The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

When a country's currency is devalued, its products become cheaper to foreigners, leading to more goods leaving the country, while holders of the currency seek to purchase foreign currencies to protect themselves from devaluation. As devaluation is usually accompanied by artificially low interest rates, capital seeks exit from the country to go where it can be better rewarded, exacerbating the devaluation of the currency. On the other hand, countries which maintained their currency better than others would thus witness an influx of capital whenever their neighbors devalued, leading to their currency appreciating further. Devaluation would sow the seeds of more devaluation, whereas currency appreciation would lead to more appreciation, creating a problematic dynamic for the two governments. No such problems could exist with the gold standard, where the value of the currency in both countries was constant, because it was gold, and movements of goods and capital would not affect the value of the currency.