The Rise of Unprintable Money
Last week, Bitcoin took a tumble.
China announced a new ban on businesses wishing to transact in cryptocurrencies. The broad digital currency market lost 30% of its dollar-value in a week.
Investors scared of inflation and reactionary moves from government began to withdraw from their riskier positions.
Now, you can’t accuse me of maintaining a rosy posture in this blog, and you won’t anytime soon. But over the past few months, I started peeling back the wrinkling wallpaper that is our global economic system to reveal the rotting reality underneath.
While Bitcoin took a hit, it may still become the cornerstone of a global trade renaissance and the key to human survival.
…What?
Before you unsubscribe, give me a chance to explain.
I am not the expert on currency, money, or global economics. You will find resources more rigorously studied on these subject — The Bitcoin Standard by Saifedean Ammous or The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan.
But I will do my best to summarize our situation. When you pay tax, when you receive a paycheck, and when you collect interest, you do it in paper money. Specifically, fiat money.
If you were alive over 100-years ago, you would receive pay in the form of barter, IOUs, or precious metals.
If the history of money is known to you, you may learn nothing from this post. But from my upbringing, I presumed, as others born into the age of paper money, that our ‘new’ solution was superior to the old.
I believed without question we had wrangled control of and mastered a sounder understanding of money than our predecessors. Lo’ and behold…
What Is Money, Really?
Money has to be three things, according to Ammous. It has to be a store of value. Something which maintains or appreciates its worth over time.
Money that loses value, especially at a high clip, won’t remain money for long. The people will choose a new money.
Second, the object which represents money must function as a record of account. It allows its owners to add, subtract, and at the bottom line, understand how much of a money they possess.
And lastly, money must be divisible as to enable a wide berth of transactions.
But why did we need money in the first place? Money freed us from bartering. Prior to the invention of money, one would barter to acquire what they needed. I give you A in exchange for B.
While this system worked in early societies, it prohibited the existence of specialists and capital growth.
For example, and this one is taken straight from the book, a shoemaker can make an excellent shoe, but knows nothing of construction.
For the shoemaker to acquire a home, he must find a home builder who requires… a pair of shoes? You don’t have to be Gordon Gekko to figure out where this system fails.
Not only must the shoemaker find a homemaker in desperate need of shoes, this homemaker must agree to a transaction in which an entire house is exchanged for sneakers. And unless we’re talking about a pair of original Nike Air Jordans signed by the legend himself, this cobbler ain’t gettin’ a house.
Money enabled the shoemaker to collect a store of value. By producing shoes for many people, his money combined into a sum of stored-value worthy of the homemaker’s efforts. He bought the house with money.
Despite its obvious benefit to society, most money fails. And money fails when someone discovers how to quickly grow the supply.
Hard vs Easy
Ammous details in his book the properties of an object that make it a satisfactory money. One such property is the difficulty required to produce more units.
We often hear of ‘easy’ money, the kind governments hand out like candy from the back of un unmarked van. But easy money has a natural enemy.
When a society chooses a material as a store of value, the material becomes a money once it satisfies the remaining properties: as a unit of account and as divisible currency. Invariably at this time, the material’s new prominence in society tempts someone to seek more of it.
That person fails to recognize their plan as self-defeating. By creating more money, they devalue the existing units. Additional money does not create wealth, it represents less of it.
So when this person succeeds at reproducing society’s money for their personal gain, they sabotage their goal. By injecting easy money into circulation, they eliminate the incentives which drew society to the money in the first place.
The alternative to easy money is hard money. Money that proves challenging to make. Money, like the kind people used for thousands of years and across tribes, cities, and international borders. Money like gold.
You’ve Got The Touch
Gold is the hardest money ever discovered.
We cannot make gold from other materials. There’s precious little to begin with. We can reshape it into any form. And at present, we add less than 2 percent to the gold supply each year — gold is tough to find and expensive to mine.
Thanks to its properties, gold remained a store of wealth and a medium of exchange for thousands of years and across countless cultures.
Gold worked so well because of how tough it is to acquire. When an entire world of people agree on the difficulties in finding one material, the entire world agrees on a money.
Prior to the introduction of paper money, gold flowed freely between any two partners in trade: nations, monarchs, lords, and peasants.
Gold coins from Rome could purchase anything on the planet so long as trade partners could agree on its purity and weight. But things change.
The world had a perfect money. So what happened? Click below to read part two.
