Goldmoney vs bitcoin
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- 30.01.2020
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Britain led the way in replacing silver as its long-standing monetary standard with gold, relegating silver to a secondary coinage. In the new gold sovereign was introduced at the exchange rate equivalent of grains 0. A working gold standard, whereby bank notes were exchangeable for gold coin commenced in , remaining at that fixed rate until the outbreak of the First World War in By , the gold standard had international as well as domestic aspects.
It implied that nations settled balance of payment differences with each other in gold, although in practice this seems to have happened relatively little. Many smaller nations, while having domestic gold circulation, did not bother to keep physical gold in reserve, but held sterling balances which, again, were regarded as being as good as gold. The Bank of England had a remarkably small reserve of under tonnes in , compared with the Bank of France which held tonnes, the Imperial Bank of Russia with tonnes, and the US Treasury with tonnes.
But even though remarkably little gold was held by the Bank of England, over 1, tonnes of sovereign coins had been minted in Australia and the UK and were in public circulation. Gold is also held for non-monetary purposes such as jewellery though the distinction between bullion held as money and jewellery can be fuzzy. A minor use is industrial. The degree of coin circulation relative to the quantity of substitutes also affects its purchasing power, as experience from nineteenth century Britain attests.
The economic progress of the industrial revolution increased the volume of goods relative to the quantity of money and money-substitutes bank notes and bank deposits subject to cheques , so the general level of producer prices declined, even though they varied with changes in the level of bank credit. That generally held until the lates, when bank credit in the economy expanded on the back of increased shipments of gold from South Africa.
Furthermore, a combination of rising demand for industrial commodities through economic expansion of the entire British empire and more currencies linking themselves to gold indirectly via managed exchange rates against pounds and other gold-backed currencies all contributed to reverse the declining trend of wholesale prices between — Consequently, wholesale prices no longer declined but tended to increase modestly.
This is shown in Figure 1. Demand for credit is set by the economic calculations of businessmen and entrepreneurs, not idle rentiers as assumed by Keynes who named this paradox after Arthur Gibson, who pointed it out in The explanation eluded Keynes and his followers but is simple.
In assessing the profitability of production, the most important variable assuming that the means of production are readily available is anticipated prices for finished products. Changes in borrowing rates, reflecting the affordability of interest that could be paid therefore do not precede changes in prices but follow changes in prices for this reason. History has demonstrated that the most stable value is placed on gold coin, which is what qualifies it as money. It has been said that priced in gold a Roman toga 2, years ago cost the same as a lounge suit today.
Clearly, the dollar is significantly less reliable than gold as a stable medium of exchange. So long as gold is freely exchangeable for currency, this stability is imparted to currency as well. When it is suspected that this exchangeability is likely to be compromised, coin becomes hoarded and disappears from circulation. The purchasing power of the currency then becomes dependent on a combination of changes in its quantity and changes in faith in the issuer.
In summary, the general level of prices tends to fall gradually over time in an economy where gold coin circulates as the underlying medium of exchange, and when faith in the currency as its circulating alternative is unquestioned. The existence of a coin exchange facility lifts the purchasing power of the currency above where it would otherwise be without a functioning standard. Even when gold exchange for a fiat currency becomes restricted, the purchasing power of the currency continues to enjoy some support, as we saw during the Bretton Woods Agreement.
The distinction between money and currency So far, we have defined money, which is metallic and physical. Now we turn to what is erroneously taken to be money, which is currency. Originally, the dollar and pound sterling were freely exchangeable by its users for silver and then gold coin, so state-issued currencies came to be assumed to be as good as money.
But its exchangeability diminished over time. In the United Kingdom exchangeability of sterling currency for gold coin ceased with the outbreak of hostilities in , though sovereigns still exist as money officially today. The post-war gold standard of was a bullion standard whereby only ounce bars could be demanded for circulating currency, which failed to tie in sterling to money proper. Bank failures following the Wall Street crash encouraged citizens to exchange dollar deposits for gold, and foreign holders of dollar deposits similarly demanded gold, leading to a drain on American gold reserves.
By Executive Order in April President Roosevelt banned private sector ownership of gold coin, gold bullion and gold certificates, thereby ending the gold coin standard and forcing Americans to accept inconvertible dollar currency as the circulating medium of exchange.
The entire removal of money from the global currency system was a gradual process, driven by a progression of currency events, until August when President Nixon ended the Bretton Woods Agreement. But following the Nixon shock, the dollar had become purely fiat. Unlike gold coin, which has no counterparty risk, fiat currency is evidence of either a liability of an issuing central bank or of a commercial bank.
It is not money. The fact that money, being gold or silver coin does not commonly circulate as media of exchange, cannot alter this fact. Goldsmiths and their banking successors were and still are dealers in credit.
Through the expansion of bank credit, which is matched by the creation of deposits through double-entry book-keeping, commercial banks create liabilities subject to withdrawal as currency to this day. That there is an underlying cycle of expansion and contraction of bank credit is evidenced by the composite price index and bond yields between and shown in Figure 1 above.
But so long as money, that is gold coin, remained exchangeable with currency and bank deposits on demand, fluctuations in outstanding bank credit only had a relatively short-term effect on the general level of prices. And as explained above, the expansion of the quantity of above-ground gold stocks from South African mines in the late s contributed to the general level of prices increasing in the final decade of the nineteenth century until the First World War.
Following the Great War, the earlier creation of the Federal Reserve Board in the United States led to the expansion of circulating dollar currency, fuelling the Roaring Twenties and the Wall Street bubble, followed by the Wall Street crash and the depression. These calamities were the inevitable consequence of excessive credit creation in the s. The error made by statist economists at the time and ever since was to ignore what caused the depression, believing it to be a contemporaneous failure of capitalism instead of the consequence of earlier currency debasement and interest rate suppression.
From then on, this error has been perpetuated by statists frustrated by the discipline imposed upon them by monetary gold. The solution was seen to be to remove money from the currency system so that the state would have unlimited flexibility to manage economic outcomes. With America dominating the global economy after the First World War, her use of the dollar both domestically and internationally had begun to dominate global economic outcomes.
The errors of earlier currency expansion ahead of and during the Roaring Twenties, admittedly exacerbated by the introduction of farm machinery, led to a global slump in agricultural prices the following decade. And the additional error of Glass Stegall tariffs collapsed global trade in all goods. In , America had 21, Today it stands officially at 8, By basing the chart on much of the currency expansion which led to the collapse of the London gold pool in the mids is captured, illustrating the strains in the relationship that led to the Nixon shock.
The rival status of cryptocurrencies Over the last decade, led by bitcoin cryptocurrencies have become a popular hedge against fiat currency debasement. And of those issued, some are irretrievably lost, theoretically adding to their value.
Fans of cryptocurrencies are unusual, because they have grasped the essential weakness of state-issued fiat currencies ahead of the wider public. If, as hodlers hope, bitcoin replaces all state-issued fiat currencies when they fail, then the increase in its dollar value has much further to go.
In theory there are reasons that bitcoin and similar cryptocurrencies can become media of exchange in a limited capacity, but never money, the basis that all currencies referred to for their original validity. Indeed, some transactions following the original pizza purchase have occurred since, but they are very few. The reasons bitcoin or rival cryptocurrencies are unlikely to be accepted widely as currencies, let alone as a replacement for money, are best summed up in the following bullet points.
To replace money, as opposed to currencies, bitcoin would have to be accepted as a replacement for both gold and silver. Beyond the imagination of tech-savvy enthusiasts, making up perhaps less than one in two hundred transacting humans, [ v] it is impossible to see bitcoin achieving this goal, because they represent a vanishingly small number of the global population.
There can be little doubt that if fiat currencies lose their utility the overwhelming majority of transacting individuals will desire physical money, and not another form of digital media, which currencies in the main and cryptocurrencies have become. Despite the advance of technology not everyone yet possesses the knowledge, media, or the reliable electricity and internet connections to conduct transactions in cryptocurrencies.
Remote theft of them is easier and more profitable than that of gold and silver coin. Cryptocurrencies are too dependent on undefinable risk factors for transactional ubiquity. The number of rival cryptocurrencies has proliferated.
It is estimated that there are now over 6, in existence compared with government-issued currencies. They represent both an inflation of numbers and values, which if unsatisfied already makes the seventeenth century tulip mania look like to have been a relatively minor speed bump in comparison. There is no such certainty with bitcoin or rival cryptocurrencies because a strictly finite quantity would make it impossible to calculate final prices at the end of an investment in production.
Without providing the means for economic calculation, any money or currency replacement will fail. Unless they disappear with their currencies, central banks will never sanction distributed ledger currencies beyond their control acting as a general medium of exchange. This is one reason why they are working to introduce their own central bank digital currencies, allowing them to maintain statist control over currencies while extending powers over how they are used.
Furthermore, central banks do not own cryptocurrencies, but they do officially own 35, tonnes of gold, having never discarded true money completely. But if there is a fall-back position in the demise of fiat, it will be based on central bank gold and never on a private-sector cryptocurrency. We should also consider what happens to cryptocurrencies in the event of a fiat currency collapse.
The point behind any money or currency is that it must possess all the objective value in a transaction with all subjectivity to be found in the goods or services being exchanged. It requires the currency to be scarce, but not so much that its value measured in goods is expected to continually rise. If that was the case, then its ability to circulate would become impaired through hoarding.
We are left with questioning whether bitcoin can ever possess a purely objective value in transactions. It appears that the only reason property law has not been pursued across the bitcoin blockchain is because of the international character of bitcoin transfers, making it virtually impossible to enforce. Furthermore, access to wallets requires consent which may be withheld.
Assuming this interpretation is confirmed in law, based on ownership being theoretically traceable the whole foundation of cryptocurrencies as legal tender fails. The authorities are unlikely to accept that it is otherwise for multiple reasons. They have stated their interest in preventing criminal activity, money laundering, and tax evasion and clearly want to confiscate the proceeds of crime when possible.
They will also dislike the idea that there is a rival to their fiat currencies, which are protected by currency status in law. Aside from the economic problems that a volatile currency creates and the encouragement for Salvadorians to use a highly volatile ethereal asset as a medium of exchange, there is the problem that by declaring it as legal tender it exposes the population to a currency where ownership in law might not actually exist if it is not classed as currency in other jurisdictions.
The following month the President Nayib Bukele announced that he was bringing a bill before the Legislative Assembly to make bitcoin legal tender. Put another way, Bukele appeared to be responding to a dollar shortage created by American sanctions. And early in September Bukele announced that the government had bought bitcoins. The timing of these events strongly suggests that Bukele thought that bitcoin could restore government finances following the withdrawal of US financial support.
The hype has died down somewhat in a rising interest rate environment, which has also undermined stockmarket prices. Clearly, owners of volatile stocks also own bitcoin, binding the fate of bitcoin to that of stockmarkets. A soft commitment is not a commitment at all, and the delay of an announcement meant to take place last week does not auger well for the project.
Furthermore, the necessary legislation has not yet been submitted and passed by the Legislative Assembly. That being the case, the Salvadoran people many of whom do not have internet access will have been saved from an eventual crisis. But the crisis for government finances will intensify. In propping up government finances Bukele appears to have been a victim of the popular delusions and the madness of crowds seen so many times in history, in this case a cryptocurrency bubble.
Arguably, if he understood money and currencies, he might not have fallen for it. In the legal sense cryptocurrencies are not and, citing longstanding law and lex mercatoria precedent, never can be currency. These simple facts are set to doom the whole cryptocurrency movement to an extinction with which historians of financial bubbles will be familiar.
Plans for a new Eurasian and monetary system For some time, the Eurasian Economic Commission has been discussing the currency aspects of trade between member states. According to Sergei Glazyev, the EEU minister in charge of integration and macroeconomics, the objective was to create a Eurasian monetary and financial system, excluding foreign currencies.
The proposal was to remove exchange controls for cross-border settlements within the Eurasian membership, and thereby replace the dollar as the commonly used settlement medium between them. Since then, the project has acquired a new urgency due to western currency sanctions against Russia.
According to 24KG, which is a news agency based in Bishkek, only last week the Eurasian Economic Union and China confirmed that they will develop a new international currency that is international between EEU members and China. The currency and the financial system that goes with it will be based on the national currencies and the prices of exchange-traded commodities.
There are no further details other than this statement. It appears that the intention is to create a sort of SDR but with links to commodity prices and unlike the SDR to be usable at local level. Presumably, the basket of commodities will include oil, and it is interesting that coincidentally Saudi Arabia is considering selling oil for Chinese yuan, calling an end to the petrodollar, and aligning itself more closely to the Eurasian superpowers behind this scheme. Let us put aside the impracticalities of the intended currency for a moment and consider the implications.
For reference, Figure 1 shows a basket of commodities in a typical ETF, which in dollars has been highly volatile. Doubtless, the EEU and China will be considering not only which commodities to include and their weightings, presumably in a daily index to be calculated by a central authority. This would then form the basis of bank credit issued by commercial banks authorised to do so. Furthermore, the absence of exchange controls between participating member states will allow businesses and citizens to exchange domestic currencies for the new currency, attracted not just by rising commodity prices, but by relative weaknesses of individual national currencies.
That alone will be a tricky issue to deal with, potentially destabilising some national currencies. Figure 2 shows that compared with pricing in dollars, oil priced in gold is considerably more stable, calling into question the concept of indexing a new currency to commodities. There is therefore a prima facie argument that instead of using a basket of currencies it would be better to use gold.
For those that understand money, there is no other alternative if the objective is to design a new stable currency to banish the inflating dollar. Using gold offers the following advantages: Gold is legal money, commodities are not. Gold is recognised as money throughout the Asian continent. The word for money and gold in Chinese is the same for good reason. A gold-backed currency would have greater public credibility than linking it to a commodity basket. Throughout the history of fiat currencies commodities have been more volatile than gold.
Virtually all the central banks of the EEU have been accumulating gold in their reserves. They do not possess commodities. The international legal position of gold as money is clear and opens the possibility of other nations joining the currency scheme in future like Saudi Arabia? We cannot know why the obvious solution is not being considered.
The signal emanating from these half-baked ideas is that Glazyev and his team in devising a new currency have a limited understanding of money, currency, and credit. The central banks in the region have sufficient gold reserves to implement such a standard. The Chinese and Russians similarly should abandon the expansion of currency and credit as an economic cure-all in favour of monetary stability.
Unfortunately, the concept for monetary reform as announced by Glazyev is redolent of being just another statist currency with no real backing. To have a daily fix against the national currencies of the member states without an obligation to deliver anything in lieu is meaningless. It would be far better to start with a new currency operating on a regionally pooled gold coin exchange standard. And by resisting the temptation to incorporate it in a BCDC it would be fully legal Anyway, one can imagine that the currency proposed will take several more years in the planning, even though Western sanctions have made the issue urgent.
Conclusion The debate on currency resets has omitted to address the fundamental legal principles behind money and currencies. They have a unique status in criminal law established over many centuries, embodied in the lex mercatoria. Without this status, no one can accept the right to currency or bank credit safe in the knowledge that it might not be reclaimed as property stolen from a previous owner.
In law this is yet to be tested on central bank digital currencies because they do not yet exist. But cryptocurrencies are already seized by governments when it is suspected they represent the proceeds of or have been used to facilitate a crime. It is acknowledged that bitcoin is not entirely fungible and the law in the US treats it as property and not a currency. The problem the authorities have is accessing wallets to recover cryptocurrencies. This is normally targeted at suspected criminals, rather than later down the transaction chain.
But the legal distinction of non-currency property seems to be clear, at least so far as the US Department of Justice is concerned: crypto and CBDCs are not currencies exempt from seizure under lex mercatoria. Attempts at finding alternatives to money, which is only gold and silver coin and bullion, and currency, which is a central bank liability along with bank credit entries, are based on avoiding the discipline of a gold exchange standard. Even bitcoin and other cryptocurrencies have set themselves up as a better medium of exchange, claiming to be in tune with our technological times.
Instead, they lack the crucial lex mercatoria exemption and so cannot replace metallic money. Instead, bitcoin and other cryptocurrencies are liable to collapse entirely if metallic money is reintroduced to back existing currencies.
This outcome is feared by the chattering classes who increasingly speculate about currency resets.
| Goldmoney vs bitcoin | Which is better depends upon your risk tolerance, investing strategy, how much capital you have to use, and how much you can tolerate losing. Admittedly, it is unlikely to be a simple decision with the problem beyond the understanding of statist policy advisers and goldmoney vs bitcoin competing interests seeking to influence the outcome. The price of bitcoin rising or falling would change nothing about our analysis for it was predicated on first principles. It is intellectually dishonest, indeed it is a severe case of cognitive dissonance, to believe or otherwise misrepresent this fact—calling to mind that famous question posed by Berkeley: Goldmoney vs bitcoin a tree falls in a forest but there is no one there to see it, did it really happen? Not only is this proposition illogical, but it is logically the consequence of assuming the state decides what is money and not the people. |
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