Goldbugs Don’t Understand Money

One of the most persis­tent false­hoods propa­gated by gold bugs is the idea that monetary goods must have direct utility. Even those who concede that Bitcoin has strong monetary attrib­utes insist that its inability to repli­cate gold’s metallic proper­ties is a critical failure. This kind of reasoning stems from a funda­mental misun­der­standing of money.

Firstly, it’s impor­tant to remember that a portion of the market value of monetary goods reflects demand that exists simply because holders expect demand from other holders. This charac­ter­istic is neces­sarily shared by all such goods.

The idea of a money without a monetary premium makes as much sense as the idea of a book without pages. Yet, some gold bugs bizarrely argue that anything with such a premium is in a “bubble” destined to implode. The logical conclu­sion to this line of thought is that gold must have been overvalued for the past few thousand years and is long overdue for a crash. Moreover, it would follow that money itself should never exist and that humans should be forever stuck with a barter system.

The more sophis­ti­cated gold bugs avoid such an obvious self-contra­dic­tion by instead arguing that it makes sense for money to have a monetary premium as long as it also has utility value. In a recent podcast episode, my dad (Peter Schiff) made the following case: 

“There is some monetary premium with respect to gold, but bitcoin doesn’t have a monetary premium because in order to have a premium, you have to have some value that the premium is built on. Bitcoin has no value. It’s 100% monetary premium. But without a base, it doesn’t matter because you can’t have a premium unless you build it on top of something.”

Part of this argument is super­fi­cial and likely stems from Bitcoiners’ usage of the term “monetary premium” to describe the differ­ence between a good’s utility value and total market value. The word “premium” can be inter­preted to mean that the utility value is the base from which the monetary value grows. This concept is reinforced by charts such as the one shown above. However, the word “premium” can easily be avoided, and different charts can be used to illus­trate monetary value without showing utility value as a base.

Putting aside seman­tics, the funda­mental under­lying argument is that a good’s monetary value is depen­dent on its direct utility. In this frame­work, the utility value is likened to the founda­tion of a building; without a founda­tion, a collapse is inevitable.

Although super­fi­cially compelling, this analogy simply doesn’t stand up to scrutiny. While a good’s utility value is supported by its direct uses, such as indus­trial appli­ca­tions, its monetary value is supported by its monetary attrib­utes, such as credible long-term scarcity and censor­ship resis­tance. There­fore, the utility value and monetary value are indepen­dent from each other. Each can survive on its own because each has its own base of support.

To illus­trate this point, we can imagine a scenario where all of gold’s indus­trial and ornamental uses suddenly vanish.

Would its monetary value disap­pear as well?

No, because its monetary attrib­utes would remain intact.

But how would people have any concep­tion of what its purchasing power should be?

That wouldn’t be an issue either; in Man, Economy, and State, econo­mist Murray Rothbard explained:

“if on day X gold loses its direct uses, there will still be previ­ously existing money prices that had been estab­lished on day X minus 1, and these prices form the basis for the marginal utility of gold on day X.

Similarly, the money prices thereby deter­mined on day X form the basis for the marginal utility of money on day X plus 1. From X on, gold could be demanded for its exchange value alone and not at all for its direct use”.

Not only is it possible for money to have only monetary value, but it is actually the most desir­able situa­tion. Contrary to popular belief among gold bugs, direct utility is actually a hindrance to monetary goods because of how fluctu­a­tions in indus­trial demand can impact their purchasing power.

There­fore, Bitcoiners who deride gold as being “just a shiny rock” are not only incor­rect (because gold does have indus­trial uses) but also are inadver­tently making gold seem like better money than it actually is.

The conclu­sion of this analysis is that Bitcoin’s improve­ment on gold is two-fold: it discards the counter­pro­duc­tive non-monetary proper­ties while also upgrading the monetary proper­ties. The result is the creation of a good that is optimized to be supreme money.