Academic Saifedean Ammous recently published a book called “The Bitcoin Standard.” In it, Ammous discusses the history of money and other mediums of exchange, the relationship between economics and various aspects of society, and explores what constitutes “good” money, drawing heavily from the Austrian school of economics. Most importantly, Ammous discusses why bitcoin may be able to provide a viable alternative to the current financial system.
Saifedean Ammous is a self-proclaimed “bitcoin maximalist” who works as an assistant professor of economics at Adnan Kassar School of Business at the Lebanese American University, having previously served as a member of the Center for Capitalism and Society at Columbia University. Ammous holds various academic qualifications ranging from MSc to Ph.D. in a varied array of subjects.
The Concept of Sound Money
To understand how the global financial system came to be, Ammous first delves into the past. Different societies have created ways through which they could exchange value. These methods were dependent on the specific set of circumstances that were relevant to the community. This means that a wide array of substances have acted as money.
“Throughout human history, many things have 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. People’s choices are subjective, and so there is no right and wrong choice of money. There are, however, consequences to choices.”
While it is true that it is possible to use any number of items as a way to exchange value, some things are better suited to serve this function. For an object to adequately serve as money, it must fit specific criteria. Ammous explains that one of the most important things that affect the viability of an item as money is it supply: “The monetary media that survived for longest are the ones that had very reliable mechanisms for restricting their supply growth-in other words, hard money.”
Austrian Economics refers to an economic theory first put forth by Viennese economist Carl Menger. This school of thought places great significance on the idea of free markets. The Austrian School is based on the belief that economies perform best when there is limited interference by governments. This economic philosophy stands in contrast to mainstream economic theories such as Keynesian economics and the Neoclassical School.
The concept of hard money is quite significant within Austrian Economics. Ammous explains: “The relative difficulty of producing new monetary units determines the hardness of money: money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.”
Ammous further reiterates that a free market produces an economy with a medium of exchange that can stand the test of time: “Free-market monetary competition is ruthlessly effective at producing sound money, as it only allows those who choose the right money to maintain considerable wealth over time. There is no need for government to impose the hardest money on society, society will have uncovered it long before it concocted its government, and any governmental imposition, if it were to have any effect, would only serve to hinder the process of monetary competition.”
Additionally, Ammous explains the connection between the choice of money and the accumulation of wealth. He also explores the link between technological advances and money:
“While people are generally free to use whichever goods they please as their media of exchange, the reality is that over time, the ones who use hard money will benefit the most, by losing very little value due to the negligible new supply of their medium of exchange. Those who choose easy money will likely lose value as its supply grows quickly, bringing its market price down. Whether through prospective rational calculation, or the retrospective harsh lessons of reality, the majority of money and wealth will be concentrated with those who choose the hardest and most salable forms of money. But the hardness and salability of goods itself is not something that is static in time. As the technological capabilities of different societies and eras have varied, so has the hardness of various forms of money and with it their salability. In reality, the choice of what makes the best money has always been determined by the technological realities of societies shaping the salability of different goods. Hence, Austrian economists are rarely dogmatic or objectivist in their definition of sound money, defining it not as a specific good or commodity but as whichever money emerges freely chosen on the market by the people who transact with it, not imposed on them by coercive authority, and money whose value is determined through market interaction and not through government imposition.”
The Connection between Money and Society
Exploring the current financial system, which is driven by government-issued money, Ammous shows how this system affects various areas of society. For instance, governance and democratic processes are often compromised through the use of money. This is because the government is able to affect how the economy performs in certain instances thus swaying public opinions through schemes that may not be actual lasting solutions for the challenges being faced by the populace. He continues, “unsound money, on the other hand, allows governments to buy allegiance and popularity by spending on achieving popular objectives without having to present the bill to their people.”
Moreover, Ammous further attempts to show how the government-backed paper money has far-reaching effects on society. For instance, “Academia is another good example, where students pay ever-more-exorbitant fees to enter universities only to be taught by professors who spend very little time and effort on the teaching and mentoring of students. [In] a free market, academics would have to contribute value by teaching or writing things people actually read and benefit from.” Furthermore, unsound money is shown to affect seemingly unconnected things like art. Perhaps most importantly, Ammous posits that sound money is essential for a society to uphold and support individual freedom and liberties adequately.
Is Bitcoin Sound Money?
The book spends seven chapters on the history of money and its connection to important historical events such as the World Wars, the Global Financial Crisis of 2008 as well as governance. With this basis, Ammous delves into the subject of bitcoin in the last three chapters.
Bitcoins’ pseudonymous creator(s), Satoshi Nakamoto, designed the cryptocurrency to only have 21 million units. “Beyond digital scarcity, Bitcoin is also the first example of absolute scarcity, the only liquid commodity (digital or physical), with a set fixed quantity that cannot conceivably be increased.” This is one of the factors that contribute to the soundness of bitcoin as money. It is not possible to artificially increase or decrease the supply of the currency.
Furthermore, bitcoin allows individuals to have agency over their finances in a way that was previously impossible due to government influence. This is in line with the Austrian Economics school of thought: “As the first form of digital cash, Bitcoins first and most important value proposition is in giving anyone in the world access to sovereign base money. Any person who owns Bitcoin achieves a degree of economic freedom which was not possible before its invention. Bitcoin holders can send large amounts of value across the planet without having to ask for the permission of anyone. Bitcoins value is not reliant on anything physical anywhere in the world and thus can never be completely impeded, destroyed, or confiscated by any of the physical forces of the political worlds.”
Due to its decentralized design, bitcoin allows users to store and exchange value in a way that is impervious to government control. Furthermore, it is built on sound technology that continues to support its network, albeit with challenges. “Bitcoin has operated with practically no failure for the past nine years, and if it continues to operate like this for the next 90, it will be a compelling solution to the problem of money, offering individuals sovereignty over money that is resistant to unexpected inflation while also being highly salable across space, scale, and time. Should Bitcoin continue to operate as it already has, all the previous technologies humans have employed as money — shells, salt, cattle, precious metals, and government paper—may appear quaint anachronisms in our modern world — abacuses next to our modern computers.”
A Final Overview
“The Bitcoin Standard” is a good introduction to Austrian Economics and how it relates to bitcoin. Moreover, the book provides a thorough explanation of the technology, terminology, and economics of the Bitcoin network.
Though Ammous takes certain liberties with his interpretations of historical events, which could be seen as a mischaracterization of the past in order to fit into his narrative, he does make a compelling case for bitcoin as an alternative to central banking.
Ammous is pretty confident bitcoin will play a major role in the decentralization of the global financial system. As Nassim Taleb states in the books’ foreword: “Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority can decide on its fate. It is owned by the crowd, its users. And it now has a track record of several years, enough for it to be an animal in its own right.”