By Mark Thornton, Mises Institute | November 18, 2024
What explains Bitcoin? Why does it exist and why is “nothing” worth $70,000 a piece? Moreover, there are millions of owners of Bitcoin and other cryptocurrencies and yet few real transactions take place relatively speaking. How does this relate to the coming of a BRICs currency, the reserve status of the petrodollar, and the War on Cash?
My real purpose here is to talk about Gresham’s Law, one of the most ancient and impactful principles of modern human society. It hasn’t been taught in college classrooms since the socialist takeover of American education and government about a century ago, but it is the most impactful determinant of socio-economic events, global geopolitics, and the book of history.
I’ll get to both the ancientness of the law and how it applies to Bitcoin and resolve some of the puzzles, but first the law itself.
Gresham’s Law goes by the adage “bad money drives out good money” with the anti-capitalist ring to it that competition drives out “good money” and promotes the use of “bad money,” implying a race to the bottom is a result of capitalism.
Nothing could be further from the truth. It only applies to government control of our money. It typically applies where both the good money, such as gold, has to compete with the poor money, such as paper, and a “leveled” playing field where merchants are required to accept both at the same price for their products. Here are examples in ascending historical order of government incompetence and wickedness:
- Worn out silver dollars drive out new silver dollars, so we end up with only dingy underweight money in circulation.
- Governments tax us in terms of full weight coinage, but then shave edges of coins in order to make extra, but lighter weight coins from them to spend, this was a favorite government trick before the printing press which resulted in smaller lighter coins. The ruff or ridged edges on quarters was the modern attempt on the part of governments to demonstrate the quality of a government’s coins—that they were not shaved.
- Governments down through history have debased the coinage and led to the downfall of great empires, such as Rome. Here they add cheap base metals to the gold and silver coins and drive the good ones out, leaving only the “bad,” “watered down” coins in circulation. The US did this in 1965, driving all the silver coins out of circulation.
- President Franklin Roosevelt drove gold coins out of circulation in 1933 by raising the price of gold from $20 to $35 per ounce and making gold ownership illegal!
- With nothing but inflationary paper money to use, Americans took all the copper pennies out of circulation. They now have three cents worth of copper in them and have been withdrawn from circulation, even the current copper-clad zinc pennies and copper-nickel nickels are flowing out of circulation too because the metal is worth more than the coins.
- It also applies to good versus bad fiat currencies. Before the Euro, Greeks and Italians would prefer to hold German marks and spend their highly inflationary local currencies, the drachma and the lira. People in Third World countries prefer to hold US dollars, up to now, and spend their local currencies.
Bitcoin and Gresham’s Law
In a world of inflationary fiat paper currencies, people have gravitated to the US dollar and the Euro. People save whatever regional currency is most stable and spend the depreciating ones in accordance with Gresham’s Law.
This is where Bitcoin and other cryptocurrencies come in. Not only was the world awash with government paper money, but even the best trash—such as the US dollar—was guaranteed by its central bank, the Federal Reserve, to depreciate by at least the 2 percent target! Then, when the financial crisis and massive banking bailouts ensued during the Fed’s Great Financial Crisis that followed from its housing bubble, Bitcoin and crypto money were invented and introduced.
It’s been an enormous success that has swept the world economy and is worth trillions of dollars. Its success as a new competing money is based on the fact that it is produced in the free market, similar to gold and silver. It is expensive to mine, and the mining gets more difficult over time, just like on the gold standard. This has made this money more valuable over time and has attracted an ever-widening worldwide market to Bitcoin.
People complain that Bitcoin is not “real” money, but then again, the US dollar and the Euro are not real money either—they are a fallacious money-substitute, mandated by the government, and that can be produced with abandon, not something produced by the marketplace.
People complain that Bitcoin is not used like money in day-to-day transactions but is more like an investment and used in investment transfers of money. However, this ignores Gresham’s law! Naturally, people are not spending cryptocurrencies very much. They prefer to hold them rather than spend them. They spend the inflationary monies first. That is Gresham’s Law!
Longer term, Bitcoin is in a battle with the US Dollar. Countries have fought wars over monetary battles to hold onto what economist Barry Eichengreen called the United States’s “exorbitant privilege” of printing money that others have to hold and use. Right now, gold is in the forefront in the battle with the US dollar, but in the future, cryptocurrency—probably denominated in gold or silver—will wage an epic battle against governments and their paper money and for the sake of humanity. Let us all hope bad money loses and that leviathan government is destroyed forever.
Gresham himself lived in the early 1500s, but this monetary law was recognized going back to the Greeks and Romans, and the great Polish polymath Copernicus himself recognized and explained the law before Gresham himself. The timelessness and power of this law tells me that good money is a good bet in our future.
Mark Thornton is a Senior Fellow at the Mises Institute, and was the Peterson-Luddy Chair in Austrian Economics from 2021-2023. He hosts two podcasts, Minor Issues and Unanimity, and serves as the Book Review Editor of the Quarterly Journal of Austrian Economics.
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