Hard money survives

In this second excerpt, Robert Breedlove goes a step further to discuss why hard money is so important, with some historical anecdotes.

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Robert Breedlove	5min	Full source

This is an excerpt from a larger resource named Money, Bitcoin, and Time by Robert Breedlove.

Throughout history, money has taken many forms — seashells, salt, cattle, beads, stones, precious metals and government paper have all functioned as money at one or more points in history. Monetary roles are naturally determined by the technological realities of the societies shaping the salability of goods. Even today, forms of money still spontaneously emerge with things like prepaid mobile phone minutes in Africa or cigarettes in prisons being used as localized currencies. Different monetary technologies are in constant competition, like animals competing within an ecosystem. Although instead of competing for food and mates like animals, monetary goods compete for the belief and trust of people. Believability and trustworthiness form the basis of social consensus — the source of a particular monetary good’s sovereignty from which it derives its market value along with the trust factors and permissions necessary to transact with it.

As these competitions continue to unfold in a free market, goods attain and lose monetary roles according to the traits which determine how believable or trustworthy they are and are expected to remain over time. As we will show, free market competition is ruthlessly effective at promulgating hard money as it only allows those who choose the hardest form available to maintain wealth over time. This market-driven natural selection causes new forms of money to come into existence and older forms to fade into extinction. Like biologically-driven natural selection, in which nature continuously favors the organisms which are best suited for success in their respective ecologies, this market-driven natural selection is a process in which people naturally and rationally favor the most believable and trustworthy monetary technologies available in their respective trade networks. Unlike ecological competition which can favor many dominant organisms, the marketplace for money is driven by network effects and favors a winner take all (or, at least, a winner take most) dynamic as the non-coincidence of wants problem is universal and if a single hard money is capable of solving all three of its dimensions than it will become dominant (as discussed earlier in the social network aspects of money).

An example of this market-driven natural selection of money comes from the ancient Rai Stones system of Yap Island, located in what is today Micronesia. Rai Stones were large disks of various sizes with a hole in the middle that weighed up to eight thousand pounds each. These stones were mined in neighboring Palau or Guam and were not native to Yap. Acquiring these stones involved a labor-intensive process of quarrying and shipping. Procuring the largest Rai Stones required workforces numbering in the hundreds. Once the stones arrived in Yap, they were placed in a prominent location where everyone could see them. Owners of the stones could then use them as payment by announcing to the townsfolk the transfer of ownership to a new recipient. Everybody in the town would then record the transaction in their individual ledger, noting the new owner of the stone. There was no way to steal the stone because its ownership was recorded by everyone. In this way, the Rai Stones solved the three dimensions of the non-coincidence of wants problem for the Yapese by providing:

• Salability across scales as the stones were various in size and payments could be made in fractions of a stone

• Salability across space as the stones were accepted for payment everywhere on the island and did not have to be moved physically, just recorded by the townsfolks’ individual ledgers (remarkably similar to Bitcoin’s distributed ledger model, as we will see later)

• Salability across time due to the durability of stones and the difficulty of procuring new stones which meant that the existing supply of stones was always large relative to any new supply that could be created within a given time period (a high stock-to-flow ratio)

This monetary system worked well until 1871, when an Irish-American captain named David O’Keefe was found shipwrecked on the shores of Yap by the local islanders. Soon, O’Keefe identified a profit opportunity in buying coconuts from the Yapese and selling them to coconut oil producers. However, he could not transact with the locals because he was not a Rai Stone owner and the locals had no use for his foreign forms of money. Undeterred, O’Keefe sailed to Hong Kong and acquired some tools, a large boat and explosives to procure Rai Stones from neighboring Palau. Although he met resistance from them initially, he was eventually able to use his Rai Stones to purchase coconuts from the Yapese. Other opportunists followed O’Keefe’s lead and soon the flow of Rai Stones increased dramatically. This sparked conflict on the island and disrupted economic activity. By using modern technologies to acquire Rai Stones more cheaply, foreigners were able to compromise the hardness of this ancient monetary good. The market naturally selected against Rai Stones because, as their stock-to-flow ratio declined, they became less reliable as a store of value and thus lost their salability across time, which ultimately led to the extinction of this ancient monetary system.

A similar story played out in western Africa which for centuries used aggry beads as money. These small glass beads were used in a region where glassmaking was an expensive craft, which gave them a high stock-to-flow ratio and made them salable across time. Since aggry beads were small and light they could easily be combined into necklaces or bracelets and transported easily, thus giving them salability across scales and space. In the 16th century, European explorers discovered the high value ascribed to these beads by the west Africans and began importing them in mass quantities; as European glassmaking technology made them extremely cheap to produce. Slowly but surely, the Europeans used these cheaply produced beads to acquire most of the precious resources of Africa. The net effect of this incursion into Africa was the transference its vast natural resource wealth to Europeans and the conversion of aggry beads from hard money to soft money. Again, the market naturally selected against a monetary good once its stock-to-flow ratio began to decline, as its store of value functionality and, therefore, its salability across time were compromised as a result. Although the details vary, this underlying dynamic of a declining stock-to-flow ratio presaging a good’s loss of its monetary role has been the same for every form of money throughout history. Today, we are seeing a similar pattern cause the collapse of the Venezuelan bolivar, (where some Venezuelans are using Bitcoin to protect their wealth as the currency collapses).

As societies continued to evolve, they began to move away from artifact money like stones and glass beads and towards monetary metals. It was initially difficult to produce most metals which kept their supply flows low, thus giving them good salability across time. Gold in particular, with its extreme rarity in the Earth’s crust and its virtual indestructibility, made it an extremely hard monetary technology. Gold mining was difficult, limiting supply increases relative to its existing supply, which itself could not be destroyed. Gold gave humans a way to store value across generations and develop a longer-term perspective on their actions (a lower time preference), which led to the proliferation of ancient civilizations.

Takeaway Hard money survives softer forms of money in an evolutionary process, simply by being able to store value better over time.