If you’ve ever wondered what the hell bitcoin is and what it’s good for, The Bitcoin Standard should rank high on your hit-list.
The vast majority of us ask no questions of money beyond “How can I get more of it?” In The Bitcoin Standard, economist Saifedean Ammous delves much deeper, querying the fundamental nature of money as we know it. Where did it come from? Which attributes have historically made it acceptable as a store of value, unit of account and medium of exchange? How has money evolved through the ages, and how might it change in the future? If you’re anything like me, it’s a book you’ll want to immediately reread before loaning to intellectually curious friends and family members.
A Bitcoin Standard Bearer: A Review of Saifedean Ammous’s Bestseller
From the title and subtitle (The Decentralized Alternative to Central Banking), readers may expect an esoteric treatise on bitcoin. But that’s not the case at all – bitcoin isn’t really discussed until page 170, in the chapter devoted to Digital Money. Before we get to that point, we are treated to an economic primer covering principles such as coincidence of wants (what you want to acquire is produced by someone who doesn’t want what you have to sell), indirect exchange (swapping one’s wares for a medium that can be parlayed for other goods, e.g. paper money) and salability (the ease with which a good can be sold on the market whenever its holder desires). While such concepts can be skimmed by more learned readers, their inclusion is likely to be welcomed by the layman, providing context for the fascinating chapters that follow.
Money Makes the World Go Round
Those chapters are both eloquently written and brimming with insight: Ammous has a gift for demystifying complex economic concepts and theories so that they can be understood and appreciated, the nuts and bolts of money and the financial system that utilizes it laid bare. Of course, before there was a financial system “many things served the function of money: gold and silver most notably, but also copper, seashells, large stones, salt, cattle, government paper, precious stones, and even alcohol and cigarettes in certain conditions.” After all, “there is nothing in principle that stipulates what should or should not be used as money.”
A central theme of the book is the implications of hard and easy money. As Ammous explains, hard money is the kind whose supply is difficult to increase; easy money is conversely amenable to large increases. There are both historic and modern examples provided, with the author summarizing the ancient system based on Rai stones on Yap Island. These cherished stones once had an unquestionable monetary role due to their beauty and rarity, as well as the difficulty of their procurement, since they had to be quarried and shipped from neighboring islands.
“Ammous has a gift for demystifying complex economic concepts and theories so that they can be understood and appreciated, the nuts and bolts of money and the financial system that utilizes it laid bare.“
“No matter how desirable they were, it was not easy for anyone to inflate the supply of stones by bringing in new rocks. Or, at least, that was the case until 1871, when an Irish-American captain by the name of David O’Keefe was shipwrecked on the shores of Yap and revived by the locals.” TL;DR: O’Keefe used modern tools and explosives to quarry a boatload (literally) of Rai stones and inflate the island’s monetary supply. In doing so, he turned hard money into easy money and precipitated the end of the stones as the island’s default currency.
A similar thing happened to aggry beads in western Africa, while seashells – which were adopted by European settlers as legal tender from 1636 – were later replaced by gold and silver coins “due to their uniformity, allowing for better and more uniform price denomination.”
From the Denarius to Monetary Nationalism
This exploration of primitive forms of money provides an excellent grounding in the fundamental economic tenets (stock-to-flow ratio, free-market monetary competition), with subsequent chapters on Monetary Metals and Government Money bringing us more or less up to date, tracing developments from the days of the Roman Republic’s silver denarius to “monetary nationalism and the end of the free world.”
Along the way, Ammous contrasts the merits of various metals and commodities, noting that “governments and counterfeiters could, and frequently did, reduce the precious metal content in these coins, causing their value to decline by transferring a fraction of their purchasing power to the counterfeiters or governments.” While conducting an engrossing, dispassionate history lesson, the author occasionally offers his own pearl of wisdom or useful graph, such as one showing global gold stockpiles and annual stockpile growth rate. In illustrating gold’s continued value, Ammous stresses the “impossibility of synthesizing gold from other chemicals,” meaning “the only way to increase the supply of gold is by mining it from the earth, an expensive, toxic, and uncertain process in which humans have been engaged for thousands of years with ever-diminishing returns.”
As would be expected given the subject matter, Ammous often references and critiques celebrated economists such as John Maynard Keynes, the man who “captured the zeitgeist of omnipotent government to come up with the definitive track that gave governments what they wanted to hear.” Ammous elaborates in the chapter Government Money, which looks at the way government edicts and policies shape monetary reality: “Gone were all the foundations of economic knowledge acquired over centuries of scholarship around the world, to be replaced with the new faith with the ever-so-convenient conclusions that suited high time-preference politicians and totalitarian governments.”
The Financing of War and Societal Effects
Ammous is especially strong when accentuating the differences between monetary eras, such as La Belle Époque and its gold standard, “a period of prosperity and flourishing that continues to appear more amazing with time,” and the era of Monetary Nationalism and the suspension of gold redeemability. With the outbreak of World War I, “governments’ war efforts were no longer limited to the money that they had in their own treasuries, but extended virtually to the entire wealth of the population. For as long as the government could print more money and have that money accepted by its citizens and foreigners, it could keep financing the war.”
To illustrate the point, a telling graph shows several national exchange rates vs the Swiss franc during WWI, with the latter having remained on the gold standard. It’s quite something.
Naturally, chapters on Government Money, Money and Time Preference and Capitalism’s Information System lead inexorably to bitcoin, but there is no sense that Ammous has a dog in this fight: there is little fat in these pages, few examples of dull, hyperbolic passages or tub-thumping; the tone is even and measured throughout, the writing informative and percipient almost to a fault. Under the author’s guidance, we find ourselves wondering about the societal impact of choosing easy money over hard money, with the transition from one to another having obvious consequences: “Society saves less, accumulates less capital, and possibly begins to consume its capital; worker productivity stays constant or declines, resulting in the stagnation of real wages, even if nominal wages can be made to increase through the magical power of printing ever more depreciating pieces of paper money.”
It’s no exaggeration to say that in deepening my understanding of the way money operates, this book drastically altered my perspective on spending vs saving, and how central banks mismanage money. How could it not? Before reading it, I had no idea that “even the best-performing and most stable government forms of money have witnessed their value decimated compared to gold, with their value currently running at around 2-3% of their value in 1971 when they were all delinked from gold.”
Bringing Money into the Digital Realm
After highlighting the relationship between unsound money and war, considering the drivers of inflation and the largesse of central banks, and dissecting the various schools of established economic thought, the author leads us into the realm of bitcoin, which brings “the desirable features of physical cash (lack of intermediaries, finality of transactions) to the digital realm and combines them with an ironclad monetary policy that cannot be manipulated to produce unexpected inflation to benefit an outside party.”
Of course, these chapters will be what many readers are most looking forward to – though it’s fair to say an appreciation of bitcoin is only nourished by the context provided in the previous pages. Even bitcoin maximalists will learn much here, if not about bitcoin per se (although the dive is deep there too, particularly in Chapter 10), about the ideology it seeks to challenge.
If you’ve ever contemplated the societal costs of using money whose “supply can be expanded at the will of a government susceptible to democratic and special-interest politics”; if you’ve ever wanted to learn about money and its underpinnings; if you’ve ever wondered what the hell bitcoin is and what it’s good for; then The Bitcoin Standard should rank highly on your hit-list.