This is an opinion editorial by Taimur Ahmad, a graduate student at Stanford University, focusing on energy, environmental policy and international politics.
Author’s note: This is the first part of a three-part publication.
Part 1 introduces the Bitcoin standard and assesses Bitcoin as an inflation hedge, going deeper into the concept of inflation.
Part 2 focuses on the current fiat system, how money is created, what the money supply is and begins to comment on bitcoin as money.
Part 3 delves into the history of money, its relationship to state and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.
Money, Society And The State
The guiding principle behind the Bitcoin standard is the separation of money and The State, borrowing from the enlightenment mantra of separating The State and religion. Admittedly, this sounds catchy and attractive, a true rallying cry (although I will say that even the separation of religion and state isn’t as distinct in practice as it is in theory). The argument seems to be that Bitcoin acts as some technologically juiced up version of the gold standard, where the money supply is exogenous, and The State enters the marketplace for money as any other entity would. This then constrains the capacity of The State to also embark on wasteful spending sprees and allows the flourishing of the market — a dream reality straight out of neoclassical economic textbooks!
The truth is that the Bitcoin standard isn’t as similar to the gold standard as it may seem. Commodity money was accepted as legal tender and required regulation through state authority, whether to set its value through the levying of fines and taxes, quality control through maintaining standards, increasing supply through the discovery of new sources of the commodity, etc. More importantly, it is critical to understand that even under commodity money regimes, other forms of money, basically IOUs created through the magic of double-entry bookkeeping, were an important driving force behind economic development. This occurred both through The State and private actors. For example, Christine Desan in her book “Making Money: Coin, Currency, And The Coming of Capitalism,” talks about how during the early days of the United States, there was a shortage of commodity money as the cost of imports exceeded proceeds from exports. The government decided to issue IOUs as a means of paying its soldiers and created economic value for this money by making it acceptable as tax payment, thereby overcoming the drag of a constrained money supply on economic activity. This story is repeated across history, whether to fund wars and imperialism — the French colonial power did something similar in Africa to mobilize labor — or to finance infrastructure and development.
On a more micro-level, commodity money was mostly used for trade with people outside the community and where political authority was minimal, thereby overcoming an inherent lack of trust between parties. Within communities, however, IOUs and debt were the primary fuel for commerce. Michael Hudson, David Graeber and others have shown with evidence the importance of this form of money across civilizations, from the Babylonians and Romans to the Middle Ages and even early modern societies.
Since there were no substantive constraints on the issuance of debt, and hence money supply, while economic activity and resources had upper bounds (imagine a S-curve), there was an inherent and imminent mismatch between these two metrics. Therefore, the concept of widespread debt cancellations, done in different ways across civilizations, was common in order to protect the private debtors from bondage, especially when faced with economic shocks such as wars and natural disasters.
This realization is critical because a lot of the arguments for the Bitcoin standard rest on the following assumptions: state control of money is a new, fiat concept; the cost of creating money being zero is new and evil; pre-fiat economies operated under a fixed money supply. These are categorically false. Private monies have existed but The State, or political authority more generally, has always been there to varying degrees. Temples, chieftains, monarchs, etc., have played an important, albeit not always productive, role in defining and governing money. As with many examples today, states have misused their authority and created financial crises through mismanagement, but that is merely the cyclical nature of politics and history.
Similarly, this notion that suddenly the cost of creating money has become zero which leads to all forms of moral corruption is based on a false understanding of history. As argued above, double-entry bookkeeping and the concept of debt as money has been around for thousands of years — essentially, money creation has been “free” for a long time.
People will point to European colonialists and their violent search for gold and silver as a counterpoint, but I will reemphasize here that it’s important to be clear about what form of money we are talking about. Gold and silver primarily played a role in international trade while also having inherent value through their use in jewelry and so on, but that does not mean credit form of money was not simultaneously prevalent in domestic economies. Wherever there is either well established rule of law through political authority or requisite community trust, these forms of commodity money were not, and arguably are not, necessary. For global trade however, it is a different story.
This also is an argument against the notion that somehow Bitcoin is “backed by energy” or that its digital scarcity is some sort of quality as money. While it may offer a unique value proposition for other use-cases, these features do not offer any credence to bitcoin as money. The value of money does not come from its perceived scarcity but from its use, and use depends on material features and the political structures. Even where commodity money was used, gold and silver coins, barley, and other commodities were chosen not because of the energy exerted to create them or their perceived scarcity, but because of their qualities of durability, standardization, portability, etc. Using energy or an artificial sense of scarcity does not create some sort of inherent value as money — it never has, and it never should.
I want to be clear here. Money is not just one thing, it is a matrix of concepts that varies across who is using it, why it is being used, where it is being used, etc. My argument here is that the history of money shows that there have been different forms of money co-existing at different levels (e.g. within a community versus across communities versus between citizens and The State). For some of these levels, private IOUs were sufficient, for others commodity money (with and without state standardization) and for others state-sanctioned IOUs.
Money, therefore, comes out of social relations, it doesn’t come before them. Class relationships, ownership of the means of production, social institutions and political power create the monetary system. Money is not an abstract, exogenous concept that gets technocratically selected and imposed. It is born out of the ruling ideology of the time, which impacts all aspects of the system, of which money is just one part. I would argue here, giving away my political leanings if they weren’t clear by now, that it is class relations and the power structures around who owns the means of production that sets up the system.
For example, the current fiat system with its lack of accountability and transparency, the dominance of private financial institutions, the single-minded profit drive, and the state support for this unequal system is a result of the neoliberal ideology that took over in the 1970s. Banks and financial institutions were given this power under this garb of the free market, leading to misallocation of capital, inequality, climate catastrophe and overconsumption. The fiat system evolved to meet these objectives, not vice versa. Do VCs prefer to fund the 5th loss-making food delivery app over funding affordable housing because fiat is inflationary? No, it’s the incentive structures of the market.
Therefore, money is a concept perpetually in flux, with flexibility and dexterity to respond to divergent socioeconomic dynamics across societies and to how those dynamics evolve over time — whether this is done for the public good (however one defines it) is not inherent to a particular money form, but the social dynamics in which that money form is created.
Bitcoin In The Global South
Until this point I have largely been talking about the system in Western countries when referring to the current era and some reader probably has thought “Check Your Financial Privilege.” Let’s now move towards how the progressive narrative of hyperbitcoinization talks about its power to liberate the Global South from the dollar hegemony and the exploitative global financial system. The two main pain points upon which this argument rests are that these countries suffer from extremely high inflation and have large portions of their populations without access to financial services. Let me focus on the first value proposition because that is centered on the adoption of Bitcoin as money, while the financial services use-case can be achieved in multiple ways (this includes Bitcoin as an investment and a store of value — I think Bitcoin has a useful role to play here). The proposed solution is that through adopting a currency with fixed supply, governments won’t be able to print their way to high inflation and hence the cyclical economic crises these countries face will be averted.
It is correct that many countries today, and over the past century, have suffered from crippling levels of inflation — Argentina, Zimbabwe, Venezuela, Turkey, Lebanon, to name a few. In many of these cases, rampant money printing has been the reality. But let’s explore the causal relationship between these two concepts and assess how “Bitcoin fixes this.”
A common thread that connects all of the countries I mentioned, and many others including Pakistan where I come from, is their reliance on dollar financing to cover their trade account deficits. Simply put, these countries import more than they export, and since trade is financed in U.S. dollars, which these countries cannot create internally, they rely on foreign funding. These countries are also not the ones that are Western favorites for geopolitical reasons and hence don’t have access to dollar swap lines, which is one source of dollar liquidity. What remains are external lenders such as the IMF to provide loans which come with the neoliberal medicine of structural adjustment — privatization, deregulation and open trade.
Fadhel Kaboub provides excellent analyses for why these countries have been stuck in a rut for decades. His main point is that these countries produce low value-added goods by offering cheap labor and resources (e.g. minerals) but import high value-added items (e.g. technology) and critical supplies (e.g. food, energy, medicines, etc.). Therefore, they get stuck in a trap because to move higher along the economic value chain, they need to expand their imports, which increases the trade deficit, which leads to foreign debt and so on. Privatization and deregulation within the profit-maximizing context make this worse. This is a simplified account but explains the gist of it.
This is the underlying dynamic that leads to higher prices as these countries are subject to the fluctuations of global commodity prices and import inflation through weakening currencies. Domestic money printing is a by-product or a symptom of this system, not the cause. It would be naïve to not also remark the political incompetence and rent-seeking socioeconomic setups of many of these countries, but those are mostly political problems that shape the domestic monetary system, rather than being caused by it.
Also, many of these countries are subject to various forms of geopolitical pressure or outright hostility. One cannot ignore Lebanon’s postcolonial setup and regional tensions, or Argentina’s installed right-wing dictatorship that was supported by the IMF (similar to IMF’s dealing with Macri’s government recently), or the brutal sanctions against Venezuela. All of these realities lead to supply chain issues and constraints on physical resources which drove prices higher, leading to money printing becoming a last-ditch effort to provide short-term relief, similar to Europe trying to paper over its current energy crisis.
How does Bitcoin fix any of this? Its adoption could put a limit on government spending but then what? Not only could that also be achieved by dollarizing (accepting the dollar as legal tender) or pegging the domestic currency to the dollar — I do not support these whatsoever — it would be disastrous for economic development as it doesn’t deal with the underlying sociopolitical factors that led to that situation in the first place.
A country’s monetary system needs to be shaped according to its idiosyncratic dynamics, it needs to be flexible and it needs to be able to expand in order to finance much needed development. For example, China’s miraculous development journey probably could not have been possible without the availability of financing through the eurodollar system combined with the management of its exchange rate. While there are definitely challenges with this development model as well, arguing for the adoption of a uniform, programmatic money by developing countries exacerbates issues by introducing additional constraints, rigidity, a technologically totalitarian one-size-fits-all system and minimizing the admittedly imperfect forms of market signals that exist in the forex market.
I imagine some Bitcoin proponents will point to stories of increasing usage in many of these countries as evidence that the people there are organically adopting Bitcoin. As Pakistan is also mentioned in this list of countries, let me offer some thoughts on an alternative explanation. These countries experience high inflation, face capital controls and don’t have well-developed capital markets. Therefore, citizens face a crisis of savings wherein they are stuck between a currency rapidly losing its value and a dearth of accessible, safe investment vehicles.
Bitcoin, and crypto in general to be honest, has quickly spread as a means of creating wealth in these countries, inspired by stories from the West. I would argue that the increased usage of bitcoin, assuming that the trend is sustainable and not just a blip, is driven by three factors: a young population looking for ways to get rich quick and experiencing FOMO (by the way, stock trading has also become a huge trend), a demand for non-local assets to store wealth, a payment system for cross-border transactions and, in extreme cases, a way to temporarily circumvent oppressive regimes. I think all these are potentially valuable use cases well-served by bitcoin, but do not equate to bitcoin replacing fiat.
Going back to the question of state and money, particularly in the Global South context. The State has an important role to play in socioeconomic development given the nation-state system we live in, and having a sovereign currency is critical to this. In his book “The Princes of the Yen,” Richard Werner documents how the post-WWII Japanese government directed banks to make loans to key parts of the economy, such as the industrial sectors, leading to Japan’s remarkable rise as a manufacturing powerhouse. This process was called window guidance and ran through the Bank of Japan, which itself was directed by the Ministry of Finance, and involved giving commercial banks specific quotas for lending to various sectors.
Ultimately, this fell apart during the 1980s-1990s through financial liberalization but arguably played a key role in helping the Japanese state organize its efforts towards a specific development plan in the prior decades. A similar approach has been adopted by China at various periods. I am not arguing that this form of central planning is always the right approach, rather that it is an example of how countries need flexibility given their particular circumstances.
Bitcoin And The Progressives
The main argument made by progressives is that the Bitcoin standard reduces the domain over which The State has power, hence reducing opportunities for mismanagement. There are fundamental problems with this approach, most of which I already hope to have established by this point. Firstly, this misrepresents the cost-benefit tradeoff that a fixed supply, rigid monetary system would have, particularly given that many of the challenges society faces today, such as the ecological catastrophe, poor infrastructure, and inequality will require considerable investments — and investments are financed through money creation. Secondly, it treats The State as an exogenous entity that must always exist in this perverted form, rather than recognizing that The State needs to be reclaimed and is an essential tool, through its organizing capacity, in delivering progress.
Thirdly, and perhaps most importantly, this argument also has the money story backwards as material and social relations in a society drive what money is, not vice versa. To fix the socioeconomic problems we face, the focal point of resistance needs to be the exploitative relation between capital and labor, state capture by the elite and overconsumption by the few at the cost of the many. Focusing on money in this outside-in, technocratic approach is a distraction.
The problem in today’s system is that it is highly deregulated, left to the animal spirits of the markets, coupled with a largely unaccountable, small political class misusing sovereign capacity and creating a nexus between government and finance. Therefore, the “progressive” solution cannot be to get The State out of the way and let the market run amok. The eurodollar system, shadow banking, financial derivatives, etc., are the result of reduced State oversight, not The State becoming larger.
The solution cannot be more privatization, nor can it be government control per se. Instead, a two-pronged approach of reclaiming The State through political action, subsequently using it to create a better framework for the market with robust institutions serving the public good and challenging the overarching ideology of capitalism (since everyone has their own definition of capitalism, let me clarify that I mean a system with profit-maximization as its only goal) needs to be the path forward.
With regards to finance specifically, my summarized solution is to decentralize finance through the proliferation of community banking, enabling the rise of local currencies to support localized economies and greater regulation on money creation to achieve not just financial viability but also socioeconomic and ecological goals. Communities need money and finance to adjust to their specific dynamics, and therefore must have the ability to shape the system how they want. That form of flexible money adapting to achieve public goals is what is needed.
4. Some Use-Cases For Bitcoin
True to what I affirmed at the start, I do believe in the utility of Bitcoin as a technology stack and an asset. For the sake of some semblance of brevity, let me quickly jot down what I speculate are potential socially beneficial use-cases (each use-case deserves its own piece):
- P2P payment infrastructure: With rapid developments in the Lightning Network, I think Bitcoin can disrupt the current payment ecosystem through cheap and quick transactions, particularly cross-border payments. There has been considerable research on the market size for remittances and the exorbitant fees money transfer agencies charge, especially hurting low-income workers. Bitcoin’s efficiency along with its low barriers to entry make it an ideal platform to considerably simplify this process and protect vulnerable, largely unbanked populations from exploitative payment companies.
- Competition for legacy financial services: I see Bitcoin as a tech stack more than a payment system, with vast opportunities for programmability on top of the base layer that can unlock a multitude of use-cases, ranging from simple financial services (e.g. lending) to smart contracts. This puts pressure on existing companies to innovate, expand access to their services, and reduce costs. The low barriers to entry for Bitcoin also mean that banking the unbanked becomes substantially easier, which enables greater socioeconomic development opportunities particularly in the Global South.
- Investment vehicle: As I mentioned earlier, I think Bitcoin is a great asset for a portfolio because of its various use-cases, superior features within the cryptocurrency space, ease of access in countries where citizens don’t have access to developed capital markets and have a different risk profile to equities, bonds, etc. Increasing demand paired with a fixed supply makes the price appreciation hypothesis, despite high volatility and increased risk of manipulation given the entry of institutions, favorable over the medium to long term.
- Outside money contender under increased geopolitical fracturing: I am sure many readers who follow the markets are aware of Zoltan Pozsar’s inside versus outside money thesis. The former is a form of money that is the liability of one party (e.g. fiat currency, bonds, etc.) while the latter is not (e.g. gold, other commodities). As trust in the global system breaks down and geopolitical tensions rise, his thesis is that countries will move away from inside money — as holding U.S. treasuries is the current favored asset — towards outside money options to minimize risk of sanctions and asset seizure. Since gold has no inherent value either, it requires considerable energy and hassle to move around, and mining it has terrible environmental and human costs, I would argue that Bitcoin offers a viable alternative, at least from a diversification perspective, for countries holding reserves. Matthew Pines made a similar argument in a piece for Bitcoin Magazine recently.
5. Conclusion
There are too many reductive, albeit catchy, one-liners and analogies that prevail in the Bitcoin community. While the broader critique of the current system is warranted, these simple narratives obfuscate the focus of resistance. Money is not information or transportation or any such inanimate act, and hence cannot be simply technologically upgraded; rather, it is a social phenomenon that comes out of the dominant ideology, class relations, etc. It is not “cheap money” (low interest rates) that is misallocating capital and driving inequality, but rather the pure profit-seeking nature of the economy coupled with power being centralized in mega-corporations and state capture by the elite.
Fear mongering of hyperinflation or claiming the U.S. is on the same path as Venezuela just belies a lack of understanding about how the economy works, drawing attention away from the real issues of energy shortages, supply chain disruptions, climate catastrophe, etc. I don’t pretend that the solution is obvious — that is where political schools of thought come into play and create a healthy debate of ideas. However, we need to at least build a common foundation around the operations of the current system, as many of those facets, if not all, are grounded in objective reality.
Lastly, I think it is a testament to the Bitcoin community that it is grounded in creating awareness and educating people from different walks of life. Many people have remarked that learning about Bitcoin was their gateway into understanding the current system and its pitfalls. This is where other communities, particularly the left, have not done as much as they could have — but Bitcoiners should also realize that there is a multitude of heterodox schools with a robust history of scholarship around these topics. These should be continuously engaged with, as some in the community do, rather than ignoring them for simply not believing in Bitcoin.
This is a guest post by Taimur Ahmad. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.