I read the Finnish language translation of The Bitcoin Standard this week. The book is authored by Dr. Saifedean Ammous, a Lebanese associate professor of economics at Adnan Kassar School of Business, and a foreign member of the Center on Capitalism and Society at Columbia University. The translation is by Niko Laamanen, Laura Oinonen, Thomas Brand, Tomi Laitila and Anita Kalergis. The translation is of very high quality.
The Bitcoin Standard makes the case for a monetary system based on the hard currency that Bitcoin is with its decentralized and antifragile protocol and a hard supply cap. The book starts with a discussion of the essence and history of money. The first chapters walk the reader through various forms of commodity money used in a number of cultures around the world and in different ages from cattle, salt, the rai stones of Micronesia and to noble metals. The purpose of money to function as a medium of exchange, a measure of value and a store of value. Money facilitates trade beyond bartering and enables the storage of value across time and space, making it possible for civilization to organize large-scale projects that may take a considerable length of time to complete. No one wants to store value in anything perishable or easily replicable, which is why the most value is always captured by something that has a high stock-to-flow ratio. When metallurgy evolved gold became the ultimate store of value because of its chemical inertness as a noble metal and its rarity in the Earth's crust and the difficulty of finding it. What a high stock-to-flow ratio translates into is the inelasticity of supply in response to an increase in price. When the price of gold goes up, it is difficult to increase its supply. A high stock-to-flow ratio ensures the salability of a currency across time and space. Many cultures saw their money lose value when coming into contact with more advanced cultures that had the technological means to produce their commodity money cheaply in large quantities.
The gold standard was born when communications technology improved sufficiently for people to be able to use cheques guaranteed with the gold deposits of their bank to transact. The problem of having several money metals in use at the same time and the consequent varying exchange rates was solved by gold becoming the sole standard. The largest economies of Europe adopted the gold standard in the first half of the 19th century and stayed in it until 1914. The USA also adopted the gold standard in 1879. The latter half of the 19th century is known as the Belle Epoque in Europe and as the Gilded Age in America. The economy advanced at a rapid pace at the time and there were no large scale military conflicts. The savings rate was high and the formation capital was high. The late Victorian age saw the invention of many of the modern conveniences and inventions associated with the modern times including electric lights, the telegraph and the radio and airplanes.
Because the scalability of gold as a means of payment was solved by centralizing its storage to large banks and central banks and having paper notes represent it, money came under the control of the state. In 1914, most European great powers gave up for the gold standard. Ammous argues that the conflict between the Austro-Hungarian Empire and the Kingdom of Serbia would never have escalated into a multi-year global orgy of devastation if governments wouldn't have been able to confiscate their citizens' wealth through inflating their currencies instead of having to raise the money by taxation alone.
Government money or money by decree (fiat money) is money not completely redeemable by gold. It is noteworthy that no fiat currency has ever been created that hasn't been gold or silver backed first. And even today, all fiat money is partially backed by gold reserves or the currency of governments that have gold backing. Pure fiat money doesn't even exist, in contrast to modern monetary theory, which states that money is created when a sovereign demands taxes and fines to be paid in a form of money.
After WW I, Germany was unable pay its war indemnities, which it attempted to repay by inflating its currency with well-known devastating consequences. The United Kingdom attempted to maintain its currency at a valuation that underappreciated gold and overappreciated the pound. As a result, gold started flowing from Britain to the US and France. In the 1920's, the British wanted to have France, Germany and the United States to help by inflating their currencies but the French and the Germans didn't agree to that. In the US, the New York regional central bank agreed and engaged in inflatory monetary policy. That resulted in the New York stock market bubble and its consequent crash in 1929. President Hoover's policies have been falsely called passive. The US government meddling during the Hoover administration included price and wage controls, resulting in high unemployment. Hoover raised government spending. Roosevelt was originally the fiscal conservative but once elected he continued and expanded Hoover's policies known as the New Deal.
After discussing the history of money, Ammous moves on the fallacies and broader consequences of Keynesian monetary policy. One of the negative consequences of Keynesian monetary policy is how it obfuscates the notion of opportunity cost causing misallocation of resources causing false booms followed by inevitable busts. Consider the following example (simplified, based on an example presented originally by Mises). Suppose there is enough material to build 100 houses. Due to monetary expansion, there is now funding to build 120 houses. For some time, things are fine. Houses are being built. But finally, it is discovered that not all of the projects that were started can be finished. The example is, of course, simplified, but that is what actually happens in real life. At the end of an economic cycle, it is typical for prices to rise when a shortage of inputs becomes evident. When projects fail, loans get unpaid and the consequences thereof cascade through the entire economy. A functioning free market economy relies on prices as the information system and a delicate balance thereof. Central planners such as central banks and large governments with their fiscal policies are capable of causing major disturbances in the balance - not to mention the fact that a large number of currencies are used globally, introducing another source of uncertainty in international trade. Governments have never in history been as large as they are today in global comparison. In Western Europe, the public sector accounts for between a third and a half of national economies. In North America, the proportion is about a third.
Another area where the monetary system have far-reaching consequences is time preference. Time preference means the degree to which someone prefer gains in the present as opposed to the future. It is natural to prefer the present to the future as the future is uncertain. High time preference, that is, preference for the future, the foundation of civilization, however. Civilization is all about delaying gratification to build resources to be used in the future. Under an inflationary monetary policy, where spending and consumption are seen as the driving forces of the economy, savers are punished and investing successfully means outpacing often fluctuating inflation, which favours risky and speculative ventures. People respond to incentives and a decrease in time preference has never been a recipe for anything positive, including a high quality of interpersonal relationships. The more short-sighted people are the weaker the foundation of marriages and families and the greater the prevalence and intensity of interpersonal conflicts as people will be less mindful of the long-term consequences of their actions. Rampant consumerism and other addictive behaviors wreck marriages, leading to fewer births and all the negative economic and other consequences of that.
I found those ideas interesting food for thought. Certainly, you don't get to read anything like the Austrian/Classical views of economic history in school.
The second half of the book discussed Bitcoin. I don't think I have to re-iterate the basics of Bitcoin in this post as its readers tend to understand the basics of cryptocurrency. Suffice to say that Bitcoin's greatest strengths as a candidate for the new monetary standard is its decentralization, hard supply cap and the strong economic incentives to not alter its monetary policy. Every participant in the protocol is replaceable and no one has power to effect any changes alone. The protocol is simple, robust and anti-fragile.
Dr. Ammous is no fan of altcoins. He sees all of them basically as scams. At best, they're unnecessary for the same reason national currencies are unnecessary and harmful in the sense that they are nothing but a hindrance to international trade. The only altcoin Dr. Ammous mentions by name is Ethereum. In his opinion, smart contracts are technologically risky as a software bug could have distastrous consequences for an immutable ledger as one had in the case of the Ethereum DAO hack. Additionally, a smart contract that executes an contract illegal contract would be a problem. Dr. Ammous argues that there will never be a need or demand for complex smart contracts and that the type of simple multi-sig and time-delay contracts already possible to be implemented using Bitcoin Script will be sufficient.
In my opinion, complex smart contracts are indeed a significant engineering problem because of the extremely low fault tolerance. The aerospace industry also has extremely low fault tolerance and the software running in systems like the space shuttle or fighter aircraft are extremely complex and large. They can be made to work with formal verification techniques and rigorous testing. But developing that kind of software is very, very expensive. But perhaps as the industry matures there will be extremely well-tested libraries and frameworks available for the creation of some level of customization. For the most part, Ethereum has been used for running ICOs and a few decentralized games, however.
Dr. Ammous turns what the banking establishment likes to repeat: "blockhain, not bitcoin" on its head and considers blockchain a useless invention except for the creation of artificially scarce hard money like Bitcoin. He predicts that the secondary, off-chain layer needed to scale Bitcoin's transaction volume may well be centralized like most cryptocurrency exchanges or Bitcoin gambling sites currently are with Bitcoin remaining a standard unit of account and a measure and store of value. Another possibility is the Lightning Network.
In my opinion, the problem with that is that because we already saw the possession of gold centralized, which resulted in the end of the gold standard, the ownership of Bitcoin centralizing only exposes Bitcoin to centralized control. The problem with that is that any attempt at buying off Bitcoin to control it would send its value skyrocketing. But perhaps the powers that be do not need to as cash-settled Bitcoin futures allow Bitcoin whales to crash the price while making money by shorting at the same time, thus burning a lot of small investors in the process. A relatively small investment of money might allow Bitcoin to be controlled as gold is said to be manipulated.
Another problem is that Dr. Ammous argues in the book that the one huge advantage of the gold standard was the stock-to-flow ratio being so large that very little human effort would be wasted on gold mining as opposed to creating useful products and services. But as a Proof-of-Work coin with a humongous hashing rate, Bitcoin certainly does not fulfill that criterion. Bitcoin's stock-to-flow ratio is very favourable and it is getting better and its block subventions indeed end in the year 2140 leaving the miners only transaction fees. But the network will always need to consume massive amounts of resources to secure itself. What the network does is valuable but it is also extremely expensive to do. A nugget of gold is also a proof of work, namely the work done by supernovae in transmuting lighter elements into gold. In contrast, the work done by Bitcoin miners is ongoing and cannot end as long as the network is in operation.
I really don't know whether humanity will ever had hard money again, although I'm convinced having it would be a blessing. The Bitcoin Standard was the best read for a long time for me as it told an alternative history of money deviating from that which everyone, including myself has been offered in school. The book is highly recommended. The Finnish edition is of high quality as it was obviously the work of people who cared about their work.