The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

It doesn't mean all participants have a democratic share in decisions. One motivated participant can disproportionately move the needle (what I have studied as the asymmetry of the minority rule). But every participant has the option to be that player.

The price was calculated by measuring the value of the electricity needed to produce a bitcoin.

In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest. This makes Bitcoin the first demonstrably reliable operational example of digital cash and digital hard money.

The larger the market, the more the opportunities for specialization and exchange, but also the bigger the problem

of coincidence of wants—what you want to acquire is produced by someone who doesn't want what you have to sell.

A good that assumes the role of a widely accepted medium of exchange is called money.

From examining such human choices in market situations, Carl Menger, the father of the Austrian school of economics and founder of marginal analysis in economics, came up with an understanding of the key property that leads to a good being adopted freely as money on the market, and that is salability—the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price.

second function of money: store of value. For a good to be salable across time it has to be immune to rot, corrosion, and other types of deterioration.

A common characteristic of forms of money throughout history is the presence of some mechanism to restrain the production of new units of the good to maintain the value of the existing units.

The more people accept a monetary medium, the more liquid it is, and the more likely it is to be bought and sold without too much loss.

The details may differ, but the underlying dynamic of a drop in stock‐to‐flow ratio has been the same for every form of money that has lost its monetary role, up to the collapse of the Venezuelan bolivar taking place as these lines are being written.

A one‐time collapse in the value of a monetary medium is tragic, but at least it is over quickly and its holders can begin trading, saving, and calculating with a new one. But a slow drain of its monetary value over time will slowly transfer the wealth of its holders to those who can produce the medium at a low cost. This is a lesson worth remembering when we turn to the discussion of the soundness of government money in the later parts of the book.

language, as the word pecuniary is derived from pecus, the Latin word for cattle, while the word salary is derived from sal, the Latin word for salt.5

The Yap Island chiefs who

refused O'Keefe's cheap Rai stones understood what most modern economists fail to grasp: a money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce. Notes

But even if more people join him in monetizing copper, our hypothetical copper‐obsessed billionaire is in trouble. The rising price makes copper a lucrative business for workers and capital across the world. The quantity of copper under the earth is beyond our ability to even measure, let alone extract through mining, so practically speaking, the only binding restraint on how much copper can be produced is how much labor and capital is dedicated to the job. More copper can always be made with a higher price, and the price and quantity will continue to rise until they satisfy the monetary investors' demand; let's assume that happens at 10 million extra tons and $10,000 per ton. At some point, monetary demand must subside, and some holders of copper will want to offload some of their stockpiles to purchase other goods, because, after all, that was the point of buying copper. After the monetary demand subsides, all else being equal, the copper market would go back to its original supply‐and‐demand conditions, with 20 million annual tons selling for $5,000 each. But as the holders begin to sell their accumulated stocks of copper, the price will drop significantly below that. The billionaire will have lost money in this process; as he was driving the price up, he bought most of his stock for more than $5,000 a ton, but now his entire

stock is valued below $5,000 a ton. The others who joined him later bought at even higher prices and will have lost even more money than the billionaire himself.

Global stockpiles of these commodities at any moment in time are around the same order of magnitude as new annual production. New supply is constantly being generated to be consumed.

because they are competing with the consumers of this commodity who use it productively in industry.

This all means that the existing stockpile of gold held by people around the world is the product of thousands of years of gold production, and is orders of magnitude larger than new annual production. Over the past seven decades with relatively reliable statistics, this growth rate has always been around 1.5%, never exceeding 2%. (See Figure 1.2)

For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%. If the new increased pace of production is maintained, the stockpiles grow faster, making new increases less significant. It remains practically impossible for goldminers to mine quantities of gold large enough to depress the price significantly.

It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history, a role it continues to hold today as central banks continue to hold significant supplies of gold to protect their paper currencies.

According to the U.S. Geological Survey, the single biggest annual increase in production was around 15% in the year 1923, which translated to an increase in stockpiles around only 1.5%. Even if production were to double, the likely increase in stockpiles would only be around 3–4%.

The highest annual increase in global stockpiles happened in 1940, when stockpiles rose by around 2.6%. Not once has the annual stockpile growth exceeded that number, and not once since 1942 has it exceeded 2%.

Human civilization flourished in times and places where sound money was widely adopted, while unsound money all too frequently coincided with civilizational decline and societal collapse.

Julius Caesar, the last dictator of the Roman Republic, created the aureus coin, which contained around 8 grams of gold and was widely accepted across Europe and the Mediterranean, increasing the scope of trade and specialization in the Old World. Economic stability reigned for 75 years, even through the political upheaval of his assassination, which saw the Republic transformed into an Empire under his chosen successor, Augustus. This continued until the reign of the infamous emperor Nero, who was the first to engage in the Roman habit of “coin clipping,” wherein the Emperor would collect the coins of the population and mint them into newer coins with less gold or silver content.

With time, the Old World no longer had prosperous lands to be conquered, the ever‐increasing lavish lifestyle and growing military required some new source of financing, and the number of unproductive citizens living off the emperor's largesse and price controls increased. Nero, who ruled from 54–68 AD, had found the formula to solve this, which was highly similar to Keynes's solution to Britain's and the U.S.'s problems after World War I: devaluing the currency would at once reduce the real wages of workers, reduce the burden of the government in subsidizing staples, and provide increased money for financing other government expenditure.

Citizens of Rome and the major cities obtained their basic necessities by trade with the far‐flung corners of the empire, and this helps explain the growth in prosperity, and the devastating collapse the empire suffered when this division of labor fell apart. 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.

He moved east and established Constantinople at the meeting point of Asia and Europe, birthing the Eastern Roman Empire, which took the solidus as its coin. While Rome continued its economic, social, and cultural deterioration, finally collapsing in 476 AD, Byzantium survived for 1,123 years while the solidus became the longest‐serving sound currency in human history.

legacy of Constantine in maintaining the integrity of the solidus made it the world's most recognizable and widely accepted currency, and it came to be known as the bezant.

With the economic liberation of the European peasantry came the political, scientific, intellectual, and cultural flourishing of the Italian city‐states, which later spread across the

or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction.

Two particular technological advancements would move Europe and the world away from physical coins and in turn help bring about the demise of silver's monetary role: the telegraph,

first deployed commercially in 1837, and the growing network of trains, allowing transportation across Europe. With these two innovations, it became increasingly feasible for banks to communicate with each other, sending payments efficiently across space when needed and debiting accounts instead of having to send physical payments. This led to the increased use of bills, checks, and paper receipts as monetary media instead of physical gold and silver coins.

The more nations officially adopted the gold standard, the more marketable gold became and the larger the incentive became for other nations to join.

It is the author's opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and

capital brought about by the demonetization of the monetary metal these countries utilized.

This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn't have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

Some of the most important technological, medical, economic, and artistic human achievements were invented during the era of the gold standard, which partly explains why it was known as la belle époque, or the beautiful era, across Europe.

Britain witnessed the peak years

of Pax Britannica, where the British Empire expanded worldwide and was not engaged in large military conflicts. In 1899, when American writer Nellie Bly set out on her record‐breaking journey around the world in 72 days, she c...

United States this era was called the Gilded Age, where economic growth boomed after the restoration of the gold standard in 1879 in the wake of the American Civil War.

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.

Britain, as the global superpower at that time, had benefited from having its money used as a reserve currency all around the world, resulting in its reserves of gold being a tiny fraction of its outstanding money supply.

The fatal flaw of the gold standard at the heart of these two problems was that settlement in physical gold is cumbersome, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations—banks and central banks—leaving them vulnerable to being taken over by governments.

But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills.14

Even as central banks repeatedly declared the end of gold's monetary role, their actions in maintaining their gold reserves ring truer.

Only through redeemability into salable forms of money did government paper money gain its salability. Government may issue decrees mandating people use their paper for payments, but no government has imposed this salability on papers without these papers having first been redeemable in gold and silver. Until this day, all government central banks maintain reserves to back up the value of their national currency. The majority of countries maintain some gold in their reserves, and those countries which do not have gold reserves maintain reserves in the form of other countries' fiat currencies, which are in turn backed by gold reserves.

No pure fiat currency exists in circulation without any form of backing.

That the government demands payment in its money for its taxes may guarantee a longer life for that money, but only if the government is able to prevent the quick expansion of the supply can it protect its value from depreciating quickly.

This isn’t fully true, the Federal Reserve has the power over supply and they are not a part of the government.