What’s the Best Money?
And why you should care
A few days ago, I wrote about why we use money as opposed to barter. But that piece left open the question of what makes a good money. If you haven’t read that first piece yet, please go back and read it so this won’t feel like starting in the middle of the story.
So what is good money?
Well, the best money is something that everyone wants, the most salable good through both time and space. The question then is, “Why does everyone want it?” There have been many answers through history as to what the most salable good is. People have used cattle, shells, stones, metal, tobacco, and a number of other commodities. No matter what any culture’s most salable good is or was, they all have one thing in common. They were wanted because they were scarce and not easily duplicated.
In fact, when someone showed up with the ability to go get wampum shells from another beach much more easily than the natives that used them for money, they ceased being scarce, and they ceased being the most salable good. When someone showed up with the ability to make breed cattle faster, cows ceased to be the most salable good.
The fact that something is scarce, and therefore in demand, goes a long way to making it salable over space. But we also have to address the problem of salable over time. Tobacco might have been scarce, but all your savings could go up in smoke with just a single spark at the wrong time. Not very salable over time; that is, not a great way to leave value to your grandchildren.
Money is technology for exchanging value, and a money that exchanges value over time must be durable. If you want to have your money last longer than the life of a cow, don’t use cattle for money. But a money technology that is salable across time, must even be more than durable — it has to retain its value. That is, it must not be easy to copy. This brings us full circle.
People don’t want money because it’s money. Things are money because people want them. And people want them because they are scarce and retain their value. To be a long lasting money something must be a store of value before it can become a medium of exchange. For thousands of years money has been defined by the market’s demand. In fact, this history of money only ended quite recently. Just a few decades ago, in my lifetime. I even remember the day: August 15, 1971.
A Sunday to remember
It was a Sunday night, and for me that meant watching Disney. After Disney, it was Gunsmoke or some show Mom and Dad liked, but I stayed for the tea and crackers. On this particular Sunday night, President Nixon pre-empted network TV to give a speech about the economy. I was 12 years old. Interrupting Disney was not a way to my heart.
The upshot of the President’s speech was that we were going to temporarily stop giving gold to other countries for the dollars they earned from us even though we’d promised to do so at the end of WWII. We’d already taken silver out of the coins, and now the gold backing of the dollar was temporarily going away. By the way, that temporary move still hasn’t ended yet.
Until that day, even though we weren’t all walking around with gold in our pockets, we thought our money was ‘as good as gold.’ After August 15, 1971, we no longer had any reason to believe that. Since that time, the US dollar has been programmed to lose value through inflation at a sustained but slow pace. In fact, the pace was designed to be so slow that no one would notice. And from year to year, you wouldn’t notice. But looking back at a McDonald’s menu from the early 70’s show you how salable the US dollar has been over time.
Gold, oil, and bitcoin
So, we had been using gold, what were we going to use now? As it turned out, the world had another commodity that was desired but didn’t have a lot of other characteristics of money: oil. Oil was scarce; that is, it was hard to get and couldn’t be copied. But it was heavier than gold, dollar for dollar, and harder to move. A 1/4 ounce gold coin could be carried easily in your pocket but the same amount of oil might be in 4 55-gal drums .We weren’t going to buy anything at McDonalds with oil.
But the US had a plan. In short, the Saudis produced the oil, sold it for US dollars, and everyone else had to buy dollars to buy oil. That replaced the gold dollar with the petro dollar and kept the system going for a bit. Well, longer than a bit actually. It’s kept it going for 40 years.
In short, gold is the historical hard money. It’s durable and buys the same goods by weight that it did in Roman times. It’s salable through time, but has a heaviness that makes it hard to carry around through space. Oil has been the new gold for the past 40 years. But there’s been a flaw in the system from the beginning.
Oil is not a store of value. Things that have been market driven stores of value, like gold, diamonds, silver, real estate, etc, have been stored. That means there’s a lot of it hanging around as savings. In fact, all the gold that’s ever been mined is still around. It may be lying on the bottom of the ocean or in a museum, but it’s all still here. Oil, not so much.
We burn oil, and so it’s about as good a store of value as a shed of tobacco. Oil as money has lasted about as long as tobacco did in the pre-revolutionary American colonies of Great Britain too. Oil is a commodity in demand, but the petro dollar system has lacked a real store of value since the beginning. What people have used as a store of value in this system has been US government bonds.
So, are US bonds the new gold? Hardly. Bonds expire. The gold’s still here, remember? And gold is scarce. It’s hard to get more. All you need for more bonds, is for the US fed to create some out of thin air. The system has worked for 40 years because the government said it did. I can think of no better definition of ‘fiat money’ than a money that exists only because government says it does.
The system of the world hoarding US bonds has created 40 years of decreasing interest rates. Noticed the interest rates lately? “The jig is up,” as Humphrey Bogart would have said when money was still good as gold. The world has stopped hoarding US bonds.
A new new gold
So the dollar is a paper IOU that used to be an IOU for gold and now is an IOU for nothing. We can’t use oil as a store of value because we burn it once it’s above ground. Below ground, it’s still a store of value, but only those countries that have it below ground can control it. We can’t use silver for a store of value anymore because we use it up in electronics now. Cows, tobacco, shells, rocks, bronze, all the old stores of value are now so easy to produce that they no longer hold much value. We’ve got nothing left to use as money.
That is until bitcoin. There is now a portable, durable commodity that cannot be debased by a country deciding to just print more of it. It is completely decentralized so that no one can stop it, and no country can control it. It is scarce, impossible to counterfeit, easy to verify, easy to store, easy to transfer, easy to move. It can be moved through space more easily and cheaply than any other commodity and can be stored through time with no cost at all. It is the new hard money for the internet age. But that’s another story for another time.
Dr Wetsman is retired from the practice of addiction psychiatry and currently studying data science. He has released his serial Ending Addiction. He also has something else in the fire — more to come.