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The Bitcoin Standard - A Critical Review

Apr. 12, 2018 10:38 AM ETGBTC, COIN-OLD10 Comments
Frances Coppola profile picture
Frances Coppola

For over a century now, the world has lacked a genuinely international means of payment. This is partly due to decisions made at the Bretton Woods conference in 1944, when the US dollar was adopted as the principal international settlement currency, rather than John Maynard Keynes's suggestion of an independent global currency that he called "bancor." Although the Bretton Woods gold-backed structure ended in 1971, the US dollar became ever more dominant.

In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one that didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.

Bitcoin emerged from the financial crisis as a fledgling international digital currency. Satoshi Nakamoto's white paper presented it as a peer-to-peer electronic cash system, but from the start, its gold-like properties were evident: it was traded like a commodity, it had a restricted supply and it operated seamlessly across borders. Some, including me, thought it could potentially replace gold as the anchor for a new international monetary system similar to Bretton Woods.

Recently, Bitcoin appears to have turned away from its original purpose and become primarily a new class of asset. Other cryptocurrencies are gradually replacing it as international media of exchange. But some argue that this is merely a transitional phase and Bitcoin will nevertheless eventually become the world's premier international currency. Those who see Bitcoin in this way are known as "Bitcoin maximalists."

One of their number, Pierre Rochard, asked me to do a thoughtful review of a new book by Saifedean Ammous, a Lebanese

This article was written by

Frances Coppola profile picture
Frances Coppola worked in banking for 17 years as a business analyst and project manager, running business and systems projects for (among others) RBS, Nat West, HSBC, Midland Bank and SBC Warburg (now UBS). Her banking experience encompasses retail and investment banking, front office, operations and settlement, but her particular area of expertise is financial control and risk management. She is particularly proud of the fact that RBS still produces its financial and regulatory reporting using a group consolidation system that she designed. Frances is now a writer and commentator on banking, finance and economics. Her blog Coppola Comment is widely read and her writing has featured on the Financial Times, City AM, The Economist. The Guardian and a range of online publications. She also writes for the online magazine Pieria and occasionally for the ICAEW, and she is a frequent commentator on banking matters for the BBC. Frances has an MBA from Cass Business School with a specialism in finance and risk management. And since financial people can be creative too, Frances is also a professional singer and singing teacher. She has a B.Mus from London University and is an Associate of the Royal College of Music. She also has two teenage children and not much time to do the garden any more!

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Comments (10)

02 Jan. 2022
Obviously the author is a keynesian, and was deeply offended by the Austrian economic truths presented in the book. That said, bitcoin is a digital fiat payment system. There are something like 12,000 different cryptos today. Gold and Silver are real physical commodities and have been money for thousands of years. There, summed it up in a few sentences. No need to overly complicate things in order to justify my intelligence or my knowledge of economics.
This review makes a lot of mistakes and willful misrepresentations in its attempts at "fact checking".

1. "Gold is not the rarest metal in the crust of the earth. It's rare, yes. But other metals, such as platinum and iridium, are rarer."

Platinum is more abundant than gold, but over a dozen other elements are rarer than gold (osmium, tellurium, ruthenium, iridium, rhodium, rhenium, krypton, xenon...)

None of this has any relevance to the thrust of the book's argument. If you're going to nitpick irrelevant details due to your political biases, at least get your facts straight.

2. "Even more problematic are the logical inconsistencies. Here, for example, he says that increasing gold production would make no difference to its price, because gold hoarding would increase to absorb the increase:

'For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%. If the new increased pace of production is maintained, the stockpiles grow faster, making new increases less significant. It remains practically impossible for goldminers to mine quantities of gold large enough to depress the price significantly.'"

Key word "significantly", and you strawmanned it into "no change at all". There's nothing wrong with the quote until some major paradigm shift like asteroid mining.

3. "But there is worse to come. Saifedean thinks he knows why World War I lasted as long as it did:

'In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary.'

So nothing to do with the fact that four great European Empires were fighting for supremacy? Nor that because of their colonial possessions, they were able to bring in fighters from all over the world? Nor that the British were eventually able to call on their historic alliance with the USA? Seriously, none of that matters?"

He does not deny any of those other factors. You are just strawmanning because you lack a counterargument. Obviously the increased ease of financing war enabled states to fight larger and longer wars.

4. "Instead of art's success being determined by the people who have succeeded in attaining wealth through several generations of intelligence and low time preference, it is instead determined by the people with the opportunism to rise in the political and bureaucratic system best. A passing familiarity with this kind of people is enough to explain to anyone how we can end up with the monstrosities of today's art.

So people who have inherited wealth are the best arbiters of taste and beauty. Paris Hilton is a better judge of music than someone from a poor background who studied at the Royal College of Music. I am stunned."

More strawmanning with the NAXALT fallacy. Your cherrypicked examples say nothing about the averages of the relevant groups.

5. "Keynes was undoubtedly a flawed man, but he was married, and he and his wife grieved over the loss of their child.

More importantly, though, this is more historical revisionism. The heyday of Keynesian ideas was the post-World War II period. This was also the period of the biggest baby boom in history."

So the guy who toured the world abusing children felt sad when his own child died. I am relieved to see he had that minimum amount of decency.

The US ran budget surpluses during most of the baby boom years, and even during the recession of 1949. Whatever the merely academic influence of Keynes in that era, it wasn't necessarily trickling down into actual government policy. US debt to GDP ratio declined steeply from the end of WWII until the nixon shock, and has been increasing ever since (except for a brief interlude at the top of the dotcom bubble)
Thanks for thoughtful assessment of the book. I think you bring up some interesting points and were pretty convincing, especially around the cause and effects of the collapse of the Roman empire, the Weimar Republic reparations, and the Florentine economy. I also believe he attributes too many maladies to Keynes.

Unfortunately for this review, it was essentially nullified by your last assessment of Bitcoin and how it somehow creates "hyperinflation" because of ICOs. It demonstrates a severe lack of comprehension around Bitcoin and blockchain technology. What does Bitcoin have to do with ICOs? They both utilize distributed ledgers? As an outsider, I can see how you might confuse the two - but this couldn't be further from the case. As a super basic level, ICOs take place on Ethereum, which is a fundamentally different blockchain than Bitcoin. Then you mentioned Bitcoin to be the anchor of the "cryptocurrency economy". What does this even mean? Once again, Bitcoin and its adherents have never claimed to Bitcoin is somehow trying to anchor this completely hypothetical and ambiguous "cryptocurrency economy".

Although I don't completely agree with Austrian Economics, Keynesian economics has demonstrably failed the lower and middle class in the US. Due to the incentive inherent in Keynesian economics to spend (which is undeniably the crux of keynesian economics, as spending stimulates growth and increases employment) as opposed to an incentive to save and deploy capital meticulously, the average American cannot afford an emergency bill of $400. This is not theory - this is fact.

When it comes down it, I think the the crux of the discussion is simple: you either believe human beings are better arbiters of monetary policy or code and algorithms. As humans are inherently flawed, emotional, greedy, and corrupt, I believe objective and unwavering code is much more efficient and less likely to be exposed to the intricacies of human nature.

I think reading the Satoshi white paper could really help frame Bitcoin in a context that's relevant to this book and will be useful for you to decouple Bitcoin from ICOs.

Sorry if I sounded harsh - I do think you brought up interesting points in the beginning of the review.
"Frances Coppola worked in banking for 17 years..."

Great.. it's like a critique by someone entrenched in a VHS company asked to write about a new technology called the DVD.

This book is OUTSTANDING. If you are interested in really understanding what Bitcoin is all about, READ THIS BOOK.. and then decide for yourself.

This critique/review runs on and on and on about little details (and maybe she's right about some of them- I don't know anything about 19th century music- and quite frankly, I don't care).. but she totally misses/ignores the main points of the whole frickin' book.

Bitcoin was started in response to the financial meltdown of 2008. Its entire purpose is to use new technology to bring sound money to a broken global financial system and transfer power and privacy away from the gvt-banking institutions to those who want a fair secure unbreakable system that can't be manipulated. IOW, the motives are pure. Bitcoin's early pioneers are, to be blunt, libertarian well-read introverted good-hearted nerds. They aren't Wall Street pump & dump salesmen or ponzi schemers as some people would lead you to believe.

The author is an Economics professor, and his basic points, starting w a long look at the history of money, are:
1) Throughout history, the hardest (most scarce, least likely to be diluted/manipulated) money always wins.
2) Since abandoning the gold standard 100yrs ago and adopting a fractional banking system and easy deficit spending, we've experienced unprecedented hyperinflation, recessions, depressions, devaluations, bailouts, and defaults. While on the gold standard (harder money with less leverage and more discipline), most of these problems didn't occur. He also compared the well-being of harder money countries (Switzerland) to weaker ones.

3) Since governments are unwilling to adopt a hard money policy (because it gives them less power and control), Bitcoin is the world's first viable alternative. Compared with gold and fiat currency, it is the hardest money the world has ever had.. partly due to new blockchain technology, which makes it essentially impossible to control or shut down.
4) The author then explains the main features of Bitcoin and what makes it superior to the status quo (hard fixed money supply so your money increases in value rather than inflation, cryptographic security would eliminate much of the cybertheft/fraud in the financial world, financial privacy.. your assets can't be frozen by the government, elimination of all the "middlemen fees".. 1.5-3% VISA fees, $3 atm charges, $50 wire transfer fees, overdraft charges, mitigation of the leverage/risk from our fractional banking system).

Again, there's a lot of bogus info in the media about Bitcoin, and a lot of powerful people badly want it to fail.. similar to the Internet 20 years ago. The author is a very smart man, and it would be absolutely be worth anyone's time to read his book or watch one of his YouTube videos (like his recent Austria talk).

I don't know if Bitcoin will become the global reserve currency, but I hope it does. The world will be a better place.
sleek profile picture
First of all, my comment on this article is going to biased because I seriously love this woman. This from the first time I started reading her articles so many years ago. I'm constantly amazed by the depth and breadth of her knowledge in so many areas.

A few remarks...

About the gold standard, this quote from Megan McArdle, which is in line with the position of this article:

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it."
—Megan McArdle
[End Quote]

Quoting Saifedean :

"Germany suffered from hyperinflation after the Treaty of Versailles had imposed large reparations on it and it sought to repay them using inflation."

I don't want to sound like an apologist for Saifedean since I haven't read the surrounding context but he may have meant that Germany was using inflation to steal from its own people in order to pay reparations "in gold or in kind".

On the subject of Keynes, Keynes was very clear that saving is non-volitional and that the saving of the community was exactly the amount of investment in the community, i.e. the Paradox of Thrift.

For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.
—Keynes (The General Theory)
[End Quote]

On the subject of low birthrates, I hew to the idea that it is caused by the social safety net, started first by Otto von Bismarck's creation of the welfare state, which eliminated the dependency function, and as regards children, created a collective action problem where there was none before. The other causes are secondary. In other words, women would not have been able to gain education and enter the workforce if they were too busy raising children.

On the subject of art...

"His attack on artists, in particular, is so virulent that I wonder if he was rejected from an art college."

No, from his name, it's probably because he's Muslim. As a Muslim myself (Lebanese also), I can see where he's coming from.

In Islamic theology, God is the ultimate creator. Glorifying art eventually leads to glorifying artists and this stops at secondary causes short of the Causer of causes. This is what secular humanism is all about, replacing the glorification of God with the glorification of people.

"He it is who forms you in the wombs as He pleases. There is no God but He, the Mighty, the Wise" —Qur'an 3:6

So say someone sings beautifully because they have a nice set of vocal chords. This is only because God gave them that as a gift so we would be wrong to attribute anything to the singer. We simply see it as a sign of God's power and beauty.
In Islamic theology, God is the ultimate creator
Yeah, um, I can think of a religion that beat you to the punch on that declaration....
sleek profile picture

Believers can be classified as deists and occasionalists. Deists believe in a creating God but not a sustaining God, a clockwork universe if you will.

In other words, God makes Adam and Eve and then they go off and make babies. God is no longer involved. Creation is only involved in that first step.

With Islam, an occasionalist religion, causality does not exist. People don't look like their parents because of DNA, or genes, or some such in a random process as science teaches, but God makes it that way. So in this case, God is continuously creating.

This leads to some interesting ideas. Muslims for example, do not accept the idea of miracles, calling them the "rupturing of the habit". Because you see, for deists, a miracle is when God interferes in the world. But for Muslims, a miracle is just God doing it a different way this particular time. Because there was never a time when God is not doing things.

Here is Ghazali, refuting causality...

Al-Ghazali's insistence on a radical divine immanence in the natural world has been posited as one of the reasons that the spirit of scientific inquiry later withered in Islamic lands. If "Allah's hand is not chained", then there was no point in discovering the alleged laws of nature. For example:

...our opponent claims that the agent of the burning is the fire exclusively; this is a natural, not a voluntary agent, and cannot abstain from what is in its nature when it is brought into contact with a receptive substratum. This we deny, saying: The agent of the burning is God, through His creating the black in the cotton and the disconnexion of its parts, and it is God who made the cotton burn and made it ashes either through the intermediation of angels or without intermediation. For fire is a dead body which has no action, and what is the proof that it is the agent? Indeed, the philosophers have no other proof than the observation of the occurrence of the burning, when there is contact with fire, but observation proves only a simultaneity, not a causation, and, in reality, there is no other cause but God.
[End Quote]
Long Tail Of Finance profile picture
Thanks for the article. Have enjoyed your movies, too.
Micskill01 profile picture
I wanted to click Follow after reading 20% of this, but I was already following -

Excellent article
@djrt profile picture
$GBTC Congrats to all who sold @12.75 or above when the RSI was around 85 then just bought back @11.90 RSI 44 that’s how you do it! R+R!
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