Better Money: Gold, Fiat, or Bitcoin?
by Lawrence H. White.
Cambridge University Press, 2023.
Paperback, 185 pages, $29.99.

Reviewed by David Weinberger.

If the last couple years have taught us anything about inflation, it is that the value of our money can rapidly decline. For many, this has raised questions about the nature of money and whether there may be a viable alternative money standard, such as gold or Bitcoin. In his new book Better Money, economist Dr. Lawrence H. White uses historical and economic analysis to evaluate the pros and cons of gold, Bitcoin, and the dollar to determine which one is likely to work best as money.

White begins by exploring the origins of money. Building on the insights of early economists like Adam Smith, White notes that early 20th century economist Carl Menger first put forward a complete theory of how money arose through market forces. Briefly, long before modern money, people engaged in direct exchange for items they produced. For example, a farmer would trade eggs for a butcher’s meat. But lugging around eggs and meat was not easy, especially since eggs break and meat spoils. Thus, instead of direct exchange traders quickly learned which items enjoyed widespread acceptance and sought to acquire them as “media of exchange.”  At various times and places, different media emerged, including salt, tobacco, and shells. Eventually, however, precious metals—gold and silver—won out. Not only are these metals desirable for personal enjoyment (jewelry and decoration), but they are durable, divisible, and difficult to counterfeit—exactly the qualities needed for sound money. 

After citing early historical evidence for this process, White explains how the mechanics of a metallic standard like gold work. Through a simple analogy, he draws a distinction between the “stock” of gold and the “flow” of gold: “The volume of water currently sitting in the bathtub is a stock; the rate at which warm water comes out of the faucet is a flow.” With these concepts in hand, he uses accessible supply-and-demand graphs to show why, if the demand to hold gold rises and thus purchasing power increases, miners expand output and bring more gold to market. Thus, as the (stock) supply of gold increases to meet the demand, purchasing power moves back toward (flow) equilibrium. Conversely, if the demand for gold falls and purchasing power declines, miners reduce production until (stock) supply falls to (flow) equilibrium. In this way, says White, “in the long run, an increased stock demand for monetary gold is met entirely by increased production of gold. Automatic market forces return the purchasing power of gold to normal after such a disturbance.”

Furthermore, the historical record reveals that the mechanics of the gold standard were not only flexible enough to accommodate growing economies, but that they also proved largely successful in maintaining the purchasing power of gold over time. And yet, as White points out, many economists today doubt the viability of a gold standard. In their view it is too primitive for the complexity of the modern world. But according to White, these doubts often rest on misunderstandings. This is because, he tells us, relatively few economists today have seriously studied a gold standard. Instead, they have uncritically accepted the conventional wisdom regarding both the need for a central bank and the shortcomings of gold. For example, writes White, “monetary economists on the whole are reluctant to criticize the policy choices of the central bank because the central bank is by far their largest employer.” Furthermore, he adds, academic economists tend to “consider the aim of scientific economics to be the prediction and control of economic phenomena, not just their explanation. An automatically self-governing gold standard does not make use of their expertise at optimizing economic systems, so they find it primitive.”

Nonetheless, after responding to several common objections against gold, White turns to appraising “fiat” (meaning “government decreed”) money, or the dollar. He looks not only at popular modern theories of money, including the “Quantity Theory of Money,” but also at fiat’s performance on inflation. He points out that “over the fifty years after August 1971 [when President Nixon took the United States completely off of the gold standard], the Consumer Price Index for All Urban Consumers (CPI-U) rose a cumulative 569 percent, for an average annual inflation rate of 3.9 percent. The average annual US CPI inflation rate during the period of the classical gold standard (1879-1913), by contrast, was 0.13 percent.” 

Another problem White sees with fiat is that, despite whatever advantages it may enjoy in theory, in practice central banks have typically acted either too early or too late to changing economic conditions, which has led to increased volatility. By contrast, he argues that a gold standard better responds to economic circumstances since the mechanics described above are automatic and thus do not depend on the foresight of central decision makers, thereby making it more stable as a medium of exchange.

In the final part of the book, White evaluates Bitcoin. After taking the reader through an interesting history of the origins and growth of the technology in cryptocurrency, he weighs the pros and cons of Bitcoin as a potential money. One disadvantage he sees is that, because the supply of Bitcoin is fixed, changes in money demand cause “unmitigated changes in purchasing power,” meaning high volatility. On the other hand, he says, precisely because the total number of coins is predetermined, Bitcoin will not experience surprises in supply, “unlike the path of the stock of monetary gold under a gold standard (there were some surprising upward shifts in annual output, like the California gold rush) or the stock of fiat base money under a fiat standard.” Still, in the end White says that because of its volatility Bitcoin is unlikely to ever be adopted as a medium of exchange.

Whatever one makes of this conclusion or any other in the book, there can be no doubt that White succeeds in presenting the complexity of money and its purpose in a way that is both informative and friendly to the general reader. For that, “Better Money” makes a worthwhile read.

David Weinberger is a freelance writer and book reviewer on topics related to philosophy, culture, history, and economics. Follow him on Twitter @DWeinberger03.

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