The Bitcoin Standard

The Bitcoin Standard Plot Summary

Introduction

Money has been one of humanity's most transformative inventions, yet few of us understand its profound impact on civilization. Throughout history, the type of money a society uses has shaped everything from its art and culture to its political systems and technological development. When societies used "sound money" - currencies whose supply couldn't be easily manipulated - they typically experienced flourishing arts, stable governance, and remarkable innovation. Conversely, when rulers debased currencies to fund wars or lavish spending, civilizations invariably declined. This fascinating journey takes us from the limestone "Rai stones" of ancient Yap islanders to the digital cryptography of Bitcoin, revealing surprising connections between monetary systems and human flourishing. We'll discover how the gold standard enabled unprecedented global prosperity in the late 19th century, how abandoning it transformed government's relationship with citizens, and how digital currencies might reshape our future. Whether you're concerned about inflation, interested in economic history, or simply curious about how money shapes society, this exploration offers valuable insights into one of humanity's most important yet misunderstood technologies.

Chapter 1: Primitive Money: The Search for Reliable Value (5000-1000 BCE)

Before standardized currencies emerged, early human societies developed ingenious monetary solutions that reveal fundamental truths about what makes effective money. Between 5000-1000 BCE, as communities grew beyond simple barter economies, they sought objects that could reliably store and transfer value. These primitive monetary systems emerged independently across different civilizations, demonstrating universal principles rather than mere cultural accidents. The Pacific island of Yap provides perhaps the most fascinating example. Yapese islanders used enormous limestone discs called "Rai stones" as money, some weighing several tons. What makes this system remarkable is that these stones rarely moved physically when ownership changed - instead, the community collectively remembered who owned which stone, creating an oral ledger system that bears striking resemblance to modern blockchain technology. When Captain David O'Keefe arrived in 1871 and began producing stones much more easily using modern tools, the village chief recognized the threat to their monetary system and declared O'Keefe's stones worthless. This intuitive understanding that sound money requires difficulty of production would later be formalized by economists. Similar patterns emerged worldwide. Western African societies used aggry beads until European traders began importing mass quantities of similar glass beads, transferring wealth from Africans to Europeans through monetary inflation. Native Americans valued wampum shells until European mass production devalued them. Cattle served as money in many ancient societies (giving us the word "pecuniary" from Latin "pecus" meaning cattle), while salt was prized for its divisibility and preservative properties (providing our word "salary" from Latin "sal"). These early monetary systems worked because they possessed key properties: relative scarcity, durability, portability, and cultural acceptance. Their eventual replacement came through two major developments: metallurgy, which allowed for uniform, portable coins, and later, the industrial revolution, which dramatically increased productive capacity. The fundamental lesson from these primitive systems remains relevant today: when money becomes too easy to produce, it loses its monetary role and transfers wealth from savers to producers, ultimately impoverishing rather than enriching society.

Chapter 2: The Rise of Gold: Monetary Metals and Empire Building

As human civilizations advanced in metallurgical knowledge, precious metals gradually replaced primitive forms of money between approximately 700 BCE and 1700 CE. This transition wasn't merely technological but represented a fundamental improvement in money's core properties. Gold emerged as the supreme monetary metal due to its unique physical and chemical characteristics that aligned perfectly with the requirements of sound money. The first standardized gold coins appeared in Lydia (modern Turkey) around 700 BCE under King Croesus. These coins contained consistent amounts of gold, making them easily recognizable and tradable throughout the Mediterranean world. The innovation spread rapidly as merchants recognized the advantages of this superior form of money. When Alexander the Great conquered the Persian Empire in the 4th century BCE, he standardized coinage across his vast territories, creating one of history's first large-scale monetary unions and facilitating unprecedented trade. Gold's dominance stemmed from its extraordinary properties. Unlike other commodities, gold is virtually indestructible, impossible to synthesize artificially, and extremely rare. Most significantly, gold possesses an exceptionally high stock-to-flow ratio - the existing stockpile accumulated over thousands of years vastly exceeds new annual production, which historically never exceeded 2% of existing supplies. This makes gold naturally resistant to inflation, as even significant increases in mining output cannot substantially dilute its value. Silver, while also valuable, had a higher supply growth rate that made it less stable for long-term value storage. The Roman Empire demonstrated both the benefits of sound money and the consequences of abandoning it. Under Julius Caesar, Rome established the aureus gold coin, creating unprecedented economic stability throughout its vast territories. However, as imperial expenses grew beyond sustainable levels, emperors began debasing the currency by reducing precious metal content while maintaining face value. Emperor Nero initiated this practice, and by the time of Diocletian in the late 3rd century, the once-pure silver denarius contained barely 5% silver. This monetary collapse coincided with Rome's decline, as savings were destroyed and economic calculation became impossible. By contrast, the Byzantine Empire maintained the gold solidus (later called the bezant) at consistent purity for nearly 800 years, helping Byzantium survive for a millennium after Rome's fall. The bezant became so trusted that it circulated as international currency throughout Europe, North Africa, and Asia. This monetary stability fostered the preservation of classical knowledge and remarkable architectural achievements like the Hagia Sophia, demonstrating how sound money enables long-term cultural projects. The historical pattern became clear: empires that maintained monetary integrity prospered, while those that debased their currencies eventually collapsed. This lesson would be tested again during the unprecedented monetary experiment of the classical gold standard era.

Chapter 3: The Classical Gold Standard Era: Global Prosperity (1870-1914)

The period from 1870 to 1914 represents one of history's most remarkable eras of economic growth, technological innovation, and relative peace - all built upon the foundation of the international gold standard. Following Germany's adoption of gold after the Franco-Prussian War of 1871, most major economies fixed their currencies to specific weights of gold, creating a de facto world currency that facilitated unprecedented global trade and investment. Under this system, national currencies weren't abstract concepts but simply names for specific weights of gold. The British pound sterling represented 7.3 grams of gold, while the U.S. dollar equaled 1.5 grams, making their exchange rate precisely calculable and stable. This monetary predictability eliminated currency risk for international commerce, allowing merchants to trade across continents without worrying about exchange rate fluctuations eroding profits. By 1900, approximately 50 nations had adopted the gold standard, creating the first truly global monetary system. The gold standard imposed fiscal discipline on governments in ways that seem almost unimaginable today. Since currencies were redeemable for physical gold, governments couldn't simply print money to finance deficits. When nations needed to fund extraordinary expenditures like wars, they had to explicitly tax or borrow rather than inflating away their debts. This accountability helped maintain the classical liberal order of limited government, with public spending rarely exceeding 10% of GDP in major economies during this period. Technological innovation flourished at an unprecedented pace during the gold standard era. Jonathan Huebner's analysis of the 8,583 most important innovations in human history found that innovations per capita peaked during the nineteenth century. The telephone, wireless telegraphy, automobile, airplane, modern medicine, electricity, and countless other transformative technologies emerged during this golden age of sound money. This correlation wasn't coincidental - sound money creates the low time preference necessary for the capital accumulation that enables such innovation. The artistic achievements of this era were equally impressive. Composers like Bach, Mozart, and Beethoven created works of enduring beauty, while artists spent years perfecting their craft. Michelangelo famously spent four years painting the Sistine Chapel ceiling - a level of dedication and long-term thinking fostered by a monetary system that rewarded saving and future orientation. This period, known as "la belle époque" or the beautiful era, witnessed cultural flourishing across Europe and America. This remarkable period of human progress came to an abrupt end with the outbreak of World War I in 1914, when governments suspended gold convertibility to finance military expenditures through inflation. What began as a "temporary" wartime measure became the new normal, fundamentally altering the relationship between citizens, governments, and money for generations to come.

Chapter 4: Fiat Currency Experiments and Their Consequences (1914-1971)

The period from 1914 to 1971 marked the gradual but relentless transition from sound money to government-controlled fiat currencies. World War I served as the catalyst, as European powers suspended gold convertibility to finance unprecedented military expenditures. This monetary expansion allowed the bloody stalemate to continue for four devastating years, far longer than would have been possible under the discipline of the gold standard. The immediate post-war period revealed the consequences of abandoning monetary restraint. Germany experienced history's most notorious hyperinflation, with prices doubling every few days by 1923. The middle class saw their life savings evaporate, creating social conditions that would later facilitate the rise of extremism. Similar monetary collapses occurred in Austria, Hungary, Poland, and Russia. As economist Ludwig von Mises observed, "The destruction of the monetary order was the destruction of the middle class, and with it, the destruction of the last remnants of the liberal society of the 19th century." The interwar period witnessed repeated failed attempts to restore monetary stability. The 1922 Treaty of Genoa established the U.S. dollar and British pound as reserve currencies alongside gold, creating a "gold exchange standard." However, Britain's attempt to return to gold at pre-war rates despite wartime inflation created unsustainable pressures. Meanwhile, the Federal Reserve's inflationary policies in the 1920s contributed to the stock market boom and subsequent crash of 1929, triggering the Great Depression. Contrary to popular narratives, the Great Depression resulted not from the gold standard's failure but from its abandonment and subsequent government interventions that prevented necessary adjustments. President Hoover implemented extensive interventionist policies including price controls, wage supports, and increased government spending. These were amplified by Roosevelt's New Deal, which included the extraordinary step of confiscating citizens' gold in 1933 and devaluing the dollar from $20.67 to $35 per ounce of gold. The Bretton Woods system, established in 1944, attempted to create a new international monetary order with the dollar as its centerpiece. While nominally tied to gold at $35 per ounce, the system allowed the United States what French economist Jacques Rueff called "deficit without tears" - the ability to finance expenditures by issuing dollars that foreign central banks were obliged to accept. This arrangement funded both the welfare state and the military-industrial complex that President Eisenhower warned against in his farewell address. By the late 1960s, the contradictions of this system became unsustainable as foreign governments, led by France, began demanding gold for their dollar reserves. On August 15, 1971, President Nixon "temporarily" suspended dollar convertibility to gold, effectively ending the last vestige of the gold standard and ushering in the era of pure fiat currencies that continues today. This severing of money from its historical anchor would have profound consequences for the global economy in the decades to come.

Chapter 5: The Age of Unlimited Money: Inflation and Debt (1971-2008)

The period from 1971 to 2008 represents the first era in human history when the entire planet operated on government-issued fiat money with no commodity backing. Following Nixon's suspension of dollar convertibility to gold, currencies became "floating" instruments whose value was determined by government policy, market forces, and relative exchange rates. This fundamental shift had profound economic and social consequences that continue to shape our world. Freed from gold's discipline, the money supply expanded dramatically. The U.S. M2 money supply grew from approximately $600 billion in 1971 to over $12 trillion by 2008, an average annual growth rate of 6.7%. Correspondingly, gold's price rose from $35 per ounce to over $1,200. While developed economies maintained relatively moderate inflation rates (typically 2-8% annually), developing nations often experienced much higher rates. According to World Bank data, the average annual growth in money supply across 167 countries between 1960 and 2015 was a staggering 32.16%. This monetary expansion fundamentally altered economic behavior. With money steadily losing value, saving became less attractive while borrowing and immediate consumption were incentivized. National savings rates plummeted across the Western world, dropping from an average of 12.66% in 1970 to just 3.39% by 2015 among major economies. Meanwhile, personal, municipal, and national debts reached historically unprecedented levels. Only Switzerland, which maintained substantial gold reserves until the early 1990s, preserved a double-digit savings rate. The fiat money era witnessed increased economic instability. Without the discipline of gold, central banks could manipulate interest rates downward, encouraging excessive borrowing and malinvestment. When these distortions eventually became unsustainable, recessions followed. According to Austrian economic theory, these business cycles were not mysterious fluctuations in "animal spirits" as Keynesian economists suggested, but predictable consequences of interest rate manipulation distorting the capital structure of the economy. International trade became increasingly complex and politicized under floating exchange rates. Countries engaged in "currency wars," deliberately devaluing their currencies to gain export advantages. The foreign exchange market grew to an astonishing $5.1 trillion daily volume by 2016 – approximately 25 times the entire world's annual economic production – representing the enormous transaction costs of operating without a common international monetary standard. Perhaps most significantly, fiat money altered the relationship between citizens and government. As economist Ludwig von Mises observed, sound money enforces fiscal responsibility, while fiat money enables unlimited government growth. With the ability to create money, governments could finance expenditures without explicit taxation, making the true cost of government programs less visible to citizens. This period saw government spending as a percentage of GDP reach historic highs across developed economies, along with unprecedented peacetime deficits. By 2008, as the global financial crisis unfolded, the contradictions and instabilities of the fiat monetary system had become increasingly apparent.

Chapter 6: Bitcoin: The Return to Sound Money Principles

On October 31, 2008, as the global financial system teetered on the brink of collapse, an anonymous figure using the pseudonym Satoshi Nakamoto published a nine-page paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This modest technical document introduced a revolutionary concept: a purely digital currency that could function without banks, governments, or any central authority. What began as an obscure experiment among cryptography enthusiasts would grow into a global phenomenon challenging fundamental assumptions about money itself. Bitcoin's design addressed the core problem that had defeated all previous attempts at digital currency: how to prevent double-spending without relying on a trusted third party. Nakamoto's breakthrough was combining several existing technologies – cryptographic signatures, peer-to-peer networks, and a proof-of-work consensus mechanism – into an elegant system that could maintain a secure, distributed ledger of transactions. The blockchain, as this ledger became known, represented a radical innovation in how humans coordinate economic activity. What makes Bitcoin revolutionary is its monetary policy, which is built into its code rather than determined by human discretion. New bitcoins are created on a predetermined schedule through the mining process, with the rate of issuance halving approximately every four years. The total supply is capped at 21 million bitcoins, making it the first absolutely scarce digital asset in history. This fixed supply schedule gives Bitcoin a stock-to-flow ratio that will eventually exceed that of gold, potentially making it the hardest money ever created. Bitcoin's early history reveals its evolution from theoretical concept to functional money. In October 2009, the first market price was established when 5,050 bitcoins sold for $5.02, valuing each bitcoin at less than one-tenth of a cent. The first real-world transaction occurred on May 22, 2010, when programmer Laszlo Hanyecz paid 10,000 bitcoins for two pizzas worth approximately $25. From these humble beginnings, Bitcoin's network and value grew exponentially, with its price eventually reaching thousands of dollars per coin. Bitcoin functions as a monetary system outside state control, embodying what Friedrich Hayek envisioned when he wrote in 1984: "I don't believe we shall ever have a good money again before we take the thing out of the hands of government. 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." Bitcoin represents precisely such a "sly roundabout way" – a monetary system based on mathematical rules rather than human discretion. The significance of Bitcoin extends beyond its technological innovation. It represents the first successful attempt in the digital age to create money with the essential properties that made gold valuable throughout history: scarcity, durability, portability, divisibility, and resistance to censorship. Unlike government fiat currencies, Bitcoin cannot be debased through inflation, making it potentially the first truly sound money of the information age – a return to monetary principles that historically fostered human flourishing.

Chapter 7: Digital Cash and the Future of Monetary Sovereignty

The emergence of Bitcoin has catalyzed a broader revolution in how we conceptualize and interact with money in the digital realm. While previous attempts at digital cash systems invariably relied on centralized authorities, Bitcoin demonstrated that peer-to-peer electronic transactions could occur without trusted intermediaries. This breakthrough has profound implications for individual freedom, global commerce, and the relationship between citizens and states. Digital cash fundamentally differs from traditional electronic payments in one crucial aspect: finality. When you make a credit card purchase or bank transfer, the transaction remains reversible for extended periods and subject to permission from multiple intermediaries. Bitcoin transactions, once confirmed on the blockchain, are practically irreversible and censorship-resistant. This property of digital cash restores the bearer instrument nature of physical cash while extending it globally and making it immune to physical confiscation. The implications for monetary sovereignty extend beyond individual transactions to the very nature of money itself. Throughout the 20th century, central banks gradually monopolized money creation, eliminating competing currencies and establishing fiat money as the only legal option. Bitcoin and subsequent cryptocurrencies have reintroduced monetary competition, allowing individuals to choose their preferred money based on properties like supply predictability, transaction privacy, and resistance to censorship rather than geographic location. For developing nations with unstable currencies and limited banking access, digital cash offers particularly transformative potential. Citizens of countries experiencing hyperinflation like Venezuela or Zimbabwe can now access sound money without requiring permission from their governments. Similarly, the approximately 1.7 billion unbanked adults worldwide can potentially access financial services through smartphones without needing traditional banking infrastructure. This financial inclusion could dramatically accelerate economic development in regions previously excluded from the global financial system. The future monetary landscape will likely feature increasing competition between government-issued digital currencies (CBDCs) and private cryptocurrencies. Central banks worldwide are developing digital versions of their currencies that could enhance surveillance capabilities while potentially offering improved efficiency. These will compete directly with Bitcoin and other cryptocurrencies that prioritize privacy and censorship resistance. This competition may ultimately benefit citizens by forcing all monetary systems to better serve users' needs. As this monetary evolution continues, we're witnessing the emergence of a more pluralistic system where different forms of money serve different purposes. Government currencies may remain dominant for everyday transactions and tax payments, while Bitcoin increasingly serves as a digital store of value similar to gold. Specialized cryptocurrencies may address specific needs like programmable money, privacy-focused transactions, or microtransactions. This diversity of monetary tools could create a more robust and user-centric financial ecosystem than the monopolistic systems of the 20th century.

Summary

The evolution of money reveals a persistent tension between sound money principles and the desire of authorities to manipulate currency for short-term advantage. From ancient gold coins to modern cryptocurrencies, monetary systems that resist debasement have consistently fostered prosperity, innovation, and social stability. Conversely, when money becomes untethered from natural constraints, societies invariably experience capital consumption, cultural decline, and eventually, political instability. This pattern has repeated across civilizations and continues to shape our world today. The digital revolution has fundamentally altered this historical dynamic by introducing money that exists outside traditional power structures. Bitcoin and subsequent cryptocurrencies have demonstrated that money can function as a purely peer-to-peer system without requiring trust in central authorities. This innovation potentially breaks the cycle of monetary debasement by making manipulation technically difficult rather than merely politically undesirable. As we navigate this monetary transition, individuals have unprecedented opportunity to preserve wealth across time while governments face new constraints on monetary policy. Whether digital sound money ultimately prevails over government-issued currencies remains uncertain, but the reintroduction of monetary choice itself represents a profound shift in how value moves through our increasingly connected world.

About Author

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Saifedean Ammous

Saifedean Ammous is an internationally best-selling author and economist. In 2018, Ammous authored The Bitcoin Standard: The Decentralized Alternative to Central Banking, the best-selling book on bitcoin, published in 36 languages. In 2021, he published The Fiat Standard: The Debt Slavery Alternative to Human Civilization, available in 12 languages. In 2023, he published Principles of Economics, a comprehensive introduction to economics in the Austrian school tradition. Saifedean teaches courses on the economics of bitcoin, and economics in the Austrian school tradition, on his online learning platform Saifedean.com, and also hosts The Bitcoin Standard Podcast.Saifedean was a professor of Economics at the Lebanese American University from 2009 to 2019. He holds a PhD in Sustainable Development from Columbia University, a Masters in Development Management from the London School of Economics, and a Bachelor in Mechanical Engineering from the American University of Beirut.

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