When we finish with the third chapter, you’ll know exactly why humanity picked gold as the most precious of metals and its form of money of choice. The reasons are unarguable. Humanity was extremely clever to do so.
However, you need this info before we get into it.
About The Coolest Club On Earth
The Bitcoinist Book Club has two different use cases:
1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you just the gold-y bits.
2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the concepts and find crucial quotes.
Everybody wins. Gold medals.
So far, we’ve covered:
“The Bitcoin Standard” (Prologue and Chapter 1)
“The Bitcoin Standard” (Chapter 2: Primitive Moneys)
Metals made obsolete the “artifact money” we deep-dived into in the previous chapter. Coins were easier to carry, highly salable, accepted everywhere, and resistant to all kinds of weather. Also, the difficulty metal mining presented at the time made it impossible to increase the supply significantly enough.
After an experimentation period, humanity settled down on three. Gold for serious transactions, silver for day-to-day life, and copper for small transactions. Those metals were rare enough, and, “Gold’s virtual indestructibility, in particular, allowed humans to store value across generations, thus allowing us to develop a longer time horizon orientation.”
Metal coins were “the prime form of money for around 2,500 years.” Especially gold coins. Nevertheless, the system was flawed. First of all, the price of those three metals fluctuated, making it hard for people to keep track of what they owned. The most volatile was, “silver, which experienced declines in value due to increases in production and drops in demand.”
The biggest flaw, however, was that “governments and counterfeiters” could reduce the metal content of these coins, thus reducing their purchasing power. This early form of devaluation transferred some of the value of each coin to whoever kept the missing metal. The real problem, though, was that “The reduction in the metal content of the coins compromised the purity and soundness of the money.”
Enter paper (backed by gold)
Technology and sophistication lead humanity to paper. As time went by, individuals began transacting with “checks backed by gold in the treasuries of their banks.” This made silver obsolete because it made gold infinitely divisible. However, the system had a “tragic flaw” that echoes into the present:
By centralizing the gold in the vaults of banks, and later central banks, it made it possible for banks and governments to increase the supply of money beyond the quantity of gold they held, devaluing the money and transferring part of its value from the money’s legitimate holders to the governments and banks.
But seriously, why gold?
Humanity tried it all and made its choice. The absolute victory of gold had two chemical causes:
First, gold is so chemically stable that it is virtually impossible to destroy, and second, gold is impossible to synthesize from other materials (alchemists’ claims notwithstanding) and can only be extracted from its unrefined ore, which is extremely rare in our planet.
And nowadays, the reasons are more solid than ever. Gold is virtually indestructible, so, almost everything that we’ve extracted from the earth is still around.
This all means that the existing stockpile of gold held by people around the world is the product of thousands of years of gold production, and is orders of magnitude larger than new annual production.
And that means that it’s “practically impossible for goldminers to mine quantities of gold large enough to depress the price significantly.” That extreme difficulty in production makes gold “hard money.” And the metal is still scarce enough to be sound money and a wise investment.
You’ll have to figure out how to store it and keep it safe, of course, but a wise investment nonetheless.
Next time, we’ll finish chapter 3 by exploring how did this process played out. Historically speaking.
Source- https://bitcoinist.com/bitcoinist-book-club-the-bitcoin-standard-chapter-3-part-1-why-gold/
