The Bitcoin Standard | Saifedean Ammous

Summary of: The Bitcoin Standard: The Decentralized Alternative to Central Banking
By: Saifedean Ammous

Introduction

Dive into the world of cryptocurrencies and explore the revolution of decentralized finance with ‘The Bitcoin Standard’ by Saifedean Ammous. This book sheds light on the history of money, the importance of sound money, and the role Bitcoin can play in reshaping the global financial landscape. Uncover how Bitcoin’s finite supply, security, and resistance to government interference make it a potential contender for sound money and an alternative to the traditional central banking system. Find out if Bitcoin can indeed replace the gold standard and survive challenges like price volatility and increasing dependence on centralized institutions.

The Evolution of Money

Before there was money, people used to barter and directly exchange goods and services. However, this often left people unable to obtain what they needed. The solution was indirect exchange through salable and divisible mediums of exchange, like the Rai stones in Yap Island. These stones were visible, had a stable value, and were accepted by the community. However, their value became unstable with increased accessibility through modern technology. Money has evolved since then, and this book examines how our current money system came to be.

The History of Gold as Money

Money and Gold’s intricate relationship throughout history is due to the unique properties of gold, which made it an excellent store of value. Gold standard was established in the eighteenth, nineteenth and twentieth century when paper money backed by precious metals were issued.

For thousands of years, metallurgy, the craft of smelting metals, has produced various currencies globally. Gold stood out from every other metal when it came to coinage as it has unique characteristics making it an excellent store of value. One of these characteristics is its indestructibility and the fact that it cannot be synthesized with other materials. Additionally, if you want to obtain gold, you have to dig underground and extract it from the earth. The deeper one goes, the harder it gets to find any gold, implying that there is only a limited supply of the metal.

Due to gold’s unique traits, it soon became evident that it was an effective store of value, and King Croesus commissioned gold coins in Greece over 2,500 years ago. However, it was in the eighteenth, nineteenth and twentieth centuries that the love affair between money and gold culminated. During this period, technology in transportation and communication made it easier than ever for people and goods to move from one place to another. To facilitate trade, merchants and consumers had to be convinced of the worth of paper money.

Governments worldwide began to issue paper money backed by precious metals, with gold being the most commonly used metal in leading European countries. Britain established the “gold standard” in 1717, with other countries following suit and adopting the same standard. This era was known as the age of sound money, where markets freely chose gold as the best store of value, backed by paper currency supported by gold reserves.

In summary, the intricate history of gold and money has been shaped over time due to the unique properties gold possesses, making it an excellent store of value. Paper money backed by precious metals was introduced to facilitate trade in the eighteenth, nineteenth and twentieth centuries, marking the establishment of the gold standard as sound money.

The Fall of the Gold Standard

In history, the gold standard has been a way for economies to facilitate trade and stabilize currency’s value across regions. However, two major events in history undermined this “backing” of currency. The first was the Roman empire’s “coin clipping” practice, which increased government spending short term, but ultimately increased inflation and created a series of economic crises that weakened the empire. The second event occurred in 1914 when European powers decided to print more money, which was not backed by gold, to support their war efforts during World War I. This increased the volatility of their currencies and severely undermined their value. The Austro-Hungarian krone, for instance, fell almost 70% compared to the Swiss franc that remained tied to the gold standard. These events demonstrate the importance of using a stable monetary standard to ensure a healthy economy and the risks of undermining it.

The Rise and Fall of the Gold Standard

After World War I, European countries faced the challenge of revaluing their currencies. Returning to the gold standard was not popular, so fiat money was introduced, leading to government intervention. The Bretton Woods system was established after World War II, tying all currencies to the US dollar, but it eventually failed due to inflation and was abandoned in 1971.

Sound Money and Sustainable Growth

Sound money, backed by gold, encourages saving and investment, leading to sustainable economic growth. Unsound money, manipulated by governments, disrupts prices, distorts capital accumulation, and impedes long-term prosperity.

Sound money refers to a monetary system where the currency in circulation is backed by a valuable commodity like gold. The adoption of sound money led to an era of prosperity in the nineteenth century since it encouraged saving and investment – the perfect recipe for sustainable, long-term growth. As humans have a natural positive time preference, meaning we prefer instant gratification over future satisfaction, sound money nudges us to think about the future. If we can expect our money’s value to increase, it makes sense to invest now to maximize future income.

Investment leads to capital accumulation, which is essential for economic growth. When people put money into producing capital goods – commodities that create other goods and revenue streams in the future -, they accumulate capital. The more capital accumulation there is, the greater the chance of stable, long-term economic growth.

On the contrary, unsound money distorts capital accumulation since government intervention, such as manipulating interest rates, interferes with prices. Prices give investors the information they need to make good decisions without learning every detail about global events. The price tells an investor everything they need to know. Unfortunately, government intervention means that prices no longer reflect market movements, impeding capital accumulation’s accuracy.

Therefore, sound money is critical for economic stability and growth, while unsound money disrupts prices, distorts capital accumulation, and impedes long-term prosperity.

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