{"id":8464,"date":"2022-06-24T02:00:00","date_gmt":"2022-06-24T02:00:00","guid":{"rendered":"http:\/\/ci02a4738580012594"},"modified":"2025-01-28T15:21:11","modified_gmt":"2025-01-28T15:21:11","slug":"bitcoin-history-you-should-know","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/bitcoin-history-you-should-know","title":{"rendered":"The Pre-Bitcoin History You Should Know: Basic Cash Versus Fiduciary Media"},"content":{"rendered":"
<\/div>

This is an opinion editorial by Matthew Mezinskis, creator of the \u201cCrypto Voices\u201d podcast and Porkopolis Economics.<\/em><\/p>\n

The following is referenced from the author\u2019s own monetary research, <\/em>published quarterly<\/em><\/a>, which tracks the supply and growth of base money in the world.<\/em><\/p>\n

Part I<\/h2>\n

The History You Should Know: Basic Cash Versus Fiduciary Media<\/h2>\n

Take a moment to reflect on how long you\u2019ve been in Bitcoin. Now take another to ask yourself how many articles on money<\/em> you\u2019ve read along the way. Not just those medium of exchange<\/em> or store of value<\/em> pieces. Think about the philosophizing diatribes which purport to identify the mysterious meanings of what \u201cmoney\u201d is. And then the ultimate twist, how does Bitcoin<\/em> fit in? Many words written by Bitcoiners, many by its detractors<\/a>. From the \u201csocial contract\u201d and \u201csomething we all agree on\u201d theories, to the \u201ctransactional currency\u201d and that ever-important \u201ccup of coffee\u201d metaphor, everyone always has something to say about money, and consequentially why or why not Bitcoin.<\/p>\n

What about its investment implications? What about transporting the productive value of your labor\u2014your savings\u2014across spacetime? Sometimes people write about good money<\/em>, sometimes they write about bad money<\/em>. And lest we forget the fan favorite\u2014never a dearth of chatter on this, how the money printer goes brrrr<\/em> and what it means for our economy. There are more articles musing on money each year than Christmas markets in Vienna.<\/p>\n

I\u2019ll try to bring you something different here. Let\u2019s go for it directly. The field of economics already has a category, a systemized classification, for what type of \u201cmoney\u201d Bitcoin is<\/em>. I will tell you right now what it is, but you must understand, the backstory here is thousands of years old.<\/p>\n

Ready? They call it \u201chigh-powered money\u201d in the west. It\u2019s referred to as \u201creserve money\u201d in the east. Historically, it\u2019s often called \u201cbase money.\u201d In the global financial system today, we call it the \u201cmonetary base.\u201d<\/p>\n

There it is. That\u2019s what type of money<\/em> Bitcoin is, and that\u2019s what type of settlement<\/em> occurs when bitcoins trade hands, when UTXOs are destroyed and created anew. That is the economic label<\/em> that completely encompasses what bitcoins are and what they do.<\/p>\n

Basic money is indeed a generally accepted medium of exchange. Sure. But again, that\u2019s a different type of article. What basic money really is<\/em> and why it matters is the story I want to tell you here.<\/p>\n

Historically, there have been two different forms of basic cash:<\/p>\n

    \n
  1. Commodity money, such as gold and silver;<\/li>\n
  2. Physical banknotes, such as those bills we yank out of ATMs today, issued by central banks.<\/li>\n<\/ol>\n

    This article is Part I of II. Here in Part I we will focus on gold and silver. In Part II we will address actual physical currency, those fiat cash banknotes. Bitcoin, as it should be, will be sprinkled throughout.<\/p>\n

    What Base Money Is Not<\/h3>\n

    This analysis will in fact be way easier if we start from the other side. We\u2019ll get to more on what it is<\/em>. But to start let\u2019s look at everything in the financial system that is not<\/em> base money.<\/p>\n

    What is not<\/em> base money? Basic cash is not<\/em> any medium of exchange that is controlled or issued by a third party. If there\u2019s an intermediary involved\u2014a bank or financial institution\u2014then you can be quite sure the stuff you\u2019re playing with is not<\/em> base money. (There are exceptions to every rule, and there is a big asterisk here in the case of those institutions we call \u201ccentral banks.\u201d We will get to this in Part II.) Another way to determine this is if you have an \u201caccount\u201d with someone. Anyone. Any financial services provider. Hold an account with a bank? Then whatever is in it is not<\/em> basic cash.<\/p>\n

    Right. Some examples. The British and American systems have long been fans of paper checks. And I already know what you\u2019re thinking. Besides being an application for fraud<\/em> (you know, with your full name, address, and account number punched right on them), why should I even care about checks today? Well, I\u2019m telling a story about money and banking here, so just know that checks once served a vital function in payments, and were instrumental<\/em> in the growth of western economies, when there was zero or loose central bank oversight. Checks are actually way, way more profound than they appear\u2014even more so than banknotes themselves\u2014regarding innovations in moneyness<\/em>. As monetary historians Dr. Stephen Quinn and Dr. George Selgin have noted<\/a>, \u201cbearer notes were a \u2018niche market\u2019 prior to 1694, checks having until then been the more important means of deposit-transfer.\u201d<\/p>\n

    Anyway, back to what the thing is. Think about it. What else is written on a check? The payee\u2019s name? Sure. But what else still? Who issued that check? Who actually came up with the thing? Is there an institution involved?<\/p>\n

    It is your bank<\/em>, of course.<\/p>\n

    But tell me still. Whose idea was it to offer you those checks? Does it matter how big the checkbooks are? Who decides what the check looks like? Should there be specific numbers of checks that each bank offers its clients? Is there a check commissar sitting in every municipality, alongside the mayor, keeping a running tally of checks that process their way through the city? I mean we are still talking about money here, and checks have been used for hundreds of years\u2026 so this stuff necessarily<\/em> must be run through the government, right?<\/p>\n

    Nope.<\/p>\n

    Exactly zero people told the bankers how many checks they could or should issue, and no one knows the (precise) answer to this in aggregate. All of this is still managed as it was 500 years ago, in a free market, where clients trust their banks (their intermediaries<\/em>) to clear checks between one another, in order for everyone to make payments and facilitate economic growth.<\/p>\n

    So that\u2019s a check. Definitely not<\/em> basic money.<\/p>\n

    What about debit cards? I\u2019m going to give you, dear Reader, the benefit of the doubt by this second example, that you have already guessed that these monetary instruments are again, not<\/em> base money. Yet again issued by a bank, these things are apparently cool for some folks, hotels like them, and they\u2019ve been around since the 50s and the dawn of electronic banking\u2026 but they are basically plastic checks that are reusable, and clear quicker. And yeah, no one told the banks how many customers, or what kind of customers, to offer them to. Fairly decentralized, for decades.<\/p>\n

    (Note, credit cards are actually a very different beast than debit cards, and in an important economic way when it comes to moneyness<\/em>, but no time for that here. Still, credit cards are not<\/em> base money).<\/p>\n

    What next? What else do you use to pay for stuff? Probably time to talk about mobile apps and online banking. Maybe the fact that these things are digitally native\u2014then they might classify as base money? Remember how to tell\u2014the key is whether a third party is running the show for this product.<\/p>\n

    Example. Apple Pay. So it\u2019s\u2026 Apple, right? Goldman Sachs, actually (ha-ha). Either way, a third-party institution is offering you that product, so it\u2019s definitely not base money<\/em>. Same goes for PayPal, Venmo, Skrill, Revolut, Wise, PaySera, and all the other online-only banking apps and accounts. And for sure, you don\u2019t actually need a bank<\/em> account to use these types of services. Even if it\u2019s just a payment processing company, that\u2019s still a third party issuing those accounts. It means all those digital payment options are still not base money<\/em>.<\/p>\n

    So that\u2019s the main stuff, when we think of payments. (Stablecoins? We\u2019ll get there in Part II!) You may understand that, besides the actual checks and cards themselves, besides the instruments, all of this is at the end of day linked back to your checking account<\/em>, or deposit account. Again, let\u2019s leave credit cards aside for now, I know there is some overlap in these products. They\u2019re even more distant \u201cmoney.\u201d But we also have other types of \u201caccounts\u201d in the financial system that nobody understands.<\/p>\n

    One is the savings account. This used to actually be a thing. Savings accounts used to (and in some countries still do) have more withdrawal restrictions than checking accounts. In return for this you\u2019d receive a higher interest rate on your money deposited there. Not so today (yet another topic for another time).<\/p>\n

    We also have time deposit<\/em> accounts, which have yet further withdrawal restrictions and pay even higher interest than savings. Again, any base money in there? Nope.<\/p>\n

    We have other old school instruments like money market funds. These are typically not insured by the government, should pay a higher interest than checking deposits, and trade more like a stock (one share should be around one native currency unit) if you want to get some of them. Base money? Again, surely, no.<\/p>\n

    So let\u2019s rehash, and please note this applies regardless of retail or institutional nature:<\/p>\n

      \n
    1. Checks, debit cards, and mobile apps linked to deposit accounts? Not base money.<\/li>\n
    2. Credit cards? Definitely not base money.<\/li>\n
    3. Savings, time deposits, money market, and other interest-bearing accounts? Not base money.<\/li>\n<\/ol>\n

      Alright, hopefully that was a semi-productive exercise in hashing through all the monetary instruments that are not basic money but are still used for payments<\/em>. And for a while now you may have been asking, \u201cSo, if not base money, then what are all these damn things actually called?!\u201d<\/p>\n

      Answer: Fiduciary media<\/strong>.<\/p>\n

      This is an important term. Crucial. And the most logical of names. I\u2019m not asking you to become an economist here (please don\u2019t), but what I hope you do realize is that all the typical stuff we think about and use as \u201cmoney\u201d in our current financial system is economically referred to as fiduciary media<\/strong>.<\/p>\n

      It\u2019s a claim. It\u2019s an IOU. It\u2019s a token<\/em>.<\/p>\n

      It\u2019s money in a \u201cmoneyness\u201d sense, but it\u2019s not money in a \u201cbase-money\u201d sense.<\/p>\n

      \u201cAgain, what?\u201d<\/p>\n

      It means just that. Fiduciary media is simply not<\/em> basic money, and if you own such a claim, you don\u2019t own any basic money! Yet when you hold this claim, you don\u2019t hold nothing. This fiduciary media can and does circulate freely and is used for payments.<\/em><\/p>\n

      Bitcoin, Briefly<\/h2>\n

      If I asked you now, are bitcoins base money, what would you say? It\u2019s not a trick question. Don\u2019t think too much.<\/p>\n

      I hope you answered yes. Bitcoin isn\u2019t issued by third parties. To acquire it, to hold it, I don\u2019t need a third party at all. I could mine it. I could work for it, earn it; in which case, yes, my employer is a third party, but we wouldn\u2019t need a trusted bank for payment. The native unit bitcoins<\/a>, equaling any number of UTXOs<\/a>, have no reliance on any fiduciary whatsoever. It is a base asset that you can acquire and hold by yourself. No permission, no intermediary. What about the big miners, though? Miners do provide a service in producing blocks, and their costs in the aggregate are expensive today, but this expensiveness shouldn\u2019t be thought of as \u201crequired\u201d by the system. If all miners left, difficulty would adjust, and attaining bitcoins would be a less \u201cexpensive\u201d proposition than it is today.<\/p>\n

      But crucially, other than bitcoins, everything <\/em>else in the financial world described above is fiduciary media. It\u2019s fine to call it money<\/em>, but if you want to know exactly what it is in an economic sense, it\u2019s simply called fiduciary media<\/em>. If you\u2019re waiting on your salary to be direct-deposited into your bank account, or you\u2019re waiting on a check to clear from your account to your payee\u2019s (really, you still are?), then you\u2019re waiting on a financial intermediary to act on your behalf. You\u2019re using fiduciary media<\/em> to settle debts and make payments.<\/p>\n

      But Why Fiduciary Media?<\/h3>\n

      \u201cSo brass tacks. Are you saying fiduciary media is bad?\u201d<\/p>\n

      Nope.<\/p>\n

      \u201cAre you saying it\u2019s a fraud?\u201d<\/p>\n

      Nope.<\/p>\n

      \u201cAre you saying it causes bad macro things to happen economically?\u201d<\/p>\n

      Still nope.<\/p>\n

      \u201cBut you are saying fiduciary media is<\/em> a type of money?\u201d<\/p>\n

      Yep.<\/p>\n

      \u201cAnd most importantly, fiduciary media is not<\/em> basic money?\u201d<\/p>\n

      YES.<\/p>\n

      In all my speeches on money, I find the above points are hardest to grok. I get it. In your daily routine all you really care about is how the card, check, or banking app looks and behaves. You want it to work. Fine. But the important questions I\u2019d like you to ask yourself after reading this are ones like, \u201cWho issued your card?\u201d \u201cWho issued your account?\u201d \u201cWho processed that payment on your behalf?\u201d \u201cWho is your fiduciary<\/strong><\/em>?\u201d This leads to the yet more important sidenote that, if<\/em> this stuff wasn\u2019t guaranteed by the government, you\u2019d spend more time (as you should) vetting your bank like you would your car maker or home builder.<\/p>\n

      In any event, if you can think about these instruments in these terms, then you\u2019ve won the battle for your money, and you know more about it than most economists. It\u2019s really not more complicated than this, when it comes to what fiduciary media is<\/em> and base money is not<\/em>.<\/p>\n

      As to the \u201cwhy\u201d of fiduciary media, this should be self-evident. The purpose of fiduciary media is this: Institutions issue these claims (have done so for centuries, do so today, will do so tomorrow) because fiduciary media has always<\/em> been more efficient than basic money. It allows for more efficient growth, scales payments in the economy, albeit<\/em> while adding some requirement of trust in a third party.<\/p>\n

      \u201cHold on though, are you sure fiduciary media doesn\u2019t cause bad things to happen in the economy?\u201d<\/p>\n

      Yes I\u2019m sure, but as always, the big asterisk is this: As long as central banks are not involved<\/em>. We will come back to this in Part II.<\/p>\n

      Main takeaways for now: Fiduciary media isn\u2019t basic cash. Fiduciary media is good for payments, and it\u2019s not inherently bad, nor fraudulent.<\/p>\n

      Base Money<\/h2>\n

      So if you\u2019re using a check or plastic or their digital equivalents on your phone, issued and managed by a private bank, then you are using fiduciary media. You are not using basic money. After all that, I\u2019ll try and keep this short as to what base money is<\/em>\u2014historically speaking<\/em>.<\/p>\n

      If you simply intuited that base money would be the opposite<\/em> of fiduciary media, this assumption will get you pretty close. What forms of money do we have in the marketplace that aren\u2019t managed by a (monopolized) third party? (Yet again, the elephant in the room is modern central banks. We will cover this in Part II.) What forms of money are assets of ultimate settlement, where you don\u2019t have to rely on anyone else to settle? What form of money is supplied by the market<\/em>, due to its demand to be held as a store of value and medium of exchange?<\/p>\n

      Aristotle famously waxed on basic money, in that it should be durable, portable, fungible (divisible), and have value in and of itself, independent of any other thing. (He was, unfortunately, one of many thinkers throughout history who had trouble with the concept of interest, calling it \u201cunnatural<\/a>,\u201d which has led countless astray, even to this day.)<\/p>\n

      History proves these metals do possess those qualities, albeit to varying degrees. Gold and silver are the deepest, most balanced, and most documented instances of base money that achieved worldwide adoption. As far as coinage goes, silver has long-been historically documented as the first mover from ancient times, and gold rose to prominence later, roughly from medieval times.<\/p>\n

      But Why Base Money?<\/h3>\n

      My reading of history as to the \u201cwhy\u201d for basic cash is twofold. Both reasons applied throughout the centuries, and both still do today. However, depending on where you live (likely a Western country if you\u2019re still bothering to read this English), these two reasons might not be obvious.<\/p>\n

      The first reason base money is needed is during a \u201cnon-local\u201d trade situation. You, as one party to the deal, may never see your counterparty again, and you need the cash before moving on. Take a European spice trader in the East Indies or a rum trader in the West. When the deal is done, he\u2019s getting back on his boat to Spain or Holland, and at best he doesn\u2019t see these people again until next season, if ever. He needs to settle the deal before he leaves port. Enter gold and silver. A global medium of exchange that works abroad, and works at home. Obviously, the entire deal doesn\u2019t need to be done 100% in gold; it could be 80% in goods, and then 20% settled in gold or silver on the margin. An early episode on our podcast<\/a> with Dr. Selgin covers this phenomenon well.<\/p>\n

      The second basic reason for basic money is that store of value function. But not just store of value in the generic sense; rather, in a very specific and personal one. The heirloom<\/em>. Transporting your life\u2019s savings to your children. Yes, as humanity develops, we\u2019ve been able to transfer on other goods besides money to our heirs, such as fine art, property, or even a portfolio of stocks; however, those examples typically rely on a legal system, and (here\u2019s that word again) a fiduciary. The reason for basic cash alludes back to the Szabo article on shells\u2014heirlooms and collectibles with deep and certain value transfer, in noncorrosive and difficult to forge assets. Gold, jewelry, and silverware still fulfill this role today. Dowries and inheritances are huge in the developing world, in particular India and China.<\/p>\n

      That\u2019s the why for basic cash. Now, let\u2019s begin to take a hard look at what it actually is.<\/p>\n

      Gold & Silver<\/h2>\n

      Even a child knows that gold and silver have something to do with money. Whether it be from video games or fairy tales, it\u2019s engrained in our DNA that these precious metals are precious. I\u2019m going to show you their supply curves right now. Here\u2019s gold, over the last 50 years.<\/p>\n

      <\/figure>\n

      Unfortunately, this picture is not a part of our most basic of financial education. It should be. You can verify my numbers from many industry and mining publications, though finding the exact format and figures will be difficult; as again, for some reason this stuff is never explained simply. Note there\u2019s going to be a margin of error in what you see modeled above, versus reality (or other research). No one knows exactly how much gold has been produced, obviously, but these are my figures and I\u2019m sticking to them.<\/p>\n

      Another issue. The industry typically quotes gold units mined in metric tonnes, which is a horrible thing to do. They should always be displayed in the native units that the marketplace quotes for price, which is per troy ounce<\/em>. Why should we do it any other way? As with many things in life, don\u2019t let CNBC or Bloomberg confuse you on what\u2019s relevant. Everything on the right-hand side is displayed in billions of troy ounces (the lines), and everything on the left-hand side (stacked area) is displayed in the current global unit of account: the US dollar.<\/p>\n

      Throughout all of humanity, we\u2019ve pulled 6.3 billion ounces of gold out of the ground. At current prices that\u2019s roughly $11.3 trillion in USD equivalent value<\/em>. Does it mean that if the entire world sells its gold right now, they would and could get 11.3 trillion-dollar bills (if they desired)? Obviously not, and we\u2019ll cover this yet still.<\/p>\n

      6.3 billion ounces is actually 60% more than 50 years ago. Meaning, nearly two-thirds of all gold throughout history has been mined since 1970.<\/p>\n

      But not all that gold comes in the mold that we typically think of from fairy tales; namely, in bullion form. Coins and bars. 12% of this is deemed to be lost or consumed by industry, where it isn\u2019t easily recovered. Of the gold that remains, about 50% of it is in jewelry form, and 50% of it sits as those coins and bars.<\/p>\n

      Nonetheless, we can think of all jewelry and bullion as gold that is liquid and global. Isolating again the value that\u2019s lost to industry, we get about 5.6 billion ounces, or $10 trillion equivalent, at current prices.<\/p>\n

      Now silver. Here is the exact same type of graph. Some 55.3 billion ounces of silver have been mined throughout humanity. Similar to gold, the majority (53%) of all silver above ground has been dug up since 1970:<\/p>\n

      <\/figure>\n

      Though silver preceded gold in the past as a mostly monetary (coinage) asset, today it\u2019s a different animal entirely on a macro level. A much larger chunk of its mined supply has gone into industry and deemed not easily recoverable. 27 billion ounces strong in fact, or $600 billion in equivalent value. This silver sits in technological devices, in conduits, in machinery, and in buildings. Much of that is constantly recycled, but then it\u2019s churned right back into more industrial usage. The demand drivers for silver today are much more industrial, and much less monetary and ornamental than gold.<\/p>\n

      Now of the non-industrial silver above ground, it\u2019s further different than gold in that only a small fraction of it is in bullion form (those coins and bars). Only about 3.6 billion ounces, or $80 billion worth. But even if we called that silver \u201cmonetary\u201d silver, we should still consider all the other wealth-transferring, liquid silver above ground. There\u2019s about 24.6 billion ounces of that stuff, $550 billion worth at today\u2019s prices. And a large portion of that includes not only jewelry, but grandmother\u2019s fancy silverware.<\/p>\n

      Now without getting much further into the weeds here, let\u2019s ask ourselves some questions about this gold and silver stuff that is liquid, ornamental, and monetary:<\/p>\n

        \n
      • Gold: 5.6 billion ounces ($10 trillion equivalent)<\/li>\n
      • Silver: 28.2 billion ounces ($610 billion equivalent)<\/li>\n<\/ul>\n

        If I hold some of this personally, in my home, is it definitely \u201cmine?\u201d Yes. Would it classify as an \u201casset\u201d on my own personal balance sheet? Yes. Can I transport this wealth into the future by passing it down to my heirs? Yes. Did any company \u201cdeem\u201d these metals into existence? No.<\/p>\n

        The answers to the above questions, alongside the obvious demand-tendencies for them throughout human history, as well as their exchange-medium function, can only lead us to one economic conclusion. The chemical elements aurum and argentum are basic cash. They classify as basic money.<\/p>\n

        Closing the loop<\/h2>\n

        The distinction that matters is that of basic cash, versus fiduciary media. Before you get to the benefits of one, versus the risks of the other, it helps to broaden the scope. Not only does it help to know the mechanics, but it eases the tension if one looks at how these two monetary forms interplay in the global financial system. A historical perspective is pretty much required as well.<\/p>\n

        So let\u2019s take stock. So far, we\u2019ve looked at what fiduciary media actually is in the modern<\/em> financial system, and why it matters. We\u2019ve taken a good gander at historical<\/em> basic money, which is gold and silver. We\u2019ve talked about why that matters. We\u2019ve briefly looked at why Bitcoin also classifies as basic cash, with similar (albeit superior) qualities to those of gold and silver.<\/p>\n

        In Part II we\u2019ll close it out. We\u2019ll visit those goldsmiths and money traders. We\u2019ll see how fiduciary media developed before, alongside, and after these old days of gold and silver. This will bring us into modern banking. Along the way we\u2019ll certainly need to scan the inevitable reach of the sovereign, of the state, around all this. As the wonderful Ron Paul tirelessly observes, \u201cMoney is one-half of every single transaction in the world.\u201d It\u2019s impossible that the state would not<\/em> ogle at, then scheme, and eventually make every effort to corner the money market in any society.<\/p>\n

        I\u2019ll also put a little more color on this word \u201cmoneyness.\u201d Money is a circuitous term straddling \u201cbasic cash,\u201d \u201ccurrency,\u201d and \u201cfiduciary media,\u201d often without a second thought by its speaker, so we should do some more work there.<\/p>\n

        The rise of the modern central bank will be impossible to ignore as well. It\u2019s unclear which one is the husband, and which is the wife, but it is undeniable that the most profitable marriage of all time is that between a nation-state\u2019s treasury, and its central bank.<\/p>\n

        And that will bring us to the modern, fiat monetary base. The core of the current monetary system. I\u2019ll show you exactly what it means today, and exactly what it looks like.<\/p>\n

        And then of course we\u2019ll see how all roads lead to Bitcoin. Readers of this magazine know how much technical, economic, and societal ground Bitcoin covers. Part II will bring further numbers to prove it.<\/p>\n

        Thanks to Nic Carter for his feedback on this article<\/em>.<\/p>\n

        This is a guest post by Matthew Mezinskis. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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      History has only illustrated two long-lasting forms of basic money. One is silver, and the other is gold. These aren\u2019t the only<\/em> two. Certain shells (specifically cowrie shells<\/a> and wampum<\/a>) came close in certain times and places, but didn\u2019t make it worldwide, nor prove long-lasting. Nick Szabo has written wonderfully<\/a> about the history of beads and shells as primitive money, highlighting the important role these collectibles played for millennia.<\/p>\n