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aliases: [Neo-metallism, neo-metallism]
---
# Summary
## Claim Steel-manned
*Bitcoin is a digital gold, a [gold standard](../concepts/gold-standard.md) was a good idea, and thus that a "Bitcoin-standard" – i.e. a new gold-standard built on bitcoin – is a good idea.*
The neo-metallist claim is that bitcoin can operate as a new asset class which exhibits similar financial properties to [gold](../concepts/gold.md). The strong version of this claim asserts that a [gold standard](../concepts/gold-standard.md) was a good idea and hence that that a new gold standard should be built on top of bitcoin.
The neo-metallist claim is that bitcoin can operate as a new asset class which exhibits similar financial properties to [gold](../concepts/gold.md). The strong version of this claim asserts that a [gold standard](../concepts/gold-standard.md) was a good idea and hence that that a new gold standard should be built on top of bitcoin. This claim has 2 components:
**Bitcoin is a better gold**: it shares the features of gold which make it a good choice for a currency (or something to peg a currency to). In addition, Bitcoin has specific features which may make it better than gold e.g.:
**The gold standard is a good idea**:
* First, because it reduces the scope for governmental or central bank intervention in the money supply. Intervention is bad because it leads to inflation which is harmful to the free market and commerce. In addition,
* Second, more philosophically, government / central bank intervention in the money supply is inherently undemocratic; the will of the few imposed on the many.
**Bitcoin is a better alternative to gold**
* It shares the features of gold which make it a good choice for a currency (or something to peg a currency to)
* In addition, Bitcoin has specific features which may make it better than gold e.g.
* Bitcoin is digital and so is not subject to the same costs around storage and transportation as gold;
* Bitcoin is under less state control. Gold supply is mostly controlled by sovereign nations like the U.S., China, Germany, and other European countries.
**The gold standard is a good idea**: for two reasons. First, because it reduces the scope for governmental or central bank intervention in the money supply. Intervention is bad because it leads to inflation which is harmful to the free market and commerce. In addition, Second, more philosophically, government / central bank intervention in the money supply is inherently undemocratic; the will of the few imposed on the many.
**The bitcoin-standard is a good idea**: combining points one and two we arrive at the neo-metallist thesis that a new digital gold-standard based on bitcoin will be good for the economy.
## Evaluation: False (High Confidence)
There was a reason the world abandoned the gold standard. The core argument of the Austrian eocnomics underpinning this claim is that all deflation is bad, and there is lots of evidence disproving this. The gold standard is inherently deflationary and risks deflationary spirals, and its rigidity left central banks with far less room to respond to economic crises. It created a brittle and shock prone economic system which in practice has been shown to be less effective than the current system of floating currencies. Claims that intervention in the money supply are undemocratic are equally unfounded. There has been no evidence of an erosion of democracy stemming from such intervention, there exist far greater curtailments of "negative liberty" which libertarians should take issue with if they are particularly concerned by such things, and there are numerous ways of making central banks and related instutitons more democratic without reverting to a currency peg.
Even if a return to the gold standard were a good idea is not capable of replacing gold because it does not share many of the core features of gold which made it suitable as a currency peg in the first place: it can;t function as a currency, no longer holds a unique place in society due to the existence of Altcoins and has no comparable synthetic floor on its price. All of this is aside from the fact that it is in fact very costly and inefficient to mine and exchange.
## Examples of claim being made
### [[notes/wences-casares|Wences Casares]] in [The Case for a Small Allocation to Bitcoin](https://www.kanaandkatana.com/valuation-depot-contents/2019/4/11/the-case-for-a-small-allocation-to-bitcoin)
### [Wences Casares](/notes/wences-casares) in [The Case for a Small Allocation to Bitcoin](https://www.kanaandkatana.com/valuation-depot-contents/2019/4/11/the-case-for-a-small-allocation-to-bitcoin)
> "If Bitcoin succeeds it will most likely not replace any national currency. It may be a supranational currency that exists on top of all national currencies. If Bitcoin succeeds it may be a global non-political standard of value and settlement." e.g. like the kilo is a global standard measure of weight
## Evaluation: False (high confidence)
*Summary: both key sub-claims are weak and since both are required the overall claim for a bitcoin-standard is very weak. Bitcoin does not resemble gold as a store of value. The gold-standard was deflationary and dysfunctional especially in times of economic stress and a Bitcoin-based gold standard would be worse.*
**Bitcoin is a better gold**: False
Bitcoin has no consistent track record of being a reliable store of value, it's price movements are extremely volatile and thus is not a reliable place to store value on long time scales. Bitcoin's price behavior is uncorrelated with gold and is largely correlated with the broader stock market making it an unreliable safe haven in times of market volatility since it is directly exposed to the price action of the Nasdaq.
Bitcoin has limited track record of being a store of value and lacks the millenlia of history that [gold](../concepts/gold.md) as a [commodity](../concepts/commodity.md) has achieved. Unlike gold it also lacks a [use-value](../concepts/use-value.md) for the physical asset which consistently generates demand. Bitcoin also has a upkeep cost in the form of [mining](../concepts/mining.md) which forces the asset to behave like a [negative-sum](../concepts/zero-sum-game.md) [speculative](../concepts/speculation.md) asset instead of a store of value.
**The gold standard is a good idea**: False (high confidence)
The [gold-standard](../concepts/gold-standard.md) and the notion of [sound-money](../concepts/sound-money.md) are undesirable foundations for a [currency](../concepts/currency.md) and were subject to extreme shocks and deflationary spirals. As such they were abandoned in the mid 20th century in favour of the [central-banks](../concepts/central-banks.md) and fiat monetary system.
>
#
# Full Analysis
## Sub-claims
### P1: The Gold standard is a good idea
Pegging currency to gold (or something similar) is beneficial as it restricts government/central bank intervention in the money supply. This is desirable for 2 reasons:
* **P1a: Government/central bank intervention in the money supply is bad for the economy as it will inevitably lead to inflation**
* **P1b: Intervention in the money supply is inherently undemocratic, and jeaopordizes liberty**
### P2: Bitcoin is a better alternative to gold
Bitcoin is a better alternative to gold as something to peg currency to.
* **P2a: Bitcoin is like gold:** Bitcoin shares the features of gold which make it a good choice for a currency (or something to peg currency to).
* **P2b: Bitcoin functions better than gold:** Bitcoin has specific features which make it a better choice than gold for this purpose.
## What is Neo-Metallism?
The term neo-metallism stems from metallism, a school of thinking which relates to the connection between money and some form of commodity.
The term Neo-Metallism stems from Metallism, a school of thinking which relates to the connection between money and some form of commodity. As Joseph Schumpter described:
Neo-metallism argues that cryptocurrencies, and in particular Bitcoin, can and should be the new gold - it should be used to fix the monetary supply to the value of this new asset. Just as under the gold standard the value of a given unit of currency (e.g. a pound or dollar) was based on a fixed quantity of gold, neo-metallists argue the value of a unit of currency should be based on a fixed amount of Bitcoin.
_“By Theoretical Metallism we denote the theory that it is logically essential for money to consist of, or to be ‘covered’ by, some commodity so that the logical source of the exchange value or purchasing power of money is the exchange value or purchasing power of that commodity, considered independently of its monetary role. . . ._
## Gold as Currency
_By Practical Metallism we shall denote sponsorship of a principle of monetary policy, namely, the principle that the monetary unit ‘should’ be kept firmly linked to, and freely interchangeable with, a given quantity of some commodity.”_[^1]
* Gold has a historical precedent as money across cultures going back millennia.
* Multiple cultures have independently used it as currency.
* Its metallurgical properties make it uniquely suited amongst the elements on the periodic table.
* Its relative abundance (although not excessive abundance) and distribution across the Earth’s crust make it rare enough to hoard and access even for Bronze Age cultures.
* It is stable at room temperature, doesn’t oxidize, is easily detectable because of its glimmer and unique aesthetics, is malleable without advanced smelting technology and is uniquely distinguishable from other metals.
* It is probably the ONLY element on the periodic table that has all of these unique characteristics that could even be used for monetary purposes.
* There is only a finite amount of it produced in supernova events and nuclear reactions: it is thus impossible to counterfeit or “debase” the supply.
* Advanced economies began stockpiling gold in government reserves and issuing notes against that float in redemption in gold by a government treasury.
* Gold theoretically acts as a universal numéraire across economic systems allowing interchange and commerce. It is a fixed “measuring stick” for economic value that cannot be changed.
* It satisfies the definition of money: it can theoretically function as a unit of account, a medium of exchange, and a store of value. The only issue is that it incurs storage costs and is not easily transported because of its density and physicality.
This school contrasts with Chartalism, as originally outlined in Knapp’s _State Theory of Money _(1924)[^2] that at the theoretical level the value of a currency is instead derived from the State making it legal tender and demanding taxes be paid in this currency. In practical terms it is associated with a commitment to the use of _fiat money_, which simply refers to currency which has no intrinsic value and is also not “backed” by some valuable commodity. It has been the global standard of the monetary system since the gold standard was finally abandoned in the 1930s[^3].
### Why the Gold Standard: Fiat Money, Sound Money and the Gold Standard
* The [Austrian](../concepts/austrian-economics.md) school of economics regards gold as a (possibly only) example of "sound money" because it is immune to government intervention in the supply, effectively by the laws of physics. It cannot be “debased” or changed. (Aside: Of course, governments have found ways to "debase" gold-based currencies -- usually by altering the coinage in various ways).
* [Fiat money](../concepts/fiat-money.md) allows for both variable supply and demand with the goal of maintaining price stability and targeting a desired inflation amount which encourages productive enterprise. Historically, going all the way back to the invention of banking in Florence, there have been examples of mismanaged fiat currencies which have not managed either their supply or demand properly and spun into either deflationary or inflationary spirals and the public lost trust in the notes and their value become illusory.
* The Austrians assert that government intervention in "business cycles" is unnatural because free market forces will naturally correct supply and demand imbalances and that recessions and [manias](../concepts/market-mania.md) are both desirable and natural events.
* The hard monetarist perspective views any intervention in the supply dynamics of currencies as inevitably leading to inflation which is harmful to the free market and commerce.
* Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
* Centralized intervention in the markets turns economic influence into political power and financial rewards based on non-public information. This in turn is worse than centrally planned economies as it doesn’t allow for accurate price formation of assets and ultimately leads society into a loss of freedom, tyranny and a state of serfdom.
* Money should be put in the hands of the free market, not the state.
* Private money is not only desirable, it is inevitable because hard “[commodity](../concepts/commodity.md)-based'' money will inevitably replace soft money. Gresham’s law
* Cantillon Effect - [Inflation](../concepts/inflationary.md) is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary and unfair benefits to people who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings. Inflationary fiat money is thus a tax on people who sell their labor for wages and don’t hold assets and disincentivizes economic activity, encourages financial speculation, and results in market consolidation.
## Steel-Manning the Neo-Metallist Position
The Gold Standard is Good
* The Managerial Argument
* Government/CB intervention in the monetary supply amounts to economic mismanagement. These interventions will inevitably lead to inflation and increase the volatility of business cycles (the “natural” upswings and downswings in broad measures of economic activity like output, employment, income, and sales).
* Inflation is a bad thing: prices will be driven up at different times, distorting relative prices, wages, and rates of return. Artificial distortion can lead to booms in production and consumption which are out of line with future reality, leading in turn to dramatic busts.
* The Philosophical Argument
* Intervention is inherently undemocratic, in that it allows a select few individuals to exert undue power over the lives of the rest of a nation (and beyond).
* This is the argument laid out in Hayek’s famous *Road to Serfdom* (1944).
Bitcoin is Better
* Bitcoin is Like Gold
* Bitcoin serves the three functions of a currency:
1. It can be a unit of account in that it’s a standard and divisible unit of measurement of market value (i.e. it can be used to signal what something is worth).
2. It can be a medium of exchange in that we can use it as an intermediary instrument to transact for goods and services.
3. It can act as a [store of value](../concepts/store-of-value.md) in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss.
* Bitcoin shares three other important characteristics with gold:
1. Scarcity: Bitcoin is artificially scarce, just as gold is naturally scarce. There is a hard limit of 21 million coins baked into Bitcoin’s design. This makes it inherently deflationary, just like gold.
2. Universality: Bitcoin shares gold’s “universality” due to its prominence in the crypto sphere. Just as gold is the standout element suited to peg currency to, so Bitcoin is the only standout cryptocurrency due to it being the original and most prominent.
3. Fair initial distribution: The lack of overarching controller or owner means there was a “fair” distribution mechanism for Bitcoin. It rewarded early finders and investors in the same way as natural distribution of gold rewarded those who initially unearthed it.
* Bitcoin Functions Better Than Gold
* Bitcoin is digital and so is not subject to the same costs around storage and transportation as gold.
* Bitcoin is arguably more decentralized. Gold supply is mostly controlled by sovereign nations like the U.S., China, Germany, and other European countries.
Neo-Metallism, then, is as the name suggests a new form of Metallism. In particular, it should be understood as arguing that cryptocurrencies, and in particular Bitcoin, can and in fact should be the “new gold”, in that it should be used to fix the monetary supply to the value of this new asset. Just as under the gold standard the value of a given unit of currency (e.g. a pound or dollar) was based on a fixed quantity of gold, so the Neo-Metallists argue that in the modern era the value of a unit of currency should be based on a fixed amount of Bitcoin. The most influential outlining of this position is found in the book “The Bitcoin Standard”[^4].
## Evaluating the Neo-Metallist Position
'The Gold Standard is Good'
* This position stems from the [Austrian](../concepts/austrian-economics.md) school of economics. It is a fringe economic position and not one supported by most economists.
* The Managerial Argument
* Moderate inflation is actually positive: it encourages spending which stimulates the economy (this is the crux of [Keynesianism](../concepts/keynsian-economics.md)).
* Moderate inflation is far preferable to the alternative of the gold standard, as the gold standard is inherently deflationary.
* The Quantity Theory of Money states: MV = PY where M = money supply, V = velocity of money in circulation, P = price level and Y = real GDP (i.e. goods and services transacted in the economy). If M remains fixed, as it must under the gold standard, then increases in real GDP will inevitably lead to a fall in the price level.
* This is problematic because it leads to hoarding. Under deflation prices fall, so it is always rational for me to hoard rather than spend my currency as much as possible, as it will be worth more tomorrow than it is today. This in turn takes yet more money out of the supply, risking deflationary spirals which threaten economic [productivity](../concepts/productive-asset.md) - if no-one wants to buy anything then we can’t fund economically and socially productive activities.
* While excessive inflation is bad and governments/central banks have made errors in the past, this has been rare. Historically most have quite easily kept inflation under control.
* The flexibility offered by the ability for governments/central banks to intervene is highly useful, and worth the risk of error. Most obviously, they can stabilise in the face of shocks, for example, a pandemic. This was the reason we switched to fiat currency in the first place.
* Paper money was issued as an emergency measure in Spain, during the conquest of Granada (1482-1492).
* The gold standard can also lead to the reverberation of shocks through the global economy. This is because economic shocks in one economy will lead to investors buying up gold as a safe asset. Given that currencies are pegged to gold, this increase in demand in one nation can have significant impacts on the value of currencies the world over.
* The Philosophical Argument
* Hayek's claim hasn't been borne out historically. Since leaving metallism most metrics of prosperity have increased, and there have been fewer crises than under the old system. There hasn’t been any evidence of any shift away from democracy or increases of the translation of political power to economic benefit (where such things do happen today, it’s not happening through monetary policy).
* There are ways to democratize the fiat system without returning to gold e.g. we can increase the democratic accountability of those in control of monetary policy.
* Central banks can be made more accountable to government, and independent bodies such as the Monetary Policy Committee can have either more democratic election mechanisms or a greater diversity of representation.
'The Bitcoin Standard is Better'
* 'Bitcoin is Like Gold'
* Bitcoin cannot function as a medium of exchange. The transaction throughput is so small that it doesn't work as a global system of currency - it can't process transactions fast enough. This is inherent to the proof-of-work process Bitcoin uses to verify its transactions. This incapacity is therefore baked in.
* Bitcoin does not appear to hold potential as a store of value given its extremely high price variance.
* Gold, on the other hand, has historical precedent as a store of value in economic insecurity; its price has proven to be better insulated from broader economic dynamics than many other asset types.
* If Bitcoin were to behave as a [store of value](../concepts/store-of-value.md) it would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen.
* 'Bitcoin Functions Better Than Gold'
* Bitcoin being digital does not mean it is without its costs.
* The extraction, transport and storage costs associated with gold are outweighed by massive Bitcoin mining costs. The [“proof-of-work” mechanism](../concepts/consensus-algorithm.md) used to validate transactions and undertake mining for Bitcoin requires a huge amount of electricity (costly and environmentally damaging). This verification process creates significant friction around transactions - the system is very slow, particularly when lots of people are using it.
* Bitcoin, unlike traditional commodities, has a negative price elasticity of demand - demand goes up with price, not down. For this reason, Bitcoin looks like a [speculative](../concepts/speculation.md) [bubble](../concepts/bubble.md), which at some point will inevitably crash.
* States can synthetically stimulate demand for a single, fiat currency by demanding tax in this currency, ensuring the whole system works and that the value of such currency can never drop to zero. In other words, there is a clear mechanism to guard against value bottoming out. The same cannot be said for cryptocurrencies such as Bitcoin.
* Bitcoin no longer shares gold’s uniqueness.
* Lots of new “alt coins” - new alternatives to Bitcoin - are being minted, meaning the cryptocurrency market is now crowded with competitors.
* High numbers of different coins also creates inflationary effects - the very thing stores of value are intended to guard against.
* Single currency systems were adopted as these are significantly more efficient. A single price in a single currency allows far easier exchange of goods. Having multiple issuers of currency adds friction to trade, as one must convert the value of a given object between currencies before exchange can take place.
* The history of large issuances of private money isn't good. These systems are subject to fraud and a general breakdown of trust. If any bank can issue its own [private bank notes](../concepts/private-money.md), how does one know which bank is reliable and which isn’t?
## A Final Note on Trust
* In the world of Bitcoin, and [blockchain](../concepts/blockchain.md) more generally, replacing interpersonal trust with cryptographic verification mechanisms is seen as positive; we no longer need trust: in states, governmental institutions or one another.
* The problem with trust is that when you get rid of it, it's very hard to get it back. If crypto were to fail we would risk a large-scale general reduction in trust. Even if it were to succeed, it would likely lead to a significantly diminished role for trust at a broader level.
* At the root of [trustless](../concepts/decentralization.md) blockchain technologies are assumptions about human nature, which have significant implications for how we approach vital questions of social cooperation.
* There is evidence that high trust of strangers correlates with positive economic and social outcomes.
* Aside from its impacts on Bitcoin’s potential as a gold substitute, the issue of trust has serious ramifications for how we govern our societies.
## Claims steel-manned
## Concepts
### P1: The Gold standard is a good idea
This is an argument most commonly associated with the Austrian school of economics, a heterodox school of economics associated with beliefs that universally applicable economic principles can be derived from abstract logical reasoning (rather than needing data or mathematical models) and that the correct unit of analysis are individuals and their choices (methodological individualism).
The case for the Gold Standard can be made via two routes, which we have divided into 1a (economic impacts) and 1b (freedom and democracy). They are each individually sufficient as a foundation for P1, but they are often made jointly.
#### P1a: Government/central bank intervention in the money supply is bad for the economy
The argument here for the gold standard is that government/CB intervention in the monetary supply amounts to economic mismanagement. In particular, these interventions will inevitably lead to inflation, and increase the volatility of business cycles (the “natural” upswings and downswings in broad measures of economic activity like output, employment, income, and sales).
The claim that intervention in the money supply will lead to inflation is accepted beyond the Austrian school[^5]. In the words of Milton Friedman, a monetarist who did believe in (albeit strictly limited) intervention by central banks in the money supply:
_“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”_[^6]
While most schools of thought see mild inflation as neutral or even positive, the Austriana claim that any degree of inflation is a bad thing. This is because it will act as a distortion of market forces; prices will be driven up at different times, distorting relative prices, wages, and rates of return in what’s known as the Cantillon Effect[^7]. As the price mechanism is the vital mechanism by which consumers and producers coordinate their future activities the artificial distortion can lead to booms in production and consumption which are out of line with future reality, leading in turn to dramatic busts. Thus according to the Austrian school and the Managerial Argument, inflationary central bank intervention in the money supply must be avoided, as they result in dramatic cycles of boom and bust and even recession.
#### P1b: Intervention in the money supply is inherently undemocratic, and jeaopordizes liberty
Even if one rejects the Managerial Argument and does not believe that central bank intervention is economically damaging, one may still endorse the Gold Standard. The argument can instead run that such intervention is inherently undemocratic, in that it allows a select few individuals to exert undue power over the lives of the rest of a nation (and beyond). This is the argument laid out in Hayek’s famous _Road to Serfdom_ (1944)[^8]. Allowing such interventions empowers the state over the individual, and sets us down the path to oppression. This is a fundamentally philosophical position as it rests on a certain understanding of what it means to be free: a notion of negative liberty or freedom from coercion[^9].
### P2: Bitcoin is a better alternative to gold
If we accept that the Gold Standard is a good idea for either or both of these reasons, then the next step is to consider bitcoin as an alternative asset to peg currency two. Again, there are two underlying claims here. First we must argue that Bitcoin can function as well as gold, before going further and arguing that in fact it functions better.
#### P2a: Bitcoin is like gold
The most important manner in which Bitcoin must be claimed to be akin to gold is that it also serves the three functions of a currency[^10].
1. It can be a _unit of account_ in that it’s a standard and divisible unit of measurement of market value (i.e. it can be used to signal what something is worth).
2. It can be a _medium of exchange_ in that we can use it as an intermediary instrument to transact for goods and services.
3. And it can act as a _store of value_ in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss[^11].
Similarly, Bitcoin is said to share three other important characteristics with gold.:
1. _Scarcity_: Bitcoin is artificially scarce, just as gold is naturally scarce. There is a hard limit of 21 million coins baked into Bitcoin’s design. This makes it inherently _deflationary_, just like gold.
2. _Universality_: Bitcoin shares gold’s “universality” due to its prominence in the crypto sphere. Just as gold is the standout element suited to peg currency to, so Bitcoin is the only standout cryptocurrency due to it being the original and most prominent.
3. _Fair initial distribution:_ The lack of overarching controller or owner means there was a “fair” distribution mechanism for Bitcoin. It rewarded early finders and investors in the same way as natural distribution of gold rewarded those who initially unearthed it.
#### P2b: Bitcoin functions better than gold
Bitcoin is digital and so is not subject to the same costs around storage and transport as gold. Bitcoin is also arguably more decentralized. Gold supply is mostly controlled by sovereign nations like the U.S., China, Germany, and other European countries.
## Evaluation: False (High Confidence)
### P1: The gold standard is a good idea (False)
P1 as mentioned stems from the Austrian school of economics. From the bat it should be noted that this is an incredibly fringe economic position and not one argued for by most economists.
It is also worth distinguishing the _Strict_ from the _Moderate_ versions of the gold standard proposition. While the Moderate version would continue to allow credit issuance outside of the pure gold backed system, the Strict system would not, as this effectively amounts to an increase in the money supply (with new credit acting as an injection of money).
Two things are notable upon this distinction. First, when historically we operated with a gold standard there were almost always also alongside the issuance of credit. Thus, historical cases cannot be used to argue for the Strict position, or as contravening evidence against many of the problems associated with it. Second, and therefore unsurprisingly, the Strict position is even more fringe than the Moderate one. Nonetheless, many of the problems of metallism persist across both the Strict and Moderate versions, with the latter simply taking some of the sting out of their tail.
Let us now address each of the sub-premises in turn.
#### P1a: Government/central bank intervention in the money supply is bad for the economy (False)
As discussed above, the managerial argument is that government/central bank intervention in the money supply will inevitably lead to inflation, and this is harmful to business and commerce and makes their effects on business cycles worse in the long run.
There is a strong case, however, that moderate inflation is actually positive: it encourages spending which stimulates the economy (this is the crux of Keynesianism).
Moderate inflation is far preferable to the alternative of the gold standard, as the gold standard is inherently _deflationary_.
The Quantity Theory of Money states: MV = PY where M = money supply, V = velocity of money in circulation, P = price level and Y = real GDP (i.e. goods and services transacted in the economy).[^12] If M remains fixed, as it must under the gold standard, then increases in real GDP will inevitably lead to a fall in the price level. Note this theory was endorsed by Milton Friedman, so we’re not even using particularly oppositional economics.[^13]
This is problematic because it leads to _hoarding_. Under deflation prices fall, so it is always rational for me to hoard rather than spend my currency as much as possible, as it will be worth more tomorrow than it is today. This in turn takes yet more money out of the supply, risking deflationary spirals which threaten economic productivity - if no-one wants to buy anything then we can’t fund economically and socially productive activities. Consider monopoly, when assets are fixed then the only end point is accumulation.[^14]
In addition, while excessive inflation is bad and governments/central banks have made errors in the past, this has been rare. Historically most have quite easily kept inflation under control.
Further, the flexibility offered by the ability for governments/central banks to intervene is in fact highly useful, and more than worth the risk of error. Most obviously, they can stabilise in the face of shocks, for example, a pandemic. Indeed, this was the reason we switched to fiat currency in the first place.[^15]
Relatedly the gold standard can also lead to the reverberation of shocks through the global economy. This is because economic shocks in one economy will lead to investors buying up gold as a safe asset. Given currencies are pegged to gold, this increase in demand in one nation can have significant impacts on the value of currencies the world over.
#### P1b: Intervention in the money supply is inherently undemocratic, and jeaopordizes liberty (False)
Hayek's claim hasn't been borne out historically. Since leaving metallism most metrics of prosperity have increased, and there have been fewer crises than under the old system. There hasn’t been any evidence of any shift away from democracy or increases of the translation of political power to economic benefit. In fact, this was arguably greater under historical gold backed systems[^16]. Where such things do happen today, it’s not happening through monetary policy.
There are many other areas of state influence which should be far more concerning to libertarians than monetary policy, with legislation affecting so-called “negative liberty” being a prime example (whatever one’s stance on its legitimacy). Of course the hard libertarian retort is that _all_ channels of state control should be dispensed with, but this simply shows that currency shouldn’t be top priority in these efforts. In short, even if one has such inclinations, central bank control is not a hill reasonable libertarians should die on in the modern era.
Finally, there are ways to democratize the fiat system without returning to gold. We can increase the democratic accountability of those in control of monetary policy, for example. Central banks can be made more accountable to government, and independent bodies such as the Monetary Policy Committee can have either more democratic election mechanisms or a greater diversity of representation[^17]. Of course, again, this will still not satisfy hard libertarians as there is still someone exerting influence unilaterally to some degree, but it at least demonstrates the option of reasonable compromise for those with an ideological concern about democracy.
### P2: Bitcoin is a better alternative to gold (False)
#### P2a: Bitcoin is like gold (False)
Bitcoin does satisfy unit of account as it is divisible. It cannot, however, function as a medium of exchange. The transaction throughput is so small that it doesn't work as a global system of currency - it can't process transactions fast enough. As mentioned above, this is inherent to the proof-of-work process Bitcon uses to verify its transactions. In other words, this incapacity is baked in.
Bitcoin also does not appear to hold potential as a store of value given its extremely high price variance. Gold, on the other hand, has historical precedent as a store of value in economic insecurity; its price has proven to be better insulated from broader economic dynamics than many other asset types. Gold also has a synthetic floor on its price due to its use value in semiconductor fabrication and jewelry[^22]. If Bitcoin were to behave as a store of value it would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen.
Bitcoin, unlike traditional commodities, has a negative price elasticity of demand - demand goes up with price, not down. For this reason, Bitcoin looks like a speculative bubble, which at some point will inevitably crash.[^23] Admittedly this argument is not easily falsifiable. One could argue that Bitcoin has simply not been around long enough to infer its potential as a store of value; even if it did drop to zero, it could hypothetically rebound. Nonetheless, on present evidence it is not delivering, and there aren’t any plausible reasons to suggest this evidence will not be indicative of future behaviour.
As mentioned in our initial definition of chartallism, states converged on this approach for a reason. States can synthetically stimulate demand for a single, fiat currency by demanding tax in this currency, ensuring the whole system works and that the value of such currency can never drop to zero. In other words, there is a clear mechanism to guard against value bottoming out. The same cannot be said for cryptocurrencies such as Bitcon.
Relatedly, Bitcoin also no longer shares gold’s uniqueness. Lots of new “alt coins” - new alternatives to Bitcoin - are being minted, meaning the cryptocurrency market is now crowded with competitors. Even Bitcoin itself has now forked into a number of distinct versions[^24] all jostling for attention and investment, something which cannot happen with physical commodities such as gold. Given its potential as a store of value is tied to at least somewhat to uniqueness, this does not bode well for Bitcon’s claim to equivalency with gold. High numbers of different coins also creates inflationary effects - the very thing stores of value are intended to guard against!
The history of large issuances of private money isn't good. Single currency systems were adopted as these are significantly more efficient. A single price in a single currency allows far easier exchange of goods wherever one is located, for example. Having multiple issuers of currency adds friction to trade, as one must convert the value of a given object between currencies before exchange can take place. These systems are also subject to fraud and a general breakdown of trust. If any bank can issue its own banknotes, how does one know which bank is reliable and which isn’t?
#### P2b: Bitcoin functions better than gold (False)
Bitcoin being digital does not mean it is without its costs. The extraction, transport and storage costs associated with gold are outweighed by massive Bitcoin mining costs. The “proof-of-work” mechanism[^18] used to validate transactions and undertake mining for Bitcoin requires a huge amount of electricity. It is therefore is highly costly[^19], not to mention environmentally damaging[^20]. This verification process creates significant friction around transactions - the system is very slow, particularly when lots of people are using it. This further undermines a key respect in which Bitcoin might otherwise be considered superior to gold.[^21]
### A Final Note on Trust
In the world of Bitcoin, and blockchain more generally, lots is made of so called “trustless systems”[^25]. Replacing interpersonal trust with cryptographic verification mechanisms is lauded as a positive; we no longer need trust: in states, governmental institutions or even one another. The problem with trust is that when you get rid of it, it's very hard to get it back. This is a major trade-off and thus risk: if crypto were to fail we would risk a large-scale general reduction in trust. Even if it were to succeed, it would likely lead to a significantly diminished role for trust at a broader level.
There is evidence that high trust of strangers correlates with positive economic and social outcomes.[^26] At the root of trustless blockchain technologies are assumptions about human nature, which have significant implications for how we approach vital questions of social cooperation. Do we cooperate through some kind of formal system that we can enforce through software and rules? Or do we do so by learning to trust each other, in ways that come from our culture, perhaps supported by institutions and laws, but ultimately coming from ourselves. There is a tension between these two approaches: as I create more formal rules based in the assumption that I trust people less, this then undermines good faith and can actually create the very opposite outcomes we aim towards[^27]. Aside from its impacts on Bitcoin’s potential as a gold substitute, the issue of trust has serious ramifications for how we govern our societies. This is a fact we’d do well not to ignore.
## Related Content
### Concepts
* [gold-standard](../concepts/gold-standard.md)
* [austrian-economics](../concepts/austrian-economics.md)
@ -169,8 +223,105 @@ Bitcoin is Better
* [value](../concepts/value.md)
* [zero-sum-game](../concepts/zero-sum-game.md)
### FAQs
* [Is bitcoin a currency?](/claims/is-bitcoin-currency)
* [Are crypto assets a risk to the dollar?](/claims/is-threat-dollar)
* [Does Bitcoin threaten the US dollar as reserve currency?](/claims/is-threat-dollar)
* [Are crypto tokens a hedge against the “debasement” of the dollar?](/claims/is-hedge-debasement)
* [Are crypto assets a hedge against inflation?](/claims/is-hedge-inflation)
* [Is private money desirable?](/claims/is-private-money)
* [Is Web3 decentralized?](/claims/is-web3-decentralized)
## References
[^1]:
Schumpeter, Joseph A. ‘History of Economic Analysis’, 1954, p.288
[^2]:
Knapp, George F. ‘The State Theory of Money’, 1924.
[^3]:
Krishna, Mrinalini. ‘When FDR Abandoned the Gold Standard’. Investopedia, 20 April 2017. [https://www.investopedia.com/news/when-fdr-abandoned-gold-standard/](https://www.investopedia.com/news/when-fdr-abandoned-gold-standard/)
[^4]:
Ammous, Saifedean. ‘The Bitcoin Standard’. Wiley. 2018
[^5]:
Boettke, Peter. ‘Austrian School of Economics’. Econlib. Accessed 7 March 2022. [https://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html](https://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html).
[^6]:
Friedman, Milton. ‘Counter-Revolution in Monetary Theory’. Wincott Memorial Lecture, Institute of Economic Affairs, Occasional paper 33. p. 24.
[^7]:
Chowdhury, Ananya. ‘The Cantillion Effect’. Adam Smith Institute. Accessed 7 March 2022.[ https://www.adamsmith.org/blog/the-cantillion-effect](https://www.adamsmith.org/blog/the-cantillion-effect).
[^8]:
Hayek, F.A. ‘The Road to Serfdom’. Routledge. 1944
[^9]:
Carter, Ian. ‘Positive and Negative Liberty’, 27 February 2003. [https://plato.stanford.edu/entries/liberty-positive-negative/](https://plato.stanford.edu/entries/liberty-positive-negative/).
[^10]:
Jevons, William S. ‘Money and the Mechanism of Exchange’, 1875.
[^11]:
Note it is this function that has seen cryptocurrency lauded as a solution to hyperinflation in developing countries, as people can store their earnings in unaffected cryptocurrency even while domestic currencies lose their value due to hyperinflation.
[^12]:
Barone, Adam. ‘What Is the Quantity Theory of Money?’ Investopedia, 27 August 2021. [https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/](https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/).
[^13]:
Milton Friedman and Anna Jacobson Schwartz. ‘A Monetary History of the United States, 1867-1960.’ Princeton University Press, 2008.
[^14]:
Bernanke, Ben, and Harold James. ‘The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison’. In Financial Markets and Financial Crises, 33–68. University of Chicago Press, 1991. [https://www.nber.org/books-and-chapters/financial-markets-and-financial-crises/gold-standard-deflation-and-financial-crisis-great-depression-international-comparison](https://www.nber.org/books-and-chapters/financial-markets-and-financial-crises/gold-standard-deflation-and-financial-crisis-great-depression-international-comparison).
[^15]:
In Spain, during the conquest of Granada (1482-1492), paper money was issued as an emergency measure. Foster, Ralph T. Fiat Paper Money – The History and Evolution of Our Currency. Berkeley, California: Foster Publishing. 2010.
[^16]:
Charles Postel: Why conservatives spin fairytales about the gold standard. 2013
https://www.reuters.com/article/us-gold-standard-idUSBRE98G07E20130917
[^17]:
British Politics and Policy at LSE. ‘Five Minutes with Ha-Joon Chang: “Members of the General Public Have a Duty to Educate Themselves in Economics”’, 7 July 2014.[ https://blogs.lse.ac.uk/politicsandpolicy/five-minutes-with-ha-joon-chang/](https://blogs.lse.ac.uk/politicsandpolicy/five-minutes-with-ha-joon-chang/).
[^18]:
https://www.investopedia.com/terms/p/proof-work.asp
[^19]:
https://minerdaily.com/2021/how-much-does-it-cost-to-mine-a-bitcoin-update-may-2021/
[^20]:
What's the Environmental Impact of Cryptocurrency? Nathen Reiff, 2021 https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/
[^21]:
Krugman, Paul. ‘Opinion | Transaction Costs and Tethers: Why I’m a Crypto Skeptic (Published 2018)’, 31 July 2018. https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html.
[^22]:
A Skeptic's View of Crypto (from the Point of View of Monetary Economics), Paul Krugman, 2018. https://www.youtube.com/watch?v=Y_IYGeZLLhI
[^23]:
Taleb, N. N. Bitcoin, Currencies, and Fragility. 2021. https://www.fooledbyrandomness.com/BTC-QF.pdf
[^24]:
What Are Bitcoin Forks? Brian Edmonson. 2022. https://www.thebalance.com/what-is-a-bitcoin-fork-4684459#:~:text=Bitcoin%20forks%20are%20splits%20that,operates%20without%20a%20central%20authority.
[^25]:
https://academy.binance.com/en/glossary/trustless
[^26]:
Henrich, Joseph; Henrich, Natalie. Why Humans Cooperate: A Cultural and Evolutionary Explanation. Oxford. 2007
[^27]:
Samual Bowers, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens. 2016.
## Further Reading
1. Bemanke, Ben, and Harold James. 1991. ‘The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison’. In Financial Markets and Financial Crises, 33–68. University of Chicago Press. https://www.nber.org/books-and-chapters/financial-markets-and-financial-crises/gold-standard-deflation-and-financial-crisis-great-depression-international-comparison.
1. Bernanke, B. S. (2004). Essays on the Great Depression. Princeton University Press.
1. Eich, Stefan. 2018. ‘The Currency of Politics’. The Political Theory of Money from Aristotle to Keynes.
@ -189,3 +340,5 @@ Bitcoin is Better
14. Caferra, Rocco, Gabriele Tedeschi, and Andrea Morone. 2021. ‘Bitcoin: Bubble That Bursts or Gold That Glitters?’ Economics Letters 205: 109942. https://doi.org/10.1016/j.econlet.2021.109942.
15. Wolf, Martin. 2019. ‘The Libertarian Fantasies of Cryptocurrencies’. Financial Times, February. https://www.ft.com/content/eeeacd7c-2e0e-11e9-ba00-0251022932c8.
16. Fantacci, Luca. 2019. ‘Cryptocurrencies and the Denationalization of Money’. International Journal of Political Economy 48 (2): 105–26. https://doi.org/10.1080/08911916.2019.1624319.
17. [Shri T Rabi Sankar. Cryptocurrencies – An Assessment ](/notes/cryptocurrencies-an-assessment)