The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

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In a society where money is free and sound, individuals have to make decisions with their capital that affect their families in the long run. While it is likely that some would make irresponsible decisions that hurt their offspring, those who wanted to make responsible decisions had the choice to do so. With nationalized money, that became an increasingly harder choice to make, as central governmental control of money supply inevitably destroys incentives to save while increasing the incentive to borrow. No matter how prudent a person, his children will still witness their savings lose value and have to pay taxes to cover for the inflationary largesse of their government.

In a traditional society, individuals are aware that they will need children to support them in the future, and so will spend their healthy young years starting a family and investing in giving their children the best life possible. But if long-term investment in general is disincentivized, if saving is likely to be counterproductive as money depreciates, this investment becomes less profitable. Further, as politicians sell people the lie that eternal welfare and retirement benefits are possible through the magic of the monetary printing press, the investment in a family becomes less and less valuable. Over time, the incentive to start a family declines and more and more people end up leading single lives. More marriages are likely to break down as partners

are less likely to put in the necessary emotional, moral, and financial investment to make them work, while marriages that do survive will likely produce fewer children. The well-known phenomenon of the modern breakdown of the family cannot be understood without recognizing the role of unsound money allowing the state to appropriate many of the essential roles that the family has played for millennia, and reducing the incentive of all members of a family to invest in long-term familial relations.

Substituting the family with government largesse has arguably been a losing trade for individuals who have partaken in it. Several studies show that life satisfaction depends to a large degree on establishing intimate long-term familial bonds with a partner and children.14 Many studies also show that rates of depression and p...

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Similarly, the musical works of Bach, Mozart, Beethoven, and the composers of the Renaissance, Classical, and Romantic eras put to shame today's animalistic noises recorded in batches of a few minutes, churned out by the ton by studios profiting from selling to man the titillation of his basest instincts. Whereas the music of the golden era spoke to man's soul and awakened him to think of higher callings than the mundane grind of daily life, today's musical noises speak to man's most base animalistic instincts, distracting him from the realities of life by inviting him to indulge in immediate sensory pleasures with no concern for long-term consequences or anything more profound. It was hard money that financed Bach's Brandenburg Concertos while easy money financed Miley Cyrus's twerks.

Only with such meticulous and dedicated effort over many decades did these geniuses succeed in producing these masterpieces, immortalizing their names as the masters of their craft. In the era of unsound money, no artist has the low time preference to work as hard or as long as Michelangelo or Bach to learn their craft

properly or spend any significant amount of time perfecting it. A stroll through a modern art gallery shows artistic works whose production requires no more effort or talent than can be mustered by a bored 6-year-old. Modern artists have replaced craft and long hours of practice with pretentiousness, shock value, indignation, and existential angst as ways to cow audiences into appreciating their art, and often added some pretense to political ideals, usually of the puerile Marxist variety, to pretend-play profundity. To the extent that anything good can be said about modern “art,” it is that it is clever, in the manner of a prank or practical joke. There is nothing beautiful or admirable about the output or the process of most modern art, because it was produced in a matter of hours by lazy talentless hacks who never bothered to practice their craft. Only cheap pretentiousness, obscenity, and shock value attract attention to the naked emperor of modern art, and only long pretentious diatribes

shaming others for not understanding the work...

As the Medicis have been replaced with the artistic equivalents of DMV workers, the result is an art world teeming with visually repulsive garbage produced in a matter of minutes by lazy talentless hacks looking for a quick paycheck by scamming the world's aspirants to artistic class with concocted nonsensical stories about it symbolizing anything more than the utter

depravity of the scoundrel pretending to be an artist who made it.

once one overcomes one's inherent bias to believe in the inevitability of

progress, there is no escaping the conclusion that ours is a generation that is inferior to its ancestors in culture and refinement, in the same way the Roman subjects of Diocletian, living off his inflationary spending and drunk on the barbaric spectacles of the Colosseum, could not hold a candle to the great Romans of Caesar's era, who had to earn their aureus coins with sober hard work.

Money's primary function as a medium of exchange is what allows economic actors to engage in economic planning and calculation. As economic production moves from the very primitive scale, it becomes harder for individuals to make production, consumption, and trade decisions without having a fixed frame of reference with which to compare the value of different objects to one another. This property, the unit of account, is the third function of

money after being a medium of exchange and store of value.

Economic knowledge of the conditions of production, the relative availability and abundance of the factors of production, and the preferences of individuals, is not objective knowledge that can be fully known to a single entity. Rather, the knowledge of economic conditions is by its very nature distributed and situated with the people concerned by their individual decisions.

Every human's mind is consumed in learning and understanding the economic information relevant to them. Highly

intelligent and hardworking individuals will spend decades learning the economic realities of their industries in order to reach positions of authority over ...

No

central authority could ever internalize all the information that goes into forming a price or replace its function.

Anybody in the world involved in the copper market will be affected by this, but they do not need to know anything about the earthquake, Chile, and the conditions of the market in order to decide how to act. The rise in the price itself contains all the relevant information they need.

Immediately, all the firms demanding copper now have an incentive to demand a smaller quantity of it, delay purchases that weren't immediately necessary, and find substitutes. On the other hand, the rising price gives all firms that produce copper anywhere around the world an incentive to produce more of it, to capitalize on the price rise.

With the simple increase in the price, everyone involved in the copper industry around the world now has the incentive to act in a way that alleviates the negative consequences of the earthquake: other producers supply more while consumers demand less. As a result, the shortage caused by the earthquake is not as devastating as it could be, and the extra revenue from the rising price...

As global markets have become more integrated and large...

disruptions are becoming less impactful than ever, as market makers have the depth and liquidity to get around them q...

To understand the power of prices as a method of communicating knowledge, imagine that the day before the earthquake, the entirety of the global copper industry stopped being a market institution and was instead given over to be under the command of a specialized agency, meaning production is allocated without any recourse to prices. How would such an agency react to the earthquake? Of all the many copper producers worldwide, how would they decide which producers should increase their production and by how much? In a price system, each firm's own management will look...

Many profession...

for decades in a firm to arrive at these answers with the help of prices, and they know their own firm far more than the central planners, who cannot resort to prices. Further, how will the planners decide on which consumers of copper should reduce their consumption and by how much, wh...

No matter how much objective data and knowledge the agency might collect, it can never know all the dispersed knowledge that bears on the decisions that each individual carries out, and that includes their own preferences and valuations of objects. Prices, then, are not simply a tool to allow capitalists to profit; they are the information system of economic production, communicating knowledge across the world and coordinating th...

breakdown of economic activity and bring a human society back t...

Prices are the only mechanism that allows trade and specialization to occur in a market economy. Without resort to prices humans could not benefit from the division of labor and specialization beyond some very primitive small scale. Trade allows producers to increase their living standards through specialization in the goods in which they have a comparative advantage—goods which they can produce at a lower relative cost. Only with accurate prices expressed in a common medium of exchange is it possible for people to identify their comparative advantage and specialize in it. Specialization itself, guided by price signals, will lead to...

In fact, even...

inherent differences in the relative costs, specialization would allow each producer to accumulate capital relevant to their production and thus increase their marginal productivity in it, allowing them to decrease their marginal cost of production, and t...

The fatal flaw of socialism that Mises exposed was that without a price mechanism emerging on a free market, socialism would fail at economic calculation, most crucially in the allocation of capital goods.

The most productive allocation is determined only through the price mechanism allowing the most productive users of capital goods to bid highest for them. The supply and demand of capital goods emerges from the interaction of the producers and consumers and their iterative decisions.

In a socialist system, government owns and controls the means of production, making it at once the sole buyer and seller of all capital goods in the economy. That centralization stifles the functioning of an actual market, making sound

decisions based on prices ...

Without a market for capital where independent actors can bid for capital, there can be no price for capital overall or for individual capital goods. Without prices of capital goods reflecting their relative supply and demand, there is no rational way of determining the most productive uses of capital, nor is there a rational way of determining how much to produce of each capital good. In a world in which the government owns the steel factory, as well as all the factories that will utilize steel in the production of various consumer and capital goods, there can be no price emerging for steel, or for the goods it is used to produce, and hence, no possible way of knowing which uses of steel are the most important and valuable. How can the government determine whether its limited...

a price system for citizens to decide between trains and cars, there is no way of knowing what the optimal allocation is and no way of knowing where the steel would be most necessary. Asking citizens in surveys is a meaningless exercise, because people's choices are meaningless without a price to reflect the real opportunity cost involved in trade-offs between choices. A survey without prices would find that everyone would like their own Ferrari, but of course, when people have to pay, very few choose Ferraris. Central p...

In a free market, as factories compete for the acquisition of copper and steel, they create scarcity and abundance in these markets and the prices allow copper and steel makers to compete for the resources that go into making them. A central planner is completely in the dark about this web of preferences and opportunity costs of trains, cars, copper, steel, labor, capital, and land. Without prices, there is no way to calculate how to allocate these resources to produce the optimal products, and the result is a complete breakdown in production.

Even if the central planning system succeeded in managing a static economy, it is powerless to accommodate change or to allow entrepreneurship. How can a socialist system make calculations for technologies and innovations that do not exist, and how can factors of production be allocated for them when there is yet no indication whether these products can even work?

The interest rate is the price that the lender receives for lending their

funds, and the price that the borrower pays to obtain them.

As a society's time preference increases, people are less likely to save, interest rates would be high, and producers find less capital to borrow.

By giving the money to the borrower while keeping it available to the depositor, the bank effectively creates new money and that results in an increase in the money supply.

This underlies the relationship between money supply and interest rates: when interest rates drop, there is an increase in lending, which leads to an increase in money creation and a rise in the money supply. On the other hand, a rise in

interest rates causes a reduction in lending and contraction in the money supply, or at least a reduct...

The marginal worker is directed away from car sales and toward a job in the car factory; the proverbial corn seed will go into the ground instead of being eaten. Scarcity is the fundamental starting point of all economics, and its most important implication is the notion that everything has an opportunity cost.

as people demand more investments, the interest rate rises, incentivizing more savers to set aside more of their money for savings. As the interest rate drops, it incentivizes investors to engage in more investments, and to invest in more