The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

technologically advanced methods of production with a longer time horizon.

A lower interest rate, then, allows for the engagement of methods of production that are longer and more productive: society moves from fishing with rod...

A modern economy with a central bank is built on ignoring this fundamental trade-off and assuming that banks can finance investment with new money without consumers having to forgo consumption.

The link between savings and loanable funds is severed to the point where it is not even taught in the economics textbooks any more,8 let alone the disastrous consequences of ignoring it.

As the central bank manages the money supply and interest rate, there will inevitably be a discrepancy between savings and loanable funds. Central banks are generally trying to spur economic growth and investment and to increase consumption, so they tend to increase the money supply and lower the...

At these artificially low interest rates, businesses take on more debt to start projects than savers put aside to finance these investments. In other words, the value of consumption deferred is less than the value of the capital borrowed. Without enough consumption deferred, there will not be enough capital, land, and labor resources diverted away from consumption goods toward higher-order capital goods at the earliest stages of production. There...

Creating new pieces of paper and digital e...

over the deficiency in savings does not magically increase society's physical capital stock; it only devalues the existin...

This shortage of capital is not immediately apparent, because banks and the central bank can issue enough money for the borrowers—that is, after all, the main perk of using unsound money. In an economy with sound money, such manipulation of the price of capital would be impossible: as soon as the interest rate is set artificially low, the shortage in savings at banks is reflected in reduced capital available for borrowers, leading to...

Unsound money makes such manipulation possible, but only for a short while, of course, as reality cannot be deceived forever. The artific...

printed money deceive the producers into engaging in a production process requiring more capital resourc...

The excess money, backed by no actual deferred consumption, initially makes more producers borrow, operating under the delusion that the money will allow them to buy all the capital goods necessary for their production process. As more and more producers are bidding for fewer capital goods and resources than they expect there to be, the n...

This is the point at which the manipulation is exposed, leading to the simultaneous collapse of several capital investments which suddenly become unprofitable at the new capital good prices; these projects are what Mises termed malinvestments—investments that would not have been under...

not possible once the misallocations...

The central bank's intervention in the capital market allows for more projects to be undertaken because of the distortion of prices that causes investors to miscalculate, but the central bank's intervention cannot increase the amount of actual capital available. So these extra projects are not completed and become an unnecessary waste of capital. The suspension of these projects at the same time causes a rise in unemployment across the...

Only with an understanding of the capital structure and how interest rate manipulation destroys the incentive for capital accumulation can one understand the causes of recessions and the swings of the business cycle. The business cycle is the natural resul...

capital by making investors imagine they can attain more capital than is available with the unsound money the...

The contractor's ruse reduced the capital spent by the developer and resulted in the construction of fewer houses than would have been possible with accurate price signals.

The developer would have had 100 houses if he went with an honest contractor. By going with a Keynesian contractor who distorts the numbers, the developer continues to waste his capital for as long as the capital is being allocated on a plan with no basis in reality.

If the contractor realizes the mistake early on, the capital wasted on starting 120 houses might be very little, and a new contractor will be able to take the remaining bricks and use them to produce 90 houses. If the developer remains ignorant of the reality until the capital runs out, he will only have 120 u...

When the central bank manipulates the interest rate lower than the market clearing price by directing banks to create more money by lending, they are at once reducing the amount of savings available in society and increasing the quantity demanded by borrowers while also d...

Hence, the more unsound the form of money, and the easier it is for central banks to manipulate interest rates, the more severe the business cycles are. Monetary history testifies to how much more severe business cycles and recession...

Whenever a government has started on the path of inflating the money supply, there is no escaping the negative consequences. If the central bank stops the inflation, interest rates rise, and a recession follows as many of the projects that were started are exposed as unprofitable and have to be abandoned, exposing the misallocation of resources and capital that took place.

If the central bank were to continue its inflationary process indefinitely, it would just increase the

scale of misallocations in the economy, wasting even more capital and making the inevitable r...

There is no escape from paying a hefty bill for the supposed free lunch that Keynesia...

Central bank planning of the money supply is neither desirable nor possible. It is rule by the most conceited, making the most important market in an economy under the command of the few people who are ignorant enough of the realities of market economies to believe they can centrally plan a market as large, abstract,

and emergent as the capital market.