Many commentators compare Bitcoin with gold, the idea being that its finite supply makes it an attractive long-term store of value. There have been historical examples of broad adoption of gold currencies, such as the British Empire’s sovereign and half-sovereign. However, adoption of the sovereigns was often promoted and directed by the British imperial government, much to the dismay of local administrators who often suffered currency shortages. Bitcoin has no nation state to promote its adoption, so the comparison between it and gold sovereigns is a weak one. One of the world’s most heavily used silver currencies, the Spanish silver dollar, may offer a better comparison.
The Spanish silver dollar, or reale as it was originally known, was unusual because it prospered as a trade currency while Spain, its nation of origin, declined. In addition, it was adopted in countries that were never Spanish colonies, thus violating the premise that a currency can only thrive if it has a strong home country promoting its use. The three main factors behind the reale’s success were its availability, quality and verifiability.
The reale was created in 1497, five years after Columbus landed in America, when King Ferdinand and Queen Isabella reformed Spain’s monetary system through the Pragmatica de Medina del Campo. The new silver reale could be divided into eight parts, hence ‘pieces of eight’. Note that it is not to be confused with ‘doubloons’, which were made from gold.
Fifty years later in 1545 the Spanish discovered the Cerro de Potosi in present day Bolivia, which was the richest source of silver in the history of the world. A shortage of coins led to the Spanish crown permitting the minting of reales in New Spain in 1535. At the same time, Portuguese explorers had discovered not only the route to the Indies and China, thus sidestepping the Arabs and the Venetians who traded in gold ducats along the Silk Route, but also that merchants in East Asia preferred silver over gold. Chinese demand was particularly large as a shortage of bronze used in the coins of the Ming dynasty forced merchants to seek alternatives. Demand for silver soon outstripped both Chinese and Japanese supply, creating a ready market for the regular shipments of reales from the colonies of New Spain to the Philippines, another Spanish colony.
Its adoption spread throughout the Americas such that by 1792 it was the de facto currency of the newly independent United States. Indeed, when the US dollar was first issued it was pegged to the reale. 87 years later in 1879 China would do the same thing, pegging its new yuan to the reale or the Mexican peso as it was then known. The growth of the Spanish Empire therefore provided the distribution and availability across both America and Asia, which was the first step towards its success.
The second factor was that the Spanish government ensured the reale’s quality stayed consistent, which in turn meant its value remained stable. Unlike many other currencies of the era, the reale was subject to very limited debasement. However, while the reale remained strong, the domestic Spanish economy weakened. Efforts to combat inflation, some of which involved debasing the domestic vellon coinage, stifled exports and encouraged imports and further crippled the Spanish economy. These policies, when combined with the demands of continuous conflict and profligate royal spending, ultimately led to a great deal of the silver reales being exported to the rest of Europe. The other European nations, particularly the Dutch and the British, were keen to compete with the Spanish empire and so needed the silver to buy tea, silks and spices from China and Asia. The early English East India Company had started out by trying to sell heavy woollen cloth in India and China, unsurprisingly with very limited success. Using silver reales was much easier.
The final factor in the reale’s success was verifiability. Other countries had tried to replicate the reale, but even foreign coins of the same quality and weight were rejected by Chinese and Asian traders, since it was easier to assume that the Spanish reales were consistent. The US was one such unsuccessful competitor. In 1872 the US Treasury noted that while the reale commanded a 6-8% premium in East Asia, American silver suffered a 2% discount. Therefore in 1873 the US Coinage Act authorised the creation of a US ‘Trade dollar’. This new coin came to be known as the ‘Eagle dollar’ owing to its Bald Eagle design. The US expected to profit from seigniorage based on the belief that most of the Eagles would never cross back across the Pacific to where they could be redeemed.
The Eagle had mixed success. Despite an endorsement by the Tongzhi Emperor, it was adopted to a limited extent in the south of China, but not the north. More disappointingly, as the value of silver fell the Eagle started reappearing in the US where its silver content was less than its face value, leading to redemptions. It was gradually phased out and, indeed, from 1873 many countries started to migrate to the gold standard.
So, the question remains whether Bitcoin, which has no nation at all, could ever be treated as a trade currency. Like the Spanish silver dollar it is, in principle, abundantly available since it sits on the open internet. Where the reale was of consistent weight and purity so Bitcoin has a consistent design and structure. The maths that underpins it is the same in any country. Where the reale had earned what was effectively brand recognition, allowing it to be easily recognised by holders, so Bitcoin is easily verifiable because it sits on a public ledger with a hashed immutable structure. It took the reale about a hundred years to gain its recognition and status and the same may be true, in time, of Bitcoin. While there may be criticism of Bitcoin’s suitability as a means of exchange, which the reale certainly had, what is undeniable is that Bitcoin shares several of the features of success that underpinned adoption of the reale in its availability, quality and verifiability.
That one currency achieved wide adoption as its home nation was in decline was remarkable. That Bitcoin has achieved this with no home nation at all is even more remarkable.
This is a guest post by Nick Philpott. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.