Financial History to the Rescue: The Harder Money Wins Out

This article is part of a series on bitcoin (and bitcoiners’) arguments about money and particularly financial history. See also:

(1) ‘On Bitcoiners’ Many Troubles’, Joakim Book, NotesOnLiberty (2019-08-13)
(2): ‘Rothbard’s First Impressions on Free Banking in Scotland Were Correct’, Joakim Book,
AIER (2019-08-18)

(4): ‘Bitcoin’s Fixed Money Supply Is a Weakness’, Joakim Book, AIER (2019-08-28)

The great monetary economist and early Nobel Laureate John Hicks used to say that monetary theory “belongs to monetary history, in a way that economic theory does not always belong to economic history.”

Today I’m going to illustrate exactly that with respect to the Bitcoiner’s (mistaken) progressivism in another episode of Financial History to the Rescue.

In the game of monetary competition, the Bitcoin maximalists posit, the “harder” money always wins out. I’ve been uneasy with the statement as it (1) isn’t clear to me what “harder” money (or money’s “hardness”) really means, and (2) probably isn’t historically true. So we end up with something that’s false, or vague – or both! Clearly unsatisfactory. As I pointed out in my overview post to this series, financial and monetary history is almost always more nuanced than what such simple generalizations allow.

Luckily enough, Saifedean Ammous at the Soho Forum debate last week, did inadvertently provide me with a useable definition – and I intend to use it to debunk the idea that money’s history is one of increased hardness. Repeatedly Saif claimed that monetary history, before the advent of central banking, showed us that the harder money always won out: whenever two monetary networks clashed (shells and silver; wampum and gold) the “harder” money won. The obvious implication is that Bitcoin, being the “hardest” money, will similarly win out. Right off the bat, there’s some serious problems here.

First, it’s not altogether clear that such “This time is not different” arguments apply. Yes, economic history teaches us not to discount what seems to be long-standing or universally applicable phenomena – but also to take notice of the institutional setting in which they happen. Outcomes specific to, say, the Classical Gold Standard, rarely generalize into our hyper-modern financial markets with inflation targeting central banks.

Second, over the twentieth century we literally went from the hardest money (gold) to the “softest” money (central bank-created fiat paper money). Sure, you can argue that this was unfair or imposed upon us from above by wars and welfare states, but discounting it as irrelevant strikes me as overly cherry-picking. If the hardest money “lost” before, what makes you think that your new fancy money will win out this time around?

Then Saif returned to the topic of hardness and defined it as a money whose supply is “the hardest to increase.” The hardness of Cowrie shells or Wampum or gold or Whale’s teeth or Rai stones or the other early money that Jevons listed and discussed in 1875, all rely on a difficult, costly and inconvenient process of extraction and/or production. Getting Rai stones from far-away islands, stringing beads together into extended strips of Wampum, or digging up gold from inaccessible patches of the earth were all cumbersome and expensive processes. In Saif’s mind, this contributed to their hardness. Their money stock were simply difficult to expand – in jargon: their money supplies were inelastic.

The early 1600s Dutch Republic struggled with another problem. As the main financial centre of the time, countless hard money (coins) from all over the world were used in Amsterdam. Estimates say over a thousand legally recognized kinds of coins – and presumably even more unrecognized coins. A prime setting for monetary competition: they were all pretty hard (Saif’s definition: difficult and costly to expand) commodity moneys, of various quality, origin, and recognition in trade.

Another feature of 17th century Amsterdam was the international environment of Bills of Exchange (circulating private credit notes). Briefly summarized, merchants across the world traded debts on Amsterdam bankers or traders, and rather than holding and transporting bullion across the world, they transported the debt of the most trustworthy and reliable Dutch financiers. As all such bills required a settlement medium in Amsterdam, trade on thin margins was very sensitive to fluctuations in prices between the commodity moneys in which their bills were denominated – and very sensitive to debasements and re-defined values by various European proto-governments.

In 1609, the City of Amsterdam created the Wisselbank (initially a 100% reserve exchange bank) specifically tasked with standardizing the coinage and to insulate the bill market from currency fluctuations (through providing a ‘neutral’ unit of account for bills settlement). The Bank accepted deposit of whatever coin at the legally recognized rate (unrecognized at metal content) and delivered ”high-quality Dutch trade coins” upon withdrawal. To fund itself, it added a withdrawal fee of 1.5%, but no internal transfer fee, which made holding currency at the Bank very expensive in the short-term, but very cheap in the long-term. Merchants also avoided much of the withdrawal fee by simply trading balances with one another rather than depositing and withdrawing trade coins. In return for this cost-saving, sellers of bank balances would share a portion of the funds saved with the buyer in what’s known as the “Agio”: the price of Bank money in terms of current money outside the Bank’s accounts. This price would fluctuate like any other price on the market and would indicate the stance of liquidity demands.

In a classic example of Alchian’s monetary competition by transaction costs, Dutch merchants and financiers “outsourced” the screening and assaying of unfamiliar coins. They preferred settling their transactions through the (cheaper) medium that was deposits in the Bank.

And it gets worse for the bitcoiner’s story. In 1683, the Bank coupled its deposits with specific receipts for withdrawal; to gain access to coins, one was required both to hold balances and to purchase a receipt issued by the Bank (they also changed the pricing). Roughly speaking, the Bank became a fractional reserved bank (with capped withdrawals) overnight – and contrary to what the hardness argument would imply, the agio on Bank money rose to above par!

Two monetary historians, Stephen Quinn and William Roberds, summarize one of their many writings on the Wisselbank as follows:

“imaginary money on the Bank’s ledgers succeeded because it was more reliable than the real stuff. […] The most liquid asset in the economy was no longer coin, but a sort of ‘virtual banknote’ residing in Bank of Amsterdam accounts.”


“the evolution of the agio shows that the market valued irredeemable balances as if they were closely tied to backing trade coins” (my emphasis)

The story of the Amsterdam Wisselbank’s monetary experiments and innovations show us that monetary adaption relies on many more dimensions than “hardness.” Sometimes “hard” money is defeated by “soft” money, since the softer money brought other benefits to its users – in this case a cheap and reliable settling medium.

The lesson for bitcoin-vs-fiat-vs-FinTech is pretty clear: hard money doesn’t always “win”; and sometimes “soft” money can better serve the needs of consumers in a free market.

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