Why Gold is Real Money, Paper is Bad Money, and Bitcoin is Not Money
Last week I did a little one-two punch of American history when I visited Philadelphia and Washington D.C. I’d never been to either of those places but I love the history and stories about the revolutionary period. Even more so I love the principles that the founding fathers left for us to perfect. Unfortunately we have gone far in the wrong direction. For about the last month I have been hesitant to really get into anything political because of all the tension out there. It’s so sad to see everyone at each other’s throats like this. So I’ve decided instead to write about something that I’ve found really interesting and important that often goes overlooked; the function of real money. It’s been said that with control over money comes control over the people and so it is because of that I think monetary policy, as in do we want to have sound money that maximizes freedom or do we want to have money that can be created out of thin air and printed into oblivion, is one of the most important issues that we have to face. A lot of the problems we have today, if not a majority, can be laid at the foot of the Federal Reserve.
In order to understand why gold is money you have to understand how money came about. You have to understand what constitutes as money and where it derives its value. Before people used money there was a system of barter. So if you had a chicken but you wanted some fish you could make that trade. The problem with that is that you need to find a guy who has some fish and also wants some chicken. Barter is very inefficient in that way. Of course you don’t have to worry about taxes and dollars and cents and currencies and all of that. It’s just two people in a free market determining value based upon their needs and what they can offer. Eventually people realized that they could trade with something that has value to everybody. This really swung the doors of commerce wide open. Trading became much more efficient because you no longer had to find a guy that wanted a chicken. You could just give him your commodity and he could do what he wanted with it.
Civilizations have used coined gold and silver for a long time. They have been functioning as money for 5,000 years all over the world. It’s good for use with local merchants and others who want to trade with and accept gold but in large quantities it started to again become impractical. Gold can be heavy and needs to be stored, perhaps in a safe or in a vault and protected from theft. When you have a lot of it or need to make big purchases it has to be transported. To solve this people started using paper receipts as money substitutes. Certificates were circulated in different denominations and basically served as an IOU. It used to be that you could take your paper receipts, your IOU, and bring them to the bank and exchange them for your gold. See it wasn’t the paper that anyone cared about it was the gold that was sitting at the bank that your paper represented. That is why paper certificates had value. Having a paper dollar meant that you had a real dollar in gold waiting for you that you could pick up at your bank and bring home with you.
By the way gold isn’t the only thing that can be money. Natives used to use seashell beads called wampum. It was valuable to them. They could make jewelry and put it on clothing and trade them with other tribes. The island of Manhattan was even purchased by the Dutch from the Natives using wampum. In WWII soldiers used cigarettes. Salt and peppercorns were commonly used amongst traders. Seriously even prisoners use Cheetos as a unit of exchange. There are many examples but it just so happens that for thousands of years gold and silver have emerged as the preferred commodities.
All of those things have something in common that paper and bitcoin don’t have: actual utility. In order for something to be money it has to be useful. I would actually make the argument that paper money is ultimately more valuable than bitcoin because at least you can burn paper if things got really bad. All kidding aside, gold has always been the best money. It’s durable, divisible, and it has utility. You can make things with it. It’s used in electronics, probably every smart phone out there, and people make jewelry out of it. It’s shiny and pretty (not necessary but doesn’t hurt) and most important of all it has scarcity. *Paper money and cryptocurrency can never be on the same scale of value because there is no limit to the number of paper dollars and crypto-coins that you can have. The Federal Reserve has a printing press and in crypto there is an unlimited amount of forks you can have for each coin and there are thousands of different types of coins. (* I wanted to make this edit here. What I mean is despite Bitcoins 21 million limit, there is no limit to the number of forks. You can't just create more Bitcoins on a printing press but there are thousands of cryptocurrencies out there and as far as I know only one of them is on a type of commodity standard.) Gold is limited to only what we have ever mined.
Precious metals as money emerged from the market out of necessity and their value is not subjective. They weren’t given value simply by decree of government (fiat literally means let it be by decree.) The value of gold is objective. It has properties that exist in the real world that fulfill certain desires and needs. Gold was valuable for thousands of years before it even became money; fiat dollars, which I’ll get to momentarily, and bitcoins weren’t valuable at all until they became money. See the difference?
In 1913 the Federal Reserve was established, in secret, by a group of bankers, as the central bank of the United States. The Federal Reserve was different from previous experiments in central banking in that now not only would they have decision-making power over monetary policy, they would actually be able to issue new money. This is key. John Pierpont-Morgan didn't even ask for that priveledge. The government just gave it up! That basically means the government gave them control of the printing press.
The following year the Fed began circulating Federal Reserve Notes. Those are the US dollars that we are familiar with today. In 1933 FDR bailed out the Federal Reserve by confiscating all privately held gold in the US and making it illegal to own. The government gave everyone $20 an ounce in exchange and turned around to sell it to foreign central banks at $35. Then there was the pseudo-gold standard of 1944 when the dollar became the reserve currency of the world with the dollar still attached to gold. On August 15th, 1971 Nixon severed the very last tie by de-pegging gold from the dollar completely. It was through this gradual shift that the Fed was able to fool the American people into using fiat dollars instead of real dollars. Federal Reserve Notes look just like gold certificates except when you go to the bank and give it to them they give you nothing. Legal tender laws have made it so you can’t even engage in commerce with gold or silver. Today if you have a one hundred dollar Federal Reserve Note it will say “This note is made legal tender for all debts, public and private” but it used to say “The United States will pay to the bearer One Hundred Dollars.” Again, the paper receipt itself wasn’t the actual dollars the gold was the hundred dollars. The paper was just saying that you had a hundred dollars on deposit at the bank.
The main problem with fiat dollars is that word we all know but still don’t quite seem to understand: inflation. People are always saying “Well if you factor in inflation…” and “but the cost of inflation” but it seems like people just kind of think it’s some natural phenomenon that happens with money over time. It’s not. Inflation means to fill up. When you just hear the word even you probably think of a balloon or basketball or something. What happens when you fill up a balloon with too much air? It pops.
Inflation, simply put, is an increase in the supply of money, an expansion in the number of dollars in circulation. The logic is pretty simple. If you have too much of something it becomes less valuable, right? If you’re the coolest kid on the block with the holographic Michael Jordan ultimate edition basketball card and no one else has one, the other kids are going to want one and be willing to trade 4 or 5 of their other cards for it. Now imagine if the basketball card company all of the sudden started issuing vast quantities of your Michael Jordan card. The other kids might not be willing to trade so many cards now because they can get that holographic one so much easier. Eventually if the basketball card company prints too many those kids might not even want them at all. The value of your ultimate MJ card has dropped. It can’t get you as much as it used to.
The same is true with money. It works exactly the same way. When the Federal Reserve creates money out of thin air they’re basically monetizing debt and you’re paying the bills through higher prices in general goods and services like food and energy. The rise in prices that we see is not inflation itself but a consequence of inflation. That’s a significant difference in definition that can’t be understated. Today the Federal Reserve defines inflation as a general rise in consumer prices. That was not always the case. They seriously just changed the way they define inflation to mean something completely different. It’s so blatantly dishonest that I can’t even believe they have gotten away with it for this long.
The most important thing about the gold standard isn’t even the gold itself. As I had said before, a lot of things can be money but commodity standard is a way to limit the power of the government. The government needs inflation to pay for it’s excesses whether it’s the bloated military budget and nonsensical undeclared wars or welfare benefits, student loan guarantees, and real estate loans. None of that could exist without central economic planning and fiat money. Gold is freedom and fiat is a rip-off. The founding fathers knew exactly this because they tried paper money and it didn’t work. Have you ever heard the phrase “not worth a Continental?” From the Wikipedia page for “Early American currency:”
The Continental Congress also issued paper money during the Revolution, known as Continental currency, to fund the war effort. Both state and Continental currency depreciated rapidly, becoming practically worthless by the end of the war. This depreciation was caused by the government having to over-print in order to meet the demands of war.
It’s right there. Clear as day. It’s so obvious and completely out in the open yet we keep doing it. This is why the Founding Fathers put in the constitution specifically that only gold and silver shall be made legal tender. They knew what they were talking about because they learned from their mistakes. We just repeat them. Examples of paper being bad money are scattered throughout of the pages of history. Remember when I said you can at least burn paper? Germans actually did that. There are famous pictures of Germans burning their marks during their hyperinflation period in the 20s. Venezuela is going through one of the worst cases of hyperinflation in human history right now. They can’t even get food and medicine down there. There’s food riots. That shit is real and that’s what happens. It’s no joke. Zimbabwe, Nicaragua, Hungary, and more recently Greece have all felt the devastating effects of over-printing. When the Fed says they are going to do a round of Quantitative Easing (QE1, QE2, QE3, and probably QE4 soon) that is just a fancy way of saying they are going to print billions of new dollars. QE means inflate. It’s their only option at this point. The people will only tolerate so much in taxes. When the government can’t tax anymore, they borrow from other nations, and since we can’t borrow our way out they just print more, and then more.
*EDIT - I wanted to make a quick update about this because some people have commented that this is "unequivocally wrong" about inflation because it doesn't address the demand side. On a commodity standard you CAN increase the supply of money but it has to remain relative to the growth of output, meaning we must produce goods, which we don't. The US has transferred to a service based economy based entirely on consumption as opposed to production. . You can't have an ever increasing supply of money chasing a constant number of goods. When output increases, the supply of money should expand. When output decreases, the supply of money should contract. That's how prices remain stable. This is probably a very important distinction.
The only reason the US is able to stay ahead of hyperinflation is because the US dollar is the reserve currency of the world. All other currencies are basically pegged to the dollar because at one time it was the most valuable currency in the world. We are lucky that they still have faith in the dollar now but once they realize they aren’t getting what they bought into the game is over. They won’t prop us up forever at the expense of their own people. Why should they take our worthless money just so we can consume what they produce and leave nothing for their own citizens? It's an endless cycle. We sell them bonds and treasuries with an incredibly low rate of interest, then we take that money and buy their stuff, they take that worthless money we bought their stuff with and buy more bonds.
I could go on and on about inflation. Inflation is a vicious tax on top of being an insult to the people. It’s dangerous because it’s regressive. Inflation doesn’t affect wealthy people as much as it does poor people. Poor people already have less money to spend to begin with and then what they do have can’t even buy them that much. Wealthy people can afford inflation. All of that new money that get’s created by the Fed always goes to the top first and it’s the middle and lower class that suffer because inflation always shows up as a rise in prices. Because the government prints so damn much, over time it buys you less and less. In Roman times you could get a toga or a robe for an ounce of gold and today an ounce of gold goes for about $1,250. That will get you a pretty nice suit. That is true preservation of value! Just look at how the costs of goods, cars, college, and medical care have skyrocketed through the years since we have gone off the gold standard. This experiment in fiat money has only been going on for about 50 years and it’s proven to be a catastrophe. Paper is bad money.
So what’s the issue with crypto? Generally I feel that the blockchain technology is going to far outlive the coins themselves. I hope that blockchain continues to be developed and that new applications will be discovered to make record keeping more secure. However the idea that Bitcoin will somehow become the new gold standard and that everyone’s going to start using crypto-coins is absolutely absurd.
The first and most obvious problem with cryptos is the volatility. Why on earth would you want to use something that can buy you a car in the morning and decrease in value so quick that maybe you could get a motor scooter by the time you go to bed? There have been some really serious daily swings in the crypto market. Bitcoin went down 60% at one point in one day. Gold hasn’t slipped that far down in 5,000 years. The crypto people call that a correction but I see it as bubbles bursting.
The other more even obvious problem is that bitcoins and cryptos still have no actual utility. It’s the technology that is valuable for it’s applications and NOT the coins. The blockchain only works when it has more information to keep track of so more and more people have to come in to keep the chain going. That’s the ponzi element of the coins. There has to be someone to come in to pay for the person that’s selling out. Bitcoin is only worth what someone is willing to pay you for it. That is so crucial because Last year someone would have given you twenty grand for a Bitcoin and now you can get six maybe. Eventually there will be someone stuck with all of these useless coins because they held on to them thinking they’d go up forever. They won’t and I’ll tell you what in 1,000 years when someone is digging through the dirt and they find a chunk of pure gold next to a paper dollar and I don’t know, a thumb drive with some bitcoins on it, I sincerely doubt they’re going to go for the bitcoins.
If Bitcoin was backed by something of value like gold or silver then it would almost be too perfect. The government would hate that because it would be too good. It’s possible. We could have gold standard principles coupled with todays technology and digital banking. The problem is that bitcoiners don’t want to be on the gold standard. They think it’s the new gold standard, the digital gold standard but it isn’t, it’s digital fiat. Bitcoiners say well it also has scarcity because there’s only so many bitcoins that can be mined into existence. That may be true but look at all the “forks” that these cryptos use so that there’s Bitcoin and Bitcoin Cash and Bitcoin Green and Bitcoin Gold. Then there’s Ripple and Etherium and whatever else. There’s thousands of different coins all with untold amount of forks that they can have.
To me it all comes down to this: that shit isn’t real. You can’t put a bitcoin in your pocket. I still can’t even wrap my head around if we all lost electricity, what happens to all the money?
I suppose I could go on about how the fed manipulates interest rates, calculates GDP and CPI numbers to look good, and has stimulated us into hell but that’s another post for another day. Right now the main point is this: sound money will lead us in the direction to a more free society where the cost of goods and services has not been shot up into the stratosphere due to inflation and the purchasing power of the currency will get you a lot more goods and services. Everyone, rich and poor alike, would benefit and see an immediate increase in their standard of living.
Look, I am by no means an expert in all of this and I definitely don’t claim to be. I am not an economist and I have not gone to school for economics but I do my best to stay honest about the information. I’ve read and read and read to try and understand the true meaning of money and inflation and the difference between fiat and sound money. It’s just so obvious to me now. The logic is too overwhelming for me to ignore. I very sincerely believe in the message of freedom and sound money and I hope that some of what I’ve said here will give you a glimpse of how things could be and that some of you have been inspired to dig a little deeper on your own.
PS. I’m in Canada right now and their money isn’t even paper anymore. It’s some kind of polymer or plastic or something. It’s kind of cool to be honest.