Bitcoin and ‘Sound Money’
A large number of books and articles have come available on Bitcoin and blockchain technology — usually, covering dauntingly large expanses of human history and thought — on the simple idea of ‘sound money’.
If you are building a library on this subject, this is cause for excitement.
But, for those of us who process rather less than we read, these intellectual riches are also turning into a case of confusion by over-nuanced cacophony.
Among the inner sanctum of the Bitcoin community, for example, the topic of sound money is discussed in hushed tones, and only after a good bit of genuflecting. Bitcoin’s overriding value proposition is that it holds the unique promise of being able to step into the Cinderella slipper of the soundest form of money humanity has yet seen.
Those who are unconvinced by the idea of Bitcoin as the quintessential currency tend to think that this obsession with sound money is either entirely misguided or that, by their definition, Bitcoin is a long way from ever being as sound as fiat issued by credible countries.
It appears that there is no established heuristic that we can all agree upon that helps us think dispassionately about what the heck this ‘sound money’ malarkey is all about and, conversely, why have we all been wantonly living in a Matrix of unsound money.
There is no point asking either side for a simplified version.
As a matter of fact, emotions are so raw and opinions so well set, that you are not even entitled to an opinion of your own in the matter. If you dare ask for insight, people will start flinging book citations in your face. Before you know what hit you, you’ll be back at square one, rather more lost than when you started and feeling poorly about the relative size of your cranium. (Or is that just me?)
But, fear not. I have the solution.
What follows is a simplified version of what sound money really means. And, for all intents and purposes, it seems to give 99% of the insight anyone else seems to be able to provide for 1% of the effort. And with the added benefit that you need not endure reading any anfractuous book on the topic or endure abuse from insufferable know-it-alls on the puny size of your brain. (This happens, I can attest.)
So, without permitting my own thoughts to obtrude too much upon this debate, I wish to point you to a simple way to decide for yourself what sound money is all about.
The approach was established by no less a man than Copernicus in the early 16th century. We already know him as a brilliant, and, importantly, true scientist, who essentially invented the fundamental basis for modern astronomy with his book, De revolutionibus. (You need not read it, of course, but it apparently puts him on par with Newton and Darwin. So, when you name-drop ‘Copernicus’… Boom! You’re already on high ground!)
By considering Copernicus’ views on sound money as the basis of your own, you can rest at ease in the knowledge that you have more grey matter on your side of the debate than anyone else. And, as another bonus, you would also avoid having to decide whether your views are in concert with some latest salvo on the topic, by someone who favors one tradition of economics, anthropology, sociology, or politics, over another.
You can take a more detached and (wink) ‘cosmic’ view of the whole thing.
There are two other reasons.
First, I think it is a great injustice that Copernicus does not get a say in this debate, especially when he seems to have presaged much of what people seem to insist really ‘matters’ long before it struck anyone else. Second, his views were informed from actually being involved at the coal face, and not by indulging in blue-sky thinking from his armchair; the guy served as an administrator within a principality of the Kingdom of Poland, charged with economic affairs and monetary systems, during a period of constant warfare with the Teutonic Order. (Oh, and he did all his work on ‘sound money’ as a sort of side-gig, while he did real science in astronomy by day!)
In a brilliant essay published in 1955 in the Journal of the History of Ideas, Mr. J Taylor provides a translation of the Copernican view on sound money from the original Latin in which it had been written. (It is worthwhile reading that essay, but, if you are in a real hurry, even that is not necessary.)
It shows that Copernicus thought about sound money from the first principles of observing a multitude of monies, all of which were based on some proportion of gold or silver in their coinage. In rough times (chiefly, war), he saw how each of these monies underwent asymmetric degradations in their fungibility. He lamented the erosion of trust in the governments that issued these coins. (I really do mean lament, by the way. Consider this pearl: “O, Wretched land of Prussia which is paying by your ruin, alas, for the mistakes of a bad government!”) He saw the contraction of economic activity, the collapse of credible seignorage, and, generally, the deleterious effects of inflation all around him.
Interestingly, Copernicus’ thoughts on sound money also show that he had presaged Gresham’s Law almost a century before Gresham came up with it. Here’s how he described the problem:
“Where, in fact, will you find any foreign merchant who will be willing to exchange his merchandise for copper money? … Yet it is with indifference that the authorities watch this terrible disaster happen to Prussia. …While the Prussian currency and consequently the country itself is suffering from these vices, the jewellers and bullion dealers alone profit from our misery. They take out the old (and good) coins and melt them down in order to sell the silver and they thus obtain from the uninformed man in the street a greater value in silver than the value of the coins in exchange. When the best of the old coins have completely disappeared, they then pick out the least bad of the coins still in circulation, leaving only the worst coins to circulate as money.”
The Six Aspects of Copernican Sound Money
Anyway, without further ado, here then are the six aspects that Copernicus considered to be of importance in defining sound money.
You might think that these six rules don’t seem to be much use in our current context of cryptocurrencies and sovereign fiat currencies that interact through sophisticated forex markets.
On the contrary, I think these Copernican insights from 500 years ago are still total gems. And, once we consider their intent carefully, they can be easily grafted on to our own understandings of the current context. Pure insight is, after all, timeless.
In that spirit then, here is my commentary on the six tenets of Copernican sound money:
- This first point he makes is about the importance of consensus on changing the rules that impact the value of a money. Copernicus’ treatise contains pointed passages where he bemoans the adverse consequences of multiple competing monies;
- Replace ‘country’ with world and ‘city’ with country, since he was talking about distinct governing principalities that were all issuing their own currency. Copernicus favored an approach where the sound money is universal, and forms the impetus for driving out several forms of unsound money;
- Relatedly, his concern was to chiefly minimize the “…confusion arising from the simultaneous circulation of new [sound] money and old [debased] currency…”. Copernicus was a sound money maximalist; he imagined that the sound money would be adopted exclusively and all old money would be withdrawn from circulation.
- The point about having an “…inviolable and unchangeable rule’’ as the basis for issuing a sound money should make you feel, regardless of your disposition on Bitcoin, that Satoshi and Copernicus would have had a riotous time shooting the breeze about the basis for sound money. Gold and silver as the foundation for Copernican sound money made sense in the early 16th century, but he did not have other choices. There is no doubt that he saw them as a compromise, as he observed how various monies being issued by the principalities were being destroyed by their unscrupulous monkeying of the purities of the precious metals in their coins.
- Sound money should have a predictable rate of supply. To Copernicus this ought to be determined by the metal value of the coin plus its coinage cost, which adds a separate source of value: the “…guarantee which it carries adds value to the coin above the value of the metal itself.”
- Divisibility is a desirable and it should be made available in a predictable manner to the public, and not served up as an insidious source of debasing the overall soundness of the money.
So, that’s it then.
There is little added benefit obtained by getting yourself twisted into a pretzel by also considering twenty other aspects. They seem to naturally occur from these simpler Copernican primitives for sound money. The ideas, for example, that sound money should serve as a store of value, a medium of exchange, a basis for long-term planning, and a myriad other things, are all very relevant for fuller examinations, but don’t make it into the TL;DR version for me. Copernicus’ six aspects cover everything you really need to have a working intuition for what sound money is all about.
It’s a separate matter, of course, that they also happen to provide some very useful food for thought on Bitcoin as sound money, both in principle and in practice.
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