The Bitcoin Standard: Book Summary

Overview

The Bitcoin Standard is a popular book published in 2018 written by Saifedean Ammous. In this book Ammous explores the history of money from early forms of money up through modern fiat money and into Bitcoin.

Throughout this exploration Ammous defines a set of attributes that he argues makes for good money. Then Ammous attempts to illustrate that societies which use good money have predictably positive outcomes from that usage. Finally Ammous illustrates that the value of Bitcoin is in that it satisfies all the conditions for good money.

Why does money develop?

In a small village of a few dozen people there would likely be no need for money. People would know each other well, have a high degree of trust and know each others’ wants. Within such a society goods could be exchanged directly between people and some limited amount of specialization could form.

As a society grows, specialization increases and diversity of goods increases several problems with direct resource exchange will manifest.

Time Problem: Some goods do not keep well through time. A bag of apples will not keep through time well. Therefore it becomes difficult to ever have enough apples to buy a very valuable good like a house.

Space Problem: Some goods cannot be transported through space very easily. For example lumber is very heavily and it is difficult to move large amounts of it through space.

Coincidence of Wants: As specialization increases and the population grows it will be harder to find trades of goods in which both parties want what the other has. It is more likely that in order to satisfy everyone’s desires complex trades of many people need to take place.

Dividing of Goods: A very valuable good would be a tough thing to have in a direct exchange society because it would be difficult to find a single trade with a sufficiently large amount of small goods to make the deal worthwhile. The fundamental problem here is some large goods are not divisible into smaller units.

Money is the tool that is developed in societies to solve these problems. Money develops out of a resource that is good at storing value through time and space, that can be divided easily and which can be easily exchanged for other goods.

Throughout history there have been tons of forms of money ranging from beads, to rocks, to metals to government issued money. These forms of money were developed in order to address the above problems.

What makes for good money?

A good money, or a sound money, is a money which addresses the problems of divisibility, exchangeability and transferability through time and space well. In order to understand why these attributes make for a good money let’s look at counter examples to illustrate forms of money which would be bad because they lack one or more of these attributes.

Divisibility: Cows were used as a form of money back in the day. But the bummer about using cows is that they are tough to divide and hold their value. In order to address this problem societies which used cows as money tended to also use salt as money. Cows were a good method for holding large amounts of money and salt was usable because it could be divided to represent smaller amounts.

Transfer through Space: Rocks were used as a money form throughout some societies. But this form of money was a bummer because in order to buy anything meaningful the buyer would have to throw out their back carrying the rocks into the market.

Transfer through Time: In ancient Africa beads were used as money. But if you were one of these people holding your money in beads you would have been very sad when Europeans started coming into Africa with beads from back home that they could produce very cheaply and buying all your goods. Since Europeans had a method to produce beads cheaply they could take goods out of Africa and replace those goods with beads which would correspondingly decreased in value. You would be left holding a bunch of beads with no goods to buy. This is called inflation.

The ability of money to hold its value through time relates to how hard the money is. The hardest of money is the ratio between its current supply and the inflow of new units. In the case of glass beads the money was hard up until the point that Europeans came in and started flooding the market with new supply at which point it became soft money.

The lower the ratio of flow to supply the harder the money supply is and the better the money will hold its value through time.

Why does gold make for a good form of money?

Gold makes for good money because it satisfies the condition of sound money.

Divisibility: It can be divided into fairly small units and combined into large units.

Transfer through Space: It is easily to carry enough gold to make large purchases through space. You can walk into the market with a small bag of gold and go home with groceries for a week and a new cow.

Transfer through Time: Gold is really hard to mine. Despite even modern improvements in mining humans have not been able to drastically increase the flow of gold. Additionally gold is nearly impossible to destroy meaning the existing supply is ever increasing. These two factors together make the flow to supply ratio very low, this implies the gold is a hard form of money and therefore holds its value well through time.

How did the gold standard come to be?

While gold is a good form of money and it was used for a long time. There was one big downside of gold. That is that it’s not super easy to settle transactions in gold. This point can be expanded into a few sub-points:

• Dividing gold is doable but its not trivial. It is also difficult to subdivide gold into extremely small units. Buying a stick of gum with gold would be tricky.
• Buying extremely large items in gold gets a bit tricky because eventually enough gold does get heavy. Let’s say you wanted to buy a huge house in LA with a view in gold. Walking around with that much gold in your bag is a risky move and pretty darn heavy.

These two downsides lead to the gold standard. The gold standard introduced fiat money — money which is declared to be money by the government. Under the gold standard each countries’ money was linked to a fixed amount of gold. The country could not increase its supply of money unless it also increased how much gold it held. In this sense under the gold standard people were really just transacting with gold but the gold was abstracted away under the paper notes (called money) representing the gold.

What were the positive impacts of the gold standard?

This book is extremely pro gold standard. Based on some Googling on the gold standard — all I am convinced of is that its a complex issue with many considerations. Instead of summarizing the book’s point of view I will summarize the pros and cons I found on the gold standard.

Pros

Improved International Trade: When a collection of countries are on the gold standard trade between them is very simple. Each country’s currency is exchangeable for some fixed amount of gold so currencies can be trivially converted between. This makes economic calculations very simple. It also encourages free and open trade between countries. In contrast if currencies are not tied to a gold standard than exchange rates between currencies fluctuate. These fluctuations make economic calculations very hard. It also limits trade because countries need to work to keep their currency strong relative to other currencies. This encourages doing things like setting up taxes on imports and negotiating trade deals.

Limit Government Power to Inflate Currency: Under a gold standard the government cannot inflate the currency. This limitation profoundly limits governments power. It forces the government to responsibly pay for all programs by issuing taxes on the people or successfully being able to sell government debt (bonds).

Balanced International Trade: When transactions between countries are settled in gold, countries which import more than they export will have gold flow out of their country. This serves a downward pressure on running a country with a trade deficit. If governments are able to print currency they can fund massive trade deficits through inflating the national currency. They can get away with this for a long time as the US has.

Limit Wars: When the government has the ability to inflate the currency it has an easy means through which it can quickly build up the military and fund wars beyond what the tax payer would be willing to pay for. One theory as to why World War One lasted as long as it did was because governments funded their war efforts through printing money and inflating their currency. If governments had to raise taxes in order to fund the war it might have ended earlier.

Cons

Fluctuations in Market: In the case of a large influx of gold, like during the California gold rush, there would be a period of inflation. This is the gold equivalent to the government printing a lot of money.

Limits Governments Power: When the government cannot control the money supply it losses a very significant tool to help guide the economy. In the case of an economic downturn the Federal Reserve can issue bounds and mess with interest rates in order to stimulate or slow down the economy. Under a gold standard the ability of government to do this would be greatly reduced.

Environmental Damage: Gold mining is bad for the environment. Being on a gold standard incentives mining and therefore produces negative environmental outcomes.

Reduced National Defense Ability: Being able to inflate the currency enables countries to rapidly ramp up for war without having to raise taxes. This can be critical to national defense.

It seems like people who are more libertarian will be pro gold standard, and people who believe in the value of government intervention into the economy will be against the gold standard. Regardless of where you personally fall regarding the gold standard, the rest of this post will assume the gold standard is a good thing — because that is what the book argued. I recommend reading the rest of this post taking that assumption as a given. This will enable you to see if the conclusions around Bitcoin logically follows from this assumption. Then upon concluding this post you can revisit this assumption to decide if you agree or not.

Where did gold fall short?

Once countries moved to the gold standard, people would nearly exclusively transact in paper notes which represented some amount of gold (fiat currency) and banks would hold large deposits of gold. At any given point fiat currency could be exchanged for gold but people preferred to transact using paper money because it was simply easier than transacting in gold. The issue with this is it resulted in a centralization of gold deposits. Large central banks started to hold all the gold which made it easy for government to take over. Which is actually what happened.

The Gold Reserve Act of January 30, 1934 basically required all people hand the government any gold they owned in exchange for fiat money. This completed the centralization of gold holdings and thereby enabled the government to fully decouple fiat money from gold — eliminating the gold standard.

Gold feel short because it was hard to transact directly in. This made fiat money more desirable, allowed for centralization and then in turn government take over and inflation.

Why is Bitcoin compelling?

Bitcoin is compelling because it has the following attributes

• It has a fixed supply so it can never be inflated. This in theory makes it a very stable store of economic value through time. We have not seen Bitcoin stabilize yet but there is all of human history to make us believe that goods that are scarce make for good stores of value through time.
• It is easy to move Bitcoin through space.
• Bitcoin can be divided into small units so it can be used for payments of any size.
• Bitcoin is easy to pay with directly. So it is not subject to the fiat replacement that occurred with gold.
• Bitcoin is not bound to any country so it is excellent for international exchange.