Bitcoin, Fiat Currencies, and ... Gold

Tesla CEO Elon Musk riled the crypto-currency community some months ago when he announced that Tesla would accept Bitcoin as a mode of payment only to withdraw the offer when reports of Bitcoin’s profligate use of energy became too prominent to ignore.  “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions,” Musk said, “especially coal …”

Musk quickly walked back his words, saying that Tesla would reconsider accepting Bitcoin if there’s progress on the energy issue.  “To be clear,” he tweeted, “I strongly believe in crypto, but it can’t drive a massive increase in fossil fuel use, especially coal.” 

Then Musk made this telling comment:  “The true battle is between fiat & crypto.  On balance I support the latter.”  This is a commonly held view among many observers of the cryptocurrency scene.  Like Musk, they see a contest between two opposing camps:  in this corner, supported by the central banks, are the major fiat currencies, and in that corner the crypto-challengers.  The inside line is that the days of fiat are numbered and the wide acceptance of some form of crypto-currency is inevitable.

What the crowd doesn’t see is that there’s a third party on the scene.  Right now he’s offstage, but he’s cued to enter to pick up the pieces when the alternatives fail.  The third party is gold -- that is, when it’s used in its monetary role as the ground of stable money.   

It’s not surprising that Musk sees only a two-sided fight.  He was born in 1971, the year in which the last connection between a global currency, the U.S. dollar, and gold was severed, with the end of the post-World War II Bretton Woods system of fixed exchange rates.  For the last half-century, the values of all currencies have been in flux against each other, sometimes more and sometimes less, but no currency has had a fixed definition that only gold can impart.  Musk has known no other kind of money — until the cryptos came along. 

An article in the UK’s Guardian recently reminds that the cryptos came into existence as a reaction to the world’s dismal experience with fiat currencies.  The last 50 years have seen chronic bouts of inflation, currency crises, asset bubbles, and the tremendous waste of capital used daily for no other purpose than foreign exchange transactions.  The cryptos, the Guardian’s Larry Elliot says, “represented a hedge against the profligacy of central banks.”

Ask a Bitcoin maximalist for his wishlist and he’d say he wants a future where there are no central banks, money would be decentralized, and citizens could choose from a multi-verse of privately issued currencies.  It would be a world where technology would make it impossible for any party, state or otherwise, to devalue or debase money.

The Bitcoiner may not realize it, but this vision is compatible with a gold standard system.  Gold-backed currencies predated central banks and the crypto-vision of a multi-verse of privately issued currencies is not revolutionary or new.  Until the 20th century in the U.S. hundreds of privately owned banks issued their own gold-backed currency: That’s where the word “banknote” comes from.  Moreover, a gold standard would satisfy the Bitcoin quest for empowering the individual.  Ideally, if the people doubted the quality of money, they could exchange it for a fixed quantity of gold.  Thus private individuals, and not the state, take the first step in fixing any imbalance in the “money supply.” 

Gold is also supportive of Bitcoin’s quest for “sound money.”  To Bitcoiners “sound money” basically means the opposite of fiat currency: it would be a money whose value cannot be manipulated by the state.  This is a worthy goal but a gold standard adds something more:  money must be measured by an objective standard.  Money measures the value of things but there must be something that measures the value of money.  That thing cannot be just another unit of money lest money lapse into a self-referential loop.  The ruler that measures the table cannot itself be part of the table.  A gold standard system would give money a definition.

Thus the future of money is not merely a rumble between the cryptos and the fiats.  Gold’s compatibility with the crypto-currencies brings a new dimension into view.  The task now is to find ways of harnessing gold in digitized form onto a blockchain-like substratum.  The easy part is that you don’t have to convince people of gold’s value; the hard part is how to do it.  Several crypto-currencies using gold (and silver) already exist but these are nascent efforts with small capitalizations.  Still, they point in the right direction.

There are two approaches for re-introducing gold-based money into the world today:  top-down and bottom-up.  In top-down, state governments write the rules.  They agree among themselves to maintain a “par value” of their currencies vis-a-vis gold and with each other.  The management of the system would be in the hands of elites, with the downside that goes along with it.

But in the bottom-up approach, the crypto-innovator would not be concerned with international agreements or central bank coordination or in “setting a par value” for gold.  His perspective is different.  He would look at money from the aspect of how it emerged from society, not how its value is fixed by the state.

Now some Bitcoiners are skeptical about re-introducing a gold standard at all, whether top-down or bottom-up.  They hold that a gold standard is itself a kind of “fiat” system because the sovereign “decrees” that the value of a unit of money is equal to a certain quantity of a precious metal — only later to break the promise.  They point to President Richard Nixon’s decision in 1971 to dismantle the post-World War II gold standard system in favor of making the U.S. dollar the world’s dominant “fiat” currency.  There is truth here, but it should be said that all human institutions, including crypto-currencies, are subject to some kind of political risk.

Nonetheless, the crypto-innovator might want to ask, How did the sovereign know what face value of a coin to assign to what weight of a precious metal?  How did those two things come together?  Did the decision come out of thin air?  The answer is that prices come forward to us from social practice and custom before the state gets involved and before any “top-down” decision is made about the value of money.

The innovator might take inspiration from the old Chinese sycee.  These were ornate silver or gold ingots made by craftsmen usually in the shape of a small boat.  They had no standardized weight but they were used as a medium of exchange in China into the 20th century.  If someone wanted to sell a piece of land, a buyer could offer his sycee in exchange for all or part of it.  No currency or coin was used or anything with a value fixed to gold or silver.  There was only the adequation of a good or service to a certain quantity of a precious metal.  Let the innovator start here and see where the path leads.

This brings us back to Elon Musk.  If Tesla decides to accept Bitcoin in payment for its cars, then what is to prevent it from accepting payment in digitized gold (or silver) encrypted onto an immutable blockchain?  Today a Tesla Model S lists for about $40,000.  A buyer could pick one up these days for about 22 ounces of gold.  Now let’s say the U.S. dollar comes down with a bad case of inflation (read: devaluation) and Telsa must raise prices.  The same Model S would now list for $45,000, but it does not follow that the underlying quantity of gold required to buy one would also change.  That is how a Chinese sycee would work. And that is what is meant when we say that gold keeps its store of value better than any commodity known in history.

So let a thousand flowers bloom.  Let Tesla and other companies accept payment in Bitcoin and in other crypto-currencies.  But let them also accept payment in a precious metal digitized for use as money.   Let’s do experiments and see the results.

James Soriano is a retired Foreign Service Officer.  He has written previously on The American Thinker on monetary affairs.

Image: Pixabay / Pixabay License

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