What is sound money & how can crypto help?

Growth in productivity alongside hourly compensation since 1948
Growth in productivity alongside hourly compensation since 1948. Clear divergence around 1970. Source: wtfhappenedin1971.com.

On August 15th, 2021 the hashtag #WTFhappenedin1971 trended on Twitter.

Alongside this hashtag, videos of President Nixon informing U.S. citizens that the US dollar would no longer be backed by gold. Nixon stated 50 years ago, “I’ve directed Secretary [of the Treasury] Connally to suspend temporarily convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and the United States.”

So, what did this mean & what happened 50 years ago? The answer is that the United States departed from sound money.

Today, sound money is important for economic activity and our departure from it causes profound issues. But the recovery of sound money is within our reach.

President Nixon removes the U.S. from the gold standard.
Source: YouTube.

What is sound money?

Perhaps the easiest way to describe sound money is to just describe money.

Money is simply an asset that is useful and widely adopted for the transacting, sending, storage, and calculation of value. In short, money is not just just a medium of exchange; it’s a language for economic activity.

From there, sound money (also called “hard money”) is simply any currency that reliably performs those functions.

Let’s unpack four these primary monetary functions & their importance.

Monetary Function #1: Transacting Value

This is probably the most basic use of money and is what people think about the most when they think of money.

It’s easy to see the origins of money & understand the utility of money by simply thinking of transactions.

Long ago, gold & silver often became money because it was just easier. For example, if you are selling a cow, it’s easier to sell the cow for money than it is to sell the cow for goats or grain (or God forbid, a combination of the two). By using money, at least one side of the transaction is in terms of an easily measurable and divisible good. So, all the focus of the transaction can simply be on the attributes & value of the cow. There’s no need for an extensive analysis or assessment of the goats or grain as well.

Additionally, the use of money for transacting is helpful in that it is widely accepted for payment. This helps to ensure that you can continue to transact in the future. Put in other terms, if you receive gold in return for the cow, then you will have more options regarding what you can purchase next because gold is so universally accepted. On the flip side, if you received a bunch of goats for your cow, then you may not be able to buy the next thing that you want because the next seller you meet doesn’t want or need goats.

Thus, in order for money to be sound money, it must be an asset which is highly useful for this critical monetary function of transacting value.

Monetary Function #2: Sending Value

This use case for money is a natural extension of transacting.

Sound money allows us to more easily send value to others. This allows for greater wealth creation as economic activity can extend great distances.

For example, let’s say you are buying an iPhone case from a manufacturer in Asia. In this scenario, sound money allows you to easily send value in return for your purchase. Poor money, such as physical goods like vegetables or livestock, would prohibit the entire transaction because the costs of sending payment to China would be higher than the value of the transaction.

Therefore, sound money is an asset that is highly useful for sending value.

Monetary Function #3: Storing Value

If you think of the global economy as a large community (which it is), then good money functions like an IOU from society that incentivizes and rewards creators of value. This means that sound money allows individuals to store & save real value without simultaneously sidelining scarce resources.

For example, let’s say that someone performs a service but sound money does not exist. So, instead of being paid in money, this person is paid for their work in barrels of oil.

Now, if this person wants to save for the future (a prudent & vital endeavor for any individual), then this person is forced to store massive barrels of oil in a building somewhere.

Saving, in this manner, is expensive. It also risks theft. But, perhaps even worse, that oil is actually useful & it could be used elsewhere to create value in society. Similarly, the building in which it is stored could be used for other ventures. But, instead of being put to good use, the oil is just sitting in a building & using space.

Thus, in the absence of sound money, individuals are forced to sideline valuable capital resources in order to save for the future. This limits the productivity of an economy; given scarce resources.

But, sound money fixes this by acting as a solid store of value. Sound money functions like an IOU from society that allows individuals to save for the future without sidelining scarce resources like oil or buildings. Put in other terms, sound money allows for society to minimize the amount of capital resources that must sit idle simply so that individuals can save.

Thus, in a world of scarce resources, sound money allows us to store value without making our scarce resources even less scarce. This monetary function is critical in maximizing society’s wealth creation potential.

Monetary Function #4: Calculating Value

At the pinnacle or summation of all its other functions, sound money allows us to make extremely complex economic calculations.

By nature, money is best for economic calculations because of its clear, uniform, and measurable amounts (i.e., all $50 bills are worth $50, no one quibbles about the stains on the bill).

Furthermore, money is best for complex calculations of value because of its incredible network effects. To understand this, consider the U.S. dollar. There are literally billions of people who have an idea in their mind about what a dollar is worth. This is absolutely incredible. The benefit of this is amazing. It monumentally increases the liquidity (e.g., the ability to buy/sell) of assets all across the globe.

So, the fourth primary function of sound money is this: through its network effects, sound money is a language or medium of exchange for calculating value.

How is the US dollar not sound money?

Unfortunately, he United States departed from sound money on that fateful day in 1971. Of course, the US dollar is still money. People still use USD to transact, send, store, and calculate value. However, the US dollar is hindered on all these fronts.

  1. Sending & transacting value: USD is hindered in these functions through capital controls & regulations. For example, strict capital controls imposed by the U.S. gov’t means that substantial amounts of value are sent via an archaic, slow, & bureaucratic ACH system. Innovation in sending & transacting value is greatly hindered when the industry is so closely connected to governmental power. Incredibly, both the time and the costs required to send money via Western Union are higher today than they were 150 years ago. In 1871, it cost 3% and took 2-4 days to send money on horseback. Today, it still costs 3% and takes 2-3 days. What’s more, international capital controls often mean that many people are not able to access the U.S. dollar within their country (either due to US sanctions or restrictions imposed by their own government). In fact, more than 1 billion people globally don’t even have a bank account at all. This causes an enormous amount of delay & friction in the sending & transacting of value globally.
  2. Storing value: the U.S. dollar is greatly damaged in regards to both of these functions. Inflation eats away at the value of money; as most recently evidenced by the U.S. government expanding the supply of money by more than 30% in response to COVID. There may be reasons or justifications for this; but the reality is that anyone saving dollars lost wealth. The extent to which that value was lost may take time to be realized. But the value lost is real. So, the US dollar is a poor store of value due to inflation.
  3. Calculating value: compounding the issue of deteriorating value, inflation is not only constant but also unpredictable. The U.S. gov’t does not print new money at a steady, predetermined rate. A monetary policy that is inflationary yet predictable (like Dogecoin) may is less than ideal. But, in such a scenario, at least businesses can do financial calculations to account for the future losses of value. Unfortunately, the US dollar fails its users on this account as well. The degree to which the monetary supply will be degraded in the future is not predictable, but rather arbitrarily determined by the federal government. To make matters worse, money’s value lies in its widespread, common, agreed upon value by many individuals. However, in an environment of unpredictable inflation, individuals typically don’t adjust their perceptions of the value of a currency appropriately. They often do not – or cannot – model future inflation and therefore they make poor economic decisions. Thus, this unpredictable degradation of the value of money makes normally non-risky endeavors – like lending money to a homeowner – riskier for banks because the fixed interest rate may not cover future inflation.
    • Side note: this is partially why the U.S. government now finds itself constantly buying mortgages from banks to ensure that banks will still loan money. In fact, the federal government now holds more than 50% of all residential mortgages in the United States.

Thus, the US dollar and most global currencies represent a departure from sound money.

The Recovery of Sound Money through crypto

To close, it’s highly important that all of us recognize that the recovery of sound money is not beyond our grasp.

Renowned bitcoin enthusiast & CEO of Microstrategy Michael Saylor often repeats a mantra: “bitcoin is hope.” In fact, he literally bought the domain https://hope.com and now devotes it to economic & bitcoin education. Saylor also led his company to purchase more than $3 billion worth of bitcoin (now worth more than $6 billion in what some are calling the greatest trade of all-time).

But, setting aside the bitcoin maximalism, the point is this: sound money is within reach; especially so because of crypto.

Blockchain technology, the underlying technology behind crypto, is revolutionary. “The technology likely to have the greatest impacts on the next few decades has arrived,” Don Tapscott noted in his seminal TED talk from 2016. “It’s the underlying technology of digital currencies like bitcoin: it’s called the blockchain.”

Don Tapscott delivered this TED Talk in Sept. 2016. It only grows more true with time. Source: YouTube.

This blockchain technology allows for a virtually unhackable, unchangeable ledger that cannot be eliminated or manipulated due to its decentralization around the globe. No middlemen required.

It could be bitcoin or it could be another asset. But regardless, blockchain assets are a new asset class that is uniquely qualified to fulfill all the functions of money in a manner better than what we’ve seen throughout all of human history:

  1. Transacting value –> bitcoin & other crypto transactions take seconds and the transaction fees are insanely low compared to traditional finance.
  2. Sending value –> crypto can be sent anywhere in the world in a mere matter of seconds, with incredible security, and often regardless of tyrannical capital controls (think Argentina, Cuba, Venezuela who limit their citizens from sending money outside the country).
  3. Storing value –> bitcoin’s finite supply means that inflation will not rob it of its value. What’s more, the finite supply is completely transparent. Other cryptoassets, if they don’t also have finite supply, they at least have highly transparent and/or predictable inflation schedules.
  4. Calculating value –> the 24/7 nature of crypto markets & their completely global liquidity results in network effects that are blowing the internet out of the water.
Source: Twitter.

In short, crypto adoption is happening and it is happening fast. May we all hope & pray for the recovery of sound money to be similarly rapid.

Lives can be saved because poverty – often driven by the lack of sound money – remains a killer in many countries around the world.

Beyond that, sound money is highly important because it represents justice for workers, owners, individuals, and societies.

We must recover sound money.

We must recover justice for millions around the world.

It’s now within our reach.

“Honest scales and balances belong to the LORD; all the weights in the bag are of his making.” – Proverbs 16:11