How Gold Became Money and How Bitcoin Can Become Money

Gold has been a valuable commodity since ancient times. When gold showed up in written history, it was already a valuable commodity [3]. Societies had used it as money. We don’t exactly know how it became money. There are hypotheses [1].

These hypotheses are reasonable. They make a good case for gold as money. But human’s obsession with gold is strange. It permeated across societies. Closer examination shows these hypotheses are flawed.

These hypotheses seem like afterthoughts. We try to stitch together some ideas that help us explain why gold became money. There are even more bizarre theories. We’re innately made to like gold. The gods make gold to seduce humans. Gold came from outer space [2].

In this post, I want to discuss the rise of gold in a different view. I think gold rise as money is related to the rise of metallurgy. Waves of innovation in metal technology destroyed and created empires. Gold is invaluable money because it is at the center of metallurgy.

The first metal that humans interacted with appears to be gold. Small amounts of natural gold had been found in present-day Spain during the late Paleolithic period, around 40,000 BC. The Paleolithic period is known as the Old Stone Age. Gold was the metal that enabled humans to move away from stone tools. This is an important development. After the Paleolithic period, we went through Upper Paleolithic (Late Stone Age), Mesolithic & Neolithic (End of Stone Age), Chalcolithic (Copper Age), Bronze Age, Iron Age. Subsequent developments in human history were marked by advances in metallurgy.

Early metallurgists started their learning by interacting with gold. Then they learned how to manipulate other metals. Gold is rare enough that it became valuable to metallurgists. There is not enough gold to mass-produce gold tools. It’s rare and shiny. It became a decorative metal, a symbol for prestige and power. Gold is often seen as jewelry. But it is really a display of metal technology advancements. When metallurgists created their tools or weapons, they would decorate the items with gold. Metallurgists were the engineers that help ruling elites destroy and create empires.

Vietnamese folklore told a story of king An Duong Vuong [5]. He ruled the ancient Vietnamese people during the Iron Age. The story said that An Duong Vuong possessed a magical crossbow. With this weapon, he was able to resist the Chinese invasion. History also mentioned Cao Lo, his weaponry engineer [6]. An Duong Vuong was finally defeated when his enemy stole his magical crossbow. His kingdom fell apart and was subjected to Chinese domination for the next 10 centuries. The thief was his Chinese son-in-law. The magical crossbow was likely a metaphor. It may be a metal technology that gives the Vietnamese king superior weapons.

Metal development was an important driver in human history. Gold was at the center of that development. The metallurgy engineers and ruling elites were obsessed with gold. Normal people followed. Gold became the most valuable form of money.

Fast forward to the 21st century, gold was slowly fading away. Fiat currencies used to be backed with gold. But the Gold Standard had hit world economies many times. During the Great Depression of the 1930s, gold rigidity spread recessions to many countries. In 1971, facing a shortage of gold reserve, the United States terminated convertibility of the US dollar to gold. This event ended the gold influence on monetary policies.

Crypto literature pitches Bitcoin as digital gold, an emerging alternative to gold. Bitcoin design imitates gold features. It has a limited supply of 21 million coins. The coins are created through a mining process that consumes electricity. In some ways, Bitcoin is better than gold. It does not require physical storage. We can transfer bitcoins almost instantly. In other ways, Bitcoin is worse than gold. Bitcoins are not physical. We can’t use bitcoins for anything other than holding. We rely on economic ideologies to justify Bitcoin’s role in the market.

We’ve been through the Gold Standard. Economists and politicians are not eager to return to gold-backed currencies. In the digital age, we can create reliable banking networks of fiat currencies. Central bankers find digital currencies easier to manage than gold-backed systems. Bitcoin supporters pitch the Bitcoin Standard. It is digital native and supposed to be better than the Gold Standard. To make the case for Bitcoin, people downplay gold. Gold is just a shiny and scarce metal that people use for decoration.

But Bitcoin is still searching for its use case. We see gold was money. One of its prominent applications is jewelry. We conclude that jewelry is the secondary market that drives gold demand. From this conclusion, crypto builders think there may be a similar secondary market for Bitcoin. Our ignorance of gold history creates a gap. We have not found the missing puzzle piece.

We’ve been looking in the wrong place. Jewelry is just the surface of gold rise. It’s a minor application that came out of metallurgy. It is not the secondary market that drove gold demand. Gold became money because it was an important part of metallurgy. It was the symbol of the metal revolutions.

From this insight, we should think about the equivalence of metallurgy for Bitcoin. Bitcoin has similar traits. It is technology. There is an ecosystem of hardware and software around Bitcoin. If Bitcoin were to be like gold, it would be the money that powers the next technology revolutions. Advance in the Bitcoin technology ecosystem may produce new use cases for Bitcoin. The “Blockchain, not Bitcoin” projects did not produce new use cases. They may have gone too far and became detached from Bitcoin. Successful applications may not have much to do directly on Bitcoin. But maybe, they will need to interact with Bitcoin like the way other metals interact with gold.

It took gold and metallurgy 30,000 years to transition humans away from stone tools. We’re still very early with Bitcoin.

References

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