Money, Bitcoin and Time: Part 1 of 3

In the ancient story of money a new chapter is being written…
The Simple Truth about Money: Money is the most successful story ever told by humans. It is a reflexive narrative: meaning it has value only because everyone believes it, and everyone believes it because it has value. Money is a story that continues to be written…

Human Exchange [2,6]

Human beings are the networked species. Initially, these were small bands of hunters and gatherers numbering no more than 150 persons strong (Dunbar’s number). When humans began to exchange with one another, they intuitively discovered the division of labor which allows people to focus on their relative advantages and concentrate on their chosen craft. The division of labor enables the specialization of productive efforts for mutual gain. If John makes axes faster than Steve, and Steve makes bows faster than John, then they both are better off by specializing and trading. Interestingly, this holds true even if John is faster than Steve at making axes and bows (up to a point) and, amazingly, this effect compounds.

Human exchange is the incipient force driving all human progress and prosperity. Prosperity is simply time saved, which is proportional to the division of labor. This recursive dynamic persists to this day as a virtuous cycle with no known natural limit — modern markets in goods, services and ideas allow human beings to exchange and specialize honestly for the betterment of all.

Story of Money [1]

Let’s begin with first principles and follow logic from there. The simplest form of human exchange is the direct trading of actual goods, say guns for boats, in a process known as direct exchange or barter. Direct exchange is only practical when few people are trading few goods. In larger groups of people, there are more opportunities for individuals to specialize in production and trade with more people, which increases the aggregate wealth for everyone. This simple fact, that exchange enables us to produce more goods per hour of human effort is the foundation of economics itself:

Hard Money [1]

Hard money is more trustworthy as a store of value precisely because it resists intentional debasements of its value by others and therefore maintains salability across time. The hardness of a monetary good, also known as its soundness, is determined by the stock of its existing supply and the flow of its new supply. The ratio which quantifies the hardness of money is called the stock-to-flow ratio:

Money is a Social Network [1,4]

Money, as a value system which connects people across space and time, is the original and largest social network. The value of a network is a reflection of the total number of possible connections it allows. Similar to the telephone and modern social media platforms, a monetary network becomes exponentially more valuable as more people join it because the number of possible connections it allows is proportional to the square of the number of its total network participants, a relationship defined by Metcalfe’s Law:

Network values are based on the number of possible connections they allow. Such values grow exponentially with the addition of each new constituent — a property commonly known as network effects.

Monetary Traits [1,4]

As we will see, markets have naturally and spontaneously selected for the monetary good which best satisfies a variety of desirable traits that determine how useful a particular monetary good is as a form of money:

Prospects of Prosperity [1]

In economics, a critical aspect of human decision making is called time preference, which refers to the ratio at which an individual values the present relative to the future. Time preference is positive for all humans, as the future is uncertain, and the end could always be near. Therefore, all else being equal, we naturally prefer to receive value sooner rather than later. People who prefer to defer current consumption and instead invest for the future are said to have a lower time preference. The lowering of time preference is closely related to the hardness of money and is also exactly what enables human civilization to advance and become more prosperous. In regard to time preference, hard money is important in three critical aspects:

As people exhibit lower time preferences and spend their time wisely, they increase their capacity for investment and create more free time for themselves.

Foundation of Economic Growth [1,4]

There are many factors beyond the scope of this essay which influence time preference. Most relevant to our discussion is the expected future value of money. As we have seen, hard money is superior at holding its value across time. Since its purchasing power tends to remain constant or grow over time, hard money incentivizes people to delay consumption and invest for the future, thereby lowering their time preference. On the other hand, soft money is subject to having its supply increased unexpectedly. Increasing the money supply is the same as lowering the interest rate, which is effectively the price of borrowing money and the incentive to save. By reducing the interest rate, the incentive to save and invest is diminished whereas the incentive to borrow is increased. So, soft money disincentivizes a favorable orientation towards the future. In other words, soft money systems raise society’s time preference. For this reason, soft money, once it is sufficiently debased, tends to precede societal collapse (more on this later).

“Historically speaking, gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value.”

Today, the US Dollar is dominant and serves as the global unit of account as prices are most commonly expressed in its terms. This consistency of expression simplifies trade and enables a (somewhat) stable pricing structure for the global economy.

The Economic Nervous System [1]

Market prices are an essential communicative force in economics. As economic production moves from a primitive scale, it becomes harder for individuals to make production, consumption and trade decisions without having a fixed frame of reference (unit of account) which to compare the value of different objects to one another.

Monetary Evolution [1]

Throughout history, money has taken many forms — seashells, salt, cattle, beads, stones, precious metals and government paper have all functioned as money at one or more points in history. Monetary roles are naturally determined by the technological realities of the societies shaping the salability of goods. Even today, forms of money still spontaneously emerge with things like prepaid mobile phone minutes in Africa or cigarettes in prisons being used as localized currencies. Different monetary technologies are in constant competition, like animals competing within an ecosystem. Although instead of competing for food and mates like animals, monetary goods compete for the belief and trust of people. Believability and trustworthiness form the basis of social consensus — the source of a particular monetary good’s sovereignty from which it derives its market value along with the trust factors and permissions necessary to transact with it.

The earliest coins are found mainly in the parts of modern Turkey that formed the ancient kingdom of Lydia. They are made from a naturally occurring mixture of gold and silver called electrum.

Monetary Metals [1]

The last dictator of the Roman Republic, Julius Caesar, issued a gold coin called the aureus coin which contained a standard 8 grams of gold. The aureus was traded widely across Europe and the Mediterranean, alongside a silver coin called the denarius, which was used for its superior salability across scales. Used together, these coins provided a hard money system that increased the scope of trade and specialization in the Old World. The republic became more economically stable and integrated for 75 years until the infamous emperor Nero came into power.

Isaac Newton is attributed with adding the small stripes along the edges of coins as a security measure against coin clipping. These stripes are still present on most coins today.

“Although the emperors of Rome frantically tried to ‘manage’ their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague.”

Amid the chaos of the crumbling Roman Republic, Constantine the Great took power. Intent on restoring the once great empire, Constantine began adopting responsible economic policies. He first committed to maintaining the solidus at 4.5 grams of gold, ended the practice of coin clipping and began minting massive quantities of these standardized gold coins. Constantine then moved east and established Constantinople in modern day Istanbul. This became the birthplace of the Eastern Roman Empire, which adopted the solidus as its monetary system.

Global Gold Standard [1,4]

When they were being used as physical means of settlement, gold and silver coins served complementary roles. Silver, having a stock-to-flow ratio second only to that of gold, had the advantage of being a more salable metal across scales, since its lower value per weight than gold made it ideal as a medium of exchange for smaller transactions. In this way, gold and silver were complementary as gold could be used for large settlements and silver could be used for smaller payments. However, by the 19th century, with the development of modern custodial banking and advanced telecommunications, people were increasingly able to transact seamlessly across scales using bank notes or checks backed by gold:

The US Dollar was once redeemable for gold on demand.

Hardness of Gold [1,3]

By this point in history, virtually everyone had come to fully trust gold’s superior stock-to-flow ratio and therefore believed they could use it to reliably store value across time. After thousands of years of mining this chemically stable element, virtually all the gold ever procured by humans is still a part of its extant supply. The stock of all the gold in the world fits into an Olympic-sized swimming pool today and is valued at almost $8T USD. Gold is rare in the Earth’s crust and extraction is costly in terms of time and energy, which keeps its flow predictably low. It is impossible to synthesize gold by chemical means (as alchemy never panned out) and the only way to increase its supply is through mining.

The rarity of gold in the Earth’s crust ensures that its new supply flows are relatively low and predictable. Since gold is virtually indestructible, nearly every ounce that has ever been mined throughout history is still part of current supply stocks. The combination of these factors gives gold the highest stock-to-flow ratio of any monetary metal and is precisely the reason gold became a global hard money standard.

Final Settlement [1]

Gold also has the advantage of being an instrument of final settlement. Whereas the use of government money requires trust in the monetary policy and creditworthiness of the issuing authority or payment intermediaries, known as counterparty risk, the act of physically possessing gold comprises all of the trust factors and permissions necessary to use it as money. This makes gold a self-sovereign form of money. This is best understood as an identity of the universal accounting equation: Assets = Liabilities + Owner’s Equity

Centralization of Gold [1,4]

By the end of the 19th century, all the industrialized nations of the world were officially on the gold standard. By virtue of operating on a hard money basis, most of the world witnessed unprecedented levels of capital accumulation, free global trade, restrained government and improving living standards. Some of the most important achievements and inventions in human history were made during this era, which came to be known as la belle époque across Europe and the Gilded Age within the United States. This golden era enabled by the gold standard remains one of the greatest periods in human history:

“La Belle Époque was a period characterized by optimism, regional peace, economic prosperity, an apex of colonial empires, and technological, scientific, and cultural innovations. In the climate of the period, the arts flourished. Many masterpieces of literature, music, theater, and visual art gained recognition.”

As multiple societies had now converged on gold as their universal store of value, they experienced significant decreases in trade costs and an attendant increase in free trade and capital accumulation. La Belle Époque was an era of unprecedented global prosperity. However, the hard money gold standard which catalyzed it suffered from a major flaw: settlement in physical gold was cumbersome, expensive and insecure. This flaw is associated with the physical properties of gold, as it is dense, not deeply divisible and not easily transactable. Gold is expensive to store, protect and transport. It is also heavy per unit of volume which makes it difficult to use for day to day transactions. As discussed earlier, banks built their business model around solving these problems by providing secure custody for people’s gold hoards. Soon after, banks began issuing paper bank notes that were fully redeemable in gold. Carrying and transacting with paper bank notes backed by gold was much easier than using actual gold. Offering superior utility and convenience, the use of bank notes flourished. This, along with government programs to confiscate gold from citizens (such as Executive Order 6102 in the United States), encouraged the centralization of gold supplies within bank vaults all over the world.

In fractional reserve banking artificial money and credit is created. For instance, assuming a reserve ratio of 10% and an initial deposit of $100 will soon turn into $190. By lending a 90% fraction of the newly created $90, there will soon be $271 in the economy. Then $343.90. The money supply is recursively increasing, since banks are literally lending money they don’t have. In this way, banks magically transform $100 into over $1,000.

Abolishing the Gold Standard [1]

By 1914, most of the major economies had begun printing money is excess of their gold reserves at the onset of World War I. Unsurprisingly, this had many negative consequences, some of which were immediate while others came on more slowly. Eliminating the gold standard immediately destabilized the unit of account by which all economic activity was assessed. Government currency exchange rates would now float against one another and become a source of economic imbalance and confusion. This distorted price signals, which would now be denominated in various government currencies with rapidly fluctuating exchange rates. This made the task of economic planning as difficult as trying to build a house with an elastic measuring tape.

Governments Take Control [1,3]

As 20th century wars raged, so did the printing presses. Governments and their central banks continued to grow more powerful with each new bank note printed as their citizens became poorer. The death stroke came when most governments, due to a unilateral decision of President Nixon in United States, finally severed the peg to gold entirely in the 1971. Which brings us to the modern form of dominant money: government fiat money. Fiat is a Latin word meaning decree, order or authorization. This is why government money is commonly referred to as fiat money, since its value exists solely because of government decree:

Today, the US Dollar is not redeemable for anything and its value is derived solely from government decree. Paradoxically, people were coerced into adopting soft government fiat money only because of their shared belief in gold as a hard monetary good.

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Unlike to the flow restrictions associated with gold mining, there are practically no economic restraints preventing a government from printing more fiat money. Since there is virtually no cost associated with producing additional units (no skin in the game), government fiat money is the softest form of money in the history of the world. Predictably, money supplies grew quickly, especially in the heat of warfare. In the past, for societies operating with hard money systems, once the tide of war had shifted in favor of one belligerent over the other, treaties were quick to be negotiated as war is an extraordinarily expensive endeavor. The fiat money printing press, on the other hand, gave governments the ability to tap the aggregate wealth of entire populations to finance military operations by implicitly taxing them via inflation. This provided a more secretive, implicit method of funding warfare than explicit taxation or selling government wartime bonds. Wars began lasting much longer and became more violent. It is no coincidence that the century of total war coincided with the century of central banking:

The ability to print unlimited quantities of money gives governments a means to finance military operations by implicitly taxing their citizens via inflation. This provides a more secretive method of funding warfare then explicit taxation or selling government wartime bonds. Resultantly, wars have grown in duration and violence.

Free Market Capitalism versus Socialism [1]

In a socialist system, the government owns and controls all means of production. This ultimately makes the government the sole buyer and seller of all capital goods in its economy. Such centralization stifles market functions, like price signals, and makes decision making highly ineffective. Without accurate pricing of capital goods to signal their relative supply, demand and relevant market conditions, there is no rational way to determine the most productive allocation of capital. Further, there is no rational way to determine how much to produce of each capital good. Scarcity is the starting point of all economics and people’s choices are meaningless without skin in the game in the form of price or trade-offs. A survey without a price would find that everyone wants to own a private island but when price is included, very few can afford to own a private island. The point here is not to trumpet free market capitalism over socialism, but rather to clearly explicate the difference between the two ways of allocating resources and making production decisions:

In a free market for money, the interest rate (the price of money) is determined by natural supply and demand dynamics. Central banks attempt to “manage” these market forces and in doing so create recessions and the boom-and-bust business cycle which is now considered “normal” in the modern era.

Failure of Government Fiat Money [1,3,4]

Seeing that governments have been forced to use coercive measures, such as confiscating gold and implementing legal tender laws, to enforce adoption of fiat money is a clear indication that soft money is inferior and doomed to fail in a free market. This severe inadequacy of government fiat money came to the forefront of global consciousness in the wake of the Great Recession that began in 2008. Due to gigantic market distortions driven by artificially low interest rates and credit ratings agencies with no skin in the game, US subprime real estate became the largest bubble in modern history. When it bursts, its affects were globally systemic, and central banks all over the world (predictably) began increasing their money supplies in an attempt to reflate their broken economies.

Money supply growth by global central banks is accelerated after each recession. This artificial liquidity only provides illusory relief and further distorts the market signals which caused the distortions in the first place.


Bitcoin accepted here: 3CiBznmvP2jXVSPR9bUWZwSNtbe9ubp36M

Synthesized Works & Further Reading

[1] The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous (a masterful work on which much of this essay is based)



Freedom Maximalist. Bitcoin is Honest Money — stack sats here: Links To All My Work: YouTube:

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