The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Never again would gold return to being the world's homogeneous currency, with central banks' monopoly position and restrictions on gold ownership forcing people to use national government moneys. The introduction of bitcoin, as a currency native to the Internet superseding national borders and outside the realm of governmental control, offers an

intriguing possibility for the emergence of a new international monetary system,

Whereas under the international gold standard money flowed freely between nations in return for goods, and the exchange rate between different currencies was merely the conversion between different weights of gold, under monetary nationalism the money supply of each country, and the exchange rate between them, was to be determined in international agreements and meetings.

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.

With this move, the U.K. had hoped to alleviate its problems with the overvalued sterling by having other countries purchase large quantities of it to place in their reserves. The world's major powers signaled their departure from the solidity of the gold standard toward inflationism as a solution to economic problems. The insanity of this arrangement was that these governments wanted to inflate while also maintaining the price of their currency stable in terms of gold at prewar levels.

Had they admitted to their people the magnitude of the devaluation that took place to fight the war, and re-pegged their currencies to gold at new rates, there would have probably been

a recessionary crash, after which the economy would have recovered on a sound monetary basis.

he engaged in inflationary monetary policy throughout the 1920s.

the most important implication of it was that it created a larger bubble in the housing

and stock markets in the Uni...

The U.S. Fed's inflationary policy ended by the end of 1928, at which point the U.S. economy was ripe for the inevitable collapse that follows from the suspension of inflationism. What followed was the 1929 stock market crash, and the reaction of the U.S. governme...

price controls are always counterproductive, resulting in surpluses and shortages.

Wages were set too high, resulting in a very high unemployment rate, reaching 25% at certain points, while price controls had created shortages and surpluses of various goods.

Some agricultural products were even burned in order to maintain their high prices, leading to the insane situation where people were going hungry, desperate for work, while producers couldn't hire them as they couldn't afford their wages, and the producers

who could produce some crops had to burn some of them to k...

All of this was done to maintain prices at the pre-1929 boom levels while holding onto the delusion that the dollar had still ma...

The inflation of the 1920s had caused large asset bubbles to form in the housing and stock markets, causing an art...

After the bubble burst, market prices sought readjustment via a drop in the value of the dollar compared to gold, and a drop in real wages and prices. The pigheadedness of deluded central planners who wanted to prevent all three from taking place paralyzed the economy: the dollar, wages, and prices were overvalued, leading to people seeking ...

None of this, of course, would be possible with sound money, and only...

money supply did these prob...

Instead of learning that lesson, the government economists of the era decided that the fault was not in inflationism, but rather, in the gold standard which restricted government's inflationism. In order to remove the golden fetters to inflationism, President Roosevelt issued an executive order banning the private ownership of gold, forcing Americans to sell their gold to the U.S. Treasury at a rate of $20.67 per ounce. With the population deprived of sound money, and forced to deal with dollars, Roosevelt then revalued the dollar on the international market from $20.67 per ounce to $35 per ounce, a 41% devaluation of the dollar in real terms (gold). This was the inevitable reality of years of inflationism

Gone were all the foundations of economic knowledge acquired over centuries of scholarship around the world, to be replaced with the new faith with the ever-so-convenient conclusions that suited high time-preference politicians and totalitarian governments: the state of the economy is determined by the lever of aggregate

spending, and any rise in unemployment or slowdown in production had no underlying causes in the structure of production or in the distortion of markets by central planners;

rather it was all a shortage of spending, and the remedy is the debauching of the currency and the in...

Saving reduces spending and because spending is all that matters, government must do all it can to de...

Imports drive workers out of work, so spending increases must g...

Academic economics stopped being an intellectual discipline focused on understanding human choices under scarcity to improve their conditions. Instead it became an arm of the government, meant to direct policymakers toward the best policies for managing economic activities.

As the major economies of the world went off the gold standard, global trade was soon to be shipwrecked on the shores of oscillating fiat money. With no standard of value to allow an international price mechanism to exist, and with governments increasingly captured by statist and isolationist impulses, currency manipulation emerged as a tool of trade policy, with countries

seeking to devalue their currencies in order to give their exporters an advantage. More trade barriers were erected, and economic nationalism became the ethos of that era, with predictably disastrous consequences.

The nations that had prospered together 40 years earlier, trading under one universal gold standard, now had large monetary and trade barriers between them, loud populist leaders who blamed all their failures on other nations, and a rising tide of hateful nationalism that was soon to fulfill Otto Mallery's prophecy: “If soldiers are not to cross international boundaries, goo...

The war machines that the

government-directed economies built were far more advanced than any the world had ever seen, thanks to the popularity of the most dangerous and absurd of all Keynesian fallacies, the notion that government spending on military effort would aid economic recovery.

All spending is spending, in the naive economics of Keynesians, and so it matters not if that spending comes from individuals feeding their famil...

it all counts in aggregate demand and it all redu...

As an increasing number of people went hungry during the depression, all major governments spent generously on arming themselves, and the result was a return to the s...

As soon as governmental central planning had abated for the first time since the 1929 crash, and as soon as prices were allowed to adjust freely, they served their role as the coordinating mechanism for economic activity, matching sellers and buyers, incentivizing the production of goods demanded by consumers and compensating workers for their effort.

In order to manage this global system of hopefully fixed exchange rates, and address any potential fundamental disequilibrium, the Bretton Woods conference established the International Monetary Fund, which acted as a global coordination body between central banks with the express aim of achieving stability of exchange rates and financial flows.

In essence, Bretton Woods attempted to achieve through central planning what the international gold standard of the nineteenth century had achieved spontaneously.

Under the classical gold standard the monetary unit was ...

and goods flowed freely between countries, spontaneously adjusting flows without any need for central control or direction, and never resulting in balance of payment crises: whatever amount of money or goods moved across borders did so at the di...

When a country's currency is devalued, its products become cheaper to foreigners, leading to more goods leaving the country, while holders of the currency seek to purchase foreign currencies to protect themselves

from devaluation.

As devaluation is usually accompanied by artificially low interest rates, capital seeks exit from the country to go where it can be better rewarded, exa...

On the other hand, countries which maintained their currency better than others would thus witness an influx of capital whenever their neighbors devalued, lea...

Devaluation would sow the seeds of more devaluation, whereas currency appreciation would lead to more appreciation, creating a problematic dynamic for the two governments. No such problems could exist with the gold standard, where the value of the currency in both countries was constant, because it was gol...

An important, but often overlooked, aspect of the Bretton Woods system was that most of the member countries had moved large amounts of their gold reserves to the United States and received dollars in exchange, at a rate of $35 per ounce. The rationale was that the U.S. dollar would be the global currency for trade and central banks would trade through it and settle their accounts in it, obviating the need for the physical movement of gold. In essence, this

system was akin to the entire world economy being run as one country on a gold standard, with the U.S. Federal Reserve acting as the world's central bank and all the world's central banks as regional banks, the main difference being that the monetary discipline of the gold standard was almost entirely lost in this world where there were no effective controls on all central banks in expanding the money supply, because no citizens could redeem their government money for gold. Only governments could redeem their dollars in gold from the United States, but that was to prove far more complicated than expected. Today, each ounce of gold for which foreign central banks received $35 is worth in excess of $1,200.

French economist Jacques Reuff coined the phrase “deficit without tears” to describe the new economic reality that the United States inhabited, where it could purchase whatever it wanted from the world and finance it through debt monetized by inflating the currency that the entire world used.

From The Great Society to affordable housing, education, and healthcare, fiat money allowed the American

electorate to ignore the laws of economics and believe that a free lunch, or at least a perpetually discounted one, was somehow possible.