Welcome back to our blog series, where we continue our exploration of "The Bitcoin Standard: The Decentralized Alternative to Central Banking" by Saifedean Ammous. In this blog, we delve into Chapter 2, which offers fascinating insights into the concept of primitive money and its relevance to Bitcoin.
Chapter 2 of "The Bitcoin Standard” provides a compelling examination of primitive money and its relevance in understanding the principles of sound money, with implications for the modern financial landscape.
Easy Money is Diminished Wealth
Among historical currencies, one fascinating example resembling Bitcoin is the ancient Rai stone system on Yap Island, part of Micronesia. These large limestone discs served as money, offering insights into Bitcoin's operation later in the book.
Rai stones, used as medium of exchange on Yap Island, varied in size and could weigh up to four metric tons. Despite not being native to Yap, they were highly prized for their rarity and beauty. Obtaining them was difficult, involving quarrying and transportation from neighbouring islands. Once on Yap, stones were displayed prominently, and ownership could be transferred without physically moving them. This communal recognition made stealing them virtually impossible.
For centuries, the Rai stone monetary system thrived among the Yapese people, demonstrating remarkable salability across both time and space. Despite never physically moving, Rai stones were widely accepted as payment across the island, with their various sizes allowing for flexibility in transactions. Their value endured over time due to the difficulty and expense of acquiring new stones, ensuring a high stock-to-flow ratio. This scarcity made Rai stones a trusted and stable form of currency, as inflating the supply was impractical, reinforcing their role as a medium of exchange.
However, in 1871, an Irish-American named David O'Keefe introduced new stones to Yap, thereby undermining the value of the traditional ones. With the advent of modern tools and industrial capabilities in the region, the production of these stones became significantly cheaper than before. This led to an increase in the supply of new stones to Yap, resulting in a drastic decrease in the stock-to-flow ratio for Rai stones. Consequently, the island's existing stock of stones lost considerable value, marking the beginning of the decline of Rai stones as currency.
Similar narratives unfolded with aggry beads in West Africa and seashells worldwide. European traders exploited the value of these commodities, flooding markets and diminishing their worth. This gradual devaluation, seen also in seashells' decline in North America, illustrates the danger of easy-to-produce money.
As technology advanced, particularly with metallurgy, humans transitioned to superior
forms of money, replacing artifacts like seashells, stones, beads, cattle, and salt. Metals emerged as a better medium of exchange due to their ability to be fashioned into uniform, highly valuable small units, facilitating easier transportation. The widespread use of hydrocarbon fuel energy further accelerated this shift by boosting productivity and increasing the supply of these metals, thereby diminishing the stock-to-flow ratio of artifact money.
By examining the demise of primitive money systems, Ammous reinforces his argument that Bitcoin represents a return to the principles of sound money. With its decentralized nature and limited supply, Bitcoin offers a modern-day alternative to fiat currencies, echoing the principles of the gold standard adapted for the digital age.
A money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard-earned wealth for sale in exchange for something easy to produce.
Stay tuned for our next blog as we continue to provide insights from "The Bitcoin Standard" and explore the transformative potential of Bitcoin in redefining wealth and the future of finance.