the scope for trade, closing societies off from one... | 8835eb39-f304-4d22-8e2a-89809aa18ed2 |
While it is widely recognized that the rise of the city-states dragged Europe out of the Dark Ages and into the Renaissance, the role of sound money in this rise is less recognized. It was in the city-states that humans could live with the freedom to work, produce, trade, and flourish, and that was to a large extent th... | b1596118-148d-48dc-8c2b-db098ca8320c |
Although the period following the introduction of the florin witnessed an improvement in the soundness of money, with more and more Europeans able to adopt gold and silver for saving and trade, and the extent of markets expanding across Europe and the world, the situation was far from perfect. There were still many per... | 6caa78e2-deb6-4028-8fd9-a901739f0694 |
As sovereigns set an exchange rate between the two commodities, they would change holders' incentives to hold or spend them. This inconvenient bimetallism continued for centuries across Europe and the world, but as with the move from salt, cattle, and seashells to metals, the inexorable advance of technology was to pro... | 0f96d2ac-b827-437c-8ae1-ab8156f2d19d |
Two particular technological advancements would move Europe and the world away from physical coins and in turn help bring about the demise of silver's monetary role: the telegraph, first deployed commercially in 1837, and the growing network of trains, allowing transportation across Europe. With these two innovations, ... | db71dfde-60a4-4d80-8b5e-5ab0d6e37f7e |
More nations began to switch to a monetary standard of paper fully backed by, and instantly redeemable into, precious metals held in vaults. Some nations would choose gold, and others would choose silver, in a fateful decision that was to have enormous consequences. Britain was the first to adopt a modern gold standard... | 58742377-41b9-45b4-9bdf-f96071ad3787 |
Further, instead of individuals having to carry gold and silver coins for large and small transactions, respectively, they could now store their wealth in gold in banks while using paper receipts, bills, and checks to make payments of any size. The holders of paper receipts could just use them to make payment themselve... | aba7a3c8-dfb0-4a39-8789-2d0e1c699569 |
With these media being backed by physical gold in the vaults and allowing payment in whichever quantity or size, there was no longer a real need for silver's role in small payments. The death knell for silver's monetary role was the end of the Franco-Prussian war, when Germany extracted an indemnity of £200 million in ... | fd16832e-b8d4-464e-96e4-c728ab31c17b |
For as long as gold and silver were used for payment directly, they both had a monetary role to play and their price relative to one another remained largely constant across time, at a ratio between 12 and 15 ounces of silver per ounce of gold, in the same range as their relative scarcity in the crust of the earth and ... | 26176a3f-b4d5-4998-aa2e-97dd31c8deab |
The demonetization of silver had a significantly negative effect on the nations that were using it as a monetary standard at the time. India witnessed a continuous devaluation of its rupee compared to gold-based European countries, which led the British colonial government to increase taxes to finance its operation, le... | ffea9bf3-0888-46c0-b2e7-4c5188486e68 |
With gold in the hands of increasingly centralized banks, it gained salability across time, scales, and location, but lost its property as cash money, making payments in it subject to the agreement of the financial and political authorities issuing receipts, clearing checks, and hoarding the gold. Tragically, the only ... | c2e5a94a-9842-4643-b53e-b79b6ad3fc38 |
The end of the Franco-Prussian War in 1871, and the consequent shift of all major European powers onto the same monetary standard, namely gold, led to a period of prosperity and flourishing that continues to appear more amazing with time and in retrospect. A case can be made for the nineteenth century—in particular, th... | d509cc17-7b2d-4567-9293-d8253ee937b0 |
Different currencies were simply different weights of physical gold, and the exchange rate between one nation's currency and the other was the simple conversion between different weight units, as straightforward as converting inches to centimeters. The British pound was defined as 7.3 grams of gold, while the French fr... | 49340a23-3727-46ca-ac01-d3ad96eaa4bc |
The soundness of money was reflected in free trade across the world, but perhaps more importantly, was increasing savings rates across most advanced societies that were on the gold standard, allowing for capital accumulation to finance industrialization, urbanization, and the technological improvements that have shaped... | e474eda0-7e29-48be-b805-929b5fa87756 |
By 1900, around 50 nations were officially on the gold standard, including all industrialized nations, while the nations that were not on an official gold standard still had gold coins being used as the main medium of exchange. Some of the most important technological, medical, economic, and artistic human achievements... | d3152b62-d8a6-43ae-b3ad-95d5ee2858cd |
In the United States this era was called the Gilded Age, where economic growth boomed after the restoration of the gold standard in 1879 in the wake of the American Civil War. It was only interrupted by one episode of monetary insanity, which was effectively the last dying pang of silver as money, discussed in Chapter ... | ecccf058-e6da-4cb8-b548-c1e3d540c298 |
With the majority of the world on one sound monetary unit, there was never a period that witnessed as much capital accumulation, global trade, restraint on government, and transformation of living standards worldwide. Not only were the economies of the west far freer back then, the societies themselves were far freer. ... | e987aced-f0e4-4f95-8964-0ccf03dcfb76 |
This world came crashing down in the catastrophic year 1914, which was not only the year of the outbreak of World War I, but the year that the world's major economies went off of the gold standard and replaced it with unsound government money. Only Switzerland and Sweden, who remained neutral during World War I, were t... | 4f86cfb1-780d-4682-ad1e-eb0323978328 |
While the gold standard of the nineteenth century was arguably the closest thing that the world had ever seen to an ideal sound money, it nonetheless had its flaws. First, governments and banks were always creating media of exchange beyond the quantity of gold in their reserves. Second, many countries used not just gol... | 0c6f7bfa-7628-4791-bbe7-39ce0aadf92e |
These two flaws meant that the gold standard was always vulnerable to a run on gold in any country where circumstances might lead a large enough percentage of the population to demand redemption of their paper money in gold. The fatal flaw of the gold standard at the heart of these two problems was that settlement in p... | 0e37a947-50cc-4e03-b9d8-8a5592ae69d5 |
Gold being centralized made it vulnerable to having its monetary role usurped by its enemies, and gold simply had too many enemies, as Mises himself well understood: The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far ... | 56ec4e26-2b3d-4e67-a6dd-94e1f311ebe0 |
The twentieth century began with governments bringing their citizens' gold under their control through the invention of the modern central bank on the gold standard. As World War I started, the centralization of these reserves allowed these governments to expand the money supply beyond their gold reserves, reducing the... | d73f8fd5-92a0-4739-ad48-9f1bef932057 |
Even as central banks repeatedly declared the end of gold's monetary role, their actions in maintaining their gold reserves ring truer. From a monetary competition perspective, keeping gold reserves is a perfectly rational decision. Keeping reserves in foreign governments' easy money only will cause the value of the co... | 16ea6c50-c6af-4ca3-96b5-fbbf4d12dab8 |
World War I saw the end of the era of monetary media being the choice decided by the free market, and the beginning of the era of government money. While gold continues to underpin the global monetary system to this day, government edicts, decisions, and monetary policy shape the monetary reality of the world more than... | 401b20a8-82e9-41af-96cd-fac77d8d080e |
The common name for government money is fiat money, from the Latin word for decree, order, or authorization. Two important facts must be understood about government money from the outset. First, there is a very large difference between government money redeemable in gold, and irredeemable government money, even if both... | 4f22f09a-c899-4a26-9137-ac5a4ef365eb |
The second and often overlooked fact, is that, contrary to what the name might imply, no fiat money has come into circulation solely through government fiat; they were all originally redeemable in gold or silver, or currencies that were redeemable in gold or silver. Only through redeemability into salable forms of mone... | 9ec81b56-7a24-4f23-913f-de9b0b15c4ee |
The oldest recorded example of fiat money was jiaozi, a paper currency issued by the Song dynasty in China in the tenth century. Initially, jiaozi was a receipt for gold or silver, but then government controlled its issuance and suspended redeemability, increasing the amount of currency printed until it collapsed. The ... | ff30c817-2827-45de-89e0-19571782f268 |
Government money, then, is similar to primitive forms of money discussed in Chapter 2 , and commodities other than gold, in that it is liable to having its supply increased quickly compared to its stock, leading to a quick loss of salability, destruction of purchasing power, and impoverishment of its holders. In this r... | 6b51c9e1-5a61-4b52-8ab5-ddb63e177d45 |
The many enemies of sound money whom Mises named in the quote referenced at the end of the last chapter were to have their victory over the gold standard with the beginning of a small war in Central Europe in 1914, which snowballed into the first global war in human history. Certainly, when the war started nobody had e... | b3b9b1c8-a892-440b-a9af-d05e2725d5d2 |
In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary. When governments were on a gold standard, they had direct control of large vaults of gold while their people were dealing with paper receipts of this gold. The ease ... | e159fddb-7e42-4c64-b7fa-0a92e5daf898 |
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