The History of Hard Money

Last Updated on December 23, 2024

For most of human history societies have used some form of hard money.

The definition of hard money is a form of money were it is difficult to produce new units and therefore it is difficult to increase the supply. This is also known as sound money.

Easy money, by contrast, is money that is easy to create and therefore is vulnerable to large increases in supply.

A money’s “hardness” is determined by the relative difficulty of producing new monetary units.

In human history, hard money has ranged from shells to cows to tobacco to salt to whale’s teeth to silver and gold and now Bitcoin.

The modern world continued to use a form of hard money right up until 1971, when the USA severed the last ties to gold ushering in the fiat era, where money is backed by nothing but the faith and confidence in central banks and governments.

The monetary system we have today is a historical rarity.

That this monetary system has persisted for several decades in what has been a predominantly peaceful era is even more rare.

In the past paper money has either been backed by gold or silver, issued as a war time emergency or has been a catastrophic short-lived failure.

Our system is none of the above, which makes it quite unique.

If you want to fully understand how the current monetary system works, you have to understand its history. That means you need to understand the history of hard money, how money developed over time and why governments have decided to abandon any formal links to hard assets.

Money as an Accounting Device

Money is a necessary prerequisite for an advanced civilisation.

The function of money is to store value, to act as a medium of exchange and a unit of account. Effective money can move that stored value across time and space.

Without money we have no way to store value, so we must consume all that we produce. Therefore we must remain at a basic level of subsistence.

However, with money we can store the rewards of our labour and keep some aside for the future. This enables us to produce more than we consume and unlocks both investment and trade, which are necessary to develop a complex economy and a complex society.

Therefore we can see, as Niall Ferguson says:

“The ascent of money has been essential to the ascent of man.”

It has commonly been assumed that money developed as an extension of barter. The argument goes that in order to allow for more efficient trade, early societies had to agree upon something to act as money.

More recent arguments suggest that money actually developed as a means of accounting first.

The first we hear about money in the historical record is from the ancient Sumerians. They had a complex economy and accounting system based on the silver shekel.

The shekel wasn’t a currency as such, in the sense that it didn’t widely circulate. Instead it was held in central vaults, with transactions recorded on tablets.

This system is not too dissimilar to our system of banking today.

The shekel played the role of bank reserves, while the tablets recorded the transactions, just as all our transactions are recorded online and the banks settle their accounts with each other at the end of each trading back through the central bank.

A similar example can be seen in the Yap Islands of Micronesia. They have giant stones placed all around the islands that they use as money.

yap-island-rai-money — *Rai Stone Money in the Yap Islands*

But they weren’t physically exchanged every time there is a transaction. Instead they acted as an accounting mechanism, whereby a change in ownership of the stone was recognised while the stone stays in place.

Money in the Ancient World

As well as being a unit of account, money also took the form of commodities which were used for transactions and exchange.

Cattle were an early form of commodity money, used for a long time in many parts of the world.

The shell of an Indian Ocean mollusc, the cowrie, has also been a prominent form of commodity money in China, the Pacific and Africa, even until quite recently.

Feathers, beads and cacao beans are other examples of things that have traditionally been used as money.

While these are all fascinating in their own right, with their own unique stories, none has had anywhere near the impact and universal appeal of precious metal coins.

The earliest standardised hard money coins that we know of came from the Lydian Empire around 600 BC.

Lydia was an empire that predated the Persians in what is now Turkey. King Alyattes coined the stater, a gold-silver alloy (known as electrum) with a small amount of copper. His son, King Croesus, is credited with minting the world’s first gold coin.

Precious metals had been used as money prior to this, but not in any standardised form. The uniqueness of the Lydian money was that it was issued by a government and it was of a standardised weight.

This meant that coins did not have to be weighed and inspected, leading to more efficient commerce.

The Greek Philosopher Aristotle is well-known for articulating the key characteristics of money. He explained that money must be durable, portable, divisible and intrinsically valuable.

We can also add fungible to that list, meaning that each unit of currency is equal to one another.

The Lydian experiment in money met those criteria and this development was to spread far and wide across the ancient world.

The Athenians used a standardised silver coin, the tetradrachm, while the Romans produced the gold aureus, the silver denarius and the bronze sestertius.

The Romans ensured the circulation of their coins by paying the military with them (about 75% of government expenditure) and by requiring conquered territories to pay taxes in them.

This money creation gig was quite the industry for governments, as most of these ancient coins carried the seal of a king, queen or emperor, in order to guarantee the coin and its metallic content.

There is some debate as to the role of government in the development of money. Austrian economists assert that money is not an invention of the state. The founder of the Austrian school, Carl B. Menger explains:

“[Money] is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.”

However, while the precious metals were recognised as the best form of money because of their unique properties, others argue it wasn’t just simply a market process that led to their adoption. There was government coercion as well. David Orrell explains:

“The Greek and Roman Empires were both built on a military–financial complex that obtained bullion and slaves from conquered lands, paid soldiers using the minted coins, and collected taxes in said coins. Money was therefore a tool to transfer resources from the general population to the well-armed state…Coin money did not supersede barter; rather it was predated by state-backed systems of credit. And rather than emerging naturally, with government and its legal system only stepping in at the last moment to claim credit by putting its stamp on everything, the use of coin money was imposed by government in the first place. It was forced on the population, just as a coin’s stamp was forced onto metal.”

Most hard money economists take it as given that money developed from barter and that it was the market that determined precious metals to be the most superior form of money.

But despite normally falling right in line with the Austrians I see quite a lot of merit in David Orrell’s explanation. Precious metals were the superior form of money, the market’s money, but it was also the states in the ancient world that imposed it.

I think that the history of money shows that the reality is somewhere in the middle.

There was (and still is) a constant tension between market money and government money.

The market always decides what the best form of money is and the state can either choose to accept it or to reject it and impose its own money instead. States have that legitimate sovereign right.

States, both ancient and modern, always have two monopolies that define them as states. The first is a military monopoly and the second is a monopoly on taxation. They can impose money on society either by decree or by determining how citizens pay their taxes.

But just because states have the power to determine the monetary system is no guarantee that the system will be effective or long lasting.

Whether government money succeeds depends on its hardness, the strength of the state and the compliance of the public. Often government money will function in the short term through coercion, but if it is not sound then it will eventually fail and market money will re-emerge.

The Roman example supports this thesis.

This monetary control bestowed enormous power on Roman governments. They began with sound money in the form of precious metals but they took advantage of their monetary power by gradually debasing the metallic content of the coins.

Famously, the Roman monetary system had almost completely disintegrated by the third century AD after a continual debasement. Emperors would recall a coin, remint it with a lower metal content and pocket the difference as a profit.

The silver denarius, the most common of all the Roman coins and originally 95% silver, was debased to such an extent that it eventually contained a mere 1-2% of precious metal.

This debasement happened because Rome had run out of foreign territory to conquer and thus the supply of new precious metals had dried up. Given that Rome itself produced very little, the money was flowing to foreign lands such as India and China to pay for imported goods.

Debasing the coins was a temporary way around this outflow, allowing the government to pay its bills and passing the suffering on to the people in the form of inflation.

Nevertheless, despite the inflation and the debasement of the coins, gold, when measured in its metallic weight, maintained its purchasing power throughout this disastrous period. This is one of the principal arguments for holding gold today.

Emperor Constantine restored a degree of stability to the money system in the 4th century when he introduced one of the world’s most famous gold coins, the solidus in large quantities. This was a gold coin with a precious metal content of 4.55g.

While a devaluation compared to the previous aureus, the solidus proved to be so sound that it was used in the Byzantine empire right up to the 10th century, long after the collapse of Rome in the West.

The exact causes of the collapse of the Roman Empire are numerous and widely debated among historians. Yet it is hard to deny that economic and monetary causes played a significant role.

Money From the Fall of Rome to the Renaissance

After the decline of Rome, Europe became a feudal backwater as the centre of wealth, power and cultural influence shifted to the Islamic world.

While the Byzantine empire still used precious metal coinage in the form of the solidus, money in the Arab world was primarily in the form of credit and promissory notes. However, gold and silvers coin were eventually adopted in the form of gold dinars and silver dirhams.

Medieval Europe saw gold and silver outflows to the East with significant amounts of precious metals also finding their way to the Church.

Prices were still quoted in terms of the Roman denarius, even in the time of Charlemagne (768-814), but there was a significant shortage of the metals themselves.

Silver coins, along with copper ones did still circulate but feudal communities, which were closed and self-contained, could manage without money as rent and taxes were often paid in the form of goods or labour. And the coins that were issued were done so by local rulers rather than a centralised governing authority.

Silver coins emerged in England in the late 8th century before being officially adopted in 928 by King Athelstan (927-939), who introduced the pound sterling. While the modern pound is a fiat currency it can trace its roots back to this silver coin from 928.

In France, a centralised government money came about in the reign of Louis IX (1226-1270), who issued a silver coin called the gros tournois. This money was soon used all over Europe.

Louis IX’s successor Philip III continued to mint the gros tournois but his successor Philip IV (1285-1314) devalued the coin three times in order to fund a war with England. After the final debasement only a third of the silver content remained.

More famous than his coin debasement was Philip IV’s suppression of the Knights Templar, who are credited with establishing one of the earliest forms of banking in Europe. They allowed travelers to deposit money with them at one of their castles and receive a letter of credit, which could then be redeemed somewhere else along the journey.

It is sometimes argued that Philip IV executed the suppression of the Knights Templar in order to confiscate their wealth, because of the financial hole he was in and the failure of his currency debasement to rescue him.

European finance took a major development with the rise of the powerful northern Italian city-states of Venice, Florence and Genoa. These city states developed extensive trade networks with the east and had become fantastically wealthy.

In 1252, the florin was first minted in Florence. This was a gold coin, which was highly significant, since Europeans had not had gold as money since the Romans. The florin quickly became the dominant currency of exchange in much of the known world.

Venice soon modeled their own gold coin, the ducat, after the Florentine florin. By the end of the 14th century 150 other European cities and states had minted coins modeled on the florin.

This adoption of gold as money was a significant reason why Europe began to flourish again during the Renaissance, as sound money is a necessary prerequisite to saving, investment and sustained economic growth.

Renaissance Italy also developed a system of banking, made most famous by the Medicis, whereby hard money could be deposited in exchange for a paper in the form of a letter of credit or a bill of exchange.

While this paper facilitated commercial trade and could be exchanged between banks, they weren’t used as currency by the wider population. Nevertheless it is worth noting that this early form of paper required a hard asset deposit.

Money in Modern Europe

The discovery of the New World, and the abundant amount of easily mined gold and silver found there, had led to massive inflows of the precious metals into Europe via Spain.

After a monetary reform in 1497, the Spanish began to issue a silver dollar, the real de a ocho or pieces of eight, which gradually began to challenge the florin as the international standard coin.

These New World mines produced approximately 2800 tons of gold and 150,000 tons of silver between 1500 and 1800. This equated to a massive 85% of the world’s silver supply and 70% of the gold supply.

This coincided with a huge inflation in Europe, known as the “Price Revolution.”

Economists have traditionally argued that the inflow of precious metals caused the inflation. This makes sense, as an increase in the money supply would normally lead to rising prices. This is just as true of precious metals as it is of paper money.

However, historians have more recently argued that the Price Revolution was predominantly caused by a population boom and that the answer lies with demographics.

Likely, it was a combination of the two.

After the Italian states had dominated financial developments in the Renaissance, the economic power shifted north in the early modern period, with Stockholm, London and Amsterdam becoming the major financial centres.

The Amsterdam Exchange Bank was established in 1609, the Swedish Riksbank in 1656 and the Bank of England in 1694.

The Amsterdam Exchange Bank facilitated commercial transactions between merchants by debiting and crediting their accounts, without the need for payment in coins. Because it was not a lender, it maintained a reserve ratio of close to 100% in precious metals.

The Riksbank, however, was a lending bank. It was a pioneer in fractional reserve banking and issued the first paper money in Europe in 1661. The Bank of England followed suit.

While precious metals still formed the reserves of these central banks, there was a philosophical shift in the nature of money and banking in that credit now became a form of money.

Money in Asia

In Medieval Asia, the use of silver and gold was limited. Silk was primarily used for inter regional exchange, with copper coins being preferred as money for smaller local exchanges.

Commodities such as rice, salt, oil and spices could also be used to facilitate trade.

chinese-copper-coins — *Chinese Copper Coins*

Paper money first began to be used during the Song Dynasty (960-1279) and continued under subsequent dynasties. However, commodity and metallic money, primarily copper, continued to be used in imperial China alongside paper.

Towards the end of the 13th century, the use of silver increased. In 1276, the Yuan dynasty in China began issuing large quantities of paper money, which had a face value denomination in terms of copper but was actually backed by silver.

Physical silver was not normally used in trade, in fact it was banned from 1263 to 1311, instead its role was primarily as a unit of account.

In India, silver also began to be used more, as the Delhi Sultans started to issue silver rupees on a large scale in 1295.

After the collapse of the Yuan in China in 1368 a variety of copper coins and commodity money circulated. The Yuan’s successor, the Ming, made silver the unit of taxation after the collapse of their paper money in 1436.

With the discovery of the Americas and in the massive silver mines that were found there, large amounts of silver found its way to Asia, especially India and China, via Spanish, Portuguese and Dutch traders.

Towards the mid-late 18th century, however, the use of silver in China declined and copper, once again, became the dominant form of money. While silver was still the standard and was used for larger transactions, particularly when trading with a distant region, copper was used in smaller local transactions.

Japan, in the Tokugawa period from 1601-1867, were using a monetary system that involved gold, silver and bronze. Under Emperor Meiji Japan adopted a monometallic gold standard in 1897.

Korea and Vietnam started issuing their own copper coins the 18th century, replacing the Chinese coins that were in circulation and giving them, for the first time, monetary independence from China.

By the late 19th century, China was still on the silver standard. India was also on the silver standard, using the rupiya which had existed largely unchanged since the mid 16th century.

India abandoned the silver standard for the gold standard in 1898. China stayed on the silver standard until 1935 when it moved onto a fiat currency. She had intended to move onto a gold standard but by the time she was ready the rest of the world had already abandoned it, so instead China jumped straight to paper.

The decision of China and India to maintain the silver standard, when the major Western powers adopted gold in the 1870s has been argued as a key reason why these large powers fell behind the west.

As the rest of the world adopted the gold standard and abandoned the bimetallic standard of the previous centuries, the value of silver plummeted, leading to a destruction of capital in silver standard countries.

Money in America

In colonial America the 13 colonies used British money at first, with Britain still on a silver standard at the time.

In more rural areas, where British money was not available, commodities such as beaver fur, fish, corn, rice and tobacco changed hands as money.

As the economy grew there was an inflow of money, both British coins and foreign coins. Spanish coins in particular were widely used and foreign money freely circulated until Congress banned their use in 1857.

Paper money issues did take place, both by colonial governments and by the Continental Congress, but these were always redeemable in gold and silver.

The signing of the US Constitution in 1788 passed the power to coin money to Congress and state governments were barred from issuing paper or coining money. In 1792 the Coinage Act was passed, establishing a bimetallic standard with a silver/gold ratio of 15/1.

Central banking experiments had been attempted before the signing of the Constitution with the short lived Bank of North America created in 1782. These efforts continued after the birth of the United States.

In 1791, the Bank of the United States was formed, although Congress did not renew its charter after it expired in 1811.

Both the Bank of North America and the Bank of the United States issued paper money, but this was also redeemable for gold and silver.

During the War of 1812, after reckless money printing by a number of banks, the government suspended the convertibility of paper money into hard money. This suspension lasted for two and a half years.

Murray Rothbard describes the significance of this event:

“More important than this inflation, and at least as important as the wreckage of the monetary system during and after the war, was the precedent that the two-and-a-half-year-long suspension of specie payment set for the banking system for the future. From then on, every time there was a banking crisis brought on by inflationary expansion and demands for redemption in specie, state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continued to flourish. It thus became clear to the banks that in a general crisis they would not be required to meet the ordinary obligations of contract law or of respect for property rights, so their inflationary expansion was permanently encouraged by this massive failure of government to fulfill its obligation to enforce contracts and defend the rights of property.”

The second Bank of the United States was formed in 1817, which immediately triggered an inflationary boom, followed by a bust in 1819. This 1819 depression gave rise to the Jacksonian movement, which favoured hard money and 100% reserve banking.

Under Presidents Jackson and Van Buren the Federal Government did not use a central bank, instead keeping government funds in an independent treasury.

This Jacksonian system was discarded during the Civil War, as the government issued paper money, the greenback, and established the national banking system, a forerunner to the Federal Reserve.

Yet despite the massive issues in paper, gold and silver remained a crucial part of bank reserves and, with the exception of the Civil War, paper money was still redeemable.

In 1879, the bimetallic standard that the US had been on since 1782 was replaced with a gold standard. This was the era of the classical gold standard, where the world’s major powers demonetised silver and made gold the sole reserve metal.

The Gold Standard

The classical gold standard was a period from the early 1870s until war broke out in 1914, where all major powers tied their currencies to gold or pegged their currency to one which was tied to gold.

This period is widely regarded as one of the most prosperous eras of human history with rapid economic growth and innovation, as the sound money of the gold standard allowed for capital accumulation which in turn drove economic progress.

Britain had adopted a de facto gold standard in 1717, which was a key pillar of the empire’s dominance. The newly formed country of Germany did the same by 1873.

Germany’s decision, along with the economic superiority of Britain, encouraged other nations to abandon silver or bimetallism and adopt a gold standard. The USA did this in 1873, Russia in 1897 and India in 1898. By 1900 all countries except China and some countries in Central America were on the gold standard.

gold-certificate-1882 — *$100 US gold certificate 1882*

Silver was effectively demonetised. There was a political fight for it, as seen in the Sherman Silver Purchase Act and William Jennings Bryan’s 1896 run for the presidency. But ultimately the gold standard prevailed.

Silver no longer had a place as it did under a bimetallic standard, which led to a massive devaluation compared to gold, which has continued right up until the present day.

The last decade has seen the silver/gold ratio range predominantly between 60/1 and 90/1, with a recent peak of over 120/1 in 2020. Compare that to the 15/1 prescribed by US law in 1792.

The gold standard worked by limiting the amount of paper money that could be issued relative to the amount of gold in bank reserves. Paper money was freely convertible into gold at a fixed price. This prevented too much money printing, otherwise it would have triggered a bank run and a collapse of the system.

In the US the price of gold was fixed in 1879 at $20.67 per ounce.

Here’s how the gold standard operated according to the World Gold Council:

“In theory, international settlement in gold meant that the international monetary system based on the Gold Standard was self-correcting. Namely, a country running a balance of payments deficit would experience an outflow of gold, a reduction in money supply, a decline in the domestic price level, a rise in competitiveness and, therefore, a correction in the balance of payments deficit. The reverse would be true for countries with a balance of payments surplus…While the ‘rules’ were not explicitly set out, governments and central banks were implicitly expected to behave in a certain manner during the period of the classical Gold Standard. In addition to setting and maintaining a fixed gold price, freely exchanging gold with other domestic money and permitting free gold imports and exports, central banks were also expected to take steps to facilitate and accelerate the operation of the standard.”

The classical gold standard only lasted until 1914, as the outbreak of the Great War sadly brought it to an end.

The European powers did not want to fund the war through increased taxation and abandoned the gold standard so they could finance the war through money printing instead. However, the United States maintained the peg to gold at $20.67 per ounce.

In 1925, several years after the war, Britain decided to re-establish the gold standard, with other countries following suit soon after.

Yet the British re-established their gold price at the prewar level of £4.86 per ounce. They didn’t account for the wartime money printing that had caused the pound to lose over a third of its prewar value.

If they had contracted their money supply back to the prewar level then a price of £4.86 per ounce could have worked. But they didn’t and continued to pursue an inflationary cheap money policy.

Additionally, as Murray Rothbard argues, this post war gold standard was not a true gold standard. Aside from the issue of what price to fix to gold, the way it was arranged did not prevent money printing and inflation the way the classical gold standard did.

Therefore, economists have given this post-war system a different name, the gold-exchange standard.

Gold and the gold-exchange standard have been blamed for the Great Depression. The yellow metal is a popular culprit for those who wish to discredit gold as money.

But that is only partially true.

It wasn’t the gold standard that was to blame, rather it was the faulty application of the gold standard. This return to the gold standard at the wrong price and with the wrong mechanisms was the culprit.

As the Depression hit, the Fed tried their best to inflate their way out of it. But Americans, sensing danger, wanted to withdraw their savings from the banks in gold, which they were perfectly entitled to do.

This began a run on the banks, who could not meet the demand and failed in large numbers. Foreign central banks also lost confidence in the US Dollar and began to withdraw gold.

bank-run-1932 — *A bank run in New York*

Bank runs occurred in Germany and Austria as well and both abandoned the gold standard in 1931. In Britain, those holding paper pounds demanded redemption in gold, so she too dropped the gold standard. 25 other countries soon followed suit and moved to floating exchange rates.

In the US President Roosevelt put an end to the official gold standard with a series of measures. He put an embargo on the export of gold, he confiscated it from US citizens and he devalued the dollar by raising the gold price from $20.67 to $35 per ounce.

The US Dollar was still tied to gold at the new price of $35 per ounce, but since gold could not legally held by the citizens it was not a true gold standard, since a true gold standard required free convertibility of paper into gold. Rather it has been described as a quasi gold standard.

After World War Two, the US Dollar replaced the British Pound as the dominant international currency. At the Bretton Woods conference, it was agreed that foreign currencies would be tied at fixed rates to the US dollar.

Because the US Dollar was still tied to gold this, in effect, meant the world’s major currencies were also still tied to gold as central banks could still redeem their paper for gold at $35 per ounce.

The Final Abandonment of the Gold Standard

In 1971, President Richard Nixon, ended convertibility of US dollars into gold by foreign central banks. This severed the last tie the US Dollar, and thus the world’s other currencies, had to gold.

Nixon did this because the USA had been pursuing an inflationary money printing policy, which devalued their dollar. But because the dollar was tied to gold at a fixed, not a market price, US Dollars were artificially overvalued.

Savvy European countries were converting their US Dollars to gold at $35 per ounce.

Why wouldn’t you, when it would have taken many more dollars to buy an ounce of gold if it was priced by the market?

By inflating and devaluing the dollar, the US was taking advantage of its favoured status set at Bretton Woods, to the detriment of the rest of the world. The Europeans were calling them out on it.

This had caused a worrying outflow of gold from the US, which the administration was determined to stop. They could have restrained their money printing and restored confidence in the dollar, but that would have been hard. Instead, they took the easy option and stopped allowing foreign central banks to redeem their US Dollar reserves for gold.

This is what happened when President Nixon famously appeared on Sunday night television in 1971 and announced that the US was “closing the gold window.”

By doing this, he removed the last tie the US Dollar has to gold, which ended the Bretton Woods monetary system.

This led to a new global monetary era of floating exchange rates with no tie to gold or any other hard asset. Money became fiat money, not backed by anything except faith and confidence in the issuing central bank.

Gold itself, now priced by the market, has risen substantially from $35 per ounce or rather, fiat currencies have fallen in value when priced in gold.

gold-price-chart — *Gold priced in USD 1971-2024*

However, most major central banks in the world still hold significant gold reserves. While they publicly disparage gold, the act of holding it suggests that central bankers still see gold as playing an important role in the global monetary system.

Even those central banks who have no gold reserves, like mine in New Zealand, hold reserves in foreign currencies whose central bank does hold gold i.e. the US Dollar.

As Safidean Ammous says:

“Even as central banks repeatedly declared the end of gold’s monetary role, their actions in maintaining their gold reserves ring truer…Even in a world of government money, governments have not been able to decree gold’s monetary role away.”

This is what Jim Rickards calls the “shadow gold standard.”

So while the world’s currencies are not formally tied to gold there is, in some sense, a very tenuous degree of gold backing.

However, unlike the classical gold standard where money printing was restrained by a fixed price to gold, this shadow gold standard does not provide any kind of handbrake on credit creation. Since 1971 the global money supply has increased enormously.

History has seen what happens when expansion of the money supply gets out of control. Currencies collapse wreaking economic and social havoc on the population. One only needs to look at Weimar Germany, Revolutionary France or Russia after the fall of the Soviet Union to see how it unfolds.

In the past these were localised. What History has not yet seen is currency expansion get out of control in a globally interconnected monetary system where even the reserve currency has no tie to a hard asset.

Some commentators, like Jim Rickards, have argued that in the future, rather then let fiat currencies collapse, governments and central banks will have to re-establish the gold standard in order to restore monetary stability.

Russia, China and others are already stacking a lot of gold in preparation for future monetary reforms.

This is a thesis that I broadly agree with, although of course, anything could happen. Bitcoin might even succeed in displacing government money.

The key, Rickards argues, will be not making the mistake of the British in the 1920s and making sure that the price of gold is set appropriately.

He offers $10,000 as a plausible figure based on calculating the world’s money supply against the world’s gold supply at a 40% backing. It seems like a crazy number at first, but the reasoning is perfectly sound.

If you believe this could happen, this means that the history of hard money is still unfolding before us and the coming decades could witness some momentous monetary events of historic proportion.

Bitcoin is the New Hard Money

Bitcoin is a new form of hard money that is still in its infancy. It was released in 2008 in a white paper, authored by the pseudonymous Satoshi Nakamoto. It began to be used in 2009.

While Bitcoin began its life as a niche plaything for computer nerds, its adoption has rapidly grown over time to the point where everybody has heard of it. Yet while the vast majority know it exists, most people don’t properly understand exactly how it works and its significance.

The explosion of Bitcoin has fueled several speculative manias with massive volatile price swings offering plenty of opportunity to both short term traders and long term hodlers alike.

The money to be made on appreciating Bitcoin has led many people to think of it as a new asset class not to dissimilar to equities.

However, it shouldn’t be thought of like equities. Bitcoin should be viewed as money, because that is what it is designed as and that is how it functions.

Arguably it is the hardest form of money known to man.

Bitcoin was designed as peer-to-peer digital money, without the need for a third party intermediary such as a bank. In this way it functions like cash or gold coins being handed directly from one person to another.

If you want to transact digitally then third party intermediaries are necessary in the current monetary system in order to verify payment.

With Bitcoin, payments are verified by other members of the network and the common ledger of balances and transactions, the blockchain, is updated.

Saifedean Ammous, in The Bitcoin Standard, describes the process:

“Whenever a member of the network transfers a sum to another member, all network members can verify the sender has a sufficient balance, and nodes compete to be the first to update the ledger with a new block of transactions every ten minutes. In order for a node to commit a block of transactions to the ledger, it has to expend processing power on solving complicated mathematical problems that are hard to solve but whose correct solution is easy to verify. This is the proof-of-work (PoW) system, and only with a correct solution can a block be committed and verified by all network members.”

The incentive for other members of the network to do this is a reward.

“Once a node solves the proof-of-work correctly and announces the transactions, other nodes on the network vote for its validity, and once a majority has voted to approve the block, nodes begin committing transactions to a new block to be amended to the previous one and solving the new proof-of-work for it. Crucially, the node that commits a valid block of transactions to the network receives a block reward consisting of brand-new bitcoins added to the supply along with all the transaction fees paid by the people who are transacting. This process is what is referred to as mining, analogous to the mining of precious metals, and is why nodes that solve proof-of-work are known
as miners.”

It is this blockchain ledger with decentralised verification that is the true genius of Bitcoin. The coin itself is merely a digital token that you can’t touch or see, but the ledger of account is very real.

It is not at all dissimilar from the Ancient Sumerians maintaining their ledger on clay tablets or the Yapese keeping a mental ledger of who owned each giant stone. Being digital, decentralised, without borders or third parties, this system is clearly superior.

While this verification feature is arguably the key game changer that Bitcoin brings to the table, its other key feature is its limited supply.

There are only 21 million bitcoin that are able to be mined and it gets more and more difficult over time to do so.

As Bitcoin gains in popularity and thus rises in price, this will attract more miners. This is crucial because as the difficulty increases more and more computer processing power needs to be dedicated to the task of mining.

However, unlike other forms of money where an increase of value leads to an incentive to increase supply, this does not apply to Bitcoin. The supply cannot be increased.

This is what makes it hard money.

Gold emerged over millennia as the best form of money because it was the hardest to produce and thus the hardest to inflate the supply. Bitcoin is harder.

The amount of gold we can mine is limited only by the amount that is in the earth’s crust and more importantly by the effort and resource we are prepared to commit to its extraction. But Bitcoin is limited to 21 million coins.

The success of Bitcoin has spawned numerous other cryptocurrencies, called altcoins, which operate on a similar blockchain ledger.

There is an understandable criticism by some commentators, like Peter Schiff, that while Bitcoin’s supply may be limited, there is no limit to the amount of altcoins that can be created. Thus Schiff argues, if one ignores Bitcoin on its own and considers the crypto space as a whole, the supply of coins is potentially unlimited.

It is easy to understand where this criticism is coming from, but it misunderstands the value proposition Bitcoin has over all the altcoins.

Bitcoin should be considered distinct from altcoins for two reasons. One is the fixed supply and the second is the decentralised nature of the network. While some altcoins do also have a limited supply, they are all projects that have centralised development teams who can change the rules at any time. Bitcoin’s monetary policy can never change.

The second of the key value propositions in bitcoin is the size and strength of its network, much of which came from the first mover advantage, the significance of which should not be discounted. Even if an altcoin could replicate Bitcoin’s decentralised and immutable features, what would the point of having two coins be? The first mover with the massive network would win.

An altcoin would have to be better in some distinct way or have an entirely different use case.

There are some altcoins e.g. Ethereum and Monero, which have a value proposition that could see them exist alongside Bitcoin. However many altcoins have no value and many will eventually go to zero.

Ultimately the market will judge the utility of each cryptocurrency.

If the market believes that Bitcoin, and any other altcoins, have a utility value then they will survive. That is how any new technology survives. There is a strong case that Bitcoin uniquely has the best chance.

But it won’t be the government, experts or enthusiasts who decide. It will be the market.

The other criticism of Bitcoin as money is that its volatility means it isn’t a stable store of value.

This is another understandable criticism yet, while there are wild price swings, the trend is one way and that is up. The common view is that as Bitcoin adoption increases, the volatility will decrease.

Of course one of the reasons for Bitcoin’s skyrocketing price is that, unlike other forms of money, the supply cannot be increased when the price goes up. With other forms of money that increased supply naturally depresses the price. With Bitcoin, the price only falls once it climbs high enough to incentivise existing holders to part with some of their coins and sell them to meet the demand of new market participants.

This inability to increase the supply is what makes Bitcoin different from every other monetary media used throughout human history. Its digital nature is what gives it the ability to be truly scarce, as no tangible earthly medium, even gold, can claim to be truly scarce.

Saifedean Ammous even speculates that Bitcoin might one day be used as a global reserve currency, where bitcoins themselves are not transferred except in large quantities internationally but kept in cold storage (i.e. offline), while other digital or physical money backed by Bitcoin circulates for everyday transactions.

In this way Bitcoin would act like gold did under the classical gold standard, while Bitcoin backed tokens assume the role of the paper currencies.

Bitcoin as a reserve currency has several potential advantages. Compared to fiat currencies, it is quick and direct without the need for intermediaries but more importantly it is neutral between nations and thus does not grant “reserve money” status to anyone. Nor would it rise and fall based on a nation’s economic performance. Compared to gold it is cheaper, safer and less cumbersome to transfer.

What is clear from developments over the last few years is that Bitcoin is a force to be reckoned with, and it is likely here to stay.

The only way that Bitcoin could be slowed, but probably not stopped entirely, would be if governments returned to a sound monetary policy in the form of the classical gold standard.

In this scenario, Bitcoin’s appeal as a sound money alternative would be less compelling.

“If the modern world is ancient Rome, suffering the economic consequences of monetary collapse, with the dollar our aureus, then Satoshi Nakamoto is our Constantine, Bitcoin is his solidus, and the Internet is our Constantinople.”

– Saifedean Ammous

Conclusion

History shows that civilizations can rise and fall on the soundness of their money.

Yet even when a society has sound money it doesn’t always last. Governments are always tempted to debase it for the short term benefits it gives them without consideration for the long term consequences or the effects on its citizens.

This is an incredibly frustrating thing to learn because there are real world consequences for you and me. Trying to work, save and invest in a 50 year old inflationary fiat system is really hard.

Yet hard money in the form of precious metals isn’t without its problems too. Until Bitcoin, gold was the best we had. But the supply can be increased due to new discoveries or the soundness of the money lost through debasement.

The lesson is, don’t keep your wealth in fiat currency. Keep it in real wealth such as land, businesses, precious metals and Bitcoin.

That way monetary policy and monetary systems can change and fluctuate around you but you will be insulated.

Sources

Akinobu Kuroda. A Global History of Money. London: Routledge, Taylor & Francis Group, 2020.

Ammous, Saifedean. The Bitcoin Standard : The Decentralized Alternative to Central Banking Hoboken, New Jersey: John Wiley & Sons, Inc, 2018.

Ferguson, Niall. The Ascent of Money. Penguin Books Ltd, 2012.

Kindleberger, Charles P. A Financial History of Western Europe. London: Allen & Unwin, 2006.

Orrell, David, and Chlupatý Roman. The Evolution of Money. New York: Columbia University Press, 2016.

Rickards, James. Death of Money. Portfolio Penguin, 2015.

———. The New Case for Gold. London: Penguin Business, 2019.

Rothbard, Murray N. A History of Money and Banking in the United States : The Colonial Era to World War II. Auburn, Ala.: Ludwig Von Mises Institute, 2005.

Spufford, Peter. Money and Its Use in Medieval Europe. Cambridge: Cambridge University Press, 1988.