Nassim Nicholas Taleb once complained that writers and scholars who speak differently in private than they do in public produce writing that is “certifiably fake, fake.” By that measure, Dr. Saifedean Ammous’s The Bitcoin Standard avoids Taleb’s trap. The Bitcoin Standard is a telling of monetary history through Ammous’ eyes, a collection of his unapologetic observations on money’s impact on society, and a vision of how bitcoin could change it. It is no surprise that Taleb wrote this book's foreword: like Taleb, Ammous plants his feet firmly and pulls no punches.
It is worth noting that Ammous’s theories on bitcoin—heavily influenced by the “Austrian School” of economics—is just one of several prominent and sometimes-overlapping schools of economic thought in the space. Murad Mahmudov and Adam Taché’s recent essay “The Many Faces of Bitcoin” is a clear and well-researched introduction to four bitcoin-related economic theories, and Jimmy Song did a great job narrowing in on the “Crypto-Austrians vs. Crypto-Keynesians” debate that threatened to divide the bitcoin ecosystem last November.
There are a number of ideas expressed in the The Bitcoin Standard—some agreeable, some controversial, and nearly all worth engaging with and thinking over.
This essay explores Ammous’ argument that bitcoin or bitcoin-backed money could end, or massively reduce, perpetual war. Understanding this argument requires taking in at least two key ideas that lead up to it. Please forgive all simplifications necessary for summary, because all three ideas are worth thinking through:
1) Money should allow people to plan for the future
One of the first lessons most children are taught about money is the value of saving. Like the marshmallow experiment, saving teaches children to forego immediate gratification in exchange for greater rewards in the future. In other words, saving can help children develop a future-oriented outlook driven by low time preference.
Similarly, money enables people to offer a product or service today in exchange for something that stores value and can be exchanged for something later. To Ammous, the ability to store value for the long run was a key development for humans, because it encouraged people to plan for the future. The most important economic decisions people make, he argues, are trade-offs with their future selves.
Money means that a fisherman who fishes by hand can sell fish and save the surplus instead of bartering it all for other goods that may spoil or otherwise soon lose value. As the fisherman begins to think about later, he may adopt a lower time preference. He may start to save his surplus, and once he has saved enough, to invest.
With enough surplus money, he may buy a fishing net that would enable him to catch more fish, or a boat to travel to bigger markets, or be better able to provide for family members as they age. But he will only save if he knows that what he saves today will still be valuable in the future.
By contrast, imagine if the fisherman knows or strongly suspects that the money he saves today will be worthless or worth much less in the future. He will not save this money long-term for the same reason he does not save his fish: it rots. He will likely adopt a high time preference. He will spend today, since there would be little sense in holding onto the money long-term. As a result, he may not save enough to ever make big investments in the boat or the net, hurting his chances of providing a better life in the future.
On a larger scale, money enables communities and their leaders to develop low time preferences. This future-oriented perspective enables them to save and then invest in projects that provide for future generations. But this only works if they can store value for later. Without the ability to safely store value, communities may think only in the short-term, and preference short-run consumption over long-term investment.
2) All money is not equal—quality matters (“hardness”)
Ammous also argues that the quality of money matters. He has a fondness for gold but his view is not limited to it: there is no “right” and “wrong” choice of money, he argues, and he lists a number of things that have served well as money, including copper, seashells, large stones, salt, cattle, government-issued paper, even alcohol and cigarettes in certain conditions.
Take, for example, wampum. When American colonists in the 17th century faced a shortage of British coins for use as money, they began using wampum, shells of a variety of clam often strung together into necklaces held and traded by nearby Indian tribes. Wampum was made legal tender in Massachusetts, even accepted as payment for taxes with a set exchange rate.
However, wampum had weaknesses as money: its units were not always durable or uniform, and, more importantly, its supply was easily increased. Captains set out to gather shells in large ships, causing supply of wampum to skyrocket (and its value, in turn, to plummet), which forced colonies to keep lowering wampum’s exchange rates. When British gold and silver coins began to flow back into the colonies—coins that, compared to clams, were more uniform, durable, and limited in supply—wampum fell out of favor.
The "easy money trap"
For Ammous, wampum’s rise and fall as money was predictable, and part of a larger trend. Some money is better than others. As he tells it, a money’s “hardness” matters, because its hardness prevents rapid increase in supply and corresponding loss of value. Money is "hard money" if its supply is hard to increase; it is "easy money" if the supply is amenable to large or unpredictable changes in supply.
What happened to wampum is what Ammous terms the "easy money trap": anything used as a store of value will have its supply increased (decreasing its value); and anything with a supply that is easily increased will undermine the savings (and the incentive to save) of those who use it to store value.
Combining the ideas of “hardness” with “time preference” described above, Ammous’s concern is clear. If a money lacks “hardness,” it cannot safely store value long-term, which means it will fail to allow for future-oriented, low-time preference planning like saving and investing.
Government money used to be harder
Until quite recently, government-issued money (“fiat money”) was backed by a promise that it was redeemable in gold or other precious metals. A government money tied to gold (a “gold standard”) does not mean that its citizenry necessarily transacts in gold itself. Rather, it means that the government-issued money that citizens exchange with one another is pegged to an exchange rate with a certain amount of gold.
For example, when the U.S. Federal Reserve was first established in 1913, the U.S. dollar was redeemable for gold at $20.67 per ounce.
The gold standard enabled paper money to substitute for gold in transactions, which carried several advantages. Paper money could act as a superior medium of exchange (gold is not easily divisible, nor convenient to carry), without sacrificing a guarantee that the money was still “worth” something hard. A gold standard offered convenience while avoiding the easy money trap: while paper money is easy to produce, the gold it is tied to was not.
Another advantage of a gold standard, Ammous argues, was that it meant that government spending carried a calculable cost. With honest accounting, government spending would reduce the treasury’s holdings or the money’s exchange rate with gold, allowing the population to better measure changes in the value of their savings. Government spending on popular programs—universal health care, clean water—might carry little political risk. But governments that spend public money on “a monarch’s lavish lifestyle,” as Ammous puts it, would engender resentment in the population and perhaps the desire to rise up and replace the government, endangering its legitimacy and rule.
In a society where nothing “hard” backs government money, two things happen: first, it is harder for the people to determine the cost of government spending; second, there is less incentive to save money for the long-run future, since the future supply of the money is unknown and easily increased. Easy money makes it easier for leaders to spend public money by manipulating the money supply rather than by raising taxes, especially taxes on the wealthy.
Still, gold-backed money has several disadvantages. For example, governments could lie about their gold reserves, masking their money's true exchange rate and allowing debasement of their citizens' savings without their citizens' knowledge. Moreover, mining gold is environmentally destructive and often hazardous labor. And, crucially, the supply of gold is unknown, so gold is still vulnerable to changes in supply. A major gold discovery or advancement in mining—say, in the seafloor or in space—could upend gold's supply and depress its price, undermining the savings of people and governments who use it to store value. For hardness, bitcoin is better.
Why bitcoin is "the hardest money ever invented"
Ammous argues that bitcoin is the “hardest money ever invented,” and the first example of "absolute scarcity." Here’s why: additional resources dedicated to bitcoin “mining” do not increase the rate of bitcoin released nor change its overall supply. Bitcoin’s underlying math limits it to an ultimate supply of 21 million. Approximately 17 million bitcoin have been produced so far, and the remaining 4 million will be produced over the next century or so at a rate of inflation that decreases in regular intervals ("halvings"). Further, bitcoin’s “difficulty” adjusts automatically in proportion to the power dedicated to its network. This ensures that a new block will be found approximately every 10 minutes, no matter how many miners there are.
3) How a bitcoin standard could end endless war
Having explained the importance of time preference and hardness, Ammous reasons that a “bitcoin standard” could end, or drastically curtail, perpetual war. Ammous does not define "perpetual war," but one could glance at the United States' self-reported data from 2016 and conclude it looks like this:
In 2016 alone, the United States deployed forces to 70% of the world's nations, and dropped over 26,000 bombs in seven different countries--an average of three bombs per hour, 24 hours a day, for the entire year. Barack Obama, winner of the Nobel Peace Prize, was the first U.S. president to preside over American war every single day of his presidency.
By Ammous’s estimation, people prefer peace to war. Further, a society with hard money—money that allows for long-term saving and planning—has a low time preference. While its people may support government spending of public money on future-oriented investments, like preventative healthcare and infrastructure, they are unlikely to support bloody bombing campaigns on distant lands. Because people prefer peace to war, and know how their government is spending their money, a government that spends on endless war risks being overthrown.
However, if a government can hide the costs of spending, it can spend public money on endless war without much resistance. The trick that sustains perpetual wars, Ammous argues, is easy money.
Easy Money, Constant War
Easy money offers governments the means to wage perpetual war by hiding war’s cost. The transparency that accompanies spending hard money adds a measure of democratic accountability and restraint. But with easy money, a government no longer needs to dig into its pockets or the pockets of its citizens in order to finance its wars. A government can effectively print money for conflict until it has completed destroyed the value of its currency.
Ammous argues that easy money also provides a motive for perpetual war: sustaining wartime industries dependent on government contracts. He echoes Dwight D. Eisenhower’s concern that the military industries that prospered in WWII grew into the “Military Industrial Complex”: a conglomeration of industries dependent on government spending and sustained by international conflict. These industries, he argues, “drive U.S. foreign policy toward an endless series of expensive conflicts with no rational end goal or clear objective.”
Under Ammous’ framework, it should come as no surprise that the U.S. did not raise taxes to pay for the War in Afghanistan or the Iraq War or its latest foray into Syria, despite spending trillions of dollars. Or that Congress recently authorized, with overwhelming support, another $700 billion in military spending. With a national debt of $21 trillion—and no intention to tie military spending to any increase in taxation—all this spending on perpetual war is just “deficit without tears.”
To Ammous, these are exactly the sort of actions we should expect from leaders who manage easy money. What point is there in responsibly saving dollars, when the U.S. President could, tomorrow, order the printing of a coin worth $20 trillion and deposit it in the Federal Reserve? Without the incentive to save, leaders will not adopt a future-oriented perspective. Instead, they will adopt high time preferences that favor spending, which creates insecurity, conflict, and debt—rather than saving and investing towards a sustainable and peaceful future.
The Costs of the Dollar Standard
One major reason that the U.S. can engage in constant conflict is that the U.S. dollar—backed today by nothing at all—has been adopted as the world’s reserve currency. The dollar as the world's reserve currency means that countries around the world back their money with U.S. dollars (a “dollar standard”). Ammous argues that tying the world economy to one country’s easy money was a historical mistake of massive proportion.
The dollar standard is also a more recent experiment than most suppose. In order to rebuild the world economy after World War II, foreign governments agreed to fix their own currencies to the U.S. dollar, which in turn was fixed to gold ($35 per ounce). Countries sold goods to the U.S. and received gold-backed dollars in return, and stockpiled their reserves with dollars that were redeemable for gold held in the U.S., or so they thought.
But by 1971, as the U.S. State Department explains, a “surplus of U.S. dollars caused by foreign aid, military spending, and foreign investment” meant the U.S. no longer had enough gold to back the supply of dollars it had printed. To make matters worse, countries began suspecting the exchange rate was off—and demanded that the U.S. take back their dollars and give them the fair value of gold in exchange. Faced with a choice of increasing taxes, cutting military spending, or adjusting the dollar’s exchange rate with gold, President Nixon decided against all three. Instead, he made a startling, unilateral announcement now known as the “Nixon Shock”: the “temporary suspension” of the dollar’s convertibility into gold. The suspension has never been lifted.
Since then, the U.S. and the rest of the world have found themselves in an uncomfortable arrangement that binds all of them to monetary insecurity and prevents all parties from adopting the low time preferences that are necessary for sustainable peace. Other countries are insecure because they stockpiled their reserves with dollars which are backed by nothing, which means they depend on the United States to maintain the dollar’s value, since that maintains the wealth of their reserves. And because U.S. dollars serve as the world’s reserve currency, the U.S. must constantly balance its domestic priorities with its international responsibility to maintain the dollar’s value. The Economist calls the dollar standard “one of the most vulnerable pillars of global stability." If other countries stop buying dollars, or dollar-denominated debt—the U.S., with all its spending and low taxation, will find itself in a massive fiscal mess.
The dollar’s insecurity also helps explain why the U.S. ties itself into arrangements that all but guarantee perpetual war. Take, for example, a then-secret deal the Nixon Administration made with Saudi Arabia soon after the Nixon Shock. As Bloomberg reports, “the basic framework was strikingly simple[:] The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.” The deal tied the U.S. into Saudi Arabia’s many regional disputes, and helps explain why the U.S. continues to lend military support to Saudi Arabia’s war against Yemen, one of the poorest countries in the Arab world, causing what is arguably the world’s worst modern humanitarian crisis.
What is clear from this argument is that both the U.S. and the rest of the world deserve relief from the dollar standard. The U.S. needs to be able to handle its needs at home and wind down its foreign wars, and the rest of the world needs the security of saving in a money that is not subject to one country’s whims. The world would not be meaningfully better off if all countries switched to a Euro Standard, or a Yuan Standard, because the problem—also known as the Triffin Dilemma—is one country controlling the money supply of the world. Any country whose money becomes the world’s new reserve currency will find itself in the same bind as the U.S.: torn between domestic and international monetary priorities, and under pressure to spend its money and military might to defend the money abroad.
A bitcoin standard may offer the world a better way out.
Enter the Bitcoin Standard
Ammous argues that bitcoin provides a global monetary standard backed by math, not military might. Without a neutral unit of monetary measurement, Ammous argues, international stability is “as hopeless as attempting to build a house with an elastic measuring tape whose own length varied every time it was used.” With absolute scarcity and known supply, bitcoin can become a neutral, international unit of monetary measurement—like the meter for distance, or the second for time.
Instead of today’s massive, speculative foreign exchange market—where countries’ currencies are constantly inflating or deflating in value and supply against other countries’ currencies that are also constantly fluctuating in value and supply—countries can manage their national currencies against an exchange rate with bitcoin, the hardest money ever invented.
Moreover, because the bitcoin unit used to transfer money between nations would be neutral to any one country’s monetary policy, a bitcoin standard could usher in a new era where countries are free to adopt different theories of economics and governance. Rather than decide international monetary policy in secret meetings of financial elites, the world can look forward to bitcoin’s inflation-rate “halvings” as publicly-known events and price them in accordingly. They can think in centuries again.
To be sure, believing that a bitcoin standard could end endless war does require believing that people and countries prefer peace to war. It may also require that people have a say in their government’s decisions, which is not always the case. And for countries deeply invested in ongoing conflict, it may take more than a change in monetary policy to wind down war. Still, one does not have to agree with Ammous’ prescription for winding down the Military Industrial Complex to credit him for offering a means for how it might happen. Hearing leaders of both major U.S. political parties clamor for seemingly endless military involvement in foreign affairs, it is unclear that they have any plan, or desire, to wind it down themselves. If they do have a plan for ending our endless wars, now would be a good time to advance it.
After all, the average lifetime of a national currency is less than thirty years.
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Misha holds a J.D. from Yale Law School, where he co-founded the Yale Law and Technology Society (TechSoc). He can be reached on Twitter @MishaGuttentag.