Austrian Monetary Economics Conference, Madrid, Nov.2-3, 2017

The 100% reserve gold standard as such has many supporters within the Austrian economics circles. The main reason why it gathers so much support is because it takes the rains from the hands of the government. In particular, it does not allow for money to be created out of thin air and  thus to create inflation and its concomitant consequences: wealth redistribution and economic crises. Admitting all of the above, however, does not logically lead us to the conclusion that the gold standard as such is the ideal monetary system. The aim of the present article is to asses the suitability of the gold as such for money by comparing it to the other available/known alternatives and show what a perfect monetary system can be.


Qualities the ideal money must possess

 The standard view about what qualities money as such must posses in order to serve its purpose well includes, from an Austrian economics perspective at least, as an absolutely necessary  minimum the following ones:

  • Portability/Convenience
  • Durability/Indestructibility
  • Homogeneity
  • Divisibility
  • General Acceptability

In what follows the three main contenders for serving the purpose of money will be compared with respect to the above listed qualities, i.e. their suitability for serving the consumer needs will be compared.  These three main contenders are in turn gold, paper notes and crypto-currencies.


This quality refers to the easiness of the money to be economically transported and conveniently used.  In other words, what is expected is the following: it must possess high value in small bulk.

Gold fares quite well on this point, but still far from perfect. Precious metals such as platinum and palladium are rarer and have historically had higher value for a given volume. In addition gold coins have considerable weight and bulk which is a detriment for their use in everyday monetary transactions.

Paper money could have considerably smaller bulk (for the same value) and weight (for the same bulk). In this respect they are better than gold when it comes to transportation or everyday use.

Bitcoin, however is a mathematical  abstraction and as such has no bulk or weight whatsoever. At the same time it can have an unlimited value as a digit. Thus Bitcoin, as an abstract has achieved the maximum achievable in this respect, i.e. unlimited value in zero bulk. In this respect Bitcoin is simply perfect if used as money, while gold lags far behind.


 Since gold is an inert metal it does not deteriorate in itself, but still it is susceptible to wear and tear. In particular, gold coins tend to wear out with time and usage. Gold is however indestructible in practice.

Paper money also wear out but they are replaceable, i.e. if a note is damaged it can be recreated a new. In this sense their  wear and tear is not important and they represent a better option than pure gold. Paper money however is easy to destruct (by being burned for instance).

Bitcoin, however, as an abstract cannot age or wear out. Thus in this respect Bitcoin has also reached the achievable maximum while gold  and paper money lag behind. One can destruct a Bitcoin by clearing the particular bitcoin wallet or by physical destruction of the computer where the data is kept.


 Gold fares quite well on this point, in particular: cold coins can be minted with the same chemical and physical composition and with the same consistency throughout the  mass.  Still, in order to prevent scams gold bars must typically be tested for consistency, which requires additional resources and effort.

Paper money can be produces easily to be homogeneous, i.e. that every note is exactly the same as any other. Still, to be sure one must verify that they correspond to the standard, i.e. that they have the particular protective/descriptive marks on them. The latter also requires resources, but is significantly cheaper than in the case of gold.

Bitcoin however is simply perfect in the respect, since parameters such as composition, mass, etc. simply do not apply to it. An abstract number is infinitely “homogeneous” so to say. Two mathematical  numbers differ only in value. We have no composition to check. So, here again Bitcoin has gone as far as is conceivably possible while gold and paper money are again behind.


 Gold can be separated into smaller or bigger coins, so it is quite good in this respect, but still there is a limit due the fact that it has a relatively big value in a fixed bulk. It is impractical to produce small denominations (i.e. cent value) for everyday use.

Paper money is better in this respect, since its divisibility is not determined by its bulk.  We could produce any denomination simply by printing it on a suitable (convenient) paper carrier. So, here paper money is better than gold.

Bitcoin however has achieved the perfection: as a mathematical abstraction it is infinitely divisible. We could use mili-, micro-, nano-, pico – coins if we wish. It is up to us to determine how it must be divided. Bitcoin’s divisibility is not limited by qualities such mass, weight, size, etc. So, here again Bitcoin is better than gold or paper money.

General Acceptability

 Gold has been generally accepted as money for at least  thousands  of  years so its general acceptability must be taken for granted.

Paper money is a more recent invention but its general acceptability must also be taken for granted, since it is in fact used for payment everywhere around the world.

Bitcoin however is something new and it is simply too early to say if it will be generally accepted as money. At present a partial but constantly growing acceptance is present. We cannot single out a clear winner here nor can we state that a tie exists.

We must note that this quality is not an independent one. The reason is that people would tend to accept something for money if it can serve its purpose as money better than the other available alternatives. What this however means is that the particular money must fare better on the previously mentioned points (Convenience, Durability, Homogeneity and Divisibility) in order to be accepted as money. Note that the latter is a prerequisite for the application of Mises regression theorem (independently of whether it is applicable to Bitcoin and/or paper money).

Because of the above reason this quality (general acceptability) has been included  here just because it has been widely discussed.


Bitcoin is not only well ahead of gold and paper money in 4 out of of the 5 qualities that money must posses so that it can serve its purpose. It is also perfect in these respects while gold and paper money are not. The overall conclusion is that crypto-currencies are better suited to serve the purpose of money than the rest of the alternatives. They would simply fulfill the needs/expectations of the market participants better.


Quantity of money and cost of production of gold, paper notes and crypto-currencies

 A basic view and a one which singles out the Austrian school of economics is that any quantity of money is sufficient to serve the needs of an economy. Another specific view is that the increase of the monetary supply must be the true definition of the term “inflation” and that inflation (an increase of the money supply) creates problems in the economy, in particular that it creates winners and losers from it and that it can lead to economic crises. The Austrian school of economics supports also the view that money by itself is not wealth.

Let us accept these views as given and apply them to the 100% reserve gold standard.

First, a short overview of what would happen from an economic point of view if the 100% gold standard was introduced. At present a minority of the population possesses gold except may be in a form of jewelry. Even nowadays, in times when gold is not officially recognized as money a big part of the produced gold is being hoarded, i.e. not used for industrial purposes or personal satisfaction. How would this situation change if the 100% gold standard was introduced? Due to the fact that gold would become money every person would need to have it as a part of its money holding so that he is able to transact on the market. What this means is that the demand for gold will skyrocket, while the supply will increase only to a certain extent. This will logically lead to  gold having a price many times higher than the one today. This higher price will naturally suppress its uses in the industry, since the companies will look for cheaper/more affordable alternatives. It will also suppress the usage of gold in jewelry. In effect most of the gold which will be mined/is available will be used for monetary purposes exclusively. As a personal guess I would stipulate that more than 90% of the gold stock will be used as money.  The mining of gold will increase due to its higher price, which will make even previously uneconomic sources to be mined.

Let us now try to assess the above situation with regard to the Austrian views already cited.

Since we know that any amount of money would be sufficient to serve an economy we must conclude that the future mining of gold will be in practice useless at the least. And the reason will be that gold mining will not contribute to the well-being of the economy. Since money is not wealth, then gold miners will not produce wealth in effect. Only 5 to 10 percent (at best) of the gold production will serve to increase the wealth of the economy, i.e. just the gold which will be used in the industry or for personal satisfaction. As already mentioned this proportion is expected to diminish significantly with respect to the situation nowadays because of the much higher price of gold under the 100% gold standard. In effect 90-95% of the effort of the gold miners will be non-productive. We could compare it to the Keynesian idea of  digging holes in the ground and filling them up again. In effect gold miners will not produce wealth while consuming wealth in the meantime. Money is not wealth. This will lead to the same re-distributive effects that the printing of fiat money has nowadays. The only difference will be the following: when fiat money is being printed no significant effort will be expended, but when gold will be mined a significant but non-productive effort will be made. In effect mining resources will be consumed without the corresponding pay off. Still, the effect will be the same as with the inflation nowadays, namely that a significant part of the economic resources will be re-distributed from wealth producers (the general population) to non-wealth producers ( the gold miners). In effect we will have inflation by the Austrian definition, i.e an increase of the monetary supply. It will be correct to say that the extent of this inflation will be lower than nowadays, but it will nevertheless exist. The inevitable consequence will be that the price signals in the economy will be distorted and a distortion in the structure of production will follow. It would be unlikely that a fully fledged economic crisis could develop, since the newly mined money will enter the economy at a constant or diminishing rate, but nevertheless the economy would have to constantly adjust to these distortions, which it turn means that it would function sub-optimally. In effect one should expect that the economic growth would be lower than in the fictional situation when gold was not being mined (because it was not allowed to be  mined or because was not available any more). At least a part of the reason for the diminished economic output would be due to the fact that an industrial metal (gold) which could have been used for production would not be available due to its prohibitively high price.

All of the above serves to show that the 100% gold standard will be far from perfection and will possess the same drawbacks of the fiat money which is used nowadays, but just to lesser extent.

Let us now turn our attention to the crypto-currencies, and to the main contender – Bitcoin in particular. Bitcoins are being mined by solving computationally complex cryptographic tasks. In the meantime this mining serves to validate the distributed network transactions without the need of a central authority (a trusted third party) to be present. According to the way Bitcoin is created, the supply of Bitcoins will end in some time in the future and mining will be getting progressively uneconomical. What is important to note is that each Bitcoin miner spends just a small (negligible) part of its resources (electricity in particular) for true validation of transactions. Most of the time and effort is expended on calculations from which no real economic benefit is present. The latter fact has been deliberately introduced in order to prevent (make uneconomical)  the possibility of cheating and to allow for agreement on the part of the network.

Let us now try to assess how Bitcoin fares with regard to the Austrian views about money mentioned before.

Bitcoins are being mined, so money is produced, which as we must admit is not actually needed. Any supply of Bitcoins would be able to serve  the needs of the economy. Similarly to the situation with gold under the 100% gold standard, Bitcoin miners would produce some value (when validating real transactions) but most of the time (probably about 95-99%) they will just waste resources (electricity in particular). What this means is that the great part of the resources will be used without a benefit to the economy as a whole. Thus resources will be transferred from wealth producers to non-wealth producers, leading to the already mentioned effect of wealth redistribution. We could similarly picture a Bitcoin miner from a Keynesian point of view as a person who 99% of the time digs holes and fills them up again and spends only 1% of his time productively. At the same time, since money will increase, then by the Austrian definition we will have inflation which distorts the price signals in the economy. Again: money is not wealth, so if we create Bitcoins we do not create wealth.

Overall Bitcoin seems to have similar drawbacks to the 100% reserve gold standard. However, when Bitcoin and crypto-currencies in general  are taken into perspective we have reasons to be optimistic. The Bitcoin supply will end at some time in the future and some other way for validating transactions and insuring agreement will have to be found, which could be much cheaper. There are already new ideas in this respect, such as using the “proof of stake” instead of the inefficient and resource consuming “proof of work” algorithm. Since the supply of money will end in the future then no inflation will be present. In short: While Bitcoin is not the ideal money nowadays it has the chance of becoming one. The latter does not apply to the 100% gold standard however.

It must be noted that from an economic point of view the best money one can have is one which is in a fixed quantity (does not increase or decrease) so that no inflation/deflation (in the Austrian definition) can be present. Since this ideal money will not be produced then no resources will be spend on unproductive purposes ( again: creating money does not create wealth). Thus the freed resources could be used for economic growth or for personal satisfaction, i.e. increasing the well-being of the particular society. In effect the  ideal money must be created once as cheaply as possible and used hopefully forever. Crypto-currencies can potentially satisfy this requirement while gold , when used as money cannot.

Costs for the support of the particular monetary standard

 The proponents of the 100% reserve gold standard picture its implementation in the following way: Gold will be kept in vaults while claims on gold  (gold substitutes) will be used for money in its place.

Let us first mention the fact that gold will not be used as money directly, i.e. in the form of coins to be used in exchange. The latter is an indirect, an implicit admission that gold by itself is not well suited for payment. In particular that its divisibility and convenience for use are not good enough. Gold coins are hard to produce in smaller denominations suitable for everyday exchange and in addition they have significant weight. This is actually the reason why gold is not expected to be used directly in exchange but through gold paper substitutes, i.e. the reason is gold’s imperfection to serve its purpose as a unit of exchange.

The expenses for keeping gold in vaults and protecting it will be significant. Since gold itself will not be used to satisfy some industry or personal need we must conclude that the economic resources  spent for storage and protection will not be productively used, i.e. that no new wealth will be produced or with other words: that wealth will be wasted.

Bitcoin on its part will have negligible expenses for support, since its security lies into the cryptographic algorithms used. Negligible resources must be spent on storage and physical protection. Whatever small resources for support will be expended will decrease along with the development of the computer technology. But as we well know the computer technology is the fastest developing branch of the economy at present.

In conclusion: From the above-mentioned point of view crypto-currencies represent a superior alternative to gold.


Additional considerations

When we take a look at the history of money as such we can observe a clear trend, namely that money with better qualities overtake the previous ones. Initially shells and similar items were used as money, but later gold as a superior alternative has been chosen. Basically, what we observe is a market trend for money to develop along with the technology and become better. Gold has initially been used as money directly, i.e. by minting and using gold coins in circulation. Later its usage  was improved by using gold substitutes (paper money) in place of gold.

If we accept the trend that the market develops and improves constantly the money then there is no reason to believe that gold is the ultimate solution/end of the money as such. In short: the fact that gold has been used as money throughout the history does not mean that it must always be used as such. Superior alternatives may appear and the market may choose them. Such possible new alternatives are the crypto-currencies. The market has not been able to use them until now because the technology on which they are based has not existed before. Similarly, paper money could not have been used before the technology became good enough so that paper notes be produced which are hard to counterfeit.

Another objection against the gold standard is that its possible introduction would be based on simple chance, namely the fact that gold is relatively rare. Note that there are other metals such as platinum which are even rarer, but they have not been generally used as money. Gold has had the chance to possess suitable qualities (easily malleable for instance)  and be in suitable quantity (not too little as in the case of platinum and not too much as in the case of iron). However, the latter fact is pure luck from a Geo-historical point of view. In a fictional/alternative history of the planet Earth gold could have been too abundant (as iron for instance) or too little (as rare earths). In such a case it would never have been chosen to serve the purpose of money. In short: having gold as money has been a matter of chance. But the fate of the human kind should not just be left to chance. Humans must be free to choose and develop the money they use. And that is where the crypto-currencies  could come into play. The offer the human kind the opportunity to be relatively more independent from the quirks of nature.



 The intention of the present article is to show that the 100% gold standard is not the ultimate end of money. The gold standard can be shown not to be perfect against the qualities money is supposed to have, such as divisibility, homogeneity, durability, etc. From this point of view the newly invented crypto-currencies are not simply better but close to the perfection.  From another point of view the 100% gold standard would introduce inflation (according to the Austrian definition of inflation) along with its concomitant consequences: wealth redistribution and crises (or lower economic growth). While crypto-currencies at present suffer from the same problems this need not be so in the future. The latter does not apply to gold. On the other hand the 100% reserve gold standard will require significant costs for support, while crypto-currencies will need negligible and constantly decreasing expenses in this respect. At the same time the usage of gold as money will prevent its use in the economy, which means a decreased economic output and lower potential growth in general. The latter problem would simply be non-existent with crypto-currencies. In the end the usage of gold as money seems to be pure luck from a geo-historical point of view. Gold could have been too abundant (as iron) or too little (as platinum) and thus not suitable for monetary use. In general we should not expect that just because god has been mostly used as money through the history of the humankind then this must always be so.  The market has always found ways to improve and offer better alternatives in forms of goods and services and we must not expect that money as such must be an exception to this trend.