@ Totally Human Writer
2025-04-02 21:02:06
# Bartering and early money
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Early societies bartered goods, but transactions were often complicated. The value of goods doesn’t always align.
Enter money. It’s used as an indirect exchange for any goods, so everyone wants it.
Early money wasn’t anything like what we use today. For example, the inhabitants of Yap Island (Micronesia) used large Rai stones for trade. New stones were dragged up a hill for everyone to see. The owner would then exchange part of the stone for goods and services.
As they were hard to quarry and move, Rai stones retained their value (salability). Then, an Irish-American captain started importing stones using modern technology. Soon enough, they became so common, they no longer worked as money.
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# Gold — the basis for sound money
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Smelting made it possible to create highly salable and transportable coins. Gold was best because it’s virtually impossible to destroy and can’t be synthesized using other materials. It has a fairly limited supply, which grows slowly and predictably (due to the difficulty of mining).
Technologies like the telegraph and trains made it easier for both people and goods to get from point A to point B. That, in turn, justified forms of payment like checks, paper receipts, and bills. But paper is not worth much unless it’s backed by something.
Governments worldwide issued paper money backed by precious metals, which they stored in vaults. By 1900, around 50 countries had adopted the Gold Standard. This was sound money.
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# Currencies devalued
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Roman emperor Julius Caesar issued the Aureus, an empire-standard coin containing 8 grams of gold. But as growth began to slow, rulers started ‘coin clipping’, reducing the quantity of precious metal in coins. This eventually triggered a series of economic crises that led to the downfall of the Roman Empire.
The gold standard had one major flaw: it had to be stored in bank vaults. This created a highly centralized system in which governments controlled the value of paper money. If they wanted to, they could always increase the supply of money without increasing the corresponding amount of gold.
In 1914, nearly every major European power decided to do this to fund their war operations. Rather than raising taxes, they simply printed new money with no extra gold. The standard had been abandoned.
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# Government-backed money
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Governments chose to introduce fiat money – currency backed by decree rather than gold. The adoption of the fiat system led to an age of unsound money shaped by ever-greater intervention in the economy as governments scrambled to stabilize their currencies.
By 1944, the end of the Second World War was in sight, and the victors began planning the postwar economic order. The world’s currencies would be tied to the US dollar at a fixed exchange rate. The dollar would in turn be tied to the value of gold, again at a fixed rate.
The United States bent the rules and inflated its own currency compared to gold. Other nations inflated their currencies compared to the dollar. On August 15, 1971, President Nixon announced that dollars would no longer be convertible to gold.
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# Sound money = functioning economy
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Sound money encourages people to save and invest, enabling sustainable, long-term growth. Why? Well, humans have a natural positive time preference: we prefer instant gratification over future gratification. Sound money prompts us to think more about the future.
The more capital accumulation there is, the greater the chance of stable, long-term economic growth. Unsound money distorts capital accumulation. When governments interfere with the money supply, they also interfere with prices. And prices give investors the information they need to make good decisions without having to learn every tiny detail about global events.
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# Recessions and debt arise from unsound money
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Government interference takes the form of central planning. No single person, agency, or department ever has access to all the information necessary to understand the vast and complex economy. Interventions distort markets, creating boom and bust cycles.
According to Keynes and his followers, the best way to respond to recessions is to increase spending. You could lower taxes, but people don’t usually spend their extra money. Raising taxes is unpopular, so governments invariably decide to increase the money supply. Saving becomes less attractive, creating a culture of unwise spending and growing debt.
We need to return to sound money and a new gold standard. Enter bitcoin.
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# Bitcoin is scarce
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Bitcoin has similar traits to gold. Its supply is literally fixed. Once there are 21 million bitcoins in circulation, no more will be issued.
The supply grows at a diminishing rate. Computers across the Bitcoin network pool their processing power to solve complex algorithmic problems. Once these puzzles have been cracked, the “miners” receive bitcoins as a reward.
Satoshi Nakamoto designed the system to avoid gold rushes. The algorithmic problems become more difficult to solve as the number of computers working on them rises, guaranteeing a steady and reliable supply. Also, the number of bitcoins issued is halved every four years, resulting in ever-smaller releases until 2140, after which no more coins will be released.
That makes bitcoin unique. It is the only good that is defined by absolute scarcity. No amount of time or resources can create more bitcoins than the programmed supply allows. The supply cannot be manipulated, making it a perfect store of value.
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# Bitcoin is secure
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The bitcoin ledger uses the public blockchain. When mining computers crack an algorithmic puzzle, they create a block. The blocks on the ledger contain details about every blockchain transaction ever completed. Every network user can view this information.
Ownership of bitcoins is only valid once it’s been registered on the blockchain. This is only possible if the majority of network users approve it, so there’s no need for a central authority to oversee transactions. While verifying new blocks requires virtually no energy, creating a fraudulent block would cost a significant amount of processing power.
Even if a user decided to expend vast amounts of energy and successfully hacked a majority of all network nodes to approve a fraudulent block, they’d gain very little. Trust in bitcoin would be lost, leading to a drop in demand and value.
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# Challenges for adoption
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Because bitcoin is new, demand has varied. The volatile price has, at times, undermined the currency’s status as an effective store of value.
Bitcoin’s transaction limit is currently set at 500,000 per day. That could be increased, but there will always be a daily cap. The more transactions that take place, the more nodes there’ll need to be. This increases transaction fees and the amount of processing power expended.
Bitcoin could be traded off the blockchain, meaning currencies will be backed by bitcoin. That would create a new standard, but it would also mean that new centralized institutions would need to manage this system.
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This 5-minute summary did not use copyrighted material from the book. It aims simply to give readers a quick understanding of the book (which is well worth reading).
‘*The Bitcoin Standard: The Decentralized Alternative to Central Banking’* was written by economist Saifedean Ammous in 2018.
Buy the book and many more titles at [bitcoinbook.shop](bitcoinbook.shop)