The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

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 possib...

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.

Because the Achilles heel of twentieth century money was its centralization in the hands of the government, we will see later how the money invented in the twenty-first century, bitcoin, was designed primarily to avoid centralized control.

With silver and other media of exchange increasingly demonetized, the majority of the planet used the same golden monetary standard, allowing the improvements in telecommunications and transportation to foster global capital accumulation and trade like never before.

In the same way metric and imperial units are just a way to measure the underlying length, national currencies were just a way to measure economic value as represented in the universal store of value, gold.

The soundness of money was reflected in free trade across the world, but perhaps more importantly, was increasing savings rates across most advanced societies that were on the gold standard, allowing for capital accumulation to finance industrialization, urbanization, and the technological improvements that have shaped our modern life.

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.

These two flaws meant that the gold standard was always vulnerable to a run on gold in any country where circumstances might lead a large enough percentage of the population to demand redemption of their paper money in 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.

As the number of payments and settlements conducted in ph...

an infinitely smaller fraction of all payments, the banks and central banks holding the gold could create money unbacked by phys...

The network of settlement became valuable enough that its owners' credit was...

As the ability to run a bank started to imply money creation, governments naturally gravitated to taking over the banki...

The temptation was always too strong, and the virtually infinite financial wealth this secured could not only silence dissent, but also finan...

Gold offered no mechanism for restraining the sovereigns, and had to rely on trust in them not abusing the gold standard and the population remaining...

This might have been feasible when the population was highly educated and knowledgeable about the dangers of unsound money, but with every passin...

complacence that tends to accompany wealth,13 the siren song of con artists and court-jester economists would prove increasingly irresistible for more of the population, leaving only a minority of knowledgeable economists and historians fighting an uphill battle to convince people that 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 ci...

Its general acceptance requires the acknowledgement of the truth that one cannot make all people richer by printing money.

The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper

The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an approp...

interest and of “improving” the balance of trade […] People fight the gold standard because they want to substitute national autarky for free trade, war for peace, to...

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.

Yet central banks continued to confiscate and accumulate more gold until the 1960s, where the move toward a U.S. dollar global standard began to shape up. Although gold was supposedly demonetized fully in 1971, central banks continued to hold significant gold reserves, and only di...

Even

as central banks repeatedly declared the end of gold's monetary role, their actions in maintaining th...

The monetary competition between easy government money and hard gold will likely result in one winner in the long-run. Even in a world of government money, governments have not been

able to decree gold's monetary role away, as their actions speak louder than their words.

World War I saw the end of the era of monetary media being the choice decided by the free market, and the beginning of the era of government money.

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

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.

Contrary to the most egregiously erroneous and central tenet of the state theory of money, it was not government that decreed

gold as money; rather, it is only by holding gold that governments could get their money to be accepted at all.

The oldest recorded example of fiat money was jiaozi, a paper currency issued by the Song dynasty in China in the tenth century. Initially, jiaozi was a receipt for gold or silver, but then government controlled its issuance and suspended redeemability, increasing the amount of currency printed until it collapsed. The Yuan dynasty also issued fiat currency in 1260, named chao, and exceeded the supply far beyond the metal backing, with predictably disastrous consequences. As the value of the...

Government money, then, is similar to primitive forms of money discussed in Chapter 2, and commodities ...

liable to having its supply increased quickly compared to its stock, leading to a quick loss of salability, destruction of purchasing pow...

That the government demands payment in its money for its taxes may guarantee a longer life for that money, but only if the government is able to prevent the quick expansion of the supply can it protect its value from depreciating quickly.

When comparing different national currencies, we find that the major and most widely used national currencies have a lower annual increase in their supply than the less salable minor currencies.

In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary. When governments were on a gold standard, they had direct control of large vaults of gold while their people were dealing with paper receipts of this gold. 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.

With the simple suspension of gold redeemability, governments' war efforts were no longer limited to the money that they had in their own treasuries, but extended virtually to the entire wealth of the population. For as long as the government could print more money and have that mone...

Previously, under a monetary system where gold as money was in the hands of the people, government only had its own treasuries to sustain its war effort, along with any taxation or bond issues to finance the war. This made conflict limited, and lay at the heart of the relatively long ...

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 o...

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 wi...

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 accumula...

As the war ended, the international monetary system revolving around the gold standard was no longer functional. All countries had gone off gold and had to face the major dilemma of whether they should get back onto a gold standard, and if so, how to revalue their currencies compared to gold.

A fair market valuation of their existing stock of currency to their stock of gold would be a hugely unpopular admission of the depreciation that the currency underwent. A return to the old rates of exchange would cause citizens to demand holding gold rather than the ubiquitous paper receipts, and lead to the flight of gold outside the country to where it was fairly valued.

This dilemma took money away from the market and turned it into a politically controlled economic decision. Instead of market participants freely choosing the most salable good as a medium of exchange, the value, supply, and interest rate...