The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

number of transactions with their future self. The examples of these trades are infinite: deciding to save money rather than spend it; deciding to invest in acquiring skills for future employment rather than seeking immediate employment with low pay; buying a functional and affordable car rather than getting into debt for an expensive car; working overtime rather than going out to party with friends; or, my favorite example to use in class: de...

A society in which individuals bequeath their children more than what they received from their parents is a civilized society: it is a place where life is improving, and people live with a purpose of making the next generation's lives better. As society's capital levels continue to increase, productivity increases and, along with it, quality of life.

The security of their basic needs

assured, and the dangers of the environment averted, people turn their attention toward more profound aspects of life than material well-being and the drudgery of work. They cultivate families and social ties; undertake cultural, artistic, and literary projects; an...

Civilization is not about more capital accumulation per se; rather, it is about what capital accumulation allows humans to achieve, the flourishing and freedom to seek higher meaning in life when their...

When economic decision making is geared toward the future, it is natural that all manner of decisions are geared toward the future as well. People become more peaceful and cooperative, understanding that cooperation is a far more rewarding long-term strategy than any short-term gains from conflict. People develop a strong sense of morality, prioritizing the moral choices that will cause the best long-term

term outcomes for them and their children.

A person who thinks of the long run is less likely to cheat, lie, or steal, because the reward for such activities may be positive in the short run, but can...

In modern economies government-issued money is inextricably linked to artificially lower interest rates, which is a desirable goal for modern economists because it promotes borrowing and investing. But the effect of this manipulation of the price of capital is to artificially reduce the interest rate that accrues to savers and investors, as well as the one paid by borrowers. The natural implication of this process is to reduce savings and increase borrowing. At the margin, individuals will consume more of their income

and borrow more against the future. This will not just have implications on their time preference in financial decisions; it will likely reflect on everything in their lives.

The move from money that holds its value or appreciates to money that loses its value is very significant in the long run: society saves less, accumulates less capital, and possibly begins to consume its capital; worker productivity stays constant or declines, resulting in the stagnation of real wages, even if nominal wages can be made to increase through the magical power of printing ever more depreciating pieces of paper money. As people start spending more and saving less, they become more present-oriented in all t...

This helps explain why civilizations prosper under a sound monetary sy...

when their monetary systems are debased, as was the case with the Romans, the Byzantines, and...

The contrast between the nineteenth and twentieth centuries can be understood in the context of the move away from sound money and al...

Monetary Inflation The simple reality, demonstrated throughout history, is that any person who finds a way to create the monetary medium will try to do it. The temptation to engage in this is too strong, but the creation of the monetary medium is not an activity that is productive to society, as any supply of money is sufficient for any economy of any size. The more that a monetary medium restrains this drive for its creation, the better it is as a medium of exchange and stable store of value. 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. Any quantity of economic transactions could be supported by a money supply of any size as long as the units are divisible enough.

A theoretically ideal money would be one whose supply is fixed, meaning nobody could produce more of it. The only noncriminal way to acquire money in such a society would be to produce something of...

As everyone seeks to acquire more money, everyone works more and produces more, leading to improving material well-being for everyone, which in turn allows pe...

their produc...

With growing wealth and productivity and an increased ability to focus on the future, people begin to reduce their time preference and can focus on improving non-material aspects of their life, including spiritual, social, and cultural endeavors.

This helps explain why Arab polymath Ibn Khaldun referred to gold prospecting and mining as the least respectable of professions, after kidnapping for ransom.4 The folly of Keynes condemning gold as money because its mining is wasteful is that it is the least wasteful of all potential metals to use as money. But the folly is doubly compounded by Keynes's “solution” to this shortcoming of gold being to propose a fiat monetary standard which has ended up dedicating far more human time, labor, and resources toward the management of the issuance of the money supply and the

profiting from it. Never in the history of gold as a monetary medium did it employ as many miners and workers as today's central banks and all the associated banks and businesses profiting from having close access to the monetary printing presses,

When new supply is insignificant compared to existing supply, the market value of a form of money is determined through people's willingness to hold money and their desire to spend it. Such factors will vary significantly with time for each individual, as individuals' personal circumstances go from periods where they prioritize holding a lot of money to periods of holding less. But in the aggregate, they will vary slightly for society as a whole, because money is the market good with the least diminishing marginal utility. One of the fundamental laws of economics is the law of diminishing marginal utility, which means that acquiring more of

any good reduces the marginal utility of each extra unit. Money, which is held not for its own sake, but for the sake of being exchanged with other goods, will have its utility diminish slower than any other good, because it can always be exchanged for any other good.

As an individual's holdings of houses, cars, TVs, apples, or diamonds increases, the marginal valuation they put on each extra unit decreases, leading to a decreasing desire to accumulate more of each. But more money is not like any of these goods, because as more of it is held, the holder...

The marginal utility of money does in fact decline, as evidenced by the fact that an extra dollar of income means a lot more to a person whose daily income is $1 than one whose daily income is $1,000. But money's marginal utility declines far slower than any other good, because it de...

The slowly declining marginal utility of holding money means demand for money at the margin will not vary significantly. Combining this with an almost constant supply results in a relatively stable market value for money in terms of goods and services. This means money is unlikely to appreciate or depreciate significantly, making it a lousy long-term investment but a good store of value. An investment would be expected to have a significant appreciation potential, but also carry a significant...

In the aggregate, demand for money will likely vary only with variance in time preference. As people develop a lower time preference overall, more people are likely to want to hold money, causing a rise in its market value compar...

A society that develops a ...

preference, on the other hand, would tend to decrease its holdings of money, slightly dropping its market value at the margin. In either case, holding money would remain the least risky and rewarding asset overall...

One of the prime functions of the monetary unit is to serve as the unit of measure for economic goods, whose value is constantly changing.

It is easier to keep increasing the supply of all commodities than gold, and so over time, all these other commodities will become relatively more abundant than gold, causing a rise in gold's purchasing power over time.

In the case of government money, on the other hand, the money supply increases through the expansion of the supply by the central bank and commercial banks, and contracts through deflationary recessions and bankruptcies, while the demand for money can vary even more unpredictably depending on people's expectations of the value of the money and the policies of the central bank.

Saving and Capital Accumulation One of the key problems caused by a currency whose value is diminishing is that it negatively incentivizes saving for the future. Time preference is universally positive: given the choice between the same good today or in the future, any sane person would prefer to have it today. Only by increasing the return in the future will people consider delaying gratification. Sound money is money that gains in value slightly over time, meaning that holding onto it is likely to

offer an increase in purchasing power. Unsound money, being controlled by central banks whose express mission is to keep inflation positive, will offer little incentive for holders to keep it, as they become more likely to spend it or to borrow it.

When it comes to investment, sound money creates an economic environment where any positive rate of return will be favorable to the investor, as the monetary unit is likely to hold onto its value, if not appreciate, thus strengthening the incentive to invest. With unsound money, on the other hand, only returns that are higher than the rate of depreciation of the currency will be positive in real terms, creating incentives for high-return but high-risk investment and spending. Further, as increases in the mone...

The track record of the 46-year experiment with unsound money bears out this conclusion. Savings rates have been declining across the developed countries, dropping to very low levels, while personal, municipal, and national debts have incre...

Such numbers have become normalized as Keynesian economists assure citizens that debt is good for growth and that saving would result

in recessions. One of the most mendacious fantasies that pervades Keynesian economic thought is the idea that the national debt “does not matter, since we owe it to ourselves.” Only a high-time-preference disciple of Keynes could fail to understand that this “ourselves” is not one homogeneous blob but is differentiated into several generations—namely, the current ones which consume recklessly at the expense of future ones. To make matters worse, this phrase is usually followed by emotional blackmail along the lines of “we would be short-changing ourselves if we didn't borrow to invest for our future.”

Many pretend this is a miraculous modern discovery from Keynes's brilliant insight that spending is all that matters, and that by ensuring spending remains high, debts can continue t...

In reality, there is nothing new in...

which was employed by the decadent emperors of Rome during its decline, except that it is being applied with government-issued paper money. Indeed, paper money allows it to be managed a little more smoothly, and less obviously, ...

He would also have understood that the only cause

of economic growth in the first place is delayed gratification, saving, and investment, which extend the length of the production cycle and increase the productivity of the methods of production, leading to better standards of living.

He would have realized the only reason he was born into a rich family in a rich society was that his ancestors had spent centuries accumulating capital, deferring gratification and investing in the future. But, like the Roman emperors during the decay of the empire, he could never understand the work and sacrifice needed to build his affluence and be...

Debt is the opposite of saving. If saving creates the possibility of capital accumulation and civilizational advance, debt is what can reverse it, through the reduction in capital stocks acr...

in living sta...

Whether it is housing debt, Social Security obligations, or government debt that will require ever-higher taxes and debt monetization to refinance, the current generations may be the first in the western world since the demise of the Roman Empire (or, at least, the Industrial Revolution) to come into the world with less capital than their parents. Rather than witness their savings accumulate and raise the capital stock, this generation has to work to pay off the growing interest on its debt, working harder t...

When money was nationalized, it was placed under the command of politicians who operate over short time-horizons of a few years, trying their best to get reelected. It was only natural that such a process would lead to short-term decision making where politicians abuse the currency to fund their reelection campaigns at the expense of future generations.

As H. L. Mencken put it: “Every election is an advanced auction on stolen