The Bitcoin Standard: The Decentralized Alternative to Central Banking
Saifedean Ammous

Ended: July 21, 2018

Somehow, under scale transformation, a miraculous effect emerges: rational markets do not require any individual trader to be rational. In fact they work well under zero intelligence—a zero‐intelligence crowd, under the right design, works better than a Soviet‐style management composed of maximally intelligent humans.
The relative salability of goods can be assessed in terms of how well they address the three facets of the problem of the lack of coincidence of wants mentioned earlier: their salability across scales, across space, and across time. A good that is salable across scales can be conveniently divided into smaller units or grouped into larger units, thus allowing the holder to sell it in whichever quantity he desires. Salability across space indicates an ease of transporting the good or carrying it along as a person travels, and this has led to good monetary media generally having high value per unit of weight. Both of these characteristics are not very hard to fulfill by a large number of goods that could potentially serve the function of money. It is the third element, salability across time, which is the most crucial. 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.
We can understand money's hardness through 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. A good that has a low ratio of stock‐to‐flow is one whose existing supply can be increased drastically if people start using it as a store of value. Such a good would be unlikely to maintain value if chosen as a store of value. The higher the ratio of the stock to the flow, the more likely a good is to maintain its value over time and thus be more salable across time.3
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. But because the flow is small compared to the existing supply, even a large increase in the new production is unlikely to depress the price significantly.
Those who are able to save their wealth in a good store of value are likely to plan for the future more than those who have bad stores of value. The soundness of the monetary media, in terms of its ability to hold value over time, is a key determinant of how much individuals value the present over the future, or their time preference,
wide acceptance of a medium of exchange allows all prices to be expressed in its terms, which allows it to play the third function of money: unit of account.
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.
These historical facts are still apparent in the English 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.
By the nineteenth century, however, with the development of modern banking and the improvement in methods of communication, individuals could transact with paper money and checks backed by gold in the treasuries of their banks and central banks. This made gold‐backed transactions possible at any scale, thus obviating the need for silver's monetary role, and gathering all essential monetary salability properties in the gold standard.
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%.
To understand the difference between gold and any consumable commodity, imagine the effect of a large increase in demand for it as a store of value that causes the price to spike and annual production to double. For any consumable commodity, this doubling of output will dwarf any existing stockpiles, bringing the price crashing down and hurting the holders. 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.
The high stock‐to‐flow ratio of gold makes it the commodity with the lowest price elasticity of supply, which is defined as the percentage increase in quantity supplied over the percentage increase in price. Given that the existing supply of gold held by people everywhere is the product of thousands of years of production, an X% increase in price may cause an increase in new mining production, but that increase will be trivial compared to existing stockpiles.
With these media being backed by physical gold in the vaults and allowing payment in whichever quantity or size, there was no longer a real need for silver's role in small payments.
For as long as gold and silver were used for payment directly, they both had a monetary role to play and their price relative to one another remained largely constant across time, at a ratio between 12 and 15 ounces of silver per ounce of gold, in the same range as their relative scarcity in the crust of the earth and the relative difficulty and cost of extracting them. But as paper and financial instruments backed by these metals became more and more popular, there was no more justification for silver's monetary role, and individuals and nations shifted to holding gold, leading to a significant collapse in the price of silver, from which it would not recover. The average ratio between the two over the twentieth century was 47:1, and in 2017, it stood at 75:1. While gold still has a monetary role to play, as evidenced by central banks' hoarding of it, silver has arguably lost its monetary role.
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.
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.
The second and often overlooked fact, is that, contrary to what the name might imply, no fiat money has come into circulation solely through government fiat; they were all originally redeemable in gold or silver, or currencies that were redeemable in gold or silver.
Had European nations remained on the gold standard, or had the people of Europe held their own gold in their own hands, forcing government to resort to taxation instead of inflation, history might have been different. It is likely that World War I would have been settled militarily within a few months of conflict, as one of the allied factions started running out of financing and faced difficulties in extracting wealth from a population that was not willing to part with its wealth to defend their regime's survival. But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people's accumulated wealth expropriated through inflation.
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.
As Friedrich Hayek put it: 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 Speaking in 1984, completely oblivious to the actual form of this “something they can't stop”, Friedrich Hayek's prescience sounds outstanding today. Three decades after he uttered these words, and a whole century after governments destroyed the last vestige of sound money that was the gold standard, individuals worldwide have the chance to save and transact with a new form of money, chosen freely on the market and outside government control. In its infancy, Bitcoin already appears to satisfy all the requirements of Menger, Mises, and Hayek: it is a highly salable free‐market option that is resistant to government meddling.
The sobering reality to keep in mind is that a man's lot in life will be largely determined by these trades between him and his future self. As much as he'd like to blame others for his failures, or credit others with his success, the infinite trades he took with himself are likely to be more significant than any outside circumstances or conditions. No matter how circumstances conspire against the man with a low time preference, he will probably find a way to keep prioritizing his future self until he achieves his objectives. And no matter how much fortune favors the man with a high time preference, he will find a way to continue sabotaging and shortchanging his future self.
In a free market economic system, prices are knowledge, and the signals that communicate information. Each individual decision maker is only able to carry out her decisions by examining the prices of the goods involved, which carry in them the distillation of all market conditions and realities into one actionable variable for that individual. In turn, each individual's decisions will in turn play a role in shaping the price. No central authority could ever internalize all the information that goes into forming a price or replace its function.
Reducing the value of the currency does nothing to increase the competitiveness of the industries in real terms. Instead, it only creates a one‐time discount on their outputs, thus offering them to foreigners at a lower price than locals, impoverishing locals and subsidizing foreigners. It also makes all the country's assets cheaper for foreigners, allowing them to come in and purchase land, capital, and resources in the country at a discount. In a liberal economic order, there is nothing wrong with foreigners buying local assets, but in a Keynesian economic order, foreigners are actively subsidized to come buy the country at a discount.
economic history shows that the most successful economies of the postwar era, such as Germany, Japan, and Switzerland, grew their exports significantly as their currency continued to appreciate. They did not need constant devaluation to make their exports grow; they developed a competitive advantage that made their products demanded globally, which in turn caused their currencies to appreciate compared to their trade partners, increasing the wealth of their population.
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, as discussed in Chapter 5.
Unsound money is a particularly dangerous tool in the hands of modern democratic governments facing constant reelection pressure. Modern voters are unlikely to favor the candidates who are upfront about the costs and benefits of their schemes; they are far more likely to go with the scoundrels who promise a free lunch and blame the bill on their predecessors or some nefarious conspiracy.
Difficulty adjustment is the most reliable technology for making hard money and limiting the stock‐to‐flow ratio from rising, and it makes Bitcoin fundamentally different from every other money. Whereas the rise in value of any money leads to more resources dedicated to its production and thus an increase in its supply, as Bitcoin's value rises, more effort to produce bitcoins does not lead to the production of more bitcoins.
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.
Bitcoin goes a long way in correcting the imbalance of power that emerged over the last century when the government was able to appropriate money into its central banks and thus make individuals utterly reliant on it for their survival and well‐being. The historical version of sound money, gold, did not have these advantages. Gold's physicality made it vulnerable to government control. That gold could not be moved around easily meant that payments using it had to be centralized in banks and central banks, making confiscation easy.
Bitcoin can thus be understood as a technology that converts electricity to truthful records through the expenditure of processing power.
In my assessment, a global monetary return to gold might be the most significant threat to Bitcoin, yet it is both unlikely to happen and unlikely to destroy Bitcoin completely.
“Blockchain technology,” to the extent that such a thing exists, is not an efficient or cheap or fast way of transacting online. It is actually immensely inefficient and slow compared to centralized solutions. The only advantage that it offers is eliminating the need to trust in third‐party intermediation. The only possible uses of this technology are in avenues where removing third‐party intermediation is of such paramount value to end users that it justifies the increased cost and lost efficiency. And the only process for which it actually can succeed in eliminating third‐party intermediation is the process of moving the native token of the network itself, as the code of the blockchain has no integrated control over anything taking place outside it.
The second implication is that all the “blockchain technology” applications being touted as revolutionizing banking or database technology are utterly doomed to fail in achieving anything more than fancy demos that will never transfer to the real world, because they will always be a highly inefficient way for the trusted third parties that operate them to conduct their business. It is outside the realm of possibility that a technology designed specifically to eliminate third‐party intermediation could end up serving any useful purpose to the intermediaries it was created to replace.
J. W. Weatherman has started an open source project to assess threats to the Bitcoin network, which can be found on