by Saifedean Ammous
“This is a historical lesson of immense significance and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn't have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.”
How did it work? It was pretty simple: people just swapped things. It worked fine, except if you didn’t have something your neighbor needed. Once people figured out you could exchange universally valued objects for goods, everything changed.
From there, we’ve gone from all kinds of currency to valuable metals, and now paper printed by governments. But since we ditched the “gold standard” of money and started relying only on easily manipulated paper money, we’ve seen a century of boom and bust and increasing debt.
A good’s salability across time refers to its ability to hold value into the future, allowing the holder to store wealth in it. For a good to be salable across time it has to be immune to deterioration.
Similarly, with money, it was inevitable that one, or a few, goods would emerge as the main medium of exchange because the property of being exchanged easily matters the most. A medium of exchange is not acquired for its own properties, but for its salability.
Monetary status is a spontaneously emergent product of human action, not a rational product of human design.
The fatal flaw of the gold standard was that settlement in physical gold was heavy, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations—banks and central banks—leaving them vulnerable to being taken over by governments.
Although gold was supposedly demonetized fully in 1971, central banks continued to hold significant gold reserves, and only disposed of them slowly, before returning to buying gold in the last decade.
Money whose supply is hard to increase is known as hard money (sound), while easy money is money whose supply is amenable to large increases (unsound).
Time preference for money is an individual's preference for possession of a given amount of money now, rather than the same amount at some future time. The time preference for money is generally expressed by an interest rate. This rate will be positive even in the absence of any risk. The natural implication of this process is to reduce savings and increase borrowing.
Individuals will consume more of their income and borrow more against the future. This will not just have implications on their time preference in financial decisions; it will likely reflect on everything in their lives.
The 20 century’s binge on conspicuous consumption cannot be understood separately from the destruction of sound money and the outbreak of vilifying savings and deifying consumption as the key to economic prosperity.
After the First World War, financial deficits forced European powers to drop the gold standard. They introduced fiat money, which was backed by decree instead of gold. This switch led to an age of unsound money where governments could intervene in the economy to stabilize the value of their currencies.
Unsound money causes a myriad of problems, like recessions and debt. Interventions of governments distort markets and cause boom and bust cycles. The only solution would be to establish a new gold standard. This is where Bitcoin comes in.
... because it is scarce, secure, and unique.
Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue Bitcoin-backed tokens to users while keeping their hoard of Bitcoins in cold storage, with each individual being able to audit in real time the holdings of the intermediary, and with online verification and reputation systems able to verify that no inflation is taking place.
This would allow an infinite number of transactions to be carried out online without having to pay the high transaction fees for on-chain transactions.
We know it is incredibly promising, but of course, there are challenges.
"I think the next best thing to solving a problem is finding some humor in it." -Frank Howard Clark
A deep dive into the role money has played across history and how Bitcoin fits in.
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