The Book in a Nutshell
In 2008, a pseudonymous programmer named Satoshi Nakamoto introduced a new “purely peer-to-peer form of electronic cash” called Bitcoin. In The Bitcoin Standard, Saifedean Ammous provides an overview of the failings of humanity’s previous choices of money, and makes the case for Bitcoin as the world’s first truly immutable, decentralised and sound money. Ammous argues that Bitcoin meets all the salability criteria upon which previous forms of money, from commodity money to government money, have failed: it is divisible, transportable and a store of value. But most importantly, it is sovereign digital money free from the dangers of government meddling.
Book Summary: The Key Ideas
#1: The Evolution of Money. Money is chosen for its salability – specifically, its divisibility, transportability and its capacity to store value. Throughout history, humans have turned from one form of money to another because the problem of salability has not been solved. As gold was not able to solve these issues, it ended up being centralised. This left it vulnerable to dilution by government, eventually being replaced by government money with no commodity backing.
#2: Unsound Money and Time Preference. Unsound money drives a low time preference. As people see a reduction in purchasing power, they reduce saving and increase borrowing and immediate consumption. This stunts productivity and drives present-oriented decisions. Ultimately, this leads to moral failings, conflicts and destructive behaviours, harming society as a whole.
#3: The Bloody Scam of Fiat Economics. Through an almost exclusive focus on Keynesianism and monetarism, the idea that governments need to manage the money supply has become an unquestionable truth. The importance of free market price mechanisms tells us that this is a flawed idea. What’s more, the unsound money created by this notion funds unaccountable violence and war.
#4: The Monetary Lifeboat. Bitcoin meets all the salability criteria of sound money. Through its divisible characteristics, it is highly salable across scales. Through its digital characteristics, it is highly salable across space. And through its monetary characteristics, it is highly salable across time. With widespread adoption, it may have the potential to become the chosen global unit of account.
Book Notes: The Key Ideas in Detail
The below are more detailed notes on the key ideas from The Bitcoin Standard by Saifedean Ammous, along with some quotations that caught my eye. These notes do not by any means cover the full breadth of the book. They are instead intended to serve as an introduction to some of the key ideas, from which to decide whether the book is worth further attention.
Key Idea #1: The Evolution of Money
The key property that leads to something being freely used as money is salability. Salability can be assessed in terms of salability across scales (divisibility), across space (transportability) and across time (how well it acts as a store of value into the future).
We can assess salability across time by understanding the stock-to-flow ratio of a particular good. A high stock-to-flow ratio (meaning existing supply far outweighs extra production) suggests that the good is more likely to maintain its value over time.
Key Concept: Stock-to-Flow Ratio. The stock-to-flow ratio measures the amount of a resource/commodity currently in circulation divided by the amount of that resource/commodity that is produced annually.
From stones to beads to seashells, throughout history civilisations have chosen a variety of forms of money. Importantly, these forms of money have all failed when the stock-to-flow ratio has dropped, driven by technological advancement or some other discovery.
This is the primary reason why the world turned to monetary metals. First, with silver standards, and then later, when the stock-to-flow ratio dropped, to gold.
Commodity money, like gold or silver, has both market demand and monetary demand. For millennia, gold has been the chosen commodity money because of its monetary demand and its rarity, giving it a higher stock-to-flow ratio than alternatives.
But as Ammous describes, gold’s historical failure is that it could only become more salable through centralization with financial institutions. And those institutions and governments soon couldn’t resist the temptation of lending out more than they had.
“Tragically, the way gold was able to solve the problems of salability across scales, space and time was by being centralised.”
Thus, we arrived at today’s forms of money: government fiat money. The hardness of government money depends on those in charge. If they choose to inflate its supply (as they have throughout its existence), this has far-reaching consequences for citizens of these countries through inflation.
Government money remains our prime form of money for several reasons:
- It’s how we pay our tax. We are forced to pay tax in the form of government money, increasing its salability.
- It’s regulated in the banking system. Governments control and regulate for its use in our financial institutions, increasing salability.
- Alternatives are often prohibited. Legal tender laws often outlaw viable alternative currencies.
- Initially backed by gold reserves. By starting with a gold backing, government money was established as the credible norm.
Government money is, of course, not sound money. As Ammous argues, sound money is chosen in a free market and is resistant to government meddling.
Key Idea #2: Unsound Money and Time Preference
Time preference refers to the degree to which individuals value the present compared to the future. Sound money – or unsound money – is inextricably linked with this idea.
As people see a reduction in purchasing power, they reduce saving and increase borrowing. They consume more now and borrow more against the future. This behavioural change feeds through to all aspects of life: productivity decreases, real wages stagnate, and people become more present-oriented in their decisions. Ammous suggests that that latter ultimately leads to moral failings, conflicts and destructive behaviours, harming society as a whole.
When we compare gold and government money, gold’s value is more predictable over time because of its supply constraint. This ensures for a lower time preference, which feeds more productive economic decision making.
“Sound money, chosen in a free market precisely for its likelihood to hold value over time, will naturally have a better stability than unsound money whose use is enforced through government coercion.”
Conversely, unsound money disincentivises saving for the future and incentivises borrowing and immediate consumption. To paraphrase Ammous, there is no incentive to hoard money controlled by central banks whose expressed goal is to devalue it.
While Keynesians argue that the rise of conspicuous consumption is a side effect of capitalism, Ammous argues that this is false by definition. Capitalism is a system of capital accumulation by saving. There is nothing capitalistic about a centrally planned capital market.
“Debt-fuelled mass consumption is as much a normal part of capitalism as asphyxiation is a normal part of respiration.”
It is unsound money which leads to debt-fueled consumption, which in turn stunts productivity. The nationalisation of money also inevitably leads to politicians abusing the currency to take short-term decisions for electoral gain.
Ammous argues that the high time preference of unsound money also has profound impacts on people’s future decisions to start families, in part perhaps explaining the sharp drop in birth rates seen over the last few decades.
“The real cost is not in the direct cost of running the printing presses, but from all the economic activity forgone as productive resources chase after the new government-issued money rather than engage in economic production.”
Unlike unsound money, sound money incentivises long-term investment and innovation due to the lower time preference. Ammous points to the 19th century under the gold standard where electricity, running water and automobiles, among many key innovations, were invented. Ammous even suggests the benefits of sound money extend to culture and the arts, contrasting artwork under periods of sound money with the modern art that makes up galleries in the 21st century under unsound money.
Key Idea #3: The Bloody Scam of Fiat Economics
In a free market, prices act as signals that communicate information. It simply impossible that any central bank could internalise all the information contained in prices.
As Ludwig von Mises argued, it’s for this reason that socialism fails. Because it lacks this price mechanism, it fails in the allocation of capital goods. Without a market of independent actors to fairly determine price, sound decisions based on prices are impossible.
While most societies don’t have central planners for all markets, all of them have central planners for capital markets. This is the role of central banks and fractional reserve banking. And in an attempt to spur growth and consumption, this system creates a disconnect between loanable funds and savings. The result is the business cycle itself, with booms and busts directly attributable to this monetary nationalisation:
“The central bank’s meddling in the capital market is the root of all recessions and all the crises which most politicians, journalists, academics, and leftist activists like to blame on capitalism.”
The idea that central banks must play a role in capital markets has been born out of flawed economic schools that have infiltrated generations of economic studies. Led by the Keynesian and monetarist schools, this fatally flawed notion is now treated like some unquestionable truth.
“The fundamental scam of modernity is the idea that government needs to manage the money supply.”
Not only is it an economically flawed conclusion, but it is an idea that funds violence. Ammous suggests it’s no coincidence that the inauguration of central-bank controlled money coincides with the first world war.
Three factors drive the relationship between unsound money and war according to Ammous:
- Unsound money is a barrier to trade. The distortion of currency values stokes animosity between governments and populations.
- Unsound money funds fighting. Money printing allows governments to continue fighting until the currency value is totally destroyed.
- Unsound money discourages cooperation. Sound money fosters a lower time preference, allowing more consideration for cooperation over conflict. Unsound money does the opposite.
Ultimately, unsound money sucks away accountability for government expenditure. It allows tyrants to spend without fiscal responsibility. Ammous points to the most horrific tyrants in history as examples of periods where leaders abused their systems of unsound money to perpetrate their crimes.
Key Idea #4: The Monetary Lifeboat
As more trade and employment takes place over long distance, physical cash has become impractical. Instead, we’ve turned to using intermediated digital payments. This has reduced the amount of sovereignty people have over their money. And coupled with the move away from gold towards fiat currencies, there is a loss of sovereignty and the slow erosion of value over time.
The motivation of Bitcoin is a “purely peer-to-peer form of electronic cash” that doesn’t require trust in third parties and whose supply can’t be altered.
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, achieved this goal through four key technologies: a distributed peer-to-peer network, hashing, digital signatures and proof of work.
Ammous identifies what he believes are the four key benefits of this new technology.
#I: Store of Value
Bitcoin offers for the first time a commodity with a strictly limited supply. No matter how many users adopt it, no matter the price, and no matter the technological innovation, there will always only be 21 million Bitcoin. The only way to address growing demand is therefore via price appreciation.
“Bitcoin’s immutable monetary supply makes it the best medium to store value produced from the limited human time, thus making it arguably the best store of value humanity has ever created.”
It’s the only medium of exchange that is guaranteed not to be debased. And unlike any commodity in history, the stock-to-flow ratio of Bitcoin is increasing until it will be infinite.
“Bitcoin serves as a monetary lifeboat for people forced to transact in monetary media constantly debased by governments.”
#II. Individual Sovereignty
Any holder of Bitcoin can send value without asking for the permission of anyone. Through a distributed peer-to-peer network, there is no central coordinator.
Unlike gold, Bitcoin cannot be destroyed or confiscated by political or criminal interests.
#III. International & Online Settlement
Bitcoin offers a new way of carrying out international settlement that has no reliance on intermediaries and operates outside the regular financial infrastructure.
Gold, on the other hand, is difficult to move around the world, for risk of confiscation or theft. With Bitcoin, there is also no counterparty risk. It is separated from any individual country’s economy.
Ammous argues that Bitcoin’s characteristics would provide central banks with more flexibility for international account settlement, meaning they might start to own it. What’s more, there might be another reason to own it for central banks:
“Perhaps the real case for central banks owning Bitcoin is as insurance against the scenario of it succeeding.”
#IV. Global Unit of Account
Ammous explores a long-term idea that, with widespread global adoption, Bitcoin might become the dominant global currency.
For now, it is likely to remain a volatile, rapidly appreciating asset. But it should it become an established prime choice for payment, should it stabilise, its technological and monetary characteristics suggest it is a serious rival to globally established fiat currencies.
Bitcoin meets all the salability criteria of sound money. Through its divisible characteristics, it is highly salable across scales. Through its digital characteristics, it is highly salable across space. And through its monetary characteristics, it is highly salable across time. With widespread adoption, it may have the potential to become the chosen global unit of account.