Gold as medieval cryptographic paper

October 22, 2016 § 32 Comments

An important feature of cryptography is authentication: the ability to verify that a document comes from who it claims to come from and has the authority it claims to have. Authentication is a feature of the medium in which a message is delivered: it is not the message itself.

There are two kinds of financial securities, for present purposes: bearer securities and securities which must be cleared when they are transferred. The latter sort have to pass through a transfer agent who verifies the identities of the parties and the legitimacy of the transfer of rights.  Rights are not technically transferred until the check clears, and if someone is being dishonest we know who they are and can hunt them down.

But bearer securities transfer the rights they represent immediately, with transfer of possession.  They don’t leave a paper trail, and it has to be possible within reason to authenticate them as they are.

Folks are always asking me to speculate about why gold or silver was the printing medium of choice for bearer securities (in particular sovereign currency) for much of premodern history.  Whatever else may be the case, it seems obvious that premodern sovereigns had limited choices of available counterfeit-resistant print media from which to choose.

As for why masses of people tend to think that the value inheres in the print media rather than the financial security it represents, that obviously involves mass psychology about why lots of people  have wrong ideas about something or other. It isn’t as if the mass of humanity has a good track record of being right about politically and religiously charged subjects. Centuries of rampant usury has doubtless contributed to a mass illusion wherein many folks can’t tell the difference between actual bread and a promise of bread, and it is an especially modern error to conflate medium and message. At the end of the day what matters is what is true though, not the results of a popularity contest.

If you find yourself psychologically in need of a reason why gold was a favored medium for bearer securities before the modern age, you need look no further than the development of cheaper counterfeit-resistant print media.  And you should probably work on your own demotic resistance to the fact that a whole lot of the time the great mass of human beings muddle through without really understanding what is going on.

§ 32 Responses to Gold as medieval cryptographic paper

  • Johannes says:

    Well, here I am in the demotic category again.

    I thought people used gold because it was valuable–probably because it was beautiful and rare. I didn’t think what was printed on it made any difference, really. You could melt the stuff and make bigger chunks of it.

    I am supposing that gold is still valuable. If you do not think so, ZIppy, could I ask you to divest yourself of the worthless stuff and send it my way. It is the least I could do for you for all the valuable information that you are dispensing these days!

  • Zippy says:

    I’ll happily send you all of the gold and gold securities in my investment portfolio. Here is a complete inventory:

  • Johannes says:

    Ha! So generous!

    You have probably covered this before, but why don’t you have any confidence in gold as something that might retain value?

    I know a lot of Catholics loading up on gold for the coming financial apocalypse.

    By the way, I will accept any rings, necklaces, watches, etc, that remind you of their worthlessness.

  • Zippy says:


    I don’t own an appreciable amount of gold at all. It is not a productive asset and is of at best infinitesimal utility to me personally as a consumable. I don’t wear a watch. There is probably more of it in electrical connectors in my personal property than anywhere else.

    I think buying gold for an apocalypse scenario is foolish. Buy guns and ammo if the goal is to preserve wealth in an apocalypse; or create the ability to make antibiotics in whatever scenario you envision. There are thousands of possibilities which make more sense than hoarding a useless pretty metal that you can’t eat and that nobody needs to survive.

    But realize that you can’t predict how an apocalypse is going to go, and that the preparations you make could be the very thing that gets you enslaved or killed.

  • Johannes says:

    Ok! Duly noted. So, why, exactly, would gold not be a good investment in normal times? (Forget the apocalypse.) And don’t worry about hurting my feelings; I don’t own any gold securities.

    (Sorry you don’t have a nice watch, like my Easy-Reader Timex.)

  • Kidd Cudi says:

    “good investment” is a more tricky subject than you’d think. Good compared to what? Zippy probably thinks gold is a better investment than bitcoins, because at least gold has an industrial use, whereas bitcoins do not.

    However, if you’re measuring a good investment by the wealth you retain when you exit, then the real answer is that no one truly knows what will or will not be a good investment. All we have is statistics and probabilities and reasons for hunches about the future. No one has a crystal ball, though.

    It’s very easy to make money from a single bad decision. See gambling. It’s very hard to make money from consistent bad decisions. See gambling.

    I think the real reason Zippy doesn’t own gold is that he has other things which he expects to perform better than gold.

    Why is gold a bad investment? Because it does not produce anything. Companies do.

    All that being said, I personally have shares in a few gold mining companies because although in reality gold has very little utility, people are very willing to ignore reality, and so I expect to profit off the foolishness of others.

  • Johannes says:

    I notice that a great number of articles used in the Church contain gold. Now, really, Kidd Cudi, should you profit off of the Church’s foolishness?

  • Hrodgar says:

    The whole “Gold v. Apocalypse” thing bugs me on a couple levels.

    For one, as Zippy just mentioned, gold by itself does astonishingly little for your ability to survive. It’s good for electronics and it’s pretty durable (doesn’t oxidize at any rate; probably another reason it was used as currency, since it was a lot harder to recall coins and issue new ones back then), but not a whole lot else.

    In a scenario of more or less total societal collapse (which seems to be the gold-standard for apocalypses in fiction and what most folks are thinking of when they talk about it), even if folks are willing to trade for it rather than simply stealing it, that puts you in the position of trading something less valuable for things you actually need, taking advantage of your fellow man’s irrational tendency to over-value gold. Sure, you may also irrationally over-value gold, thus mitigating your culpability, but that doesn’t change what is in fact going on.

    For two, in any high risk and rapidly changing scenario flexibility, adaptability, and mobility have a higher premium re: survival than pretty much any particular form of property. Getting too attached to material things can kill you even in just the temporal sense, setting aside the state of your soul. An account of Cortez’s flight from Tenochtitlan, for instance, attributes the deaths of most of the soldiers that died during the movement to the fact that they got greedy and weighed themselves down with too much gold.

    In a nutshell, outside of a tolerably stable society, gold mostly serves to slow you down and kill you. Even in a tolerably stable society, it’s mostly only good for decoration, electronics and protection against the elements.

  • Hrodgar says:

    Gold might occasionally be a good investment in “normal times,” but that would depend both on circumstances and the investor’s objectives.

  • Zippy says:


    I don’t give investment advice but I’ll tell you what I (don’t) do and why.

    I don’t invest in gold itself because it is not productive (as Kidd Cudi says). Maintaining it is pure ontological cost with no offsetting production.

    I don’t invest in related productive businesses (e.g. mining) either long or short because the market for the end product (gold) is wildly irrational. All markets suffer from the limitations of human reason, but some much moreso than others. Gold markets represent peak human anti-realist economic irrationality — or I would have thought so before bitcoin.

    Standard disclaimer:
    It is possible that one of my managed accounts or mutual funds holds a small non-severable long or short position in some gold related products or services. Also, since I own some ‘total market’ securities (e.g. VTI) there is probably a small bit of non-severable gold related stuff in there.

  • Zippy says:

    Shorter version:

    I invest when I am convinced that there is a rational case to do so.

    It is impossible to rationally invest in a fundamentally irrational market. (It is possible to gamble in a fundamentally irrational market. Gambling is not investing).

    Gold and its directly derivative markets are fundamentally irrational.

    Therefore I do not invest in gold and its directly derivative markets.

  • Mike T says:

    I think buying gold for an apocalypse scenario is foolish. Buy guns and ammo if the goal is to preserve wealth in an apocalypse; or create the ability to make antibiotics in whatever scenario you envision. There are thousands of possibilities which make more sense than hoarding a useless pretty metal that you can’t eat and that nobody needs to survive.

    Gold and silver should never be your primary commodity in such a scenario. However, they are rational investments for you provided you do so as a way of exploiting human irrationality. Plenty of people would still love to get some gold or silver in that scenario. It’s stupid, but then holding all of your money in bank deposits is seen as a perfectly rational strategy today by the majority.

  • Tom says:

    One of the best “apocalyptic” scenarios for gold is fleeing a country – the people who fled Germany and were able to escape with some gold had something that could be traded elsewhere – it is dense, keeps well, and usually has some value anywhere.

    Now owning usurious companies in VTI, that’s something I’m still working out (as I also do it); perhaps it’s worse than owning gold?

  • ignacy says:

    I definitely agree that anti-counterfeiting properties of gold have significantly contributed to it being chosen as printing medium.

    However, I’m pretty sure that the value of gold isn’t something to be easily dismissed as a factor in a choice of that medium. The sovereign has incentives to have valuable tokens and might want to peg the value of these tokens to some asset or a basket of assets (sacrificing his financial sovereignty in the process). This is essentially how currency board functions even nowadays.

  • Zippy says:


    The moral question is distinct. It could be perfectly rational qua investment strategy to invest in the slave trade or pornography as part of an optimized investment strategy.

    Gold in a “go bag” should probably be considered a distinct prepper LARP exercise. Investing in skills still might be a better bet, but of course as authors of the hypothetical scenarios and their complications (e.g. robbery and murder) we could probably beg whatever questions we want.

  • ignacy says:

    The sovereign has incentives to have valuable tokens and might want to peg the value of these tokens to some asset

    The peg I’m talking about doesn’t even necessitate holding that asset or printing tokens on it, it merely is an announcement that the exchange ratio of tokens to that asset is fixed. How can that be credibly maintained is a different question.

    As a side note, it could be argued that currently USA have a sort of CPI standard (instead of gold standard), where the Fed pegs the value of the dollar to the index of prices (or a rate of change of that index).

  • Zippy says:


    That is a good point about incentives.

    No doubt there is some temptation for smaller sovereigns to abdicate sovereignty in return for stability — this is true for sovereignty in general not just in its financial aspect. There is also temptation for larger sovereigns to consolidate smaller ones – kind of like sovereign mergers and acquisitions. The EU was basically a sovereign financial merger.

    The stock price of a small startup can be wildly unstable, its volatility could be mitigated by carrying a large base of non-operating capital, and a similar scale effect is at work here. (Note though that most startups don’t do this because it is very financially inefficient. It is better to just get acquired if it comes to it).

    As scale goes up the feasibility of carrying dead weight on the balance sheet at such a massive scale reverses and the incentive, such as it is, goes away. If the balance sheet of USG is proportional to the US economy it would require storage of far more gold than actually exists, and unquestionably would be counterproductive in terms of financial waste and stability.

  • Zippy says:

    A ‘peg’ can be established when the sovereign agrees to buy certain assets (through whatever circuitous process) for a particular number of his tax vouchers. His capacity to back that up depends on his market power. It is basically the same as Google making a stock offering at a specific price: this will naturally establish the current trading price of Google stock.

    But of course their capacity to ‘dictate’ this price depends upon their market power.

  • Andrew E. says:

    a whole lot of the time the great mass of human beings muddle through without really understanding what is going on.

    But Zippy knows what’s really going on!!

  • Zippy says:

    Tragically, some people on the Internet disagree with me.

  • vishmehr24 says:

    Zippy’s brand of realism consists in holding all people deluded on fundamental points all the time. It may be very metaphysical but I wonder what would Chesterton have said on such an anti-democratric sentiment.

    Is a gold coin really a “gold-printed bearer security”? What does it even mean?

  • vishmehr24 says:

    This sort of rationalism smacks of rationalism of Rights of Man and Temples of Reason.
    What if gold is irrational. Kings and bishops were also irrational.
    However, the deeper rationality of gold or silver or any metal-I supsect Zippy understands but does not like. That the value of these is not set by the sovereign but by the market. The point with gold is not it is a good investment but politically it is a check on the sovereign. And this Zippy appraently finds intolerable.
    Incidentally, why disparage the decorative value of gold? Should the value of a painting be held to its industrial value too?

  • Zippy says:


    Your feelings are noted.

    Also your perplexity, since no institution has the power to arbitrarily set the value of its securities without limit.

  • Zippy says:

    Folks who want to see reasonable limits on what the sovereign does financially might consider the fact that actually understanding sovereign finances is a first step in the direction of being able to audit them, as opposed to engaging in ignorant raving.

  • donnie says:


    Quite a few people I know personally are impressed by this video that’s been making the rounds on the internet.

    Apparently people find this to be a devastating critique of how the incentive structures of both liberal (democratic) and illiberal (monarchy/dictatorship) governments do exactly the same thing: incentivize those in power to act in ways contrary to the interests of the citizenry. Most of the points made are not especially noteworthy if you’re familiar with the writings of Machiavelli, but it is well-presented.

    What I did find interesting though, is how the crux of all the video’s arguments hinges on the notion that cash is everything when it comes to ruling a sovereign state. The sovereign needs money to maintain his castles, feed his court, keep his powerful vassals happy, reinforce his military, and still have enough left over to improve the lives of his subjects (or not).

    But if sovereign finance is an unexplored mystery, with the national debt being non-existent and the sovereign balance sheet a complete unknown, it would seem that developing a realist system of sovereign finance would more or less eliminate the perverse incentive structures described here.

  • vishmehr24 says:

    Zippy manages to leave out the point that a metal coin (or printing medium of choice for bearer securities) derives its value from the amount of metal contained in it. Its value does not depend on the sovereign that prints his picture upon it. Thus, it is certainly not analogous to the fiat currency that derive its value entirely from the sovereign’s promise to honor it.

  • Zippy says:


    A security printed on metal (e.g. a metal coin) derives its value from both the security (the financial commitment of the issuing institution) and the metal. This distorts the market price of both the security and the metal, and confuses folks about what they are dealing with.

    The same is true technically of securities printed on paper; but because paper is so cheap it is far less of a problem.

    Confusing metals and securities with each other makes both less transparent, not more. That is why fiat currency is more transparent and honest than gold backed currency. Gold backed currency pretends to be two things at once, and your ongoing confusion about the subject is frankly in itself a demonstration of the point.

  • Zippy says:

    People do have very wrong ideas about both money and sovereign finance; and critiques which depend upon wrong ideas are themselves also wrong — obvious I suppose, but worth saying nonetheless.

    I doubt that more transparent metaphysical realism in sovereign finance would eliminate perverse incentives, but it would probably at least be an improvement over troupes of dart throwing monkeys convinced that their dart game is the pinnacle of financial reason.

  • […] things that aren’t true about sovereign finance, and can’t tell the difference between a financial security and the media upon which it is printed; so they […]

  • donnie says:


    I couldn’t count for you how many times I’ve come across people who share Churchill’s belief that democracy is the worst form of government, except for all the other forms that have been tried. It’s not hard for people to see the problems with liberal governance, what is difficult is getting them to renounce liberal governance in favor of something better. Modern people simply don’t believe there is something better.

    Common concerns with traditional, authoritarian governance seem to be summed up well in the video: authoritarian rulers have little incentive to improve the lives of their subjects. Democratically elected rulers also have little incentive to improve the lives of their subjects either, but at least their perverse incentives are arranged in a way so that a well-educated, productive citizenry becomes a positive externality of the perverse arrangement.

    I don’t think the concerns are unfounded. Rulers are people, and are just as susceptible to anti-realist thinking when it comes to taxation and government spending as the rest of us. Just because taxation isn’t actually income to the sovereign doesn’t mean the sovereign won’t think of it in this way.

    My hunch is that, once the reality of sovereign finance is understood, it will eliminate the temptation for authoritarian rulers to treat taxes as if they were income to the ruler. And once this is eliminated, the fear of reverting to an authoritarian form of governance will (hopefully) be largely alleviated.

  • Zippy says:


    My hunch is that, once the reality of sovereign finance is understood, it will eliminate the temptation for authoritarian rulers to treat taxes as if they were income to the ruler. And once this is eliminated, the fear of reverting to an authoritarian form of governance will (hopefully) be largely alleviated.

    Those are good thoughts. Notice how company founders will sometimes go without a salary. That isn’t because they lack self interest. It is because, objectively, to them, salary is trivial in the scheme of things. There is plausibly something that vaguely rhymes with that when it comes to the sovereign and taxes.

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