How money evolves
How money evolves
Genesis article. Block height: 760500. From the barter economy to metals, from fiat money to Bitcoin. The most saleable good in a marketplace is what is called money.
Welcome to the ₿ informed newsletter. We start with a short summary of news about Bitcoin and Macroeconomics:
Price level: Producer and Consumer prices hotter than expected. CPI in Austria 10.5% and Germany 10.9% at a 70-year-high. ECB announces rate hike of 75 basis points despite France and Italy opposition.
Bitcoin in numbers: Bitcoin hash rate reached an all-time high, meaning that the network has never been as secure as it is now. More than 91.385% of all Bitcoin has been mined.
U.K. Bonds: Bonds crashed and Bank of England delays monetary tightening. Liz Truss resigns as prime minister. U.K. bond yield rise further as political turmoil deepens. Rishi Sunak, New U.K. PM, Delays Major Economic Plan.
U.S. Treasuries: The Fed’s next crisis is brewing in U.S. Treasuries. Liquidity in the Treasury market is worse now than during the early days of the pandemic and the lockdowns, when no one knew what to expect.
This is the Genesis Edition of my newsletter, and I have been thinking for a long time about which article I should start with. To create a solid basis for further articles, it is fundamental to understand money and how it emerges. Let’s start there.
Money is and has always been a tool to trade human time. That is the reason why the history of money is closely linked to the history of mankind in general.
The barter economy
The “Neolithic Revolution”, i.e. the transition from the “nomadic way of life and predominant occupation economy” of hunters, gatherers and fishermen to a settled life as a farmer, was decisive in this respect. Not only did our living habits change, but also our way of interconnecting with each other. Hunters and gatherers were organized in small groups (max 150 people), which had to adapt quickly to new circumstances and never stayed long in the same place. With the settling, the size of the group also grew. People began to barter and quickly discovered the advantage of specialization. When humans began to exchange with one another, they intuitively discovered the division of labor, which allows people to focus on their relative advantages and concentrate on their chosen craft:
Eve was good at fishing, while Adam was good at cooking. Therefore, it was more efficient for Eve to focus exclusively on fishing and trade the fish she caught with Adam, who would prepare it for her. Thus, Eve could catch more fish and could also enjoy a better meal. Adam could feed more guests and did not have to go fishing himself. On top of that, Eve could also put some of her time into improving the equipment and thus her productivity increased. Adam was able to do the same. Because of the increased production, the number of barter transactions also increased.
While at the beginning of the agricultural revolution the groups were still small, these villages grew by leaps and bounds due to the increased productivity and the increased amount of food. The first towns sprang up. When many strangers work together, the economy of mutual favors and obligations no longer works. With the increased number of people and products, it also becomes more complicated to exchange things for other things. This was the birth of money, solving the double coincidence of wants problem.
Saleability
Let's imagine that Eve's fishing rod breaks, and she needs a new one. She goes to someone who sells fishing rods. The seller doesn't like fish, he instead prefers apples. Eve must now find someone who will trade fish for apples, and then trade the apples for the fishing rod. All very cumbersome and time-consuming.
Imagine now that Eve, before embarking on further exchange missions, gathers some information, not only on the preferences of the one fishing rod producer, but figures out which good is generally preferred by market participants. Let's assume that bags of wheat are very popular and in demand in the marketplace. Almost everyone accepts wheat in return for their goods. With this information, it makes sense for Eve, to exchange her fish for bags of wheat. Now Eve has a variety of ways to trade them for a new fishing rod and not just one option. She will therefore get a much better deal and can exchange the surplus for other things. It logically follows that the good in the marketplace with a relatively high grade of acceptance in barter - or saleableness - gradually has its saleablness enhanced even further as individuals like Eve use it as a medium of exchange.
Thus, the most saleable good in a marketplace is called money. In fact, the very words for ‘money’ often were indistinguishable from the words of various traded goods, like coffee, cowries or livestock. The specific money good in the marketplace is now demanded not only for the uses it had prior to becoming money, but also for the specific use case of facilitating much more efficient barter, or economic exchange, now as well as in the future. Money, therefore, is the best interspatial, intertemporal and interscalable medium of exchange.
“The theory of money necessarily presupposes a theory of the saleableness of goods.” - Menger
It is critical to understand that the origin story of a good emerging as money does not necessarily end with the good's now more or less absolute state of superior saleablness. While having once fully shouldered the mantle for money, bags of wheat may end up losing it in favor of another good now better suited, because wheat is hard to store and may spoil. In other words, wheat may slowly be demonetized in favor of more durable goods. It lies in the economic interest of each trafficking individual to exchange less saleable for more saleable commodities.
The dynamic above, of that of money naturally getting dethroned in favor of goods better suited, has historically shown itself countless times. One such major transition used to happen when the nomadic population became more sedentary. The nomads have considered animals as money. The costs of storing their livestock money at home became more burdensome in cities due to lack of space. This created a pressure on the saleablness of that money, which ultimately had it dethroned in favor of copper, silver and gold, which is easier to store and exchange. The birth of coinage.
Hard money
There is still one important external factor affecting the saleablness of money, which we have not yet considered. It is the dilution and debasement resistance of money. It may be very well be the case that money, while having emerged after a number of iterations, and while having properties that cause it to be highly transportable, durable, divisible, fungible and so on, still sees its saleableness suffer due to being easily produced, or more specifically, diluted.
The valuation of the good, that became money, usually increases due to higher demand. Prior to monetization, the good was subjectively valued by individuals only for its original use case, but now it is suddenly valued for the vital use case of facilitating the cheapest possible barter, or economic exchange. In a society of surpluses, it facilitates savings, which is just another word for deferred economic exchange.
It must further be understood that the monetary good in question was collected or produced by individuals also before it emerged as money. Seeing an increase in its demand and consequently its valuation in comparison to all other goods, this of course acts as information to the collectors or the producers, signaling that it is suddenly profitable to expend more resources in order to acquire more units.
Any good being monetized quickly attracts more production, meaning higher dilution of the existing supply, meaning a dampening effect on the price.
Now the holder of the most saleable goods suddenly find themselves having to bear the increased supply and the dampening price. It is in their economic interest, to seek out goods with higher resistance to such dilution, yet with similar monetary properties in regard to saleableness across space and time.
Perhaps it is now clear, that the next iteration of a good getting monetized ought to occur for metals that were hard to dilute. Gold and Silver are harder to dilute than copper, for example, that's why the first two won out over all the others. It is just natural for individuals to want to escape the cost of dilution, and so the very same broader dynamic of cost minimization in regard to economic exchange, that dethroned foodstuff in favor of metal coins like copper, and copper in favor of silver, and silver in favor of gold, now makes itself known again.
This means that over a longer period of time, the form of money that is not only fungible and divisible, but also best protects against dilution, prevails. This is also the reason why gold and not wheat has been considered money for centuries. The production of gold is limited because it is basically rare in nature and requires great resources to dig it up. You now may wonder why our current monetary system is then based on paper money that can be multiplied at will. Let's take a look.
Soft (Fiat) Money
The Latin word “fiat” means “let it be done”, and in English, the term has been adopted to mean a formal decree, authorization, or rule. Value on a solely fiat based system is not based on a freely traded physical commodity but is instead dictated by authority, which can control its issuance, supply, clearance, and settlement, and even confiscate it at any time it sees fit.
If you look at the history of fiat moneys, they very often start with the promise that you can exchange a certain amount at a certain price for a commodity, usually a scarce commodity like gold. This is also how our current fiat system started. The reason for this provision is to limit the issuance of new money, to gain trust. This usually works quite well for a while, until it suddenly stops working. This was also the case in 1971, when President Nixon 'temporarily' suspended the exchange of dollars for gold. Since then, we have money based solely on trust, without any limits to the increase in money supply.
What people tend to forget about easily produced money, however, is the hidden costs that from time to time appear and inadvertently suffocate trade and production. Since the cost of money production is low, mass production is suddenly economical, creating a situation where such innovative and modern monetary systems were indeed saved from the frying pan, just to be chaotically put into the fire instead. The sudden low cost of money production has time and time again thrown economies into states of incredibly high and destructive monetary inflation, with accompanying deterioration of trade, of savings and, in the end, of dignity as the authorities overstep their bounds in clumsy attempts to counter the ever more grim situation. All experiments with fiat money failed. Why should it be different this time, and what is the logical consequence?
If you look at the high debt levels and the increased general price level, you can see that our fiat monies are losing confidence, gradually at first and then suddenly. Since trust is the only thing paper money is based on, it is likely that sooner or later they will collapse like a house of cards. It is not a question of if, but rather when. If you look at history, every soft money standard has been replaced or at least backed by a hard money standard after a period of upheaval. As we have seen, the money that best fulfills the properties of transport through time and space combined with scarcity will prevail in the end. It is very unlikely that we will go back to a standard based on stones in a digital world. Especially since gold has a big problem that also led to why paper money prevailed in the first place: The burdensome and slow transport through space. This in turn leads us directly to Bitcoin.
The Bitcoin Standard
Bitcoin combines the characteristics of fiat money, i.e. the easier transfer through space, with the characteristics of gold, i.e. the better transfer through time. Bitcoin is therefore the next logical stage of iteration, because people naturally want to escape the cost of dilution, and so the very same broader dynamic of cost minimization in regard to economic exchange, that dethroned foodstuff in favor of metal coins now makes itself known again.
Whenever a new iteration process takes place, it must be noted that these processes are not smooth and straightforward, but occur in waves. Every iteration process initially brings volatility, which only decreases as the new money becomes more widespread. It must also be emphasized that these processes are always initiated by the fact that at the beginning there are more and more people who collect and hoard (hodl) the new, superior money.
The more people this new form of money hoard, the higher the valuation in comparison to all other goods over time will be, this of course acts as information to the collectors, signaling that it is suddenly profitable to expend more resources in order to acquire more units. As we have seen, this price increase lead to more resources being devoted to producing the better money. But the fact that Bitcoin is absolutely limited to 21 million units, means that it is completely inelastic to increased demand. If Bitcoin proves to be a better (harder) form of money and more people collect Bitcoin for this reason, the price will have to increase compared to all other goods, because the supply can't be expanded.
Money is basically a game where the winner takes all. In a globalized world, the superior form of money, i.g. the money with the most saleability, sooner or later prevails everywhere. The commodity that becomes money is the one that has the highest saleability, because it is the easiest to transport through time and space, and the hardest to multiply.
In the end, it is not mystical or magical, but just the most saleable good that prevails over a longer period of time. Money, fulfilling such an incredible important role for the prospering of individuals, is therefore nothing to be tampered or experimented with. It is, on the contrary, the result of a conscious effort on the part of individuals, and should be left to their discretion just as any other market activity. Why many assume that money in particular must be something that requires government coercion, even though fiat money is historically the exception, needs further study.
But this is it for the Genesis Newsletter edition. I hope you enjoyed reading. Let me know what you think and leave me a commment. ₿ critical, ₿ informed, ₿ prepared. Stay tuned,
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