– January 4, 2020

There are a lot of good economic lessons to be learned from popular culture. Perhaps that’s not surprising, as the subject matter of economics is ingrained in our very humanity and movies and the arts reflect aspects of human life. By chance alone, some of that creative work ought to carry with it some profound economic wisdom.

For instance, take the last Hobbit movie, The Battle of the Five Armies, set in the fictional fantasy world of Middle Earth and centered around the mountain Erebor. Preceding the events of the Lord of the Rings by some 60 years, The Hobbit features Bilbo on some of his adventures, teaming up with dwarves for an epic quest to reclaim their ancestral home in the depths of Erebor. 

Next to the mountain lies a large, cold lake upon which a human settlement of a few thousand inhabitants have carved out what looks like a subsistence living under a particularly callous king. Once, under the dwarven kingdoms of old, trade flourished in this region, ensuring a much higher standard of living for the people of Lake Town, fueled by the raw material that the dwarves dug from the depths of Erebor.

The glimpses we get from within the mountain’s grand halls bear witness to an almost endless amount of shiny gold coins, goblets, diamonds, and other jewelry. In the preceding movie, the dragon who ousted the dwarves from their mountain generations ago sat on this massive treasure, placing a large and intimidating barrier between our heroic dwarves and their goal. 

Michael Noer at Forbes estimates the dragon’s wealth at some $62 billion, enough to place you in the top seven wealthiest people of our world. We might quibble over numerical details and how plausible Noer’s implied exchange rate is, but the point still stands: there’s an awful lot of gold in that mountain. 

Having removed the dragon that guarded the immense treasure, the dozen or so dwarves take to defending the fortress against noisy humans, greedy elves, and — unbeknownst to the dwarves — rapidly approaching orc armies. Before the latter armies arrive at Erebor for the some of the epic fighting scenes for which all Lord of the Rings movies are known, elves, humans, and dwarves are quibbling over the mountain’s endless treasures of gold.

“On behalf of the people of Lake Town, I ask that you honor your pledge — a share of the treasure so that they might rebuild their lives,” proclaims Bard, the reluctant but de facto leader of the humans. 

“I came to reclaim something of mine,” says the ferocious yet elegant elf leader Thranduil as a justification for why his horde of military elves have stationed themselves right outside the entrance to Erebor. “There are gems in the mountain that I too desire. White gems of pure starlight.”

All of them desire the “wealth” of the mountain, yet nobody asks what for. After the dragon destroyed the entire human settlement and most of the capital involved in their very basic lines of production, there is nothing left to buy with this treasure of gold. 

Admittedly, there are other lands in Middle Earth, civilizations where — presumably — gold is a valuable commodity and an acceptable means of payment for the food, shelter, steel, livestock, or other items of survival that a Middle Earther might need and want. But that requires you to physically transport even a small amount of gold to those markets (and the items back to the humans who made it out of Lake Town), which seems entirely impossible given the mountainous and inhospitable areas in which the story takes place and the destitute nature of the frail human community. 

With some economics in the back of your head, the humans’ decision to march toward Erebor seeking part of the treasure after they’ve lost their homes, equipment, fishing nets, and boats makes no sense at all. Sure, the mountain contains endless quantities of gold of which Thorin, the dwarf king, has promised them some. A common saying, apocryphally accredited to Native American tribes, states that after you’ve emptied the natural resources of the land, “you will realize that you cannot eat money.” There is even a documentary about Native Americans in Alaska opposing gold mining, appropriate titled We Can’t Eat Gold

The same applies for Bard and his human followers. 

In 1776, Adam Smith taught us (or assembled previous economic wisdom of others) that the wealth of a nation does not consist of its gold stock, but the productive capabilities of the economy. Why? Because the purpose of production — or indeed of the lives most humans want to live — is not hoarding gold coins, as mercantilists of ages past used to believe and children of today watching Scrooge McDuck quickly discover. Even J.K. Rowling’s enchanted world of Harry Potter gets this wrong, where the wizard bank Gringotts is stuffed with gold in every vault from an altogether questionable real economy

Instead, we produce in order to consume; we acquire money — be it gold, lines of code, or liabilities of some trusted third party — so that we can give it away in exchange for things we really want. Money is merely an intermediary between production and consumption that is separated by time, place, and individuals. 

This speaks to the heart of monetary economics, which goldbugs and their recent intellectual brethren — bitcoin maximalists — have completely misunderstood. They never cease to make the following point: a thousand years hence, an ounce of gold will still be an ounce of gold; one bitcoin will always be 1/21 millionth of the total money supply (actually more, since a good number of bitcoins are irrevocably lost). One jewel in the halls of Erebor will always be one jewel. 

They make this claim, believing erroneously that it is an argument against fiat currencies or that it sets gold or bitcoin apart from any other currency. It doesn’t. Provided that nobody destroyed it, the unit of every piece of money will always be one. We can imagine that the holder of the Weimar Republic’s soon-to-be-inflated notes on the eve of hyperinflation similarly said, “A mark is always a mark” — which, despite its disastrous history as a monetary unit, it still is, as 100-mark notes sell on eBay for a few dollars plus shipping. 

A monetary unit, no matter its durability or the rigidity of its supply schedule, only has value to us insofar as it can be exchanged for goods and services. That means we’re not primarily concerned about the money supply or how expandable that supply is, but — as with all things in economics — the relationship between supply and demand. If nobody wants to hold or accept gold, dollars, bitcoins, or dragon-smelling Erebor-dusty jewels, their physical appearance and all other qualities they may have are all for naught. 

Rather than making their durable yellow metal into a no-brainer investment, goldbugs mistake physical characteristics for economic desire. Bitcoin maximalists believe that bitcoin is the best-suited money because of its “hardness.” Both sadly forget that no matter the quality of the technical unit, any store of value is exposed to market risks, which is to say its ability to be exchanged, at variable prices, into goods and services that consumers ultimately want. This holds even if their utopia, where gold or bitcoin is the main unit of account and medium of exchange, were to be realized. 

The service that money provides our societies (its stored-up purchasing power — that is, its ability to separate consumption from production, temporally and geographically) is a relationship between these two phenomena: the unalterable unit that bitcoiners and goldbugs so adore, and the price level at which those goods can be exchanged. 

Following the title of their recent book Money, Currency and Crisis: In Search of Trust, 2000 BC to AD 2000, the Dutch historians R.J. van der Spek and Bas van Leeuwen astutely conclude that “the recurring point in all stories of money [is] trust.” 

Despite bitcoiners’ endless rants about “trustless transactions” and “censorship resistance,” the purchasing power of bitcoin (or any other monetary unit) is still subject to trust: trust that a sufficient number of other people will accept it at a future date at roughly the same exchange rates (i.e., prices) as those at which one first acquired the money.

When we put it that way, the frequent claims about gold’s and bitcoin’s unbeatable durability become obviously much less persuasive. So what, we might reply; that’s not the main quality we’re looking for in a good money. 

What we care about is not a currency’s natural, mandated, or technically designed supply, but what goods and services we might get for our tokens of monetary value. Maybe our bitcoiner and goldbug friends ought to re-watch The Hobbit for some monetary lessons.  

Joakim Book

Joakim Book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019. His work has been featured in the Financial Times, FT Alphaville, Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property Chronicle and many other outlets. He is a regular contributor and co-founder of the Swedish liberty site Cospaia.se, and a frequent writer at CapXNotesOnLiberty, and HumanProgress.org.

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