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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
- Veröffentlichungsjahr: 2018
A comprehensive and authoritative exploration of Bitcoin and its place in monetary history
When a pseudonymous programmer introduced "a new electronic cash system that’s fully peer-to-peer, with no trusted third party" to a small online mailing list in 2008, very few people paid attention. Ten years later, and against all odds, this upstart autonomous decentralized software offers an unstoppable and globally accessible hard money alternative to modern central banks. The Bitcoin Standard analyzes the historical context to the rise of Bitcoin, the economic properties that have allowed it to grow quickly, and its likely economic, political, and social implications.
While Bitcoin is an invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space. Author Saifedean Ammous takes the reader on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the reader with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art. Compellingly, Ammous shows that it is no coincidence that the loftiest achievements of humanity have come in societies enjoying the benefits of sound monetary regimes, nor is it coincidental that monetary collapse has usually accompanied civilizational collapse.
With this background in place, the book moves on to explain the operation of Bitcoin in a functional and intuitive way. Bitcoin is a decentralized, distributed piece of software that converts electricity and processing power into indisputably accurate records, thus allowing its users to utilize the Internet to perform the traditional functions of money without having to rely on, or trust, any authorities or infrastructure in the physical world. Bitcoin is thus best understood as the first successfully implemented form of digital cash and digital hard money. With an automated and perfectly predictable monetary policy, and the ability to perform final settlement of large sums across the world in a matter of minutes, Bitcoin's real competitive edge might just be as a store of value and network for the final settlement of large payments a digital form of gold with a built-in settlement infrastructure.
Ammous' firm grasp of the technological possibilities as well as the historical realities of monetary evolution provides for a fascinating exploration of the ramifications of voluntary free market money. As it challenges the most sacred of government monopolies, Bitcoin shifts the pendulum of sovereignty away from governments in favor of individuals, offering us the tantalizing possibility of a world where money is fully extricated from politics and unrestrained by borders.
The final chapter of the book explores some of the most common questions surrounding Bitcoin: Is Bitcoin mining a waste of energy? Is Bitcoin for criminals? Who controls Bitcoin, and can they change it if they please? How can Bitcoin be killed? And what to make of all the thousands of Bitcoin knockoffs, and the many supposed applications of Bitcoin's 'block chain technology'? The Bitcoin Standard is the essential resource for a clear understanding of the rise of the Internet's decentralized, apolitical, free-market alternative to national central banks.
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Table of Contents
Cover
Title Page
Copyright
Dedication
About the Author
Author's Preface to 2021 Update
Foreword
Prologue
Notes
Chapter 1: Money
Notes
Chapter 2: Primitive Moneys
Notes
Chapter 3: Monetary Metals
Why Gold?
Roman Golden Age and Decline
Byzantium and the Bezant
The Renaissance
La Belle Époque
Chapter 4: Government Money
Monetary Nationalism and the End of the Free World
The Interwar Era
World War II and Bretton Woods
Government Money's Track Record
Notes
Chapter 5: Money and Time Preference
Monetary Inflation
Saving and Capital Accumulation
Innovations: “Zero to One” versus “One to Many”
Artistic Flourishing
Notes
Chapter 6: Capitalism's Information System
Capital Market Socialism
Business Cycles and Financial Crises
Sound Basis for Trade
Notes
Chapter 7: Sound Money and Individual Freedom
Should Government Manage the Money Supply?
Unsound Money and Perpetual War
Limited versus Omnipotent Government
The Bezzle
Notes
Chapter 8: Digital Money
Bitcoin as Digital Cash
Supply, Value, and Transactions
Notes
Appendix to Chapter 8
Chapter 9: What Is Bitcoin Good For?
Store of Value
Individual Sovereignty
International and Online Settlement
Global Unit of Account
Notes
Chapter 10: Bitcoin Questions
Is Bitcoin Mining a Waste?
Out of Control: Why Nobody Can Change Bitcoin
Antifragility
Can Bitcoin Scale?
Is Bitcoin for Criminals?
How to Kill Bitcoin: A Beginners' Guide
Altcoins
Blockchain Technology
11
Notes
Acknowledgments
Bibliography
Online Resources
List of Figures
List of Tables
Index
End User License Agreement
List of Tables
Chapter 3
Table 1 Major European Economies' Periods Under the Gold Standard
Chapter 4
Table 2 Change in Value of National Currency Against the Swiss Franc During W...
Table 3 The Ten Countries with Highest Average Annual Broad Money Supply Grow...
Table 4 Average Annual Percent Increase in Broad Money Supply for the Ten Lar...
Chapter 7
Table 5 Conflict Deaths in the Last Five Centuries
Chapter 8
Table 6 Bitcoin Supply and Growth Rate
Table 7 Bitcoin Supply and Growth Rate (Projected)
Table 8 Annual Transactions and Average Daily Transactions
Table 9 Total Annual US Dollar Value of All Bitcoin Network Transactions
Table 10 Average Daily Percentage Change and Standard Deviation in the Market...
List of Illustrations
Chapter 3
Figure 1 Global gold stockpiles and annual stockpile growth rate.
Figure 2 Existing stockpiles as a multiple of annual production.
Figure 3 Price of gold in silver ounces, 1687–2017.
Figure 4 Central bank official gold reserves, tons.
Chapter 4
Figure 5 Major national exchange rates vs. Swiss Franc during WWI. Exchange ...
Figure 6 Broad money average annual growth rate for 167 currencies, 1960–201...
Figure 7 Annual broad money growth rate in Japan, U.K., United States, and E...
Chapter 5
Figure 8 Purchasing power of gold and wholesale commodity index in England, ...
Figure 9 Price of commodities in gold and in U.S. dollars, in log scale, 179...
Figure 10 Major currencies priced in gold, 1971–2017.
Figure 11 Oil priced in U.S. dollars and ounces of gold, 1861–2017, as multi...
Figure 12 National savings rates in major economies, 1970–2016, %.
Chapter 6
Figure 13 Unemployment rate in Switzerland, %.
Chapter 8
Figure 14 Bitcoin supply and supply growth rate assuming blocks are issued e...
Figure 15 Projected bitcoin and national currency percentage growth in suppl...
Figure 16 Price of bitcoin in US dollars.
Figure 17 Annual transactions on the bitcoin network.
Figure 18 Average U.S. dollar value of transaction fees on bitcoin network, ...
Figure 19 Monthly 30-day volatility for bitcoin and the USD Index.
Chapter 9
Figure 20 Global oil consumption, production, proven reserves, and ratio of ...
Figure 21 Total available global stockpiles divided by annual production.
Chapter 10
Figure 22 Blockchain decision chart.
Guide
Cover
Table of Contents
Begin Reading
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THE BITCOIN STANDARD
The Decentralized Alternative to Central Banking
Saifedean Ammous
Copyright © 2018 by Saifedean Ammous. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993, or fax (317) 572–4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is Available:
ISBN 9781119473862 (Hardcover)
ISBN 9781119473893 (ePDF)
ISBN 9781119473916 (ePub)
Cover Design: Wiley
Cover Images: REI stone © Danita Delimont/Getty Images; gold bars © Grassetto/Getty Images; QR code/Courtesy of Saifedean Ammous
To my wife and daughter, who give me a reason to write.
And to Satoshi Nakamoto, who gave me something worth writing about.
About the Author
Saifedean Ammous is an independent scholar researching and teaching bitcoin and economics in the Austrian school tradition on his website: www.saifedean.com.
Author's Preface to 2021 Update
Three years after the initial publication of The Bitcoin Standard in 2018, interest in the book has continued to grow steadily, with each of the first three months of 2021 registering a record in monthly sales, and translations rights sold for 25 languages. The growing demand made me consider publishing a second edition of the book, correcting some unfortunate errors, updating the book with the data and developments of the intervening three years, and adding two new chapters to discuss bitcoin's scaling and energy consumption in more depth. But a lot has changed in the world of bitcoin over the last three years, and introducing the data and developments of these years would require significant edits to the text. The Bitcoin Standard, and its analysis and conclusions, was the product of its time, a snapshot of a specific point in bitcoin's history, after the contentious hard fork wars were decisively resolved in a way that cemented bitcoin's value proposition of an immutable hard monetary policy, when the total value of the bitcoin network had settled around the milestone of $100 billion, just before the network was to enter its second decade and mature into an investment-grade asset class attracting the attention of the world's major financial institutions and corporations. While the events of the last three years do not invalidate the analysis and conclusions of the book, including them would change the book significantly from the original text, popular with readers around the world, and result in the creation of a different book, a product of a different time in bitcoin's life.
Instead of a significantly altered second edition, and in consultation with my editor, I decided to let The Bitcoin Standard live on in its original form, with only some minor adjustments to correct a few obvious mistakes, some of which were glaring, though inconsequential to the substance and arguments of the book. I will instead include new developments and analysis in a sequel, The Fiat Standard: The Debt Slavery Alternative to Human Civilization. The sequel will analyze the rise of bitcoin by analyzing the workings of the fiat monetary system using the same approach, methods, and terminology used in studying bitcoin in The Bitcoin Standard.
Unexpected to me at the time of writing, The Bitcoin Standard has proven popular among corporations and financial institutions entering the bitcoin space. The most astonishing compliment the book received was when Michael Saylor, CEO of publicly traded software intelligence firm Microstrategy, decided to put his company on a bitcoin standard, making bitcoin its prime treasury reserve asset. Mr. Saylor has not only backed his conviction in bitcoin by putting significant amounts of his personal wealth and company treasury in bitcoin, but he has, in a very short period of time, become one of the leading thinkers and analysts of bitcoin, as well as one of its most effective communicators. The conviction, courage, and clarity of Mr. Saylor in pursuing a bitcoin standard has been an inspiration, and I am honored he has agreed to write a foreword to include with this reprint, to contextualize the importance of this book for the continued emergence of a global bitcoin standard.
With the revisions complete, and a new foreword to introduce the book from the world's pioneering leader in adopting the bitcoin standard, I hope readers find this version of the book worthy of a place on their bookshelves, and in their recommendations to family, friends, and colleagues, well into the future.
Saifedean AmmousAmman, JordanApril 27, 2021
Foreword
by Michael J. Saylor
In March 2020, the world was struck by a pandemic, which brought entire segments of our economy to a grinding halt, and interrupted patterns of behavior that we had all grown accustomed to over the course of hundreds of years. Offices and schools closed, public gatherings ceased, commercial and recreational travel were stopped, and in-person meetings became impossible or impractical. Stores were closed, factories idled, aircraft were grounded, ships anchored, roads were blocked, and borders closed.
The monetary response of policymakers to this economic shock was unprecedented. The supply of currency expanded at the fastest rate in modern history, with every nation engaged in aggressive asset purchases, fiscal stimulus, deficit spending, and interest rate suppression. The result was a K-shaped recovery—asset-rich firms rapidly bounced back and had their best performing year of the century, while operating companies saw their revenues collapse and their earnings dissipate.
The cognitive dissonance was bewildering, as was the massive wealth redistribution. Purely digital firms saw their demand and revenues explode upwards. Brick-and-mortar retail, travel, hospitality, and entertainment industries struggled to stay solvent. MicroStrategy was positioned in the middle of this economic landscape—and we spent the entire second quarter transforming our operations to become digital first, by rebuilding the sales, marketing, and services operations around our website, and implementing videoconferencing, automation, cloud services, and remote work.
By June, we had done enough work and gained enough information to conclude that the five-hundred-million-dollar war chest that we were saving for a rainy day would be of no use in the new virtual world, and we would probably generate an additional five hundred million in cash flow due to our digital transformation. The good news was that we had plenty of cash and a high prospect of generating more over time. The bad news was that the monetary inflation rate had tripled, and the price of other assets was exploding at the fastest rate in a generation. Our treasury was a rapidly melting ice cube, and we needed to act quickly if we didn't want to see all the value it represented waste away.
This catalyzed a mad scramble for a solution to our problem. How does a modern corporation protect its balance sheet in an environment of monetary inflation where the currency is losing 15% of its purchasing power each year, while the after-tax yields available from traditional treasury instruments are effectively zero? A company generating seventy-five million per year in cash flow, holding five hundred million dollars in treasury balances at a negative real yield of 15% is destroying as much shareholder value as it is creating. In essence, we were running as hard as we could to stand still.
After considering and dismissing cash, bonds, real estate, equity, derivatives, art, commodities, and collectibles as treasury assets, we were left with just precious metals and cryptocurrencies. It was at this point in my search for a solution that I discovered The Bitcoin Standard by Saifedean Ammous, and it was this book, more than any other, that provided the holistic economic framework that I needed to interpret the macroeconomic forces reshaping our world, distorting our markets, and buffeting corporations.
The Bitcoin Standard should be required reading for everyone in modern society. It offers a concise, coherent narrative of monetary theory, the history of money, practical economics, and the impact of political policy on business, culture, and the economy. The book contains perhaps one of the best articulations of the virtues of strong money and the dangers of weak currency yet presented in modern business literature. The Bitcoin Standard also masterfully debunks the myths of modern monetary theory and the broken ideas that have dominated the fiat economic school of thought since the early twentieth century.
In May 2020, this book was critical in leading me to conclude that bitcoin was the solution to our corporate treasury problem. Our firm elected to invest our cash assets in bitcoin in August 2020, eventually adopting it as our primary treasury reserve asset and purchasing $2.2 billion in BTC over the following six months. The Bitcoin Standard helped us realize that the best business strategy for our firm was to hold just a small working capital balance in fiat currencies, sweeping the rest of our cash flows into our treasury and converting those sums into bitcoin as soon as practical. As I write these words, 99% of our assets are stored in bitcoin, with the remaining 1% stored in the local currencies required to do business in various markets. In essence, MicroStrategy has adopted the bitcoin standard.
The Bitcoin Standard is my first recommendation for those seeking a holistic appreciation of the economic theory, political history, and technological developments that have driven the growth of the bitcoin network and define its future trajectory. It is suitable for individuals, investors, executives, technologists, politicians, journalists, and academics alike, regardless of their agenda. Bitcoin is the world's first digital monetary network. Bitcoin is also the world's first engineered monetary asset. Together, these traits represent the most disruptive technology in the world, the greatest opportunity currently available to those who wish to create something new and wonderful, and the solution to the store-of-value problem faced by 7.8 billion people, 100+ million companies, and hundreds of trillions of dollars of investor capital.
I hope you enjoy this book as much as I did, and benefit from ideas contained within these pages.
Michael J. SaylorChairman & CEOMicroStrategyMiami Beach, FL24 March 2021
Prologue
On October 31, 2008, a computer programmer going by the pseudonym Satoshi Nakamoto sent an email to a cryptography mailing list to announce that he had produced a “new electronic cash system that's fully peer-to-peer, with no trusted third party.”1 He copied the abstract of the paper explaining the design, and a link to it online. In essence, bitcoin offered a payment network with its own native currency, and used a sophisticated method for members to verify all transactions without having to trust in any single member of the network. The currency was issued at a predetermined rate to reward the members who spent their processing power on verifying the transactions, thus providing a reward for their work. The startling thing about this invention was that, contrary to many other previous attempts at setting up a digital cash, it actually worked.
While a clever and neat design, there wasn't much to suggest that such a quirky experiment would interest anyone outside the circles of cryptography geeks. For months this was the case, as barely a few dozen users worldwide were joining the network and engaging in mining and sending each other coins that began to acquire the status of collectibles, albeit in digital form.
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.3 The price was calculated by measuring the value of the electricity needed to produce a bitcoin. In economic terms, this seminal moment was arguably the most significant in bitcoin's life. Bitcoin was no longer just a digital game being played within a fringe community of programmers; it had now become a market good with a price, indicating that someone somewhere had developed a positive valuation for it. On May 22, 2010, someone else paid 10,000 bitcoins to buy two pizza pies worth $25, representing the first time that bitcoin was used as a medium of exchange. The token had needed seven months to transition from being a market good to being a medium of exchange.
Since then, the bitcoin network has grown in the number of users and transactions, and the processing power dedicated to it, while the value of its currency has risen quickly, exceeding $7,000 per bitcoin as of November 2017.4 After eight years, it is clear that this invention is no longer just an online game, but a technology that has passed the market test and is being used by many for real-world purposes, with its exchange rate being regularly featured on TV, in newspapers, and on websites along with the exchange rates of national currencies.
Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. 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. While bitcoin is a new invention of the digital age, the problems it purports to solve—namely, providing a form of money that is under the full command of its owner and likely to hold its value in the long run—are as old as human society itself. This book presents a conception of these problems based on years of studying this technology and the economic problems it solves, and how societies have previously found solutions for them throughout history. My conclusion may surprise those who label bitcoin a scam or ruse of speculators and promoters out to make a quick buck. Indeed, bitcoin improves on earlier “store of value” solutions, and bitcoin's suitability as the sound money of a digital age may catch naysayers by surprise.
History can foreshadow what's to come, particularly when examined closely. And time will tell just how sound the case made in this book is. As it must, the first part of the book explains money, its function and properties. As an economist with an engineering background, I have 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.
The second part of the book discusses the individual, social, and global implications of sound and unsound forms of money throughout history. Sound money allows people to think about the long term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and the advance of human civilization. Money is the information and measurement system of an economy, and sound money is what allows trade, investment, and entrepreneurship to proceed on a solid basis, whereas unsound money throws these processes into disarray. Sound money is also an essential element of a free society as it provides for an effective bulwark against despotic government.
The third section of the book explains the operation of the bitcoin network and its most salient economic characteristics, and analyzes the possible uses of bitcoin as a form of sound money, discussing some use cases which bitcoin does not serve well, as well as addressing some of the most common misunderstandings and misconceptions surrounding it.
This book is written to help the reader understand the economics of bitcoin and how it serves as the digital iteration of the many technologies used to fulfill the functions of money throughout history. This book is not an advertisement or invitation to buy into the bitcoin currency. Far from it. The value of bitcoin is likely to remain volatile, at least for a while; the bitcoin network may yet succeed or fail, for whatever foreseeable or unforeseeable reasons; and using it requires technical competence and carries risks that make it unsuited for many people. This book does not offer investment advice, but aims at helping elucidate the economic properties of the network and its operation, to provide readers an informed understanding of bitcoin before deciding whether they want to use it.
Only with such an understanding, and only after extensive and thorough research into the practical operational aspects of owning and storing bitcoins, should anyone consider holding value in bitcoin. While bitcoin's rise in market value may make it appear like a no-brainer as an investment, a closer look at the myriad hacks, attacks, scams, and security failures that have cost people their bitcoins provides a sobering warning to anyone who thinks that owning bitcoins provides a guaranteed profit. Should you come out of reading this book thinking that the bitcoin currency is something worth owning, your first investment should not be in buying bitcoins, but in time spent understanding how to buy, store, and own bitcoins securely. It is the inherent nature of bitcoin that such knowledge cannot be delegated or outsourced. There is no alternative to personal responsibility for anyone interested in using this network, and that is the real investment that needs to be made to get into bitcoin.
Notes
1
The full email can be found on the Satoshi Nakamoto Institute archive of all known Satoshi Nakamoto writings, available at
www.nakamotoinstitute.org
. “Re: Bitcoin P2P e-cash paper.” Received by The Cryptography Mailing List, 31 Oct. 2008.
2
The now-defunct
New Liberty Standard
,
newlibertystandard.wikifoundry.com/
.
3
Popper, Nathaniel.
Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
. HarperCollins, 2015.
4
In other words, in the eight years it has been a market commodity, a bitcoin has appreciated around almost eight million-fold, or, precisely 793,513,944% from its first price of $0.000994 to its all-time high at the time of writing, $7,888.
Chapter 1Money
Bitcoin is the newest technology to serve the function of money—an invention leveraging the technological possibilities of the digital age to solve a problem that has persisted for all of humanity's existence: how to move economic value across time and space. In order to understand bitcoin, one must first understand money, and to understand money, there is no alternative to the study of the function and history of money.
The simplest way for people to exchange value is to exchange valuable goods with one another. This process of direct exchange is referred to as barter, but is only practical in small circles with only a few goods and services produced. In a hypothetical economy of a dozen people isolated from the world, there is not much scope for specialization and trade, and it would be possible for individuals to each engage in the production of the most basic essentials of survival and exchange them among themselves directly. Barter has always existed in human society and continues to this day, but it is highly impractical and remains only in use in exceptional circumstances, usually involving people with extensive familiarity with one another.
In a more sophisticated and larger economy, the opportunity arises for individuals to specialize in the production of more goods and to exchange them with many more people—people with whom they have no personal relationships, strangers with whom it is utterly impractical to keep a running tally of goods, services, and favors. 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. The problem is deeper than different requirements for different goods, as there are three distinct dimensions to the problem.
First, there is the lack of coincidence in scales: what you want may not be equal in value to what you have and dividing one of them into smaller units may not be practical. Imagine wanting to sell shoes for a house; you cannot buy the house in small pieces each equivalent in value to a pair of shoes, nor does the homeowner want to own all the shoes whose value is equivalent to that of the house. Second, there is the lack of coincidence in time frames: what you want to sell may be perishable but what you want to buy is more durable and valuable, making it hard to accumulate enough of your perishable good to exchange for the durable good at one point in time. It is not easy to accumulate enough apples to be exchanged for a car at once, because they will rot before the deal can be completed. Third, there is the lack of coincidence of locations: you may want to sell a house in one place to buy a house in another location, and (most) houses aren't transportable. These three problems make direct exchange highly impractical and result in people needing to resort to performing more layers of exchange to satisfy their economic needs.
The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell. That intermediary good is a medium of exchange, and while any good could serve as the medium of exchange, as the scope and size of the economy grows it becomes impractical for people to constantly search for different goods that their counterparty is looking for, carrying out several exchanges for each exchange they want to conduct. A far more efficient solution will naturally emerge, if only because those who chance upon it will be far more productive than those who do not: a single medium of exchange (or at most a small number of media of exchange) emerges for everyone to trade their goods for. A good that assumes the role of a widely accepted medium of exchange is called money.
Being a medium of exchange is the quintessential function that defines money—in other words, it is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods. While investment is also meant to produce income to be exchanged for other goods, it is distinct from money in three respects: first, it offers a return, which money does not offer; second, it always involves a risk of failure, whereas money is supposed to carry the least risk; third, investments are less liquid than money, necessitating significant transaction costs every time they are to be spent. This can help us understand why there will always be demand for money, and why holding investments can never entirely replace money. Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.1 It is common sense, and age-old wisdom in virtually all human cultures, for individuals to want to store some portion of their wealth in the form of money, because it is the most liquid holding possible, allowing the holder to quickly liquidate if she needs to, and because it involves less risk than any investment. The price for the convenience of holding money comes in the form of the forgone consumption that could have been had with it, and in the form of the forgone returns that could have been made from investing it.
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.2
There is nothing in principle that stipulates what should or should not be used as money. Any person choosing to purchase something not for its own sake, but with the aim of exchanging it for something else, is making it de facto money, and as people vary, so do their opinions on, and choices of, what constitutes money. Throughout human history, many things have served the function of money: gold and silver, most notably, but also copper, seashells, large stones, salt, cattle, government paper, precious stones, and even alcohol and cigarettes in certain conditions. People's choices are subjective, and so there is no “right” and “wrong” choice of money. There are, however, consequences to choices.
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. It is safe to say anyone who thought he could store his wealth for the long term in fish, apples, or oranges learned this lesson the hard way, and likely had very little reason to worry about storing wealth for a while. Physical integrity through time, however, is a necessary but insufficient condition for salability across time, as it is possible for a good to lose its value significantly even if its physical condition remains unchanged. For the good to maintain its value, it is also necessary that the supply of the good not increase too drastically during the period in which the holder owns it. 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 relative difficulty of producing new monetary units determines the hardness of money: money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.
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. On the other hand, if people chose to store their wealth in an easy money, with a low stock-to-flow ratio, it would be trivial for the producers of this good to create very large quantities of it that depress the price, devaluing the good, expropriating the wealth of the savers, and destroying the good's salability across time.
I like to call this the easy money trap: anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value. The corollary to this trap is that anything that is successfully used as money will have some natural or artificial mechanism that restricts the new flow of the good into the market, maintaining its value across time. It therefore follows that for something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium.
Whenever a natural, technological, or political development resulted in quickly increasing the new supply of a monetary good, the good would lose its monetary status and be replaced by other media of exchange with a more reliably high stock-to-flow ratio, as will be discussed in the next chapter. Seashells were used as money when they were hard to find, loose cigarettes are used as money in prisons because they are hard to procure or produce, and with national currencies, the lower the rate of increase of the supply, the more likely the currency is to be held by individuals and maintain its value over time.
When modern technology made the importation and catching of seashells easy, societies that used them switched to metal or paper money, and when a government increases its currency's supply, its citizens shift to holding foreign currencies, gold, or other more reliable monetary assets. The twentieth century provided us an unfortunately enormous number of such tragic examples, particularly from developing countries. The monetary media that survived the longest are the ones that had very reliable mechanisms for restricting their supply growth—in other words, hard money. Competition is at all times alive between monetary media, and its outcomes are foretold through the effects of technology on the differing stock-to-flow ratio of the competitors, as will be demonstrated in the next chapter.
While people are generally free to use whichever goods they please as their media of exchange, the reality is that over time, the ones who use hard money will benefit most, by losing very little value due to the negligible new supply of their medium of exchange. Those who choose easy money will likely lose value as its supply grows quickly, bringing its market price down. Whether through prospective rational calculation, or the retrospective harsh lessons of reality, the majority of money and wealth will be concentrated with those who choose the hardest and most salable forms of money. But the hardness and salability of goods itself is not something that is static in time. As the technological capabilities of different societies and eras have varied, so has the hardness of various forms of money, and with it their salability. In reality, the choice of what makes the best money has always been determined by the technological realities of societies shaping the salability of different goods. Hence, Austrian economists are rarely dogmatic or objectivist in their definition of sound money. They define it not as a specific good or commodity, but as whichever money emerges on the market, freely chosen by the people who transact with it. It is not imposed by coercive authority, and its value is determined through market interaction, not government imposition.4 Free-market monetary competition is ruthlessly effective at producing sound money, as it only allows those who choose the right money to maintain considerable wealth over time. There is no need for government to impose the hardest money on society; society will have uncovered it long before it concocted its government, and any governmental imposition, if it were to have any effect, would only serve to hinder the process of monetary competition.
The full individual and societal implications of hard and easy money are far more profound than mere financial loss or gain, and are a central theme of this book, discussed thoroughly in Chapters 5, 6, and 7. 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, a pivotal concept in this book.
Beyond the stock-to-flow ratio, another important aspect of a monetary medium's salability is its acceptability by others. 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. In social settings with many peer-to-peer interactions, as computing protocols demonstrate, it is natural for a few standards to emerge to dominate exchange, because the gains from joining a network grow exponentially the larger the size of the network. Hence, Facebook and a handful of social media networks dominate the market, when many hundreds of almost identical networks were created and promoted. Similarly, any device that sends emails has to utilize the IMAP/POP3 protocol for receiving email, and the SMTP protocol for sending it. Many other protocols were invented, and they could be used perfectly well, but almost nobody uses them because to do so would preclude a user from interacting with almost everyone who uses email today, because they are on IMAP/POP3 and SMTP. 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.
Further, 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. In an economy with no recognized medium of exchange, each good will have to be priced in terms of each other good, leading to a large number of prices, making economic calculations exceedingly difficult. In an economy with a medium of exchange, all prices of all goods are expressed in terms of the same unit of account. In this society money serves as a metric with which to measure interpersonal value; it rewards producers to the extent that they contribute value to others, and signifies to consumers how much they need to pay to obtain their desired goods. Only with a uniform medium of exchange acting as a unit of account does complex economic calculation become possible, and with it comes the possibility for specialization into complex tasks, capital accumulation, and large markets. The operation of a market economy is dependent on prices, and prices, to be accurate, are dependent on a common medium of exchange, which reflects the relative scarcity of different goods. If this is easy money, the ability of its issuer to constantly increase its quantity will prevent it from accurately reflecting opportunity costs. Every unpredictable change in the quantity of money would distort its role as a measure of interpersonal value and a conduit for economic information.
Having a single medium of exchange allows the size of the economy to grow as large as the number of people willing to use that medium of exchange. The larger the size of the economy, the larger the opportunities for gains from exchange and specialization, and perhaps more significantly, the longer and more sophisticated the structure of production can become. Producers can specialize in producing capital goods that will only produce final consumer goods after longer intervals, which allows for more productive and superior products. In the primitive small economy, the structure of production of fish consisted of individuals going to the shore and catching fish with their bare hands, with the entire process taking a few hours from start to finish. As the economy grows, more sophisticated tools and capital goods are utilized, and the production of these tools stretches the duration of the production process significantly while also increasing its productivity. In the modern world, fish are caught with highly sophisticated boats that take years to build and are operated for decades. These boats are able to sail to seas that smaller boats cannot reach and thus produce fish that would otherwise not be available. The boats can brave inclement weather and continue production in very difficult conditions where less capital-intensive boats would be docked uselessly. As capital accumulation has made the process longer, it has become more productive per unit of labor, and it can produce superior products that were never possible for the primitive economy with basic tools and no capital accumulation. None of this would be possible without money playing the roles of medium of exchange to allow specialization; store of value to create future-orientation and incentivize individuals to direct resources to investment instead of consumption; and unit of account to allow economic calculation of profits and losses.
The history of money's evolution has seen various goods play the role of money, with varying degrees of hardness and soundness, depending on the technological capabilities of each era. From seashells to salt, cattle, silver, gold, and gold-backed government money, ending with the current almost universal use of government-provided legal tender, every step of technological advance has allowed us to utilize a new form of money with added benefits, but, as always, new pitfalls. By examining the history of the tools and materials that have been employed in the role of money throughout history, we are able to discern the characteristics that make for good money and the ones that make for bad money. Only with this background in place can we then move on to understand how bitcoin functions and what its role as a monetary medium is.
The next chapter examines the history of obscure artifacts and objects that have been used as money throughout history, from the Rai stones of Yap Island, to seashells in the Americas, glass beads in Africa, and cattle and salt in antiquity. Each of these media of exchange served the function of money for a period during which it had one of the best stock-to-flow ratios available to its population, but stopped when it lost that property. Understanding how and why is essential to understanding the future evolution of money and any likely role bitcoin will play. Chapter 3 moves to the analysis of monetary metals and how gold came to be the prime monetary metal in the world during the era of the gold standard at the end of the nineteenth century. Chapter 4 analyzes the move to government money and its track record. After the economic and social implications of different kinds of money are discussed in Chapters 5, 6, and 7, Chapter 8 introduces the invention of bitcoin and its monetary properties.
Notes
1
See Ludwig von Mises'
Human Action,
p. 250, for a discussion of how uncertainty about the future is the key driver of demand for holding money. With no uncertainty of the future, humans could know all their incomes and expenditures ahead of time and plan them optimally so they never have to hold any cash. But as uncertainty is an inevitable part of life, people must continue to hold money so they have the ability to spend without having to know the future.
2
Menger, Carl. “On the Origins of Money.” Trans. C. A. Foley.
Economic Journal
, vol. 2, 1892, pp. 239–55.
3
Fekete, Antal.
Whither Gold?
Winner of the 1996 International Currency Prize, Sponsored by Bank Lips, 1997,
www.professorfekete.com/articles/AEFWhitherGold.pdf
.
4
Salerno, Joseph.
Money: Sound and Unsound
. Auburn, AL, Ludwig von Mises Institute, 2010, pp. xiv–xv.
Chapter 2Primitive Moneys
Of all the historical forms of money I have come across, the one that most resembles the operation of bitcoin is the ancient system based on Rai stones on Yap Island, today a part of the Federated States of Micronesia. Understanding how the large circular stones carved from limestone functioned as money will help us explain bitcoin's operation in Chapter 8. Understanding the remarkable tale of how the Rai stones lost their monetary role is an object lesson in how money loses its monetary status once it loses its hardness.
The Rai stones that constituted money were of various sizes, rising to large circular disks with a hole in the middle that weighed up to four metric tons. They were not native to Yap, which did not contain any limestone, and all of Yap's stones were brought in from neighboring Palau or Guam. The beauty and rarity of these stones made them desirable and venerable in Yap, but procuring them was very difficult as it involved a laborious process of quarrying and then shipping them with rafts and canoes. Some of these rocks required hundreds of people to transport them, and once they arrived on Yap, they were placed in a prominent location where everyone could see them. 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 recognize 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.
For centuries, and possibly even millennia, this monetary system worked well for the Yapese. While the stones never moved, they had salability across space, as one could use them for payment anywhere on the island. The different sizes of the different stones provided some degree of salability across scales, as did the possibility of paying with fractions of a single stone. 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. Or, at least, that was the case until 1871, when an Irish-American captain by the name of David O'Keefe was shipwrecked on the shores of Yap and revived by the locals.1
O'Keefe saw a profit opportunity in taking coconuts from the island and selling them to producers of coconut oil, but he had no means to entice the locals to work for him, because they were very content with their lives as they were, in their tropical paradise, and had no use for whatever foreign forms of money he could offer them. But O'Keefe wouldn't take no for an answer; he sailed to Hong Kong, procured a large boat and explosives, took them to Palau, where he used the explosives and modern tools to quarry several large Rai stones, and set sail to Yap to present the stones to the locals as payment for coconuts. Contrary to what O'Keefe expected, the villagers were not keen on receiving his stones, and the village chief banned his townsfolk from working for the stones, decreeing that O'Keefe's stones were not of value, because they were gathered too easily. Only the stones quarried traditionally, with the sweat and blood of the Yapese, were to be accepted in Yap. Others on the island disagreed, and they did supply O'Keefe with the coconuts he sought. This resulted in conflict on the island, and in time the demise of Rai stones as money. Today, the stones serve a more ceremonial and cultural role on the island and modern government money is the most commonly used monetary medium.
While O'Keefe's story is highly symbolic, he was but the harbinger of the inevitable demise of Rai stones' monetary role with the encroachment of modern industrial civilization on Yap and its inhabitants. As modern tools and industrial capabilities reached the region, it was inevitable that the production of the stones would become far less costly than before. There would be many O'Keefes, local and foreign, able to supply Yap with an ever-larger flow of new stones. With modern technology, the stock-to-flow ratio for Rai stones decreased drastically: it was possible to produce far more of these stones every year, significantly devaluing the island's existing stock. It became increasingly unwise for anyone to use these stones as a store of value, and thus they lost their salability across time, and with it, their function as a medium of exchange.
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 similar story happened with the aggry beads used as money for centuries in western Africa. The history of these beads in western Africa is not entirely clear, with suggestions that they were made from meteorite stones, or passed on from Egyptian and Phoenician traders. What is known is that they were precious in an area where glassmaking technology was expensive and not very common, giving them a high stock-to-flow ratio, making them salable across time. Being small and valuable, these beads were salable across scale, because they could be combined into chains, necklaces, or bracelets; though this was far from ideal, because there were many different kinds of beads rather than one standard unit. They were also salable across space as they were easy to move around. In contrast, glass beads were not expensive and had no monetary role in Europe, because the proliferation of glassmaking technology meant that if they were to be utilized as a monetary unit, their producers could flood the market with them—in other words, they had a low stock-to-flow ratio.
When European explorers and traders visited West Africa in the sixteenth century, they noticed the high value given to these beads and so started importing them in mass quantities from Europe. What followed was similar to the story of O'Keefe, but given the tiny size of the beads and the much larger size of the population, it was a slower, more covert process with bigger and more tragic consequences. Slowly but surely, Europeans were able to purchase a lot of the precious resources of Africa for the beads they acquired back home for very little.2 European incursion into Africa slowly turned beads from hard money to easy money, destroying their salability and causing the erosion of the purchasing power of these beads over time in the hands of the Africans who owned them, impoverishing them by transferring their wealth to the Europeans, who could acquire the beads easily. The aggry beads later came to be known as slave beads for the role they played in fueling the slave trade of Africans to Europeans and North Americans. 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.
Seashells are another monetary medium that was widely used in many places around the world, from North America to Africa and Asia. Historical accounts show that the most salable seashells were usually the ones that were scarcer and harder to find, because these would hold value more than the ones that can be found easily.3 Native Americans and early European settlers used wampum shells extensively, for the
