Ultimately, Bitcoin Wins

“…when the dust has settled, bad money will have completely disappeared but bitcoin will still be here — Serving as a boat to cross the stormy seas of the final leg of this era, bitcoin will thrive.”

Bad money drives out good money, states Gresham’s Law. Indeed the claim is fundamentally true but, unfortunately, often misinterpreted. For if bad money drives out good money, does that mean all efforts towards good money are destined to fail? More importantly — does that mean that bitcoin is destined to fail?

In this article, we will explore the underlying idea behind Gresham’s Law, and why ultimately bitcoin, being the best money, will thrive in the new world.

Ancient References

The most famous reference to this “law” was credited to, and named after, Sir Thomas Gresham in 1890. However, these ideas were well understood far before 1890 and were deeply rooted in ancient economic thought. In fact, Nicolaus Copernicus highlighted the idea in his treatise on money: On The Principle Of Coining Money, all the way back in 1519.

Even the ancient Athenian comedy playwright, Aristophanes cites the conquest of bad money over good money in his play — “The Frogs”:

“ I’ll tell you what I think about the way

This city treats her soundest men today:

By coincidence more sad than funny,

It’s very like the way we treat our money.

The noble silver drachma, which of old

We were so proud of, and the one of gold

Throughout the world have ceased to circulate.

Instead the purses of Athenian shoppers

Are full of phoney silver-plated coppers.”

Aristophanes cleverly points out that the debasement of money and the debasement of society go hand in hand. As sound money ceases to circulate through society, so do the soundest of men. But why does this phenomenon take place? To answer that question, we need to first understand what “bad money” really means.

Bad Money

Many may at first balk at the notion of “bad money drives out good money.” But upon further reflection, they would soon realize that this fundamental idea stems from human rationality. Yes —it is the rational course of human behavior to “drive out” good money.

Let’s examine the statement “Bad money drives out Good Money”. What does “bad money” even really mean? Oftentimes, bad money, in this context, is misinterpreted to mean “counterfeit money”. In the pre-modern era, bad money referred to the debasement of “coinage” via various legal or illegal means such as coin-clipping, coin-sweating, coin-plugging, etc.:

Coin-Clipping: Shaving off a piece of the coin to be melted into bullion and then re-sold. The clipped coin would be pushed back into circulation.

Coin-Plugging: Punching a hole through the middle of the coin, which is then hammered to conceal the hole. The punched bit was then sold for profit, while the hammered coin was used in circulation.

Coin-Sweating: Several coins would be placed in a sack, and then shaken vigorously to extract gold or silver bits of metal. The coins would look “worn out” but would maintain their legal purchasing power.

All of these methods had a common purpose: to extract some of the intrinsic value from the coins while attempting to maintain the coin’s legal tender properties. Coins would gradually, but increasingly, begin to lose the amount of pure silver or gold they held. This essentially had the effect of turning “good” coins into “bad” coins. The few good coins that would remain would be recognized and held onto.

For example, a savvy merchant who received payment from several customers may stumble upon an unadulterated coin. Upon receiving and recognizing this coin, he would be less likely to spend that coin at face value back into the economy. He was more likely to save that coin and spend his “bad coins” instead. This tendency to hoard “good coins” while spending the “bad coins” would have the effect of “driving out good coins” from circulation.

Bad Money in Antiquity

Unfortunately, the debasement of coins was not confined to just criminal actors. Ruling powers would also engage in the debasement of coinage by taking advantage of their legal right to mint new coins. The new coins minted would consist of less precious metal than the older coins. The process would repeat (slowly, then rapidly) until there would be only a modicum of precious metal left in the new coins.

During the era of Julius Caesar, the Roman silver-denarius had a purity level of around 95%. By the time Marcus Aurelius came into power, the Roman denarius was only 75% pure silver. And by the time Gallienus came into power, the Roman denarius was debased to only 5% pure silver.

Denarius of Julius Caesar: 95% Pure Silver
Denarius of Marcus Aurelius: 75% Pure Silver
Denarius of Gallienus : 5% Pure Silver

As observed earlier in this essay, the Ancient Greeks were known to debase their currency as well. The Greeks used an alloy of Gold and Silver to mint their coins. But, the purity of gold in the coins varied all the way from 80% to 52%. In his detailed book, The Greek Commonwealth, Sir Alfred Eckhard Zimmern points out that the Greek leadership would “shamelessly” debase their coinage:

“…they habitually and shamelessly debased their coinage

and even when our extant coins are not debased,

they are in most cases under weight.

It is, in fact, an honest coinage

which is the exception…

…The coins of Darius, we are told, were ‘ the purest ‘,

that is, not necessarily pure in general,

but purer than others”

From The Greek Commonwealth
By Sir Alfred Zimmern

Zimmern highlights that it was, in fact, “honest coinage” that was rare to find, and those that were deemed honest, were relatively so — alluding to the conquest of “bad” money over “honest” money.

Bad Money in the Middle Ages

Evidence of the idea of “bad money drives out good money” is noticed again in the 13th century. In Economic Concepts of Ibn Taimiyyah, we observe Taimiyyah’s firm understanding of this phenomenon.

“If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches (amwal) which they possess, by decreasing their value as the old coins will now become merely a commodity”

Ibn Taimiyyah

He then goes on to highlight the incentives that are consequented from the debasement of coins by the ruler. He explains that if the intrinsic value of the older coins is higher than the new coins, then the “good money” (the older coins) will flee to another country, and thereby be eventually removed from circulation:

“Moreover, if the intrinsic values of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people’s goods will be damaged”

Ibn Taimiyyah

However, Taimiyyah’s use of the word “wicked” in reference to individuals who arbitrage the intrinsic value between coins is noteworthy. Is it not rational behavior to want to hold on to what’s “dear”? And if the rational action is in fact “wicked”, then is it not the fault of the ruling powers who construct the incentive mechanisms?

These are contentious topics that are debated even today when pertaining to bitcoin and the U.S. dollar.

Bad Money & Restoration to “Good Money”

England’s story with bad money is an interesting one. Leading toward the end of the 15th century, England resisted the allure of bad money. However, Henry VIII, the infamous monarch of England, couldn’t resist the enticement of undisciplined money-minting.

In his essay, The Great Debasement and Its Aftermath, Stephen Deng notes the spiraling debasement of the sterling that took place whilst under the rule of Henry VIII:

“For approximately 400 years, England had maintained 92.5 percent purity for sterling, but with Henry’s debasement, the purity of coins gradually dropped to 75 percent, then to 50 percent, to 33 percent, and finally to 25 percent”

From The Great Debasement and Its Aftermath
By Stephen Deng

It is fascinating to observe the debasement that which took the Romans 150 years to accomplish, Henry VIII accomplished in just 36 years.

However, just as interesting, is how quickly this debasement was “undone” under the reign of Queen Elizabeth later in the 16th century. In fact, Queen Elizabeth was counseled by Sir Thomas Gresham himself when she led the recoinage of the sterling to restore the strength and faith of the currency.

This example of sterling’s rapid debasement and its equally swift restorement poses an interesting thought. Does the proliferation of bad money act like that of an elastic rubber band? If stretched too far and too fast, will the tension in society cause a snapping back to equilibrium?

And is this precisely what we are seeing today?

Bad Money, America & Currency Wars

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered”

Thomas Jefferson

America’s story with bad money — and specifically Central Banking, is one of rebellion and distrust. In fact, it was the British overreach after the Debt-Credit Panic of 1773 that escalated tensions and resulted in the American Revolutionary War.

Thomas Jefferson in particular regarded the First Bank Of The United States as an engine for speculation, financial manipulation and corruption. Nonetheless, there were other Founding Fathers who supported the idea of a national bank system.

This inherent distrust led to a long period of several failed attempts at Central Banking where the US-Dollar was on & off backed by commodities like Gold & Silver. It wasn’t until the Panic of 1907 (which was preceded by countless bank failures) that the American people united on an idea of a Central Bank as a lender of last resort. The Federal Reserve Act of 1913 marked the beginning of the steady decoupling of the US-Dollar from Gold, and eventually its rapid debasement.

Since 1913, the U.S. dollar has lost more than 96% of its purchasing power. This debasement of money has become a global phenomenon. Governments across the world have taken to debasement to boost their ability to spend & to give themselves a strategic trade advantage on their exporting power.

This has led long-term savers to look elsewhere for a store of value. As a result, people are quick to “spend” their money into the economy, and hoard anything else that they deem scarce.

The term “Currency Wars” refers not to countries attempting to strengthen their currency — but rather to the trend of countries debasing their money faster than their sovereign competitors. This has incentivized people to flock toward “scarce” assets like corporate equity and real estate as instruments of “Good Money,” which has consequently led to equity bubbles (e.g: 2001), real estate bubbles (e.g. 2008) and unaffordability for the masses.

Good Money: Enter Bitcoin

The Federal Reserve Bank of St. Louis lists the following characteristics of a “useful” money:

• Durability
• Portability
• Divisibility
• Uniformity
• Limited Supply
• Acceptability

While the US-Dollar may meet many of these characteristics, it fails stupendously in the “Limited Supply” department. In fact, the currency wars and global debasement have ensured failure for almost all fiat currencies.

“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop.”

F.A. Hayek

Renowned economist F.A Hayek envisaged that a “Good Money” would never again be available to the masses unless something unstoppable was introduced by “some sly roundabout way”.

In the wake of the 2008 Financial Crisis, the world was introduced to an unsuspecting P2P innovation called “bitcoin”. It was hard-coded to not just be a “Good Money”, but the “Best Money”. It was designed to be independent of government reach, immune to government inflation, and impervious to censorship, all while meeting every single characteristic of “useful money.”

In stark contrast to fiat currencies, bitcoin is designed to be finite. There will only ever be 21 Million bitcoin. Period. There is no central government or agency that could ever change that on a whim.

This has led to bitcoin’s growing prominence and adoption as it now surpasses many fiat currencies in the “Acceptability” department as well. People in developing nations with failing currencies are far more likely to accept bitcoin as a means of payment.

The 2021 Chainanalysis Global Crypto Adoption Index showed that worldwide adoption of crypto assets has jumped 880%, with emerging countries leading the list. Another report conducted by Statista found that Nigeria ranks first globally as the leading country per capita for bitcoin adoption.

But bitcoin’s adoption isn’t just a retail phenomenon. Traditional hedge funds that would otherwise be slow to move on innovative technologies have begun to adopt bitcoin as well. The 2022 PWC Crypto Hedge Fund Report showed that one-third of all traditional hedge funds have invested in crypto assets like bitcoin. Among these hedge funds, 67% of them intend to deploy more capital by EOY 2022.

Bitcoin — A Growing Global Debasement Hedge

Over a span of a decade, the Federal Reserve’s balance sheet has ballooned from ~ $1 trillion to more than $8 trillion U.S. dollars. This explosion of the government balance sheet has punished savers, rewarded risk-takers & fanned the flames of speculative frenzies.

Amidst the turmoil & disorder, bitcoin has been the beacon of light for people seeking to preserve the long-term value of their hard day’s work. They have increasingly begun to opt for bitcoin as their “Good Money” & long-term store of value.

Gresham’s Law is currently unfolding before our eyes on a global scale. Much like the Savvy Merchant who held onto the “unadulterated coin” and let go of the “bad coins”, people are opting to let go of their fiat currency and hold onto their bitcoin.

This phenomenon will further exacerbate periods of inflation & mania. Asset prices will rise, and fiat currencies will continue their march to zero. But when the dust has settled, bad money will have completely disappeared but bitcoin will still be here. Serving as the boat to cross the stormy seas of the final leg of this era, bitcoin will thrive.