The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

As taxes increased and inflation made price controls unworkable, the urbanites of the cities started fleeing to empty plots of land where they could at least have a chance of living in self-sufficiency, where their lack of income spared them having to pay taxes. The intricate civilizational edifice of the Roman Empire and the large division of labor across Europe and the Mediterranean began to crumble, and its descendants became self-sufficient peasants scattered in isolation and would soon turn into serfs living under feudal lords.

Britain was the first to adopt a modern gold standard in 1717, under the direction of physicist Isaac Newton, who was the warden of the Royal Mint, and the gold standard would play a great role in Britain advancing its trade across its empire worldwide. Britain would remain under a gold standard until 1914, although it would suspend it during the Napoleonic wars from 1797 to 1821. The economic supremacy of Britain was intricately linked to its being on a superior monetary standard, and other European countries began to follow it. The end of the Napoleonic wars heralded the beginning of the golden age of Europe, as, one by one, the major European nations began adopting the gold standard. The more nations officially adopted the gold standard, the more marketable gold became and the larger the incentive became for other nations to join.

As Mises described it: The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital markets. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization to the remotest parts of the earth's surface, everywhere destroying the fetters of old-aged prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another. It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes.12

As the ability to run a bank started to imply money creation, governments naturally gravitated to taking over the banking sector through central banking. The temptation was always too strong, and the virtually infinite financial wealth this secured could not only silence dissent, but also finance propagandists to promote such ideas. 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 eternally vigilant against them doing so. This might have been feasible when the population was highly educated and knowledgeable about the dangers of unsound money, but with every passing generation displaying the intellectual 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 civilized human living itself rests on the integrity of money providing a solid foundation for trade and capital accumulation.

Keeping reserves in foreign governments' easy money only will cause the value of the country's currency to devalue along with the reserve currencies, while the seigniorage accrues to the issuer of the reserve currency, not the nation's central bank.

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 for money now became centrally planned by national governments, a monetary system which Hayek named Monetary Nationalism, in a brilliant short book of the same name: By Monetary Nationalism I mean the doctrine that a country's share in the world's supply of money should not be left to be determined by the same principles and the same mechanism as those which determine the relative amounts of money in its different regions or localities. A truly International Monetary System would be one where the whole world possessed a homogeneous currency such as obtains within separate countries and where its flow between regions was left to be determined by the results of the action of all individuals.

The drain of gold from Britain is a little-known story with enormous consequences. Liaquat Ahamed's Lords of Finance focuses on this episode, and does a good job of discussing the individuals involved and the drama taking place, but adopts the reigning Keynesian understanding of the issue, putting the blame for the entire episode on the gold standard. In spite of his extensive research, Ahamed fails to comprehend that the problem was not the gold standard, but that post–World War I governments had wanted to return to the gold standard at the pre–World War I rates.

A better treatment of this episode, and its horrific aftermath, can be found in Murray Rothbard's America's Great Depression.

In the Bretton Woods system, however, governments were dominated by Keynesian economists who viewed activist fiscal and monetary policy as a natural and important part of government policy. The constant monetary and fiscal management would naturally lead to the fluctuation of the value of national currencies, resulting in imbalances in trade and capital flows.

The United States, however, was put in a remarkable position, similar to, though massively exceeding in scope, the Roman Empire's pillaging and inflating the money supply used by most of the Old World. With its currency distributed all over the world, and central banks having to hold it as a reserve to trade with one another, the U.S. government could accrue significant seigniorage from expanding the supply of dollars, and also had no reason to worry about running a balance of payment deficit. 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.

This war machine was also made more palatable for the American people because it came from the same politicians who intensified government welfare in various shapes and forms. 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.

French president Charles de Gaulle even sent a French military carrier to New York to get his nation's gold back, but when the Germans attempted to repatriate their gold, the United States had decided it had had enough. Gold reserves were running low, and on August 15, 1971, President Richard Nixon announced the end of dollar convertibility to gold, thus letting the gold price float in the market freely.

Most other currencies fared even worse, as they were the victim of inflation of the U.S. dollars backing them, as well as the inflation by the central banks issuing them.

Sound money, then, according to Mises, is what the market freely chooses to be money, and what remains under the control of its owner, safe from coercive meddling and intervention. For as long as the money was controlled by anyone other than the owner, whoever controlled it would always face too strong an incentive to pilfer the value of the money through inflation or confiscation, and to use it as a political tool to achieve their political goals at the expense of the holders.

For those who worship government power and take joy in totalitarian control, such as the many totalitarian and mass-murdering regimes of the twentieth century, this monetary arrangement was a godsend. But for those who valued human liberty, peace, and cooperation among humans, it was a depressing time with the prospects of economic reform receding ever more with time and the prospects of the political process ever returning us to monetary sanity becoming an increasingly fanciful dream.

This is an important but often underappreciated feature of government money. Because banks create money when they issue loans, the repayment of loans or the bankruptcy of the borrower leads to a reduction in the money supply. Money can have its supply increase or decrease depending on a variety of government and central bank decisions.

from the understanding of monetary economics afforded to us by Austrian economics, the importance of sound money can be explained for three broad reasons: first, it protects value across time, which gives people a bigger incentive to think of their future, and lowers their time preference. The lowering of the time preference is what initiates the process of human civilization and allows for humans to cooperate, prosper, and live in peace. Second, sound money allows for trade to be based on a stable unit of measurement, facilitating ever-larger markets, free from government control and coercion, and with free trade comes peace and prosperity. Further, a unit of account is essential for all forms of economic calculation and planning, and unsound money makes economic calculation unreliable and is the root cause of economic recessions and crises. Finally, sound money is an essential requirement for individual freedom from despotism and repression, as the ability of a coercive state to create money can give it undue power over its subjects, power which by its very nature will attract the least worthy, and most immoral, to take its reins.

Sound money is a prime factor in determining individual time preference, an enormously important and widely neglected aspect of individual decision making. Time preference refers to the ratio at which individuals value the present compared to the future. Because humans do not live eternally, death could come to us at any point in time, making the future uncertain. And because consumption is necessary for survival, people always value present consumption more than future consumption, as the lack of present consumption could make the future never arrive. In other words, time preference is positive for all humans; there is always a discount on the future compared to the present.

Only through a lower time preference can a human decide to take time away from hunting and dedicate that time to building a spear or fishing rod that cannot be eaten itself, but can allow him to hunt more proficiently. This is the essence of investment: as humans delay immediate gratification, they invest their time and resources in the production of capital goods which will make production more sophisticated or technologically advanced and extend it over a longer time-horizon. The only reason that an individual would choose to delay his gratification to engage in risky production over a longer period of time is that these longer processes will generate more output and superior goods. In other words, investment raises the productivity of the producer.

It is only through the lowering of time preference that individuals begin to appreciate investing in the long run and start prioritizing future outcomes. 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; and seek to offer lasting contributions to their community and the world. 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 base needs are met and most pressing dangers averted.

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 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 be devastatingly negative in the long run.

As people start spending more and saving less, they become more present-oriented in all their decision making, resulting in moral failings and a likelihood to engage in conflict and destructive and self-destructive behavior.

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.

Examining Diocletian's edict5 of prices from 301 AD and converting gold prices to their modern-day U.S. dollar equivalent, we find that a pound of beef cost around $4.50, while a pint of beer cost around $2, a pint of wine around $13 for high quality wine and $9 for lower quality, and a pint of olive oil cost around $20.

Only Switzerland, which remained on an official gold standard until 1936, and continued to back its currency with large reserves of gold until the early 1990s, has continued to have a high savings rate, standing as the last bastion of low-time-preference Western civilization with a savings rate in the double digits, as every other Western economy has plummeted into the single digits and even to negative saving rates in some cases. The average savings rate of the seven largest advanced economies12 was 12.66% in 1970, but has dropped to 3.39% in 2015, a fall of almost three-quarters.

“Every election is an advanced auction on stolen goods.”

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.

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.

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.

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.

“The Use of Knowledge in Society,” by Friedrich Hayek, is arguably one of the most important economic papers to have ever been written. Unlike highly theoretical, inconsequential, and esoteric modern academic research that is read by nobody, the eleven pages of this paper continue to be read widely seventy years after its publication, and have had a lasting impact on the lives and businesses of many people worldwide, perhaps none as significant as its role in the founding of one of the most important websites on the Internet, and the largest single body of knowledge assembled in human history.

Any economic system that tries to dispense with prices will cause the complete breakdown of economic activity and bring a human society back to a primitive state.

The monetary expansion created illusory wealth that misallocated resources, and that wealth must disappear for the market to go back to functioning properly with a proper price mechanism.

As Hayek put it: “The cause of waves of unemployment is not ‘capitalism’ but governments denying enterprise the right to produce good money.”

Hayek, Friedrich. Denationalisation of Money: The Argument Refined. London, Institute of Economic Affairs, 1976.

There is no shortage of alternatives to the Austrian capital theory as an explanation of recessions, yet all of these are largely just the rehashed arguments of monetary cranks from the early twentieth century. One does not even need to read modern rebuttals of the latest line of Keynesian and pop psychology theories. Reading Hayek's Monetary Theory and the Trade Cycle, from 1933, or Rothbard's America's Great Depression, from 1963, is sufficient.

For Keynesian and Marxist economists, and other proponents of the state theory of money, money is whatever the state says is money, and therefore it is the prerogative of the state to do with it as it pleases, which is going to inevitably mean printing it to spend on achieving state objectives.

Most worryingly for Monetarists, deflation is usually accompanied by collapses in the banking sector balance sheets, and because they, too, share an aversion for understanding cause and effect, it thus follows that central banks must do everything possible to ensure that deflation never happens. For the canonical treatment of why Monetarists are so scared of deflation, see a 2002 speech by former Chairman of the Federal Reserve Ben Bernanke entitled Deflation: Making Sure “It” Doesn't Happen Here.5

The financial decisions of people also reflect on all other aspects of their personality, engendering a high time preference in all aspects of life: depreciating currency causes less saving, more borrowing, more short-termism in economic production and in artistic and cultural endeavors, and perhaps most damagingly, the depletion of the soil of its nutrients, leading to ever-lower levels of nutrients in food.

Further, an economy with an appreciating currency would witness investment only in projects that offer a positive real return over the rate of appreciation of money, meaning that only projects expected to increase society's capital stock will tend to get funded. By contrast, an economy with a depreciating currency incentivizes individuals to invest in projects that offer positive returns in terms of the depreciating currency, but negative real returns. The projects that beat inflation but do not offer positive real returns effectively reduce society's capital stock, but are nonetheless a rational alternative for investors because they reduce their capital slower than the depreciating currency. These investments are what Ludwig von Mises terms malinvestments—unprofitable projects and investments that only appear profitable during the period of inflation and artificially low interest rates, and whose unprofitability will be exposed as soon as inflation rates drop and interest rates rise, causing the bust part of the boom-and-bust cycle. As Mises puts it, “The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment.”

The larger the extent of the market with which individuals can trade, the more specialized they can be in their production, and the larger their gains from trade. The same amount of labor expended working in a primitive economy of 10 people would lead to a far lower material living standard than if it had been expended within a larger market of 1,000 or 1,000,000 people. The modern individual living in a free-trading society is able to work for a few hours a day in a highly specialized job, and with the money she makes she is able to purchase the goods she wants from whichever producers in the entire planet make them with the lowest cost and best quality. To fully appreciate the gains from trade that accrue to you, just imagine trying to live your life in self-sufficiency. Basic survival would become a very hard task for any of us, as our time is spent inefficiently and fruitlessly attempting to provide the very basics of survival to ourselves.

Farming

Unsound money is a particularly dangerous tool in the hands of modern democratic governments facing constant reelection pressure. Modern voters are unlikely to favor the candidates who are upfront about the costs and benefits of their schemes; they are far more likely to go with the scoundrels who promise a free lunch and blame the bill on their predecessors or some nefarious conspiracy. Democracy thus becomes a mass delusion of people attempting to override the rules of economics by voting themselves a free lunch and being manipulated into violent tantrums against scapegoats whenever the bill for the free lunch arrives via inflation and economic recessions.

It is no coincidence that when recounting the most horrific tyrants of history, one finds that every single one of them operated a system of government-issued money which was constantly inflated to finance government operation. There is a very good reason that Vladimir Lenin, Joseph Stalin, Mao Ze Dong, Adolf Hitler, Maximilien Robespierre, Pol Pot, Benito Mussolini, Kim Jong Il, and many other notorious criminals all ruled in periods of unsound government-issued money which they could print at will to finance their genocidal and totalitarian megalomania. It is the same reason that the same societies which birthed these mass murderers did not produce anyone close to their level of criminality when living under sound monetary systems which required governments to tax before they spent. None of these monsters ever repealed sound money in order to fund their mass murder. The destruction of sound money had come before, hailed with wonderful feel-good stories involving children, education, worker liberation, and national pride. But once sound money was destroyed, it became very easy for these criminals to take over power and take command of all of their society's resources by increasing the supply of unsound money.

Keynes believed it was the role of the government to devise “a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.”

Scary. Covid?

Fiscal support is the more straightforward of zombie-creation methods to detect. Any firms that receive direct government support, and the vast majority of firms that are alive thanks to selling their products to the public sector, are effectively zombies. Had these firms been productive to society, free individuals would have willingly parted with their money to pay for their products. That they cannot survive on voluntary payments shows that these firms are a burden and not a productive asset for society. But the more pernicious method of creating zombies is not through direct government payments, but through access to low-interest-rate credit. As fiat money has slowly eroded society's ability to save, capital investments no longer come from savers' savings, but from government-created debt, which devalues existing money holdings. In a society with sound money, the more a person saves, the more he is able to accumulate capital and the more he can invest, meaning that capital owners tend to be those with lower time preference. But when capital comes from government credit creation, the allocators of capital are no longer the future-oriented, but members of various bureaucratic agencies.

In a free market with sound money, capital owners choose to allocate their capital to the investments they find most productive, and can utilize investment banks to manage this allocation process. The process rewards firms that serve customers successfully, and the investors who identify them, while punishing mistakes. In a fiat monetary system, however, the central bank is de facto responsible for the entirety of the credit allocation process. It controls and supervises the banks that allocate capital, sets the lending eligibility criteria, and attempts to quantify risks in a mathematical manner that ignores how real-world risks work. The test of the free market is suspended as central bank direction of credit can overrule the economic reality of profit and loss.

Sustainability

Even after the rationale for a government agency's existence has been removed, the agency will continue operating and find itself more duties and responsibility. Lebanon, for instance, continues to have a train authority decades after its trains were decommissioned and the tracks rusted into irrelevance.

NIH fauci

In a society with sound money, a central bank would have to tax everyone not involved in the bank in order to bail out the bank. In a society with unsound money, the central bank is simply able to create new money supply and use it to support the bank's liquidity. Unsound money thus creates a distinction between liquidity and solvency: a bank could be solvent in terms of the net present value of its assets but face a liquidity problem that prevents it from meeting its financial obligations within a certain period of time. But the lack of liquidity itself could trigger a bank run as depositors and lenders seek to get their deposits out of the bank. Worse, the lack of liquidity in one bank could lead to a lack of liquidity in other banks dealing with this bank, creating systemic risk problems. If the central bank credibly commits to providing liquidity in such cases, however, there will be no fear of a liquidity crisis, which in turn averts the scenario of a bank run and leaves the banking system safe.

Any industry in which people complain about their asshole boss is likely part of the bezzle, because bosses can only really afford to be assholes in the economic fake reality of the bezzle. In a productive firm offering valuable service to society, success depends on pleasing customers. Workers are rewarded for how well they do that essential task, and bosses who mistreat their workers will either lose the workers to competitors or destroy their business quickly. In an unproductive firm that does not serve society and relies on bureaucratic largesse for its survival, there is no meaningful standard by which to reward or punish workers. The bezzle can appear seductive from outside, thanks to the generous regular paychecks and the lack of actual work involved, but if there's one lesson economics teaches us, it is that there is no such a thing as a free lunch. Money being handed out to unproductive people will attract a lot of people who want to do these jobs, driving up the cost of doing these jobs in time and dignity. Hiring, firing, promotion, and punishment all happen at the discretion of layer upon layer of bureaucrats. No work is valuable to the firm, everyone is dispensable, and the only way anyone maintains a job is by proving valuable to the layer above him. A job in these firms is a full-time game of office politics. Such jobs are only appealing to shallow materialistic people who enjoy having power over others, and years of being maltreated are endured for the payc...

Megan

The security of bitcoin lies in the asymmetry between the cost of solving the proof-of-work necessary to commit a transaction to the ledger and the cost of verifying its validity. It costs ever-increasing quantities of electricity and processing power to record transactions, but the cost of verifying the validity of the transactions is close to zero and will remain at that level no matter how much bitcoin grows. To try to commit fraudulent transactions to the bitcoin ledger is to deliberately waste resources on solving the proof-of-work only to watch nodes reject it at almost no cost, thereby withholding the block reward from the miner. As time goes by, it becomes increasingly difficult to alter the record, as the energy needed is larger than the energy already expended, which only grows with time. This highly complex iterative process has grown to require vast quantities of processing power and electricity but produces a ledger of ownership and transactions that is beyond dispute, without having to rely on the trustworthiness of any single third party. Bitcoin is built on 100% verification and 0% trust.