The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Let us follow the logic of things from the beginning. Or, rather, from the end: modern times. We are, as I am writing these lines, witnessing a complete riot against some class of experts, in domains that are too difficult for us to understand, such as macroeconomic reality, and in which not only is the expert not an expert, but he doesn't know it.

Foreward

Sound money allows people to think about the long term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and the advance of human civilization. Money is the information and measurement system of an economy, and sound money is what allows trade, investment, and entrepreneurship to proceed on a solid basis, whereas unsound money throws these processes into disarray.

Sound and unsound money definition

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 it advancing its trade across its empire worldwide. Britain would remain under a gold standard until 1914, although it would suspend it during the Napoleonic wars from 1797 to 1821. The economic supremacy of Britain was intricately linked to its being on a superior monetary standard, and other European countries began to follow it. The end of the Napoleonic wars heralded the beginning of the golden age of Europe, as, one by one, the major European nations began adopting the gold standard. The more nations officially adopted the gold standard, the more marketable gold became and the larger the incentive became for other nations to join. Further, instead of individuals having to carry gold and silver coins for large and small transactions, respectively, they could now store their wealth in gold in banks while using paper receipts, bills, and checks to make payments of any size. The holders of paper receipts could just use them to make payment themselves; bills were discounted by banks and used for clearance and checks could be cashed from the banks that issued them. 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.

Gold Standard

Tragically, the only way gold was able to solve the problems of salability across scales, space, and time was by being centralized and thus falling prey to the major problem of sound money emphasized by the economists of the twentieth century: individual sovereignty over money and its resistance to government centralized control.

Gold had to be centralized, thus falling prey to the major problem of sound money.

Major European Economies' Periods Under the Gold Standard

European Periods of the Gold Standard

The common name for government money is fiat money, from the Latin word for decree, order, or authorization. Two important facts must be understood about government money from the outset. First, there is a very large difference between government money redeemable in gold, and irredeemable government money, even if both are run by the government. Under a gold standard, money is gold, and government just assumes a responsibility of minting standard units of the metal or printing paper backed by the gold. The government has no control over the supply of gold in the economy, and people are able to redeem their paper in physical gold at any time, and use other shapes and forms of gold, such as bullion bars and foreign coins, in their dealings with one another. With irredeemable government money, on the other hand, the government's debt and/or paper is used as money, and the government is able to increase its supply as it sees fit. Should anybody use other forms of money for exchange, or should they attempt to create more of the government's money, they run the risk of punishment.

Fiat Money

Money and Time Preference Sound money is chosen freely on the market for its salability, because it holds its value across time, because it can transfer value effectively across space, and because it can be divided and grouped into small and large scales. It is money whose supply cannot be manipulated by a coercive authority that imposes its use on others. From the preceding discussion, and from the understanding of monetary economics afforded to us by Austrian economics, the importance of sound money can be explained for three broad reasons: first, it protects value across time, which gives people a bigger incentive to think of their future, and lowers their time preference. The lowering of the time preference is what initiates the process of human civilization and allows for humans to cooperate, prosper, and live in peace.

Time Preference - Lower is better

Sound Money and Individual Freedom

Sound Money

the Keynesian conception of the state, from which came the modern central banking doctrines held widely by all central bankers, and which shape the vast majority of economic textbooks written worldwide, comes from a place of a man who wanted government direction of two important areas of life: first, the control of money, credit, saving, and investment decisions, which meant the totalitarian centralization of capital allocation and destruction of free individual enterprise, making individuals utterly dependent on government for their basic survival, and second, the control of population quantity and quality, which meant eugenics. And unlike socialists, Keynes did not seek this level of control over individuals in order to enhance their freedom in the long run, but rather to develop a grander vision of society as he sees fit. While socialists may have had the decency to at least pretend to want to enslave man for his own good, to free him in the future, Keynes wanted government enslavement for its own sake, as the ultimate end. This may help explain why Murray Rothbard said, “There is only one good thing about Marx, at least he was not a Keynesian.”

Keynes - Keynesian conception of the state

We saw in Chapter 4 how Samuelson predicted that ending World War II would cause the biggest recession in world history, only for one of the biggest booms in U.S. history to ensue. But it gets better: Samuelson wrote the most popular economics textbook of the postwar era, Economics: An Introductory Analysis, which has sold millions of copies over six decades.22 Levy and Peart23 studied the different versions of Samuelson's textbook to find him repeatedly presenting the Soviet economic model as being more conducive to economic growth, predicting in the fourth edition in 1961 that the Soviet Union's economy would overtake that of the United States sometime between 1984 and 1997. These forecasts for Soviets overtaking the United States continued to be made with increasing confidence through seven editions of the textbook, until the eleventh edition in 1980, with varying estimates for when the overtaking would occur. In the thirteenth edition, published in 1989, which hit the desks of university students as the Soviet Union was beginning to unravel, Samuelson and his then‐co‐author William Nordhaus wrote, “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

Samuelson's Economics Textbook predictions

The dean of today's Keynesian economists, Paul Krugman, has even written of how an alien invasion would be great for the economy

Paul Krugman