Bitcoin Standard ch. 2 and 3

 Ch. 2

    This chapter starts with some historical examples of money and how it has worked in different cultures. Most notably, as the author indicated that it was the closest thing to how Bitcoin works, the Rai stones of the Yap people in Micronesia. The Rai stones were large limestone discs with a hole in the middle from when they were transported.  They had to be excavated and carved on a nearby island, making increasing the supply difficult, and their rarity made them beautiful and desirable. Although they came in different sizes to some extent, they were heavy ang bulky- they were not scalable across distance. This problem was solved by a different method of transferring them. The stones were left on display in a public place, and ownership was transferred by public decree. This system worked well for the Yap people for a long time, until an Irish man, David O'Keefe came along. When he couldn't entice the people to work for him (harvesting coconuts or something like that), he traveled to the nearby island and got some more Rai stones. It was easier with his advanced technology, so the supply to flow ratio was disrupted. The Rai stones lost their value and their money system collapsed. This pattern: tech advancements making monetary medium easier to produce, disrupting the supply to flow ratio and collapsing monetary systems, has been repeated many times. The glass aggry beads of Western Africa, seashells in many places, including North America. The result is always the same. Produce too much money too easily, value collapses, a new monetary medium takes its place. 

    Eventually, gold and silver took over as the monetary medium of choice all over. The supply to flow ratio was fairly stable, and since they could be minted in uniform weights, it was simpler to have uniform pricing. 

Ch. 3. 

    The first section explains a price bubble when storing value in consumable goods instead of money. For example, if I decide to store my wealth by investing in copper, I diminish the available supply of copper. The law of supply and demand kicks in, raising prices of copper. Some other investors may see this and jump in, too. However, the law of supply and demand also dictates that as prices rise, more people will want to produce more copper. The price of copper goes back down. Then, if investors get spooked, they might start selling off their copper, lowering the price even further. It could have been a good investment, but only if timed exactly right. This example serves to illustrate why the difficulty of mining gold is so important to its role as a monetary medium. So, gold has a steady supply to flow ratio, it is easily scalable in size (especially when combined with silver coins), it can be minted into common weights- it ticks all the boxes for sound money. Or, at least it did for centuries. 

    Romans began "coin clipping", or minting coins of slightly less weight in gold. This allowed them to mint (and spend) more money, but resulted in less valuable money and less productivity. Since the taxes were worth less, they now had to tax more or coin clip more. It became a vicious cycle, and eventually urban dwellers  chose to move to more rural areas where they could be more self-sufficient. So now Rome had even less tax revenue, and the cycle continued until its collapse. 

    "With this fall in the value of its money, the long process of terminal decline of the empire resulted in a cycle that might appear familiar to modern readers: coin clipping reduced the aureus's real value, increasing the money supply, allowing the emperor to continue imprudent overspending, but eventually resulting in inflation and economic crises, which the misguided emperors would attempt to ameliorate via further coin clipping. Ferdinand Lips summarizes this process with a lesson to modern readers: 

    It should be of interest to modern Keynesian economists, as well as to the present generation of investors, that although the emperors of Rome frantically tried to ""manage" their economies, they only succeeded in making matters worse. Price and wage controls and legal tender laws were passed, but it was like trying to hold back the tides. Rioting, corruption, lawlessness and a mindless mania for speculation and gambling engulfed the empire like a plague. With money so unreliable and debased, speculation in commodities became far more attractive than producing them." 

    Another example of devaluing money prior to the collapse of an empire is the Bezant of Byzantium. Originally called the solidus, Constantine the Great committed to keeping it at 4.5 grams of gold. Maintaining the integrity of the solidus made it "the world's most recognizable and widely accepted currency." "As with Rome, the fall of Constantinople happened only after its rulers had started devaluing the currency." The longstanding success of the bezant inspired the Islamic dinar, which, in spite of not being official currency of any nation, continues to circulate widely to this day. 

Wealth was concentrated in a ruling minority, leading feudal type systems. Italian nation states started minting their own coins, like the florin and the ducat. Standardized money allowed them to flourish and inter trade, and made the Renaissance possible. "With the economic liberation of the European peasantry came the political, scientific, intellectual, and cultural flourishing of the Italian city-states, which later spread across the European continent. Whether in Rome, Constantinople, Florence, or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction." That right there is a dire warning, when you consider what politicians have been doing to our money in the last 50 years, and increasingly in the past few. 

    With the rise of the telegraph, banks could communicate with each other quickly and over large distances. As communication improved, it became easier for banks to simply credit each other certain amounts than to have people physically move their gold for a transaction.  People began to rely more on checks and paper, and nations began to standardize paper money based on a gold or silver standard. This increased gold's salability over scale, eliminating the need for silver as a monetary medium. 

    "Tragically, the only way gold was able to solve the problems of salability across scales, space, and time was by being centralized and thus falling prey to the major problem of sound money emphasized by the economist of the twentieth century: individual sovereignty over money and its resistance to government centralized control. We can thus understand why nineteeth-century sound money economists like Menger focused their understanding of money's soundness on its salability as a market good, whereas twentieth-century sound money economists, like Mises, Hayek, Rothbard, and Salerno, focused their analysis of money's soundness on its resistance to control by a sovereign. Because the Achilles heel of 20th century money was its centralization in the hands of the government, we will see later how the money invented in the twenty-first century, Bitcoin, was designed primarily to avoid centralized control. "