The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

None of this would be possible without money playing the roles of medium of exchange to allow specialization; store of value to create future-orientation and incentivize individuals to direct resources to investment instead of consumption; and unit of account to allow economic calculation of profits and losses.

A one-time collapse in the value of a monetary medium is tragic, but at least it is over quickly and its holders can begin trading, saving, and calculating with a new one. But a slow drain of its monetary value over time will slowly transfer the wealth of its holders to those who can produce the medium at a low cost. This is a lesson worth remembering when we turn to the discussion of the soundness of government money in the later parts of the book.

a money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard-earned wealth for sale in exchange for something easy to produce.

Its tragic flaw, however, was that by centralizing the gold in the vaults of banks, and later central banks, it made it possible for banks and governments to increase the supply of money beyond the quantity of gold they held, devaluing the money and transferring part of its value from the money's legitimate holders to the governments and banks.

For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.

Ferdinand Lips summarizes this process with a lesson to modern readers: It should be of interest to modern Keynesian economists, as well as to the present generation of investors, that although the emperors of Rome frantically tried to “manage” their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them.

While Rome continued its economic, social, and cultural deterioration, finally collapsing in 476 AD, Byzantium survived for 1,123 years while the solidus became the longest-serving sound currency in human history.

Britain was the first to adopt a modern gold standard in 1717, under the direction of physicist Isaac Newton, who was the warden of the Royal Mint, and the gold standard would play a great role in Britain advancing its trade across its empire worldwide. Britain would remain under a gold standard until 1914,

This solved the problem of gold's salability across scales, making gold the best monetary medium—for as long as the banks hoarding people's gold would not increase the supply of papers they issued as receipts.

is the author's opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized. The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period. This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of bitcoin means he doesn't have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

A case can be made for the nineteenth century—in particular, the second half of it—being the greatest period for human flourishing, innovation, and achievement that the world had ever witnessed, and the monetary role of gold was pivotal to it.

Some of the most important technological, medical, economic, and artistic human achievements were invented during the era of the gold standard, which partly explains why it was known as la belle époque, or the beautiful era, across Europe.

With the majority of the world on one sound monetary unit, there was never a period that witnessed as much capital accumulation, global trade, restraint on government, and transformation of living standards worldwide. Not only were the economies of the west far freer back then, the societies themselves were far freer.

While the gold standard of the nineteenth century was arguably the closest thing that the world had ever seen to an ideal sound money, it nonetheless had its flaws. First, governments and banks were always creating media of exchange beyond the quantity of gold in their reserves. Second, many countries used not just gold in their reserves, but also currencies of other countries. Britain, as the global superpower at that time, had benefited from having its money used as a reserve currency all around the world, resulting in its reserves of gold being a tiny fraction of its outstanding money supply. With growing international trade relying on settlement of large quantities of money across the world, the Bank of England's banknotes became, in the minds of many at the time, “as good as gold.”

The fatal flaw of the gold standard at the heart of these two problems was that settlement in physical gold is cumbersome, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations—banks and central banks—leaving them vulnerable to being taken over by governments.

wealth can't be generated by tampering with the money supply, that allowing a sovereign the control of the money can only lead to them increasing their control of everyone's life, and that civilized human living itself rests on the integrity of money providing a solid foundation for trade and capital accumulation.

Mises himself well understood: The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavours to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills.

The twentieth century began with governments bringing their citizens' gold under their control through the invention of the modern central bank on the gold standard. As World War I started, the centralization of these reserves allowed these governments to expand the money supply beyond their gold reserves, reducing the value of their currency.

Had European nations remained on the gold standard, or had the people of Europe held their own gold in their own hands, forcing government to resort to taxation instead of inflation, history might have been different. It is likely that World War I would have been settled militarily within a few months of conflict, as one of the allied factions started running out of financing and faced difficulties in extracting wealth from a population that was not willing to part with its wealth to defend their regime's survival. But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people's accumulated wealth expropriated through inflation.

Freed from the final constraints of the pretense of gold redemption, the U.S. government expanded its monetary policy in unprecedented scale, causing a large drop in the purchasing power of the dollar, and a rise in prices across the board. Everyone and everything was blamed for the rise in prices by the U.S. government and its economists, except for the one actual source of the price rises, the increase in the supply of the U.S. dollar. Most other currencies fared even worse, as they were the victim of inflation of the U.S. dollars backing them, as well as the inflation by the central banks issuing them.

The market for foreign exchange, at $5 trillion of daily volume, exists purely as a result of this inefficiency of the absence of a single global homogeneous international currency.

Government control of money has turned money from being the reward for producing value to the reward for obedience to government officials.

This, in effect, takes wealth away from people who produce it and gives it to people who specialize in the control of money without actually producing things valued by society,

I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.

investment raises the productivity of the producer.

An important demonstration of the importance of time preference comes from the famous Stanford marshmallow experiment,

most important economic decisions to any individual's well-being are the ones they conduct in their trade-offs with their future self.

The main factor determining a man's choices in life is his time preference.

It is only through the lowering of time preference that individuals begin to appreciate investing in the long run and start prioritizing future outcomes.

Civilization is not about more capital accumulation per se; rather, it is about what capital accumulation allows humans to achieve, the flourishing and freedom to seek higher meaning in life

Observing prices of agricultural commodities in the Roman empire in terms of grams of gold shows they bear remarkable similarity to prices today.

Debt-fueled mass consumption is as much a normal part of capitalism as asphyxiation is a normal part of respiration.

while the total number of innovations rose in the twentieth century, the number of innovations per capita peaked in the nineteenth century.

It is no coincidence that Florentine and Venetian artists were the leaders of the Renaissance, as these were the two cities which led Europe in the adoption of sound money.

It was hard money that financed Bach's Brandenburg Concertos while easy money financed Miley Cyrus's twerks.

Only cheap pretentiousness, obscenity, and shock value attract attention to the naked emperor of modern art, and only long pretentious diatribes shaming others for not understanding the work give it value.

“The Use of Knowledge in Society,” by Friedrich Hayek, is arguably one of the most important economic papers to have ever been written. Unlike highly theoretical, inconsequential, and esoteric modern academic research that is read by nobody, the eleven pages of this paper continue to be read widely seventy years after its publication, and have had a lasting impact on the lives and businesses of many people worldwide,

In other words, the value of consumption deferred is less than the value of the capital borrowed. Without enough consumption deferred, there will not be enough capital, land, and labor resources diverted away from consumption goods toward higher-order capital goods at the earliest stages of production.

Creating new pieces of paper and digital entries to paper over the deficiency in savings does not magically increase society's physical capital stock; it only devalues the existing money supply and distorts prices.

The business cycle is the natural result of the manipulation of the interest rate distorting the market for capital by making investors imagine they can attain more capital than is available with the unsound money they have been given by the banks.

The central bank's meddling in the capital market is the root of all recessions and all the crises which most politicians, journalists, academics, and leftist activists like to blame on capitalism. Only through the central planning of the money supply can the price mechanism of the capital markets be corrupted to cause wide disruptions in the economy.

Whenever a government has started on the path of inflating the money supply, there is no escaping the negative consequences. If the central bank stops the inflation, interest rates rise, and a recession follows as many of the projects that were started are exposed as unprofitable and have to be abandoned, exposing the misallocation of resources and capital that took place. If the central bank were to continue its inflationary process indefinitely, it would just increase the scale of misallocations in the economy, wasting even more capital and making the inevitable recession even more painful.

Established in 1914, the U.S. Federal Reserve was in charge of a sharp contraction in reserves in 1920–21, and then the sharp bust of 1929, whose fallout lasted until the end of 1945. From then on, economic depressions became a regular and painful part of the economy, recurring every few years and providing justification for growing government intervention to handle their fallout.

The abandonment of the gold standard in 1914 through the suspension and limitation of exchanging paper money for gold by most governments began the period Hayek named monetary nationalism.

The World Bank estimates the GDP of all the world's countries combined at around $75 trillion for the year 2016. This means that the foreign exchange market is around 25 times as large as all the economic production that takes place in the entire planet.22

None of this would be necessary if only the world were to be based on a sound global monetary system that serves as a global unit of account and measure of value, allowing producers and consumers worldwide to have an accurate assessment of their costs and revenues, separating economic profitability from government policy. Hard money, by taking the question of supply out of the hands of governments and their economist-propagandists, would force everyone to be productive to society instead of seeking to get rich through the fool's errand of monetary manipulation.

Reading Hayek's Monetary Theory and the Trade Cycle, from 1933, or Rothbard's America's Great Depression, from 1963, is sufficient.

In contrast to these two schools of thought stands the classical tradition of economics, which is the culmination of hundreds of years of scholarship from around the world. Commonly referred to today as the Austrian school, in honor of the last great generation of economists from Austria in its golden age pre–World War I, this school draws on the work of Classical Scottish, French, Spanish, Arab, and Ancient Greek economists in explicating its understanding of economics. Unlike

If society were a little girl in that marshmallow experiment, Keynesian economics seeks to alter the experiment so that waiting would punish the girl by giving her half a marshmallow instead of two, making the entire concept of self-control and low time preference appear counterproductive. Indulging immediate pleasures is the more likely course of action economically, and that will then reflect on culture and society at large. The Austrian school, on the other hand, by preaching sound money, recognizes the reality of the trade-off that nature provides humans, and that if the child waits, there will be more reward for her, making her happier in the long run, encouraging her to defer her gratification to increase it.

The projects that beat inflation but do not offer positive real returns effectively reduce society's capital stock, but are nonetheless a rational alternative for investors because they reduce their capital slower than the depreciating currency. These investments are what Ludwig von Mises terms malinvestments—unprofitable projects and investments that only appear profitable during the period of inflation and artificially low interest rates, and whose unprofitability will be exposed as soon as inflation rates drop and interest rates rise, causing the bust part of the boom-and-bust cycle.