What you will learn from reading The Bitcoin Standard:
– What sound money is, and why fiat (government backed) money can’t be sound.
– Why Keynesian economics is wrong and what the implications are.
– How bubbles create illusory wealth that disappears when they pop.
The Bitcoin Standard Book Summary
The Bitcoin Standard book summary is a deep dive into the role money has played across history. From Rai Stones to Gold to Fiat Currencies and now Bitcoin. If you want to understand more about the popularity of Bitcoin and the problems it aims to solve then this is the book for you!
Distilling the Essence:
As an economist with an engineering background Saifedean Ammous has always sought to understand a technology in terms of the problems it purports to solve, which allows for the identification of its functional essence and its separation from incidental, cosmetic, and insignificant characteristics.
By understanding the problems money attempts to solve, it becomes possible to elucidate what makes for sound and unsound money, and to apply that conceptual framework to understand how and why various goods, such as seashells, beads, metals, and government money, have served the function of money, and how and why they may have failed at it or served society’s purposes to store value and exchange it.
A good’s salability across time refers to its ability to hold value into the future, allowing the holder to store wealth in it, which is the 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.
Similarly, with money, it was inevitable that one, or a few, goods would emerge as the main medium of exchange, because the property of being exchanged easily matters the most. A medium of exchange, as mentioned before, is not acquired for its own properties, but for its salability.
Monetary status is a spontaneously emergent product of human action, not a rational product of human design.
The owner of the stone could use it as a payment method without it having to move: all that would happen is that the owner would announce to all townsfolk that the stone’s ownership has now moved to the recipient. The whole town would recognise the ownership of the stone and the recipient could then use it to make a payment whenever he so pleased. There was effectively no way of stealing the stone because its ownership was known by everybody.
The stones’ salability across time was assured for centuries by the difficulty and high cost of acquiring new stones, because they didn’t exist in Yap and quarrying and shipping them from Palau was not easy.
The very high cost of procuring new stones to Yap meant that the existing supply of stones was always far larger than whatever new supply could be produced at a given period of time, making it prudent to accept them as a form of payment. In other words, Rai stones had a very high stock-to-flow ratio, and no matter how desirable they were, it was not easy for anyone to inflate the supply of stones by bringing in new rocks.
The Yap Island chiefs who refused O’Keefe’s cheap Rai stones understood what most modern economists fail to grasp: a money that money 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.
When Money Fails:
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.
With falls in the value of its money, the long process of terminal decline of the empire resulted in a cycle that might appear familiar to modern readers: coin clipping reduced the aureus’s real value, increasing the money supply, allowing the emperor to continue imprudent overspending, but eventually resulting in inflation and economic crises, which the misguided emperors would attempt to ameliorate via further coin clipping.
It should be of interest to modern Keynesian economists, as well as to the present generation of investors, that although the emperors of Rome frantically tried to “manage” their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides.
Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them.
The interrelations of money:
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. The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period.
History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours. With gold in the hands of increasingly centralized banks, it gained salability across time, scales, and location, but lost its property as cash money, making payments in it subject to the agreement of the financial and political authorities issuing receipts, clearing checks, and hoarding the gold.
The Gold Standard:
Different currencies were simply different weights of physical gold, and the exchange rate between one nation’s currency and the other was the simple conversion between different weight units, as straightforward as converting inches to centimeters.
In the same way metric and imperial units are just a way to measure the underlying length, national currencies were just a way to measure economic value as represented in the universal store of value, gold. Some countries’ gold coins were fairly salable in other countries, as they were just gold. Each country’s money supply was not a metric to be determined by central planning committees stocked with Ph.D. holders, but the natural working of the market system.
While gold was very hard money, the instruments used for settlements of payments between central banks, although nominally redeemable in gold, ended up in practice being easier to produce than gold.
These two flaws meant that the gold standard was always vulnerable to a run on gold in any country where circumstances might lead a large enough percentage of the population to demand redemption of their paper money in gold.
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 centralising physical gold reserves in a few locations-banks and central banks-leaving them vulnerable to being taken over by governments.
As the number of payments and settlements conducted in physical gold became an infinitely smaller fraction of all payments, the banks and central banks holding the gold could create money unbacked by physical gold and use it for settlement.
The network of settlement became valuable enough that its owners’ credit was effectively monetised. 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.
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, 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.
The Return to Gold:
Although gold was supposedly demonetized fully in 1971, central banks continued to hold significant gold reserves, and only disposed of them slowly, before returning to buying gold in the last decade. Even as central banks repeatedly declared the end of gold’s monetary role, their actions in maintaining their gold reserves ring truer. From a monetary competition perspective, keeping gold reserves is a perfectly rational decision. 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 seniorage accrues to the issuer of the reserve currency, not the nation’s central bank,
Contrary to the most egregiously erroneous and central tenet of the state theory of money, it was not government that decreed gold as money; rather, it is only by holding gold that governments could get their money to be accepted at all.
Government intervention and Money:
Government is immune to the concept of opportunity costs, and rarely are the negative results of government intervention in economic activity even considered, and if they are, it is only to justify even more government intervention.
With no standard of value to allow an international price mechanism to exist, and with governments increasingly captured by statist and isolationist impulses, currency manipulation emerged as a tool of trade policy, with countries seeking to devalue their currencies in order to give their exporters an advantage.
More trade barriers were erected, and economic nationalism became the ethos of that era, with predictably disastrous consequences. The nations that had prospered together 40 years earlier, trading under one universal gold standard, now had large monetary and trade barriers between them, loud populist leaders who blamed all their failures on other nations, and a rising tide of hateful nationalism.
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. It was only natural that such a process would lead to short-term decision making where politicians abuse the currency to fund their reelection campaigns at the expense of future generations. As H. L. Mencken put it: “Every election is an advanced auction on stolen goods.”
Thanks to the popularity of the most dangerous and absurd of all Keynesian fallacies, the notion that government spending on military effort would aid economic recovery.
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.
The problems with moving from the Gold Standard:
The automatic adjustment mechanisms of the gold standard had always provided a constant measuring rod against which all economic activity was measured, but the floating currencies gave the world economy imbalances.
The International Monetary Fund’s role was to perform an impossible balancing act between all the world’s governments to attempt to find some form of stability or “equilibrium” in this mess, keeping exchange rates within some arbitrary range of predetermined values while trade and capital flows were moving and altering them. 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.
Only governments could redeem their dollars in gold from the United States, but that was to prove far more complicated than expected. Today, each ounce of gold for which foreign central banks received $35 is worth in excess of $1,200.
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 seniorage 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 monetised by inflating the currency that the entire world
This move by President Nixon completed the process begun with World War I, transforming the world economy from a global gold standard to a standard based on several government-issued currencies. For a world that was growing increasingly globalised along with advancements in transportation and telecommunications, freely fluctuating exchange rates constituted what Hoppe termed “a system of partial bartering” things from people who lived on the other side of imaginary lines in the sand now required utilizing more than one medium of exchange and reignited the age-old problem of lack of coincidence of wants.
The seller does not want the currency held by the buyer, and so the buyer must purchase another currency first, and incur conversion costs. As advances in transportation and telecommunications continue to increase global economic integration, the cost of these inefficiencies just keeps getting bigger. The market for foreign exchange, at $5 trillion of daily volume, exists purely as a result of this inefficiency of the absence of a single global homogeneous international currency.
Time preferences of Money:
The reduction in the purchasing power of money is similar to a form of taxation or expropriation, reducing the real value of one’s money even while the nominal value is constant. In modern economies government-issued money is inextricably linked to artificially lower interest rates, which is a desirable goal for modern economists because it promotes borrowing and investing. But the effect of this manipulation of the price of capital is to artificially reduce the interest rate that accrues to savers and investors, as well as the one paid by borrowers. The natural implication of this process is to reduce savings and increase borrowing.
At the margin, individuals will consume more of their income and borrow more against the future. This will not just have implications on their time preference in financial decisions; it will likely reflect on everything in their lives.
The move from money that holds its value or appreciates to money that loses its value is very significant in the long run: society saves less, accumulates less capital, and possibly begins to consume capital; worker productivity stays constant or declines, resulting in the stagnation of real wages, even if nominal wages can be made to increase its through the magical power of printing ever more depreciating pie of paper money. As people start spending more and saving less, ue 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.
Consumption is key:
The twentieth century’s binge on conspicuous consumption cannot be understood separately from the destruction of sound money and the outbreak of Keynesian high-time-preference thinking, in vilifying savings and deifying consumption as the key to economic prosperity.
The reduced incentive to save is mirrored with an increased incentive to spend, and with interest rates regularly manipulated downwards and banks able to issue more credit than ever, lending stopped being restricted to investment, but has moved on to consumption. Credit cards and consumer loans allow individuals to borrow for the sake of consumption without even the pretense of performing investment in the future.
The Problem with Socialism:
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.
Without a market for capital where independent actors can bid for capital, there can be no price for capital overall or for individual capital goods. Without prices of capital goods reflecting their relative supply and demand, there is no rational way of determining the most productive uses of capital, nor is there a rational way of determining how much to produce of each capital good. In a world in which the government owns the steel factory, as well as all the factories that will utilize steel in the production of various consumer and capital goods, there can be no price emerging for steel, or for the goods it is used to produce, and hence, no possible way of knowing which uses of steel are the most important and valuable.
Interest rates and misallocation of capital:
Whenever a government has started on the path of inflating the money supply, there is no escaping the negative consequences. If the central bank stops the inflation, interest rates rise, and a recession follows as many of the projects that were started are exposed as unprofitable and have to be abandoned, exposing the misallocation of resources and capital that took place.
If the central bank were to continue its inflationary process indefinitely, it would just increase the scale of misallocations in the economy, wasting even more capital and making the inevitable recession even more painful. There is no escape from paying a hefty bill for the supposed free lunch that Keynesian cranks foisted upon us.
Planning leads to inaccurate price signals:
The relative stability of sound money, for which it is selected by the market, allows for the operation of a free market through price discovery and individual decision making.
Unsound money, whose supply is centrally planned, cannot allow for the emergence of accurate price signals, because it is by its very nature controlled. Through centuries of price controls, central planners have tried to find the elusive best price to achieve the goals they wanted, to no avail.
The reason that price controls must fail is not that the central planners cannot pick the right price, but rather that by merely imposing a price-any price-they prevent the market process from allowing prices to coordinate consumption and production decisions among market participants, resulting in inevitable shortages or surpluses.
State of modern Academia:
The fundamental flaw of Friedman and Schwartz’s book is typical of modern academic scholarship: it is an elaborate exercise in substituting rigor for logic. The book systematically and methodically avoids ever questioning the causes of the financial crises that have affected the U.S. economy over a century, and instead inundates the reader with impressively researched data, facts, trivia, and minutiae.
Bubbles and Illusory Wealth:
The crash resulted from the monetary expansion of the 1920s, which generated a massive bubble of illusory wealth in the stock market. As soon as the expansion slowed down, the bubble was inevitably going burst. Once it burst, this meant a deflationary spiral where all the illusory wealth of the bubble disappears.
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. It was this illusory wealth that caused the collapse in the first place. Returning that illusory wealth to its original location is simply reassembling the house of cards again and preparing it for another, bigger and stronger fall.
The Politics of Devaluation:
This brings us to the current state of affairs in the global economy, where most governments attempt to devalue their currencies in order to boost their exports, and all complain about one anothers “unfair” manipulation of their currencies. Effectively, each country is impoverishing its citizens in order to boost its exporters and raise GDP numbers, and complaining when other countries do the same.
The economic ignorance is only matched by the mendacious hypocrisy of the politicians and economists parroting these lines. International economic summits are convened where world leaders try to negotiate each others acceptable currency devaluation, making the value of the currency an issue of geopolitical importance.
The drag of Currency Exchanges:
It is also a huge boon for large financial institutions which have generated a foreign exchange market worth trillions of dollars a day, where currencies and their futures are trading But this arrangement is likely not to the benefit of almost everyone else, particularly for people who actually have productive enterprises that owners offer valuable goods to society.
Unsound moneys link to war:
There are three fundamental reasons that drive the relationship between unsound money and war.
First, unsound money is itself a barrier to trade between countries.
because it distorts value between the countries and makes trade flows a political issue, creating animosity and enmity between governments and populations.
Second, government having access to a printing press allows it to continue fighting until it completely destroys the value of its currency, and not just until it runs out of money. With sound money, the government’s war effort was limited by the taxes it could collect. With unsound money, it is restrained by how much money it can create before the currency is destroyed, making it able to appropriate wealth far more easily.
Third, individuals dealing with sound money develop a lower time preference, allowing them to think more of cooperation rather than conflict,
The replace of liberalism by liberality:
It was after this war that the West suffered from what Barzun terms “The Great Switch,” the replacement of liberalism by liberality, the impostor claiming its mantle but in reality being its exact opposite.
Liberalism triumphed on the principle that the best government is that which governs least; now for all the western nations political wisdom has recast this ideal of liberty into liberality. The shift has thrown the vocabulary into disorder.
Whereas liberalism held the role of government as allowing individuals to live in liberty and enjoy the benefits, and suffer the consequences, of their actions, liberality was the radical notion that it was government’s role to allow individuals to indulge in all their desires while protecting them from the consequences.
Socially, economically, and politically, the role of government was recast as the wish-granting genie, and the population merely had to vote for what it wanted to have it fulfilled.
Credit creation by central banks causes unsustainable booms by allowing the financing of unprofitable projects and allowing them to continue consuming resources on unproductive activities.
In a sound monetary system, any business that survives does so by offering value to society, by receiving a higher revenue for its products than the costs it incurs for its inputs. The business is productive because it transforms inputs of a certain market price into outputs with a higher market price. Any firm that produces outputs valued at less than its inputs would go out of business, its resources freed up to be used by other, more productive firms, in what economist Joseph Schumpeter termed creative destruction.
The test of the free market is suspended as central bank direction of credit can overrule the economic reality of profit and loss.
Resources and production:
The only limited resource is human time. Each human has a limited time on earth, and that is the only scarcity we deal with as individuals. As a society, our only scarcity is in the total amount of time available to members of a society to produce different goods and services. More of any good can always be produced if human time goes toward it. The real cost of a good, then, is always its opportunity cost in terms of goods forgone to produce it.
The limit on how much we can produce of each of those metals, however, remains the opportunity cost of their production relative to one another, and not their absolute quantity. There is no better evidence for this than the fact that the rarest metal in the crust of the earth, gold, has been mined for thousands of years and continues to be mined in increasing quantities as technology advances over time.
It is a misnomer to call raw materials resources, because humans are not passive consumers of manna from heaven. Raw materials are always the product of human labor and ingenuity and thus humans are the ultimate resource, because human time, effort, and ingenuity can always be used to produce more output.
The eternal dilemma humans face with their time concerns how to store the value they produce with their time through the future. While human time is finite, everything else is practically infinite, and more of it can be produced if more human time is directed at it. Whatever object humans chose as a store of value, its value would rise, and because more of the object can always be made, others would produce more of the object to acquire the value stored in it.
Bitcoin as a reserve currency:
As Bitcoin continues to evolve in the direction of having a higher market value with higher transaction fees, it starts to look more and more like a reserve currency than a currency for everyday trading and transactions.
Bitcoin is scaling through an increase in the value of on-chain transactions, not through a rise of their number. More and more transactions are being carried out off-chain, settled on exchanges or websites that handle Bitcoin, turning Bitcoin into more of a settlement network than a direct payment network.
If this analysis is correct, and Bitcoin continues to grow in value and off-chain transactions while on-chain transactions do not grow as much, Bitcoin would be better understood as cash in the old meaning of the term, similar to gold cash reserves, rather than the modern term for cash as paper money for small transactions.
Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue Bitcoin-backed tokens to users while keeping their hoard of Bitcoins in cold storage, with each individual being able to audit in real time the holdings of the intermediary, and with online verification and reputation systems able to verify that no inflation is taking place. This would allow an infinite number of transactions to be carried out online without having to pay the high transaction fees for on-chain transactions.
Based on the foregoing analysis, the real advantage of Bitcoin lies in it being a reliable long-term store of value, and a sovereign form of money that allows individuals to conduct permissionless transactions. Bitcoin’s main uses in the foreseeable future will follow from these competitive advantages, and not from its ability to offer ubiquitous or cheap transactions.
Verification > Trust:
Bitcoin can thus be understood as a technology that converts electricity to truthful records through the expenditure of processing power.
Those who expend this electricity are rewarded with the bitcoin currency, and so they have a strong incentive to maintain its integrity. As a result of attaching a strong economic incentive for honesty, Bitcoin’s ledger has been practically incorruptible for the period of its operation so far, with no example of a successful double-spend attack on a confirmed transaction.
This integrity of the bitcoin ledger of transactions is achieved without having to rely on any single party being honest. By relying entirely on verification, Bitcoin dooms fraudulent transactions to failure and obviates the need for trust in anyone for transactions to be completed.
In other words, Bitcoin is a system built entirely on cumbersome and expensive verification so it can eliminate the need for any trust or accountability between all parties: it is 100% verification and 0% trust.
The Growth of Altcoins:
The growth of these altcoins cannot be understood outside the context of easy government money looking for easy investment, forming large bubbles in massive malinvestments.
This is why virtually all altcoins have a team in charge; they began the project, marketed it, designed the marketing material, and plugged press releases into the press as if they were news items, while also having the advantage of mining a large number of coins early before anybody had heard of the coins.
These teams are publicly known individuals, and no matter how hard they might try, they cannot demonstrate credibly that they bave no control over the direction of the currency, which undermines any claims other currencies might have to being a form of digital cash that cannot be edited or controlled by any third party.