Gold as Hard Money
It’s not the goal of this report to delve into the complete history of money. That would require writing a very long book!
However, suffice to say that only one good has stood the test of time as Hard Money and that is… Gold.
Gold has been used as Sound Money for millennia.
It is extremely rare on Planet Earth and is – as far as we know – only created by a extremely rare events in the known Universe called a Supernova, which is when stars reach the end of their life, implode and then explode with a colossal amount of energy.
Gold was delivered to Earth via asteroids from different parts of the universe when the planet was being formed billions of years ago.
Because Gold is so rare (approximately 15 times rarer than Silver), it’s “stock to flow ratio” — explained below — is like no other medium of exchange, with the exception of Bitcoin after its next inflation halving, which I’ll explain later.
Stock to flow ratio sounds complicated, but it’s not.
It measures how much of a good is produced each year vs how much already exists.
Note: Many economists (of whom I am not one!) measure stock to flow ratios differently by calculating how many years it would take to mine the existing supply. However I find it more useful and easily understandable to measure them in percentage terms.
So, if 2000 tons of Gold is mined each year, and the total amount of Gold in existence is 200,000 tons, the “stock to flow ratio” of Gold is 1% (2000 tons being 1% of 200,000 tons).
Those numbers are broadly accurate, by the way.
The stock to flow ratio of Gold is usually around 1.5% per year – in other words, the mined gold in existence increases by about 1.5% each year.
Even if demand goes up, the Gold mined does not increase significantly because it is extremely rare, and so extremely difficult to mine.
Silver
Silver was used alongside Gold as sound money for centuries.
China and India used a Silver Standard rather than Gold Standard until 1935 and 1898 respectively, eventually conceding defeat and switching to the Gold Standard.
While Silver has a respectable stock to flow ratio of around 22, it lost the battle to be the base currency to Gold because it is significantly more abundant, and so easier to mine (around 19 times).
If demand goes up, production can go up, which has not proven to be the case with Gold.
The other disadvantages – in terms of Hard Money – that Silver has to Gold is that it can perish more easily, and is an industrial metal which is used in the production of goods.
While these may seem like advantages in terms of it’s value, it in fact increases the stock to flow ratio of Silver. This is because much of the above ground stock of Silver is used up by industry, effectively taking it “out of stock” and meaning that the new mined production is a larger percentage of the existing stockpile.
That may be a little difficult to get your head around, so let me put it this way:
If 2.5 tons of silver is mined each year and the total amount of silver ever mined is 25 tons then the stock to flow ratio is 10% (i.e. the mined silver in existence increases by 10% each year).
However, if half of the Silver that’s ever been mined has corroded or been used in industry with no real prospect of ever being reclaimed in monetary form, the stock to flow ratio increases to 20% (i.e. the mined Silver in existence – excluding the Silver that has been “used up” in industry – increases by 20% each year).
Confused?
If this is the first time you’ve heard of stock to flow ratio, that is totally normal.
The important thing is to understand the underlying concept:
The lower the stock to flow ratio, the more inherent value a good has if it is to be used as money, due to its difficulty to produce relative to the current supply.
The important factor is not necessarily the actual stock to flow ratio, but rather the possible stock to flow ratio.
If there were little demand for – say – Copper, then the stock to flow ratio could be extremely low because no one would bother to mine it.
However, if demand then increased, production could easily increase because Copper is relatively easy to mine due to its abundance. Increasing production would then make the stock to flow ratio much higher and so destroy it’s hardness as money.
Hopefully now you understand the concept of stock to flow and I’ll tease you than in 2022 the stock to flow ratio of Bitcoin (which gets lower over time until it reaches zero) will become lower than Gold. This will be explained in more detail further on in this paper.
Speaking of paper…
