Bitcoin: The Standard of the Digital Age
The nature of money is, tragically, one of the most important and unexamined questions in modern society. Over the course of history, various monetary systems have risen and fallen as technology has advanced and new forms of money have emerged that are superior to previous ones. To help us understand our money, we need to examine the question, “Who keeps the books?” By exploring the technological history of money and its various implementations, from informal social credit to commodity support systems, we can gain insight into how control over the money ledger affects personal freedom, economic prosperity, and human flourishing.
In the Austrian tradition, Carl Menger, Ludwig von Mises, and many other figures wrote extensively about the functions of money. Money is essentially a medium that facilitates transactions, making indirect exchange possible. In small communities, a social credit system can appropriately regulate resources through direct exchange. But as these communities grow, indirect exchange through money becomes essential. Increasing division of labor and specialization requires more complex economic calculations. As needs become increasingly sophisticated, indirect transactions between distant parties become necessary. Most importantly, direct exchange relies on trust and familiarity between trading partners, which weakens as scale increases. Money arose to enable growing communities to benefit from economic expansion through indirect exchange. Without sound funding, productivity growth and specialization cannot be coordinated effectively. Austrian tradition recognizes the importance of a monetary system in a developing economy.
Naturally, certain products are selected as money within a market economy due to their optimal monetary characteristics as a monetary technology. Put differently, the best salable good with the lowest rate of diminishing marginal utility is selected to promote indirect trade. The key monetary characteristics of scarcity, durability, portability, divisibility, fungibility, and verifiability lead to the salability of a good over time and space. Shells, beads, silver, and gold are all examples of various commodities that have historically been used as various mediums of exchange on the strength of these monetary characteristics.
In her recent book Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better, Lyn Alden revisits the question of what money is through a ledger theory of money. She writes:
“The ledger theory of money observes that most forms of exchange are improved upon by having salable units of account that can be held and transferred across both time and space, and that these units of account imply, either literally or formally, the existence of a ledger. do. green. These monetary units and the ledgers that define them rely on human administrators or natural laws to maintain stability across time and space.”
Through this lens, we can better understand what the government is doing with our money. The cumbersome nature of physical gold as a medium of exchange ultimately led to the adoption of paper money, and eventually fiat money, which was no longer backed by commodities. As economies grow and technological advancements occur, it becomes increasingly impractical to store, transport, and verify pure gold for trading. Gold’s weight and risk of theft made it expensive to store. Analyzing gold to determine its purity has been difficult in routine commerce. And transporting adequate gold for large transactions was risky. Paper money provided a lighter, more portable proxy for gold, which was more practical for exchange. However, it still relied on central authorities to secure adequate gold reserves to maintain convertibility. This restrictive monetary policy was achieved because monetary expansion was limited by the gold supply. Over time, restrictions on gold convertibility led to frustration among governments and central banks. Ending convertibility in 1971 allowed greater control over the money supply and interest rates and greater policy flexibility. However, without commodity backing, fiat presents greater risks of inflation, hyperinflation, and other negative externalities. Alden continues:
“The multi-unit banking system and paper note technology backing gold have improved the effective divisibility of gold. Then, in addition to exchanging paper, people could eventually “send” money to other parts of the world over communication lines, using banks and ledgers as administrative intermediaries. This was the gold standard, with paper money and financial communication systems backed by gold.”
“For a gold-based banking system, the only part of the ledger that individual users can control are the precious metal coins they manage, and to do this they rely on the properties of nature to maintain the integrity of their assets. ledger. Once they handed over their coins to the banking system, they began to rely on a hierarchy of other people to control their money.”
In the context of Alden’s ledger theory, the supply of gold is controlled by nature and natural laws. In contrast, Fiat is controlled by human administration and explicitly by the state. This explanation is a simple answer to the question of what the government has done with our money. The state deviated from natural law, wrested control of its currency ledgers and used that power to promote metastatic growth. Moreover, the Company has exercised this control as one of its exclusive exclusive privileges. As advocates of free markets, private property rights, and self-determination, nothing is more important in our time than separating money from the state. Friedrich A. Hayek, the great advocate of denationalization of money, famously said:
“I don’t believe we will ever have good money again until we get things out of the hands of the government. That means we cannot violently take it out of the hands of the government. All we can do is help someone else. Introducing the unstoppable in a cunning roundabout way.”
Over the past 15 years, Bitcoin has emerged and continued to evolve in the cunning way Hayek postulated. Initially and abstractly, Bitcoin was conceived as a peer-to-peer electronic cash system. It is a distributed ledger system that utilizes encrypted digital signatures to enforce the concept of complete digital scarcity. Bitcoin, as a unit of currency, represents a truly revolutionary concept: a digitally-based bearer commodity asset. In the context of Alden’s monetary ledger theory, she wrote:
“Gold has long been utilized as a form of defense and savings, but in the digital age it is no longer a useful transactional currency. The Bitcoin network presents a newer, faster alternative where no one can create Bitcoin for free and therefore no one has the power to mint the currency.”
Bitcoin bridges the speed gap between transactions and payments. Since the invention and deployment of intercontinental communication systems in the late 19th century, transactions have been able to travel around the world at the speed of light, but scarce, self-governing bearer asset currencies (such as gold) are transported and verified at the speed of matter. This speed gap opens up massive arbitrage opportunities because banks and governments have a management monopoly on fast long-distance payments. Bitcoin represents the first significant way to address scarcity at the speed of light.
Politics may influence how we interact with money locally and temporarily, but it is technology that influences how we interact with money globally and permanently. As new technologies emerge, certain types of ledgers become obsolete and disappear, while new types of ledgers are born and become necessary. That’s why new forms of money tend to be adopted everywhere, not just locally. As the world became increasingly industrialized, gold took precedence over all other commodities. And as the world became increasingly connected by communications systems, fiat currency replaced gold in every country. Now that digital scarcity and digital payments exist as new forms of technology, a new era of money will begin again.”
The primary use of Bitcoin today is as a store of value assets. One possible explanation for this is Gresham’s law, which states that when two forms of currency have the same denomination, the currency perceived as less valuable is more widely circulated and the more valuable currency is hoarded. This helps explain Bitcoin’s current role. Limited supply and unstable valuation make Bitcoin “good money” to hold as an asset, while the less recognized fiat currency remains a common medium of exchange. However, as adoption increases, Bitcoin’s monetary status may evolve.
conclusion:
Studying the history of money reveals that its evolution reflects technological advances. Societies have chosen different monetary media based on the strength of their monetary properties, that is, their salability over time and space. Examining who maintains the ledger of each monetary system also provides useful insight. Natural law governed the ledger of commodities such as gold. However, the advent of telecommunications made it possible for financial transactions to take place much faster than settlement with physical gold. This highlighted the limitations of using physical gold as currency in the modern digital age. As a result, society has adopted credit-based paper and digital currencies with ledgers controlled by human administration rather than natural law. Unfortunately, over time, states took control of these ledgers and manipulated fiat currencies, expanding their power and completely removing the link to gold. To counter the unbridled growth of state power, we must return to sound money pegged to a reliable store of value through ledgers that cannot be manipulated by the state. In an increasingly digital world, using physical gold as a medium of exchange is no longer practical. Therefore, creative, censorship-resistant monetary alternatives must be developed to separate control of money from the state. Over the past 15 years, Bitcoin’s globally distributed public ledger has proven to be an interesting experiment in decentralized digital currency. Unlike traditional currencies, Bitcoin’s ledger is not controlled by a single entity. Rather, it relies on a network of private individuals running Bitcoin software voluntarily to reach consensus on the protocol. This decentralized approach allows the market to determine the nature of the network and its monetary unit. Ultimately, the market will decide whether Bitcoin is best suited as a medium of exchange for humanity in the digital world. One of the questions we need to ask ourselves is:
“What if a global, digital, sound, open, programmable currency appears to be generating returns from absolute zero?”
This is a guest post by Michael Matulef. The opinions expressed are solely personal and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
