The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Bitcoin is a currency without a government. But, one may ask, didn't we have gold, silver, and other metals, another class of currencies without a government? Not quite. When you trade gold, you trade “loco” Hong Kong and end up receiving a claim on a stock there, which you might need to move to New Jersey. Banks control the custodian game and governments control banks (or, rather, bankers and government officials are, to be polite, tight together).

So Bitcoin has a huge advantage over gold in transactions: clearance does not require a specific custodian. No government can control what code you have in your head.

But in October 2009, an Internet exchange2 sold 5,050 bitcoins for $5.02, at a price of $1 for 1,006 bitcoins, to register the first purchase of a bitcoin with money.

On May 22, 2010, someone else paid 10,000 bitcoins to buy two pizza pies worth $25,

understanding two distinct quantities related to the supply of a good: (1) the stock, which is its existing supply, consisting of everything that has been produced in the past, minus everything that has been consumed or destroyed; and (2) the flow, which is the extra production that will be made in the next time period. The ratio between the stock and flow is a reliable indicator of a good's hardness as money, and how well it is suited to playing a monetary role.

If people choose a hard money, with a high stock‐to‐flow ratio, as a store of value, their purchasing of it to store it would increase demand for it, causing a rise in its price, which would incentivize its producers to make more of it.

learning the importance of the stock‐to‐flow ratio, and why not all that glitters is gold.

While it is widely recognized that the rise of the city‐states dragged Europe out of the Dark Ages and into the Renaissance, the role of sound money in this rise is less recognized. It was in the city‐states that humans could live with the freedom to work, produce, trade, and flourish, and that was to a large extent the result of these city‐states adopting a sound monetary standard. It all began in Florence in 1252, when the city minted the florin, the first major European sound coinage since Julius Caesar's aureus. Florence's rise made it the commercial center of Europe, with its florin becoming the prime European medium of exchange, allowing its banks to flourish across the entire continent.

The death knell for silver's monetary role was the end of the Franco‐Prussian war, when Germany extracted an indemnity of £200 million in gold from France and used it to switch to a gold standard.

India finally switched from silver to gold in 1898, while China and Hong Kong were the last economies in the world to abandon the silver standard in 1935.

History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

Menger focused their understanding of money's soundness on its salability as a market good, whereas twentieth‐century sound money economists, like Mises, Hayek, Rothbard, and Salerno, focused their analysis of money's soundness on its resistance to control by a sovereign.

The end of the Franco‐Prussian War in 1871, and the consequent shift of all major European powers onto the same monetary standard, namely gold, led to a period of prosperity and flourishing that continues to appear more amazing with time and in retrospect.