The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

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.

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.

Even in a world of government money, governments have not been able to decree gold's monetary role away, as their actions speak louder than their words. (See

This made conflict limited, and lay at the heart of the relatively long periods of peace experienced around the world before the twentieth century.

In the most vivid personification of the absolute senselessness of this war, on Christmas Eve 1914, French, English, and German soldiers stopped following orders to fight, laid down their arms, and crossed the battle lines to mingle and socialize with one another.

While all governments were funding their war machines with inflation, Germany and the Austro‐Hungarian Empire began to witness serious decline in the value of their currency in 1918,

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:

It is a little‐known fact, carefully airbrushed from the history books, that in the 1932 U.S. general election, Hoover ran on a highly interventionist platform while Franklin Delano Roosevelt ran on a platform of fiscal and monetary responsibility. Americans had actually voted against Hoover's policies, but when FDR got into power, he found it more convenient to play along with the interests that had influenced Hoover, and as a result, the interventionist policies of Hoover were amplified into what came to be known as the New Deal. It's important to realize there was nothing unique or new about the New Deal. It was a magnification of the heavily interventionist policies which Hoover had instituted.

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 which started in 1914 with the creation of the Federal Reserve and the financing of America's entry into World War II.

German edition Keynes wrote: The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez‐faire.7

Universities lost their independence and became part and parcel of the government's ruling apparatus. 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. The notion that government management of the economy is necessary became the unquestioned starting point of all modern economic education, as can be gleaned from looking at any modern economics textbook, where government plays the same role that God plays in religious scriptures: an omnipresent, omniscient, omnipotent force that merely needs to identify problems to satisfactorily address them.

Today government‐approved economics curricula still blame the gold standard for the Great Depression. The same gold standard which produced more than four decades of virtually uninterrupted global growth and prosperity between 1870 and 1914 suddenly stopped working in the 1930s because it wouldn't allow governments to expand their money supply to fight the depression, whose causes these economists cannot explain beyond meaningless Keynesian allusions to animal spirits.

Otto Mallery's prophecy: “If soldiers are not to cross international boundaries, goods must do so. Unless the Shackles can be dropped from trade, bombs will be dropped from the sky.”8

All spending is spending, in the naive economics of Keynesians, and so it matters not if that spending comes from individuals feeding their families or governments murdering foreigners: it all counts in aggregate demand and it all reduces unemployment! 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 senseless destruction of three decades earlier.

For Keynesian economists, the war was what caused economic recovery, and if one looked at life merely through the lens of statistical aggregates collected by government bureaucrats, such a ridiculous notion is tenable. With government war expenditure and conscription on the rise, aggregate expenditure soared while unemployment plummeted, so all countries involved in World War II had recovered because of their participation in the war. Anybody not afflicted with Keynesian economics, however, can realize that life during World War II, even in countries that did not witness war on their soil, like the United States, cannot by any stretch of the imagination be characterized as “economic recovery.”

But without a stable unit of account for the global economy, this was a task as hopeless as attempting to build a house with an elastic measuring tape whose own length varied every time it was used.

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 military industry that prospered during World War II grew into what President Eisenhower called the Military–Industrial Complex—an enormous conglomerate of industries that was powerful enough to demand ever more funding from the government, and drive U.S. foreign policy toward an endless series of expensive conflicts with no rational end goal or clear objective.

The second problem was that some countries started trying to repatriate their gold reserves from the United States as they started to recognize the diminishing purchasing power of their paper money. 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. In effect, the United States had defaulted on its commitment to redeem its dollars in gold.

The seller does not want the currency held by the buyer, and so the buyer must purchase another currency first, and incur conversion costs.

While most governments produce their own currencies, the U.S. government was the one that produced the prime reserve currency with which other governments backed theirs. This was the first time in human history that the entire planet had run on government money, and while such an idea is considered normal and unquestionable in most academic circles, it is well worth examining the soundness of this predominant form of money.

Hyperinflation is a form of economic disaster unique to government money. There was never an example of hyperinflation with economies that operated a gold or silver standard, and even when artifact money like seashells and beads lost its monetary role over time, it usually lost it slowly, with replacements taking over more and more of the purchasing power of the outgoing money.

Should a currency credibly demonstrate its supply cannot be expanded, it would immediately gain value significantly. In 2003, when the United States invaded Iraq, aerial bombardment destroyed the Iraqi central bank and with it the capability of the Iraqi government to print new Iraqi dinars. This led to the dinar drastically appreciating overnight as Iraqis became more confident in the currency given that no central bank could print it anymore.20 A similar story happened to Somali shillings after their central bank was destroyed.21 Money is more desirable when demonstrably scarce than when liable to being debased.

In the late 1960s, with the Bretton Woods system straining under the pressure of increased money supply, governments began to offload some of their gold reserves. But in 2008 that trend reversed and central banks returned to buying gold and the global supply has increased. It is ironic, and very telling, that in the era of government money, governments themselves own far more gold in their official reserves than they did under the international gold standard of 1871–1914. Gold has clearly not lost its monetary role; it remains the only final extinguisher of debt, the one money whose value is not a liability of anyone else, and the prime global asset which carries no counterparty risk. Access to its monetary role, however, has been restricted to central banks, while individuals have been directed toward using government money.

As Alan Greenspan once explained: “Central banks stand ready to lease gold in increasing quantities should the price rise.”22 (See Figure 4.23)

I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.25

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.

As an economics professor, I make sure to teach the marshmallow experiment in every course I teach, as I believe it is the single most important lesson economics can teach to individuals, and am astounded that university curricula in economics have almost entirely ignored this lesson, to the point that many academic economists have no familiarity with the term time preference altogether or its significance.

While microeconomics has focused on transactions between individuals, and macroeconomics on the role of government in the economy, the reality is that the most important economic decisions to any individual's well‐being are the ones they conduct in their trade‐offs with their future self.

Every day, an individual will conduct a few economic transactions with other people, but they will partake in a far larger 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 ex...

Debt‐fueled mass consumption is as much a normal part of capitalism as asphyxiation is a normal part of respiration.

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.

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

The family's ability to finance the individual has been eclipsed by the state's largesse, resulting in a declining incentives for maintaining a family.

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.

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.

The Use of Knowledge in Society, by Friedrich Hayek, is arguably one of the most important economic papers to have ever been written.

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 at the prices of copper and the prices of all inputs into its production and come up with an answer to the most efficient new level of production. Many professionals work 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.

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.

Prices are the only mechanism that allows trade and specialization to occur in a market economy.

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 goods3.

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 impossible.

Further, when the government owns all inputs into all the production processes of the economy, the absence of a price mechanism makes it virtually impossible to coordinate the production of various capital goods in the right quantities to allow all the factories to function. Scarcity is the starting point of all economics, and it is not possible to produce unlimited quantities of all inputs; trade‐offs need to be made, so allocating capital, land, and labor to the production of steel must come at the expense of creating more copper.

“Those who confuse entrepreneurship and management close their eyes to the economic problem…. The capitalist system is not a managerial system; it is an entrepreneurial system.”

While most of the world's countries today do not have a central planning board responsible for the direct allocation of capital goods, it is nonetheless the case in every country in the world that there is a central planning board for the most important market of all, the market for capital.

In a fractional reserve banking system similar to the one present all over the world today, banks not only lend the savings of their customers, but also their demand deposits.

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.

Whereas in a free market for capital the supply of loanable funds is determined by the market participants who decide to lend based on the interest rate, in an economy with a central bank and fractional reserve banking, the supply of loanable funds is directed by a committee of economists under the influence of politicians, bankers, TV pundits, and sometimes, most spectacularly, military generals.

It is first important to understand the distinction between loanable funds and actual capital goods. In a free market economy with sound money, savers have to defer consumption in order to save. Money that is deposited in a bank as savings is money taken away from consumption by people who are delaying the gratification that consumption could give them in order to gain more gratification in the future. The exact amount of savings becomes the exact amount of loanable funds available for producers to borrow. The availability of capital goods is inextricably linked to the reduction of consumption: actual physical resources, labor, land, and capital goods will move from being employed in the provision of final consumption goods to the production of capital goods. 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. In the capital market, the opportunity cost of capital is forgone consumption, and the opportunity cost of consumption is forgone capital investment.