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But its mere existence is an insurance policy that will remind governments that the last object the establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future. Nassim Nicholas Taleb January 22, 2018
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 the advance of human civilization.
but also the bigger the problem of coincidence of wants
A good that assumes the role of a widely accepted medium of exchange is called money.
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.
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 increase in the new production is unlikely to depress the price significantly. On the other hand, if people chose to store their wealth in an easy money, with a low stock‐to‐flow ratio, it would be trivial for the producers of this good to create very large quantities of it that depress
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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.
It therefore follows that for something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium.
supply growth—in other words, hard money. Competition is at all times alive between monetary media, and its outcomes are foretold through the effects of technology on the differing stock‐to‐flow ratio of the competitors, as will be demonstrated in the next chapter.
In reality, the choice of what makes the best money has always been determined by the technological realities of societies shaping the salability of different goods.
There is no need for government to impose the hardest money on society; society will have uncovered it long before it concocted its government, and any governmental imposition, if it were to have any effect, would only serve to hinder the process of monetary competition.
time preference, a pivotal concept in this book.
property of being exchanged easily matters the most. A medium of exchange, as mentioned before, is not acquired for its own properties, but for its salability.
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.
Each of these media of exchange served the function of money for a period during which it had one of the best stock‐to‐flow ratios available to its population, but stopped when it lost that property. Understanding
The very high cost of procuring new stones to Yap meant that the existing supply of stones was always far larger than whatever new supply could be produced at a given period of time, making it prudent to accept them as a form of payment. In other words, Rai stones had a very high stock‐to‐flow ratio, and no matter how desirable they were, it was not easy for anyone to inflate the supply of stones by bringing in new rocks.
one‐time collapse in the value of a monetary medium is tragic, but at least it is over quickly and its holders can begin trading, saving, and calculating with a new one. But a slow drain of its monetary value over time will slowly transfer the wealth of its holders to those who can produce the medium at a low cost. This is a lesson worth remembering when we turn to the discussion of the soundness of government money in the later parts of the book.
These historical facts are still apparent in the English language, as the word pecuniary is derived from pecus, the Latin word for cattle, while the word salary is derived from sal, the Latin word for salt.
As soon as these monies lost their hardness, their holders suffered significant wealth expropriation and the entire fabric of their society fell apart as a result.
a money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce.
The reduction in the metal content of the coins compromised the purity and soundness of the money.
Its tragic flaw, however, was that by centralizing the gold in the vaults of banks, and later central banks, it made it possible for banks and governments to increase the supply of money beyond the quantity of gold they held, devaluing the money and transferring part of its value from the money's legitimate holders to the governments and banks.
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 value, increasing their wealth in the long run as it becomes the prime store of value, because those who chose other commodities will either reverse course by copying the choice of their more successful peers, or will simply lose their wealth. The clear
Over the past seven decades with relatively reliable statistics, this growth rate has always been around 1.5%, never exceeding 2%. (See Figure 1.
The price of silver eventually crashed and the Hunt brothers lost over $1bn, probably the highest price ever paid for learning the importance of the stock‐to‐flow ratio, and why not all that glitters is gold.3
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.
The high stock‐to‐flow ratio of gold makes it the commodity with the lowest price elasticity of supply, which is defined as the percentage increase in quantity supplied over the percentage increase in price.
Nero, who was the first to engage in the Roman habit of “coin clipping,” wherein the Emperor would collect the coins of the population and mint them into newer coins with less gold or silver content.
With time, the Old World no longer had prosperous lands to be conquered, the ever‐increasing lavish lifestyle and growing military required some new source of financing, and the number of unproductive citizens living off the emperor's largesse and price controls increased. Nero, who ruled from 54–68 AD, had found the formula to solve this, which was highly similar to Keynes's solution to Britain's and the U.S.'s problems after World War I: devaluing the currency would at once reduce the real wages of workers, reduce the burden of the government in subsidizing staples, and provide increased
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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.
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 inflation and economic crises, which the misguided emperors would attempt to ameliorate via further coin clipping. Ferdinand Lips summarizes this process with a lesson to modern readers: It
Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague.
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 the largest market in human history with the largest and most productive division of labor the world had ever known.
Byzantium survived for 1,123 years while the solidus became the longest‐serving sound currency in human history.
The Umayyad Caliph Abdul‐Malik ibn Marwan defined the weight and value of the Islamic dinar and imprinted it with the Islamic shahada creed in 697 AD.
Venice was the first to follow Florence's example with its minting of the ducat, of the same specifications as the florin, in 1270, and by the end of the fourteenth century more than 150 European cities and states had minted coins of the same specifications as the florin, allowing their citizens the dignity and freedom to accumulate wealth and trade with a sound money that was highly salable across time and space, and divided into small coins, allowing for easy divisibility.
sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction.
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.
With Germany now joining Britain, France, Holland, Switzerland, Belgium, and others on a gold standard, the monetary pendulum had swung decisively in favor of gold, leading to individuals and nations worldwide who used silver to witness a progressive loss of their purchasing power and a stronger incentive to shift to gold. India finally switched from silver to gold in 1898, while China and Hong Kong were the last economies in the world to abandon the silver standard in 1935.
It is the author's opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized.
This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn't have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.
We can thus understand why nineteenth‐century sound money economists like Menger focused their understanding of money's soundness on its salability as a market good, whereas twentieth‐century sound money economists, like Mises, Hayek, Rothbard, and Salerno, focused their analysis of money's soundness on its resistance to control by a sovereign. Because the Achilles heel of 20th century money was its centralization in the hands of the government, we will see later how the money invented in the twenty‐first century, Bitcoin, was designed primarily to avoid centralized control. La
First, governments and banks were always creating media of exchange beyond the quantity of gold in their reserves. Second, many countries used not just gold in their reserves, but also currencies of other countries.
With growing international trade relying on settlement of large quantities of money across the world, the Bank of England's banknotes became, in the minds of many at the time, “as good as gold.” While gold was very hard money, the instruments used for settlements of payments between central banks, although nominally redeemable in gold, ended up in practice being easier to produce than gold.
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 physical gold is cumbersome, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations—banks and central banks—leaving them vulnerable to being taken over by governments.
Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavours to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills.
Even in a world of government money, governments have not been able to decree gold's monetary role away, as their actions speak louder than their words. (See Figure 4.16)
government money is fiat money,
Until this day, all government central banks maintain reserves to back up the value of their national currency.
No pure fiat currency exists in circulation without any form of backing. Contrary to the most egregiously erroneous and central tenet of the state theory of money, it was not government that decreed gold as money; rather, it is only by holding gold that governments could get their money to be accepted at all.
