The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

When modern technology made the importation and catching of seashells easy, societies that used them switched to metal or paper money, and when a government increases its currency's supply, its citizens shift to holding forei...

The twentieth century p...

an unfortunately enormous number of such tragic examples, particularly from developing countries. The monetary media that survived the longest are the ones that had very reliable mechanisms for restr...

the ones who use hard money will benefit most, by losing very little value due to the negligible new supply of their medium of exchange. Those who choose easy money will likely lose value as its supply grows quickly, bringing its market price down.

Whether through prospective rational

calculation, or the retrospective harsh lessons of reality, the majority of money and wealth will be concentrated with those who choose the h...

Hence, Austrian economists are rarely dogmatic or objectivist in their definition of sound money. They define it not as a specific good or commodity, but as whichever money emerges on the market, freely chosen by the people who transact with it.

It is not imposed by coercive authority, and its value is determined through market interaction, not government imposition.

Similarly, with money, it was inevitable that one, or a few, goods would emerge as the main medium of exchange, because the property of being exchanged easily matters the most. A medium of exchange, as mentioned before, is not acquired for its own properties, but for its salability.

Further, wide acceptance of a medium of exchange allows all prices to be expressed in its terms, which allows it to play the third function of money: unit of account.

In an

economy with a medium of exchange, all prices of all goods are expressed in terms of the same unit of account. 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.

Only with a uniform medium of exchange acting as a unit of account does complex economic calculation become possible, and with it comes the possibility for specialization into compl...

The operation of a market economy is dependent on prices, and prices, to be accurate, are dependent on a common medium of exchange, which reflects ...

If this is easy money, the ability of its issuer to constantly increase its quantity will prevent it from accurately reflecting opportunity costs. Eve...

money would distort its role as a measure of interpersonal value and a conduit f...

Having a single medium of exchange allows the size of the economy to grow as large as the number of people willing to use that medium of exchange. The larger the size of the economy, the larger the opportunities for gains from exchange and specialization, and perhaps more significantl...

Slowly but surely, Europeans were able to purchase a lot of the precious resources of Africa for the beads they acquired back home for very little.

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.

Seashells also shared with aggry beads the disadvantage of not being uniform units, which meant prices and ratios could not be easily measured and expressed in them uniformly, which creates large obstacles to the growth of the economy and the degree of specialization.

whenever societies employing seashells had access to uniform metal coins, they adopted them and benefited from the switch.

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.

These metals proved a better medium of exchange than seashells, stones, beads, cattle, and salt because they could be made into uniform, highly valuable small units that could be moved around far more easily. Another nail in the coffin of artifact money came with the mass utilization of hydrocarbon fuel energy, which increased our productive capacity significantly, allowing for a quick increase in the new supply (flow) of these artifacts, meaning

that the forms of money that relied on difficulty of production to protect their high stock-to-flow ratio lost it.

The Yap Island chiefs who refused O'Keefe's cheap Rai stones understood what most modern economists fail to grasp: 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.

Due to their durability and physical properties, as well as their relative abundance in earth, some

metals were more valuable than others. Iron and copper, because of their relatively high abundance and their susceptibility to corrosion, could be produced in increasing quantities. Existing stockpiles, constantly depleting from corrosion and consumption, could be dwarfed by new production, destroying the value in them. These metals developed a relatively low market value and would be used for smaller transactions. Rarer metals such as silver and gold, on the other hand, were more durable and less likely to corrode or ruin, making them more salable across time and useful as a store of value into the future.

Initially, metals were bought and sold in terms of their weight,1 but over time, as metallurgy advanced, it became possible to mint them into

uniform coins and brand them with their weight, making them far more salable by saving people from having to weigh and assess the metals every time.

The three metals most widely used for this role were gold, silver, and copper, and their use as coins was the prime form of money for around 2,500 years, from the time of the Lydian king Croesus, who was the first recorde...

Gold coins were the goods most salable across time, because they could hold their value over time and resist decay and ruin. They were also the goods most salable across space, because they carried a lot of value in small weights, allowing for easy transportation. Silver coins, on the other hand, had the advantage of being the most salable good across scales, because their lower value per weight unit compared to gold allowed for them to conveniently serve ...

By the nineteenth century, however, with the development of modern banking and the improvement in methods of communication, individuals could transact with paper money and checks backed by gold in the treasuries of their banks and central banks. This made gold-backed transactions possible at any scale, thus obviating the need for silver's monetary role, and gathering all essential monetary salability properties in the gold standard.

The gold standard allowed for unprecedented global capital accumulation and trade by uniting the majority of the planet's economy on one sound market-based choice of money. 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.

begin by differentiating between a good's market demand (demand for consuming or holding the good for its own sake) and its monetary demand (demand for a good as a medium of exchange and store of value).

At some point, monetary demand must subside, and some holders of copper will want to offload some of their stockpiles to purchase other goods, because, after all, that was the point of buying copper.

After the monetary demand subsides, all else being equal, the copper market would go back to its original supply-and-demand conditions, with 20 million annual tons selling for $5,000 each. But as the holders begin to sell their accumulated stocks of copper, the price will drop significantly below that. The billionaire will have lost money in this process; as he was driving the price up, he bought most of his stock for more than $5,000 a ton, but now his entire stock is valued below $5,000 a ton. The others who joined him later bought at even higher prices and will have lost even more money than the billionaire himself.

This model is applicable for all consumable commodities such as copper, zinc, nickel, brass, or oil, which are primarily consumed and destroyed, not stockpiled. Global stockpiles of these commodities at any moment in time are around the same order of magnitude as new ann...

Should savers decide to store their wealth in one of these commodities, their wealth will only buy a fraction of global supply before bidding the price up enough to absorb all their investment, because they are competing with the co...

As the revenue to the producers of the good increases, they can then invest in increasing their production, bringing the price crashing down again, robbing the savers of their wealth. The net effect of this entire episode is the transfer of the wealth of th...

This is the anatomy of a market bubble: increased demand causes a sharp rise in prices, which drives further demand, raising prices further, incentivizing increased production and increased supply, which inevitably brings prices down, punishing everyone who bought at a price higher than the usual market price.

Investors in the bubble are fleeced while producers of the asset benefit.

For copper and almost every other commodity in the world, this dynamic has held true for most of recorded history, consistently punishing those who choose these commodities as money by devaluing their wealth and impoverishing them in the long run, and returning the commo...

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 prod...

the supply significantly enough to bring ...

Such an asset will reward those who choose it as their store of value, increasing their wealth in the long run as it becomes the prime store of value, because those who chose other commodities will either reverse course by copying the choice ...

The clear winner in this race throughout human history has been gold, which maintains its monetary role due to two unique physical characteristics that differentiate it from other commodities: first, gold is so chemically stable that it is virtually impossible to destroy, and second, gold is impossible to synthesize from other materials (alchemists' claims notwithst...

The chemical stability of gold implies that virtually all of the gold ever mined by humans is still more or less ...

Humanity has been accumulating an ever-growing hoard of gold in jewelry, coins, and bars, which is never consumed and never rusts or disintegrates. The impossibility of synthesizing gold from other chemicals means that the only way to increase the supply of gold is by mining gold from the earth, an expensive, toxic, and uncertain proces...

This all means that the existing stockpile of gold held by people around the world is the product of thousands of years of gold production, and is orders of magnitude larger than new annual production. Over the past seven decades with relatively reliable statist...

To understand the difference between gold and any consumable commodity, imagine the effect of a large increase in demand for it as a store of value that causes the price to spike and annual production to double. For any consumable commodity, this doubling of output will dwarf any existing stockpiles, bringing the price crashing down and hurting the holders. For gold, a price spike that causes a doubling of annual production will be insignificant, increasing