The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Bitcoin will go through hiccups. It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated espresso macchiato at your local virtue‐signaling coffee chain. It may be too volatile to be a currency for now. But it is the first organic currency. But its mere existence is an insurance policy that will remind governments that the last object the establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.

Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.

The simplest way for people to exchange value is to exchange valuable goods with one another.

Physical integrity through time, however, is a necessary but insufficient condition for salability across time, as it is possible for a good to lose its value significantly even if its physical condition remains unchanged. For the good to maintain its value, it is also necessary that the supply of the good not increase too drastically during the period during which the holder owns it.

forms of money throughout history is the presence of some mechanism to restrain the production of new units of the good to maintain the value of the existing units.

Hence, Austrian economists are rarely dogmatic or objectivist in their definition of sound money, defining it not as a specific good or commodity, but as whichever money emerges freely chosen on the market by the people who transact with it, not imposed on them by coercive authority, and money whose value is determined through market interaction, and not through government imposition.

In this society money serves as a metric with which to measure interpersonal value; it rewards producers to the extent that they contribute value to others, and signifies to consumers how much they need to pay to obtain their desired goods.

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.

European settlers adopted seashells as legal tender from 1636, but as more and more British gold and silver coins started flowing to North America, these were preferred as a medium of exchange due to their uniformity, allowing for better and more uniform price denomination and giving them higher salability.

These historical facts are still apparent in the English language, as the word pecuniary is derived from pecus, the Latin word for cattle, while the word salary is derived from sal, the Latin word for salt.

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.

As human technical capacity for the production of goods became more sophisticated, and our utilization of metals and commodities grew, many metals started getting produced at large enough quantities and were in large enough demand to make them highly salable and suited for being used as monetary media. These metals' density and relatively high value made moving them around easy, easier than salt or cattle, making them highly salable across space. The production of metals was initially not easy, making it hard to increase their supply quickly and giving them good salability across time.

Byzantium survived for 1,123 years while the solidus became the longest‐serving sound currency in human history.

With the economic liberation of the European peasantry came the political, scientific, intellectual, and cultural flourishing of the Italian city‐states, which later spread across the European continent. Whether in Rome, Constantinople, Florence, or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction.

It 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 common name for government money is fiat money, from the Latin word for decree, order, or authorization.

The ease with which a government could issue more paper currency was too tempting in the heat of the conflict, and far easier than demanding taxation from the citizens. Within a few weeks of the war starting, all major belligerents had suspended gold convertibility, effectively going off the gold standard and putting their population on a fiat standard, wherein the money they used was government‐issued paper that was not redeemable for gold.

The first major treaty of the century of monetary nationalism was the 1922 Treaty of Genoa. Under the terms of this treaty, the U.S. dollar and the British pound were to be considered reserve currencies similar to gold in their position in other countries' reserves.

In theory, the global monetary system was still based on gold, and if the U.S. government had maintained convertibility to gold by not inflating the dollar supply beyond their gold reserves while other countries had not inflated their money supply beyond their dollar reserves, the monetary system would have effectively been close to the gold standard of the pre‐World War I era. They did not, of course, and in practice, the exchange rates were anything but fixed and provisions were made for allowing governments to alter these rates to address a “fundamental disequilibrium.”

The military industry that prospered during World War II grew into what President Eisenhower called the Military–Industrial Complex—an enormous conglomerate of industries that was powerful enough to demand ever more funding from the government, and drive U.S. foreign policy toward an endless series of expensive conflicts with no rational end goal or clear objective. The doctrine of violent militant Keynesianism claimed this spending would be good for the economy, which made the millions of lives it destroyed easier to stomach for the American electorate.

The tenuous link of gold exchangeability was an annoying detail for the U.S. government's inflationism, and it manifested in two symptoms: first, the global gold market was always seeking to reflect the reality of inflationism through a higher gold price. This was addressed through the establishment of the London Gold Pool, which sought to drop the price of gold by offloading some of the gold reserves that governments held onto the market. This worked only temporarily, but in 1968, the U.S. dollar had to start getting revalued compared to gold to acknowledge the years of inflation it had suffered.

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.

but this is a process that has occurred 56 times since the end of World War I, according to research by Steve Hanke and Charles Bushnell, who define hyperinflation as a 50% increase in the price level over a period of a month. Hanke and Bushnell have been able to verify 57 episodes of hyperinflation in history,18 only one of which occurred before the era of monetary nationalism, and that was the inflation in France in 1795, in the wake of the Mississippi Bubble, which was also produced through government money and engineered by the honorary father of modern government money, John Law.

In its infancy, Bitcoin already appears to satisfy all the requirements of Menger, Mises, and Hayek: it is a highly salable free‐market option that is resistant to government meddling.

A few animals are capable of building nests or homes that can last for the future, and these have a lower time preference than the animals that act to the satisfaction of their immediate needs such as hunger and aggression.

Some animals may occasionally use a tool in hunting another animal, but they have no capacity for owning these tools and maintaining them for long‐term use. Only through a lower time preference can a human decide to take time away from hunting and dedicate that time to building a spear or fishing rod that cannot be eaten itself, but can allow him to hunt more proficiently. This is the essence of investment: as humans delay immediate gratification, they invest their time and resources in the production of capital goods which will make production more sophisticated or technologically advanced and extend it over a longer time‐horizon.

investment raises the productivity of the producer.

microeconomics has focused on transactions between individuals, and macroeconomics on the role of government in the economy, the reality is that the most important economic decisions to any individual's well‐being are the ones they conduct in their trade‐offs with their future self.

Unlike all other goods, money's functions as a medium of exchange, store of value, and unit of account are completely orthogonal to its quantity. What matters in money is its purchasing power, not its quantity, and as such, any quantity of money is enough to fulfil the monetary functions, as long as it is divisible and groupable enough to satisfy holders' transaction and storage needs.

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

Money's primary function as a medium of exchange is what allows economic actors to engage in economic planning and calculation.

Jimmy Wales, Wikipedia's founder, has stated that the idea for establishing Wikipedia came to him after he read this paper by Hayek and his explanation of knowledge.

In a free market economic system, prices are knowledge, and the signals that communicate information.

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 cause of waves of unemployment is not ‘capitalism’ but governments denying enterprise the right to produce good money.”19

unsound money is itself a barrier to trade between countries, because it distorts value between the countries and makes trade flows a political issue, creating animosity and enmity between governments and populations. Second, government having access to a printing press allows it to continue fighting until it completely destroys the value of its currency, and not just until it runs out of money. With sound money, the government's war effort was limited by the taxes it could collect. With unsound money, it is restrained by how much money it can create before the currency is destroyed, making it able to appropriate wealth far more easily. Third, individuals dealing with sound money develop a lower time preference, allowing them to think more of cooperation rather than conflict,

The larger the area using a common currency, the easier and the larger the scope of trade within the area.

As it stands, a large number of firms in all advanced economies specialize in warfare as a business, and are thus reliant on perpetuating war to continue being in business. They live off government spending exclusively, and have their entire existence reliant on there being perpetual wars necessitating ever‐larger arms spending.

Jacques Barzun identifies the end of World War I as the crucial turning point to begin the decadence, decay, and demise of the West. It was after this war that the West suffered from what Barzun terms “The Great Switch,” the replacement of liberalism by liberality,

Governments had to keep a balanced budget by always keeping consumption within the limits of earnings from taxation.

consumption must come after production.

By being the first digital object that is verifiably scarce, Bitcoin is the first example of digital cash

Satoshi Nakamoto's motivation for Bitcoin was to create a “purely peer‐to‐peer form of electronic cash” that would not require trust in third parties for transactions and whose supply cannot be altered by any other party.

Nakamoto removed the need for trust in a third party by building Bitcoin on a foundation of very thorough and ironclad proof and verification.

Every transaction has to be recorded by every member of the network so that they all share one common ledger of balances and transactions.

Difficulty adjustment is the most reliable technology for making hard money and limiting the stock‐to‐flow ratio from rising, and it makes Bitcoin fundamentally different from every other money.

Bitcoin relies on economic incentives, making fraud far costlier than its rewards.

Realistically, the only way to kill it is to make the service it offers so useless and obsolete that no one wants to use it. So obsolete that no one wants to pay for it. No one wants to host it. Then it will have no money to pay anyone. Then it will starve to death.

With this technological design, Nakamoto was able to invent digital scarcity. Bitcoin is the first example of a digital good that is scarce and cannot be reproduced infinitely.

with the invention of Bitcoin, the world had finally arrived at a synthetic form of money that had an ironclad guarantee governing its low rate of supply growth. Bitcoin takes the macroeconomists, politicians, presidents, revolutionary leaders, military dictators, and TV pundits out of monetary policy altogether.