Money, Bitcoin and Time: Money (part 1)

The Simple Truth About Money: Money is the most popular story people have ever told.It isreflexive storytelling: meaning that it has significance only because everyone believes in it, and everyone believes in it because it hasMoney is a story that goes on...

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Summarizing the views of many prominent thinkers, this three-part essay will address the following topics in sequence:

Money – Its Properties, History and Evolutionary History (this article)
Bitcoin – Its Nature and Significance in the History of Money (see Bitcoin).PART 2)*
Time – A Look at Its Value and How It Canthe history of money (see PART 3)*

*Note: Translations of other partscoming soon on BitNews *

This essay is highly influenced, inspired byand revised based on numerous literary works. The heading of each section will contain a number [n] referencing the corresponding synthesized works at the end of each part. For those of you looking for further clarification on any of the topics discussed here, I highly recommend reading the original writings presented.

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Exchange between people [2.6]

Human beings are networked species. At first, it was about small groups of hunters and gatherers, the number of which did not exceed 150 people (Dunbar's number). When people began to exchange with each other, they intuitively discovered a division of labor that allows a person to reflect on their comparative merits and focus all their time on their chosen craft. The division of labor promotes the specialization of productive efforts for profit on a mutually beneficial basis. If John makes axes faster than Steve, and Steve makes bows faster than John, then both of them are better off focusing on their specialization and mutual exchange. Interestingly, this is true even if John makes axes and bows faster than Steve (to a certain extent), and, surprisingly, this effect is increasing.

Tools or technologies are mechanisms that increase productivity byWith an axe, you can chop more wood in a man-hour than with your bare hands.As people created and exchanged more diverse tools, there was an increase in time savings and specialization.Specialization gave rise to innovation, as it encouraged the investment of time in tools for the production of tools, such as grindstones, used to make sharper axes.This allowed people to create better tools, which led to even greater productivity gains.As a result, there was a significant increase in time savings, which people began to invest in further specialization and increase the scope of trade due to theexchange with a wider range and variety of people, which contributed to a further deepening of the division of labor, and so on.This recursive dynamic persists to this day as a virtuous cycle that knows no natural limits.people to freely and conscientiously exchange and specialize for the common good.Thus, the act of exchange is the original force that ensures the progress and prosperity of all humanity.Prosperity is merely a saving of time, which is proportional to the division of labor:

In cultural development, exchange between people isthe same as sex — for biological evolution. Through exchange and specialization, innovations emerge and spread. At some point, the human mind becomes collective and cumulative in a way that has never happened to any other animal. Language, and then writing, allowed us to pass on all the accumulated collective knowledge to each subsequent generation. Writing has helped us express and spread belief systems and belief systems. As the only member of the animal kingdom who can tell and believe stories, we have learned to organize ourselves using abstractions such as money, mathematics, nations, and corporations. Our unique ability to tell stories and believe them — as free market capitalists, human rights activists, citizens of a country, or whatever history we associate ourselves with, — allows us to flexibly collaborate with each other on a large scale and across genetic boundaries. This scale of cooperation, which has never been seen before or since, is the reason that humanity has come to occupy a dominant position on Earth. We are an interconnected species, closely interacting with each other through acts of exchange. The spontaneously emerging feature of these complex human interactions is money, which solved the problems inherent in trade and accelerated the rate of human exchange and division of labor. Money, as an essential lubricant for the process of exchanges between people, was among the first stories that we used to organize in a collective way.

History of money [1]

So let's start with the basics andWe will continue to be guided by logic. The simplest form of human exchange is the direct trading of real goods, say guns for boats, in a process known asdirect exchangeor barter.Direct trade is only practical when a small number of people are trading a small number of goods. If we are talking about larger groups of people, then individuals become more able to specialize in production and trade with a wider range of people, which increases the aggregate wealth for the benefit of each of them. This simple fact, that exchange allows us to produce more goods per hour of human effort, is the basis of economic activity itself:

Economics is the social science of increasing production per unit of contribution.

Larger groups of people exchanging goods imply larger markets, but at the same time create a problemmismatch of desires— what you seek to acquire through trade is produced by someone who does not want what you have to offer. This problem has three specific directions:

Inconsistency in scale — supposethat by trying to exchange pencils for a house, it is impossible to acquire part of this house, and the owner of the house may not need such a large number of pencils.
Location mismatch — Imagine,that you are trying to exchange a coal mine in a particular place for a factory in some other place, unless by chance you are looking for a factory in that particular place, and the counterparty with whom you are dealing is looking for a coal mine in at this location, the transaction cannot be carried out, since factories and coal mines are not movable.
Mismatch in temporal context —Imagine trying to collect enough oranges to trade for a truck, since oranges are a perishable commodity, they will most likely rot before the trade can be completed.

The only way to solve this 3D problem is to use something calledmediated (indirect) exchangewhere you are looking for another person withthe goods desired for the counterparty and exchange it for your goods solely in order to, in turn, exchange it for the counterparty's goods in order to complete the transaction.

An intermediate good used to complete a transaction with a counterparty is calledmedium of exchange, which is the primary function of money.

Over time, people tend to graduallyconverge on one medium of exchange (or, in extreme cases, on several mediums of exchange), since this greatly simplifies the trading process. A commodity that becomes a generally accepted medium of exchange is usually called money. Money gives its users complete freedom of action, as they can be easily exchanged for any product on the market.

From this point of view, money is considered to have the highestmarketability, implying the ease with which theycan be sold on the market at any time with the least price loss. A product's sales level can be fairly accurately measured by how well it solves all three aspects of the desire mismatch problem:

Suitable for transactions of various sizes— a commodity that can be easily divided into smaller units or grouped into larger units, allowing the user to trade it in any quantity desired
Suitability for sale in any geographical region — a product that is easily transported or transmitted over any distance.
Possibility of implementation over time —a product that can reliably hold its value over time, being resistant to rot, corrosion, counterfeiting, unpredictable increases in supply, and other adverse effects on its value.

It is the third component, marketability over time, that determines the utility of a product asstorage of value– which is the second function of money.

Since the production of each new unitmonetary commodity makes any other unit relatively less scarce, this helps to dilute the value of existing units in a process known asinflation... Ensuring the safety of value from loss inAs a result, inflation is an extremely important function of money, and money plays a key role in the functioning of thriving commercial networks.

Hard money [1]

Hard money is more reliable as a meansstorage of value precisely because they resist deliberate depreciation of their value by others and, therefore, remain marketable in the long run.

Hardness of a monetary commodity, also known asits reliability is determined by the stock of available goods and the influx of new ones. The indicator that quantifies the hardness of money is called the ratioreserves to inflow:

“Stocks” is the existing supply of monetary units.
“Inflow” is a new offer created over a certain period of time, usually within one year.
The division of the stock of a monetary good by its inflow is the ratio of the stock to the inflow.
The higher the ratio of reserves to inflow, the more the hardness (or reliability) of the money.

The higher the stock-to-flow ratio, the moreMoney is resistant to its value being affected by inflation. There is no right choice regarding the form of money, but there are certain consequences regarding which form the market will naturally choose. If people choose to store wealth in a monetary good that exhibits less hardness, then producers of that monetary good are incentivized to produce more monetary units, which expropriates the wealth of existing monetary unit holders and destroys the marketability of the monetary good in the long run. This is the fatal flawsoft money: if there will beIf anything is used that may have the ability to increase its supply, then its supply will only increase as producers will seek to appropriate the value stored in soft currency and store it in the more solid form of money themselves. As will be shown in many of the historical examples in this essay, any monetary commodity that can be stockpiled relatively inexpensively and easily will quickly wipe out the wealth of those who use it as a store of value.

In order for the product to play the dominantmonetary role in the economy, it must have a higher hardness and a higher stock-to-inflow ratio than competing monetary goods. Otherwise, overproduction of units of a monetary good will not only destroy the wealth of the people who hold it, but also the incentives to use it as a store of value. Based on the interaction of decisions made by people, some goods acquire the status of a monetary unit. It is from the chaos of complex human interactions that the monetary order is born. In this regard, it is important to take into account the social aspects of the spontaneous emergence of the monetary order.

Money — is a social network [1,4]

Money as a value system that connects peoplein space and time, are the original and largest social network. The value of a network is a reflection of the total number of possible connections it allows. Like the telephone and modern social media platforms, a money network becomes exponentially more valuable as more people join it, because the number of possible connections it allows is proportional to the square of the number of all participants in the network, and this ratio is determined byMetcalfe's Law:

The value of a network is determined by the number of possibleconnections it allows. In a monetary network, increasing the number of possible connections means greater marketability and greater trading prospects. Participants in a monetary network are connected through the use of a common form of money to express and store value.Network Effects, defined as additional benefit,achieved by adding a new member to the network for all existing members of the same network, encourage people to accept a single form of money. Intuitively, a monetary good that retains value over time (hard money) is always preferable to one that loses value (soft money). This causes people to naturally gravitate toward the hardest form of money available to them. Moreover, since human exchange is an exceptional social phenomenon that suffers from the three-dimensional problem of divergence of desires, any monetary good that can solve all three aspects of this problem will conquer the entire market (or the vast majority of it). For these reasons, the free money market exhibits suchthe tendency for the winner to take it all(or at least the largest share).Network effects accelerate the natural unification of people around a single monetary technology, as larger monetary networks support higher marketability of the corresponding monetary commodity.

However, the choice of monetary goods is limitedtechnological realities of a particular market, which chooses a monetary product for itself. This can hinder the dynamics — the winner takes all, since each specific monetary commodity more or less satisfies the desired monetary qualities.

Monetary qualities [1.4]

As we will see, markets naturally andspontaneously chose for a monetary good that which best suits a number of desirable traits that determine how useful a particular monetary good is as a form of money:

Hardness — resistance to unpredictable increases in supply and decreases in value
Interchangeability — units are interchangeable and indistinguishable from each other.
Portability — ease of transportation or transfer of monetary units over distances.
Durability (wear resistance) — resistance of monetary units to rot, corrosion or loss of value due to dilapidation.
Divisibility — ease of separating or grouping currencies
Security — resistance to counterfeiting or counterfeiting
Sovereignty — the source of its value, the trust factors and permissions necessary to transact with it (natural social consensus or artificial government decree)
State approval — authorized as legal tender by the government.

As already mentioned, toughness is a special feature,which, in determining the suitability of a good for fulfilling a monetary role, takes precedence over all others. Money, as an expression of value, remained fundamentally unchanged, but evolved over time, taking the form of certain goods. Like a language that was first spoken, then written, and now printed, the meaning expressed in money remains unchanged, while its modality is constantly evolving. Just like the monetary technology we use to express value, our preferences change.

Prospects for prosperity [1]

In economics, the most important aspect of decision makinghuman are time preferences, which are understood as the ratio in which the individual values the present relative to the future. Temporal preferences have a positive effect on all people, since the future is uncertain, and the end may always be closer than expected. Therefore, other things being equal, we naturally prefer to receive any value sooner rather than later. “Better a bird in hand than pie in the sky” ... It is believed that people who choose to postpone current consumption and instead invest in the future have lower time preferences. The decline in time preference is closely related to the hardness of money, and is also precisely what allows human civilization to develop and become more prosperous. When it comes to timing preference, hard money plays an important role in three key areas:

By providing a reliable way of protecting value over time, hard money encourages people to think longer and thereby reduce their time preferences.
As a stable unit of measurement, solidmoney contributes to the constant growth of markets by reducing the costs and risks of free trade, which increases incentives for long-term cooperation and reduces temporary preferences.
Self-sovereign money (such as gold andbitcoin) that resist manipulation by the outside, reduces government intervention, which stimulates the growth of free markets, increasing their long-term stability and reducing time preferences.

Lower time preferences arean important part of what separates humans from other animal species. As we contemplate what is best for the future, we can curb our animalistic impulses and decide to act rationally and cooperate for the greater good. As people lower their time preferences, they develop the ability to accomplish longer-term goals. Instead of spending all of our time producing goods for immediate consumption, we may decide to devote time to developing better products that take longer to create but that will benefit us more in the long run.

Only by reducing time preferencesa person can produce goods that are not themselves intended for consumption, but, on the contrary, are used in the production of other goods. Goods intended exclusively for the production of other goods are calledcapital goods.

Only a person with less timepreferences may decide to give up several hours of direct fishing and opt for the creation of a more advanced fishing rod, which cannot be eaten by itself, but which in the future will provide better results per unit of time spent fishing. That's the pointinvesting: people delay immediate gratificationtheir needs and invest time in the production of capital goods, which, in turn, will make the production process itself more improved, extend it for a longer time horizon and provide better results per hour of labor expended by a person.

Thus, investment increases the stock of capital goods, which increases productivity. Surprisingly, this effect also turns intopositive feedback loop... Also known as the virtuous cycle ora flywheel effect, a positive feedback loop, is a process that is recursively powered (its outputs also serve as inputs) and thus create combined effects. Positive feedback loops play an important role in biology, chemistry, psychology, sociology, economics, and cybernetics. As for investment, as more capital goods accumulate, the level of productivity rises even more, and the production time horizon expands even further:

To clearly understand the meaning of temporarypreference, let's consider two hypothetical fishermen, Harold and Louis, who had nothing but their own hands at the start. Harold has higher time preferences than Louis, and decides to fish exclusively with his bare hands. Using this approach, Harold spends about eight hours a day catching enough fish to feed him for one day. Louis, on the other hand, spends only six hours a day fishing, content with fewer fish, and decides to spend the remaining two hours making a fishing rod.

Two weeks later, Louis managed to build a fishing rod, withwith which he can now catch twice as many fish per hour than Harold. Louis' investment in fishing rod allowed him to spend only four hours fishing every day, eat the same amount of fish as Harold, and spend the remaining four hours relaxing and indulging in leisure. However, since Louis has lower time preferences, he instead opted to fish 4 hours a day and use the remaining 4 hours to build a fishing boat instead of leisure.

A month later, Louis finally managed to builda fishing boat on which he can now go out to sea and catch fish that Harold has never even seen. Louis not only increased his productivity (the number of fish caught per person per hour), but also improved the quality of his products (a greater variety of fish from the deep sea). Using a fishing rod and boat, Louis now needs only 1 hour a day to obtain the required amount of food for the day, and he spends the remaining 7 hours on further accumulation of capital — for the construction of more advanced fishing rods, boats, nets, baits, etc. — which, in turn, further increases his labor productivity and quality of life.

If Louis and his descendants continuesticking to lower time preferences, the results of such behavior will increase over time and from generation to generation. As they accumulate more capital, their labor efforts will become more tangible as a result of increased productivity and will enable them to participate in ever larger projects that take longer to complete. These achievements will be further strengthened when Louis and his descendants begin to trade with other people who specialize in crafts that they do not do themselves, such as housing, winemaking or agriculture. Consistent levels of learning, increased productivity and the prosperity of retail chains are fundamental factors on which all human progress in knowledge, technology and culture is built. The advancement of humanity is manifested in the tools we create and in the way we interact with each other.

From this point of view, it becomes clear that the mostimportant economic decisions that a person faces are associated with certain trade-offs that he will face with his future self.

Eat fewer fish today to build a fishing boat tomorrow.

Eat wholesome food today to be healthy tomorrow.

Train today to be in great physical shape tomorrow.

Read books today for knowledge tomorrow.

Invest money today to be rich tomorrow.

Our consolation is the fact that thisthe multifaceted power of nature is always available to each of us. No matter how unfavorable the circumstances may be for a person with low time preferences, they will most likely find a way to continue to increase their efforts in the present and prioritize their future self until they reach their goals. In contrast, no matter how good luck and wealth favor a person with high time preferences, he is likely to find a way to continue squandering wealth and robbing his future self. Such an individually oriented relationship with our future is a microcosm of the social macrocosm. As a society develops lower time preferences, its prospects for prosperity will improve in tandem.

The foundation of economic growth [1.4]

There are many factors beyondof this essay and influencing time preferences. Most relevant for further discussion is the expected future value of money. As practice shows, hard money is distinguished by the fact that it is superior to all other types of money, since it has the property of maintaining its value over time. Because its purchasing power tends to remain constant or increase over time, sound money encourages people to delay consumption and invest in the future, thereby lowering their time preferences. As for soft money, it is subject to unexpected increases in supply. An increase in the money supply is the same as a decreaseinterest rate, which, in fact, is the cost of borrowingmoney and an incentive to save. Reducing the interest rate weakens the motivation to save and invest, in turn, increases the incentive to borrow. Thus, soft money impedes the formation of a positive orientation towards the future. In other words, soft money systems increase society's time preferences. This is why soft money, once it is sufficiently depreciated, tends to anticipate the collapse of society (more on that later).

The ideal hard money would be those whosethe supply is absolutely limited, that is, it would be impossible to produce more of such money. In such a society, the only non-criminal way to acquire money would be to produce something of value and exchange it for money. As everyone strives for more money, everyone will become more productive, which will promote capital accumulation, increase productivity, and reduce time preferences. Because the money supply is fixed, economic growth will cause the prices of real goods and services to fall over time as a limited number of monetary units hunt for a growing supply of goods. Since people can expect to be able to buy more in the future for the same amount of money, such a world will discourage immediate consumption and encourage saving and investment for the future. Paradoxically, a world that continually defers consumption will actually end up consuming more in the long run, as increased savings will lead to increased investment and increased productivity, thereby making its citizens wealthier in the future. Such dynamics will cause positive feedback — With current needs met and an increasing focus on the future, people naturally begin to focus on other aspects of life, such as social, cultural and spiritual aspirations. This is the essence of free market capitalism: people choose to lower their time preferences, pushing aside immediate gratification and investing in the future.

The foundation of any economic growth isdelayed gratification, which leads to accumulation of savings, which in turn leads to investments that extend the duration of the production cycle and increase productivity in a self-sufficient, virtuous cycle without any established natural limits.

Debt is the opposite of saving. While saving creates an opportunity for capital accumulation and the associated benefits, debt is what can reverse this trend, reducing capital stocks, productivity and living standards across generations. It will be shown later that when the gold standard was forcibly abolished by governments, money not only became much softer, but also came under the control of politicians motivated to work with greater time preferences, as they tend to be reelected every few years. This explains why politicians continue to sanction the use of soft government money despite the long-term damage they cause to the economy, ensuring that it remains the dominant form of money in the world (we will discuss later on the unnatural rise of soft government money to world domination).

When some form of cashgains widespread popularity and becomes the dominant means of payment throughout the world, it ultimately begins to fulfill the third function of money - to serveunit of account. As history shows, this function isthe final evolutionary stage in the natural ascent of monetary goods, which achieve a dominant role — which are first a store of value, then — a medium of exchange and, finally, a unit of account. As economist William Stanley Jevons explained:

“From a historical point of view, gold is likeappears to have acted, first, as a valuable item for decorative purposes; secondly, as a stored wealth; third, as a medium of exchange; and, finally, as a measure of value. "

Today the US dollar isdominant position and serves as a global unit of account, since prices are most often expressed in it. This uniform pricing system simplifies trade and provides (to some extent) a stable pricing structure for the global economy.

The nervous system of the economy [1]

Market prices are the most important communicationforce in the economy. As economic production outgrows primitive forms, it becomes extremely difficult for individuals to make production, consumer and trade decisions without a fixed system of measures and coordinates (unit of account) that allows comparing the value of various goods in relation to each other.

In his work "Use of knowledge in society"Friedrich Hayek illuminated the economic problem not only as a problem of the distribution of human efforts. More precisely, the economic problem is the distribution of human effort in accordance with the knowledge that is in the minds of people, each of whom is primarily concerned with his own field within the broader economy. This distributed knowledge includes the following:

Production conditions
Availability of factors of production
Individual preferences

Knowledge, due to its dynamic and fluidnature, cannot be fully known to the individual subject, since they are constantly in a continuous flux and are largely scattered among many minds. In a free market economic system, prices capture this fragmented knowledge, transform it into impartial information, and ensure that it is widely disseminated.Price Signalsare the coordinating force of free systemsmarket. Each individual decision maker can reasonably rely on the prices of goods relevant to his production process, since prices themselves are the result of converting all known market realities into a single variable that can be used to take practical steps. Each individual's buying and selling decisions, in turn, contribute to the further formation of prices that transmit this changed information back to the market. Price signals for market participants are like light for the eyes.

To understand this point, considerthe 2010 earthquake that severely damaged an area in Chile responsible for most of the world's copper production. As a result of this earthquake, copper mines and export infrastructure were significantly damaged, which immediately reduced the flow of new supplies to the world copper market and led to an increase in its price by 6.2%. It will affect everyone in the world whose business overlaps with the copper market in one way or another, but they do not need any specific knowledge of the Chilean earthquake or market conditions to decide how to respond. All the relevant information they need to make effective decisions is contained in the copper price itself.

Immediately all firms that needcopper are encouraged to reduce demand, delay purchases or find substitutes. On the other hand, all enterprises that are engaged in the extraction of copper are encouraged to increase the volume of its production. The natural shift in price prompts everyone in the copper industry to act in ways that mitigate the negative effects of the earthquake. This is the power of a free market with accurate price signals.

The wisdom of the crowd always trumps the wisdom of the audiencemeetings of the board of directors. It is not possible to simply take and recreate the adaptability and collective intelligence of the markets by introducing a central planning authority. How will they decide who should increase production and by how much? How would they decide who should cut consumption and how much? How would they coordinate and enforce their decisions in real time on a global scale? In this sense, prices are the economic nervous system that spreads knowledge around the world and helps coordinate complex production processes:

Stimulating changes in supply and demand to bring them in line with economic reality and quickly restore market equilibrium.
Effective combination of buyers and sellers in the market
Compensating producers for their manufacturing efforts

Without accurate price signals, people could notbenefit from division of labor and specialization beyond small-scale activities. Trade allows producers of goods to reciprocally improve their standard of living by specializing in goods in which they have a relative orcomparative advantage– exactly the products they canproduce relatively faster, cheaper or better. Accurate prices, expressed through a single, stable medium of exchange, help people identify and specialize in their comparative advantages. Specialization, guided by reliable price signals, allows producers to increase production efficiency and accumulate capital specific to their craft. It is for this reason that the most productive distribution of human effort can only be determined by an accurate pricing system within the free market. In addition (as will be shown below), this is why capitalism prevailed over socialism, since under socialism there was no economic nervous system.

But before diving into the economic aspects,underlying this historical ideological struggle, and to ensure that it continues to this day, one must first understand the evolutionary forces that have shaped money throughout history.

Evolution of cash [1]

In the course of historical development, money was acceptedvarious shapes — sea shells, salt, cattle, beads, stones, precious metals and government securities — they have all functioned as money at one time or another in history. The roles of money are naturally determined by the technological realities of societies that shape the salability of goods. Even to this day, forms of money such as prepaid cell phone minutes in Africa or cigarettes in prisons appear spontaneously and are used as locally focused currency. Different monetary technologies are in constant competition, like animals competing within the same ecosystem. Although, instead of competing for food and mating partners like animals, monetary goods compete for human faith and trust. Credibility and reliability form the basissocial consensus— source of sovereignty specifica monetary good from which it derives its market value, along with the trust factors and permissions necessary to use it as a means of payment in transactions.

As such a competitioncontinues to unfold in the free market, commodities acquire and lose monetary roles in accordance with attributes that determine how credible or trustworthy they are, and which are expected to remain so over time. As will be shown later, free market competition is ruthlessly effective in making hard money public, as it only preserves wealth in the long run by those who choose the hardest form of money available. This market-driven natural selection leads to the emergence of new forms of money and the disappearance of older forms. Similar to biological natural selection, in which nature continually favors organisms best suited to thrive in an appropriate ecological environment, this market-based natural selection is a process in which people naturally and rationally choose the most plausible and reliable monetary technology available within corresponding trading systems. Unlike environmental competition, which can favor many dominant organisms, the money market is driven by network effects and favors a winner-take-all dynamic (or at least a winner takes most of it), since the problem of mismatching desires is universal, and if what - Either hard money can solve all three of its inherent problems, then it will become dominant (as discussed earlier in the chapter on the social network aspects of money).

An example of such market natural selectionmonetary forms is the ancient system of Rai stones of the Yap archipelago, located in the territory of modern Micronesia. Rai Stones were large stone discs of various sizes with a hole in the middle, the largest of which weighed four tons. These stones were mined on the neighboring islands of Palau or Guam, and then transported to the Yap archipelago. The acquisition of such stones involved a very time consuming process of extraction and transportation. The delivery of the largest of the Rai stones at times required the labor of hundreds of workers. When the next stone fell on Yap, it was placed in a prominent place of honor.

The owners of the stones could use them asmeans of payment, while there was not even a need to move the stone somewhere to a new place. It was enough to announce to all members of the community that the stone now has a new owner. Then each resident of the settlement recorded this transaction in his personal ledger, recording the new owner of the stone. It was simply impossible to steal such a stone, since everyone on the island knew who and which stone belonged to. Thus, the Rai stones solved the three-sided problem of mismatching desires for the inhabitants of the Yap Islands, providing:

Suitability for transactions of different volumes (divisibility)- a variety of stone sizes made it possible to carry out payment transactions in transactions of various scales, in addition, it was possible to pay with stone fragments;
Suitability for securing transactions anywhere(portability) - since the stones were accepted as a means of tender everywhere in the archipelago and did not need to be physically moved, since it was enough to simply write them into the personal ledgers of the population of the islands (remarkably similar to the distributed model of the ledger of Bitcoin, as we will see later)
Retention of value over time (durability) -the durability of the stones and the difficulty in acquiring new stones meant that the available supply of stones was always large compared to any new supply that could be created over a period of time (high stock-to-inflow ratio)

This monetary system functioned perfectly until1871, until an Irish-American captain named David O'Keefe was found shipwrecked on the shores of Yap and rescued by local islanders. O'Keefe soon discovered the possibility of making a profit by buying coconuts from the Yapese and selling them to coconut oil producers. However, he could not make deals with the locals because he was not the owner of the Rai stone, and the locals had no use for his foreign money. However, he could not enter into transactions with the local residents, since he was not the owner of the rai stone, and besides, the islanders did not recognize any foreign money, from which they had no use. But O'Keefe was not going to give up. Undeterred by the refusal, O'Keefe sailed to Hong Kong, where he acquired the necessary tools, a large boat and explosives to mine Rai stones in neighboring Palau. Although he initially encountered opposition from the locals, he was eventually able to use his Rai stones to buy coconuts from the Yapese. Inspired by O'Keefe's success, other profit seekers appeared, and soon the flow of Rai stones to the island increased sharply. This sparked conflict and disrupted economic activity in the archipelago. By using modern technology to obtain Rai stones more cheaply, foreigners were able to compromise the hardness of this ancient monetary commodity.

The market naturally opposed the Rai stones,because with decreasing stock-to-inflow ratios, they became less reliable as a store of value and thus lost their long-term marketability, which ultimately led to the disappearance of this old monetary system.

A similar story played out in ancient WesternAfrica, where Aggri beads have been used as money for centuries. These small glass beads were extremely prized in places where glassblowing was expensive or not practiced at all. The high reserve-to-inflow ratio provided them with value in the long run. Since aggri beads were compact and lightweight, they could easily be made into necklaces or bracelets and transported without problems, thereby solving the problem of their use as a means of payment in transactions of various sizes and throughout West Africa. In the 16th century, European travelers and traders discovered that such beads were of high value among West Africans, and began to import them massively into Africa, as European glassmaking technologies made them extremely cheap to manufacture. Slowly but surely, Europeans used these cheap beads to acquire most of Africa's precious resources.

The end result of this invasion of Africawas the transfer of its enormous natural resources to Europeans and the transformation of aggri beads from hard money into soft money. Again, the market naturally voted against the monetary good as soon as its stock-to-inflow ratio began to decline, because as a result, its function as a store of value and therefore its marketability over time was compromised. While details may vary from example to example, this underlying surge in inflows and devaluation of reserves, which heralds a commodity's loss of its monetary status, has been the same for all forms of money throughout history.

Today right before our eyes in Venezuelaa similar picture unfolds that caused the collapse of the Venezuelan bolivar (while some Venezuelans are using bitcoins to protect their wealth as their national currency is crashing).

As the societies continueddeveloped, they began to move away from artifact money such as stones and glass beads, and move to money metals. Initially, the production of metals was difficult and time consuming, which did not allow for the rapid expansion of existing reserves and gave them long-term value. In particular, gold, with its extreme rarity in the earth's crust and its virtual indestructibility, has made it an exceptionally solid monetary technology. Gold mining was fraught with difficulties, limiting the growth of supply over its existing stock, which, in principle, could not be destroyed. The longevity of gold allowed people to pass on accumulated wealth from generation to generation and to make long-term planning of their actions (which is a manifestation of lower time preferences), which led to the spread of ancient civilizations:

Monetary Metals [1]

The last dictator of the Roman Republic, Julius Caesarissued a gold coin called the "Aureus", which contained a standard amount of gold — eight grams. The aureus circulated widely in trade throughout Europe and the Mediterranean, along with a silver coin called the denarius, which was used for its excellent suitability for transactions of any size. The combined use of these coins allowed the creation of a system of sound money that expanded the scope of trade and specialization in the Old World. Over the 75 years of using this system, the republic became more economically stable and coherent and maintained the status quo until the infamous Emperor Nero came to power.

Nero was the first to introduce into practice the so-called “coin trimming"When the money collected from citizenswere melted and minted into new coins with the same nominal value, but with a lower content of precious metals, and the difference in metal was taken by the emperor for his own enrichment. Like modern inflation, it was a way of implicitly taxing the population by devaluing the national currency. Nero and successive emperors continued the practice of cutting coins to finance government spending for several hundred years:

Gradually, the citizens realized this deception and becameto accumulate coins with a higher content of precious metals and spend "spoiled" coins, since, according to the law, they had to be accepted at face value when paying off debts, which is one of the first cases of application of the legislation on means of payment. This, of course, caused the prices of coins with a higher content of precious metals to rise and the prices of coins with a lower content to fall.

This dynamic later became known asGresham's law: bad money (soft money) drives outcirculation is good money (hard money). This is an important law to keep in mind when we consider the impact of today's hoarding on the price of bitcoin.

Eventually a new coin was introduced calledsolid, which contained only 4.5 grams of gold, whichwas slightly more than half the gold content of the original Aureus coin. This decline in coin value began a cycle familiar to many modern economies supported by public money — the coin clipping lowered the real value of money, increased the money supply, enabled the emperor to continue his imprudent spending, and ultimately ended in rampant inflation and economic crisis.

By analogy with today's central banking practice, the Swiss banker Ferdinand Lips has well summarized the historical lesson of that era for the edification of future generations:

“Despite the fact that the Roman emperors are desperatetried to "manage" the economy, they only succeeded in aggravating the crisis. They legislated prices, wages, monetary units, but it was more like trying to plug a hole in a dam with a finger. The empire was mired in corruption, lawlessness, fraud; the craving for speculation and gambling spread like a plague throughout the country. "

In the chaos of the crumbling Roman Republic to powercame Constantine the Great. In an effort to rebuild the once great empire, Constantine began to pursue a responsible economic policy. At first, he made a commitment to keep the solidus at 4.5 grams of gold, stopped the practice of trimming coins, and began minting these standardized gold coins in huge quantities. Constantine then moved east and founded Constantinople in present-day Istanbul. Thus was born the Eastern Roman Empire, which chose solidus as its main currency.

Rome continued to degrade in all areas, according toreason for the use of soft money in circulation, until it finally fell under the onslaught of the barbarians in 476 AD. Meanwhile, Constantinople prospered. Solid, who eventually became known asbezant, provided Constantinople with a solid monetary system, thanks to which it remained prosperous and free for many centuries.
As with Rome before it, the fallThe rise of Constantinople only happened when its rulers began to debase its currency, which happened around 1050 AD. As with the Western Roman Empire before it, the move away from sound money led to the financial and cultural decline of the Byzantine Empire. After a series of crises following one another, Constantinople was finally captured by the Ottomans in 1453. However, the bezant inspired the creation of another form of hard money that circulates to this day, the Islamic dinar. People all over the world have used this coin as a medium of exchange for more than seventeen centuries - a coin that began as the solidus before changing its name to the bezant and finally becoming the Islamic dinar, thus proving the exceptional timeless value of gold.

After the collapse of the Roman Empire, Europe was plungedin the "Dark Ages". It was the emergence and development of city-states (a new history around which humanity would begin to organize itself) and their use of financial systems based on hard money that allowed Europe to throw off the shackles of the Dark Ages and step towards the Renaissance. It all started in Florence in 1252, where the city authorities mintedflorin, which became the first large-scale European coin issued since the aureus of Julius Caesar.

By the end of the XIV century, more than 150 European cities andstates minted coins in accordance with the same characteristics as the florin. By empowering its citizens to accumulate wealth using a reliable store of value that could be freely traded across scales, space and time, this hard money system freed up scientific, intellectual and cultural capital in the Italian city-states and eventually spread to all of Europe.
Of course, the situation was far from perfect,for there were many more periods marked by various rulers who decided to debase their currency in order to finance war or other wasteful items of expenditure.

International Gold Standard [1.4]

When were gold and silver coins usedas physical means of payment, they played a complementary role. Silver, having a stock-to-flow ratio second only to gold, had the advantage of being more suitable for use in transactions of various sizes, because its lower value by weight than gold made it an ideal medium of exchange for smaller transactions. Thus, gold and silver complemented each other, since gold could be used for large settlements, and silver for small payments.

However, by the 19th century, thanks to the developmentbanking and the emergence of advanced telecommunication channels, people have the opportunity, which is becoming more and more accessible, to freely carry out transactions of various scales using paper money and checks, backed by the gold reserves of the Treasury and banks:

Taking into account the fact that all the most important monetary characteristics collected within the framework of the monetary system of the gold standard are expressed by paper banknotes, the superior division of physical silver has lost its relevance, thus removing it from participation in transactions as a payment facility (due to the dynamics "the winner receivesIronically, the same banking industry that helped establish the world gold standard will beseek to abolish it (more on that later).

A small excursion into the history of silver: this dynamic of demonetization also explains why the "soap bubble" of silver has repeatedly burst throughout history, when faced with gold, and burstmore than once, if he ever pedds again.
Since silver is not the hardestform of an available monetary commodity, then in the event of any significant investment flow into silver, its producers will be incentivized to increase the flow of silver into the market, and store the profits received from the increased production of silver in the hardest form of money available to them (which, before the advent of Bitcoin, was only gold). This will certainly lead to a collapse in silver prices, depriving investors of their invested capital.

As a more recent historical exampleSoft Currency Traps in Action Consider the Hunt Brothers story: In the late 1970s, billionaire brothers William and Nelson Hunt decided to remodel silver and began buying massive amounts of it on the market. This initially led to a rise in the price of silver, and the Hunt brothers believed they could keep raising the price until the market was driven into a corner. They believed that as the price of the metal rose, there would be more and more people willing to buy it, as a result of which prices would rise even more, and eventually silver would again become a popular means of payment.

As they continued to buy silver and pricescontinued to rise, silver producers and holders continued to flood the market with the metal. However, no matter how much money the Hunt brothers poured into this venture, they were still unable to keep up with the explosive growth in supply, which consequently lowered the ratio of reserves to inflows and ultimately led to a dramatic collapse in the price of silver. The Hunt brothers have lost over a billion dollars (due to rampant inflation of government money since then, their losses in 2019 dollars are $6.5 billion) in an ordeal that is likely the highest price ever paid to learn about the importance of hard money and its defining indicator - the ratio of stocks to inflows.

Driven by expansion and developmenttelecommunications and retail networks, and due to the fact that depository banks increased the suitability of gold for payments of any volume by issuing gold-backed notes and checks, the gold standard quickly spread. More and more countries began to switch to paper monetary systems, fully backed and freely redeemable in gold. As more countries transitioned to the gold standard, the network effect intensified, increasing gold liquidity, its marketability and creating more powerful incentives for other countries to join.

Those countries that stayed on the longestsilver standard before the transition to gold, the likes of China and India witnessed colossal devaluation of their currencies during the transition period. In essence, the demonetization of silver put India and China in a situation similar to that of the West African countries that used the aggri beads when the Europeans arrived. Foreigners from countries that have adopted the gold standard have been able to gain control over huge amounts of capital and resources in China and India. This leads to a key point: every time hard money encounters a softer form of money in a trading system, softer money is ultimately driven out of the market by competitors and dies out.

This dynamic has serious implications forholders of soft money, and is an important lesson for anyone who believes that their abandonment of bitcoin means that they are protected from its economic impact. History has repeatedly shown that if others choose a harder currency, it will not be possible to insulate themselves from the likely consequences.

Finally, for the first time in history, much of the world economy began operating on the gold standard of hard money, which was naturally chosen by the free market.

Gold hardness [1.3]

By this point in history, almost everyone has becomerely entirely on the superior gold reserves / inflow ratio and therefore believed they could use it to securely store value over the long term. Despite thousands of years of mining for this chemically stable element, today virtually all the gold ever mined by man is still part of its existing reserves. The world's gold reserves today will fit into an Olympic-sized swimming pool, and is estimated at nearly $ 8 trillion. US dollars. Gold is rare in the earth's crust and is costly to mine in terms of time and energy, keeping its supply predictably low. It is impossible to synthesize gold chemically (since alchemy never gave the desired result), and the only way to increase its reserves is through mining.

The high cost of gold mining is the very "skinat stake ”required to increase its inflow - the risk that you need to take on in order to receive a reward. Skin at stake is a concept based on symmetry, a balance of incentives and disincentives: in addition to positive impact, people must also be punished if something they are responsible for goes wrong or harms others. The skin at stake is the central pillar of well-functioning systems and is at the heart of hard money. For gold, mining costs and risks create disincentives that are counterbalanced by incentives for its market price. Until decisions are made by people who are influenced by the results of their decisions, the system is vulnerable to total collapse (an important point that we will look at later in the discussion of soft government money).

At each evolutionary stage in the development of monetarysystems, the market naturally chose the form of money with the highest reserve-to-inflow ratio available to the population of that time, but further development stopped as soon as the chosen form of money lost this key property. With the highest stock-to-flow ratio of all monetary metals, gold is the hardest physical form of money ever to exist, which explains its success as hard money throughout history. Even with the development of its mining technology, gold still has a relatively low and predictable inflow, as evidenced by the graph of the annual increase in its supply since 1970:

Gold mining, of course, has an economicmeaningful only if the cost of producing the extra ounce of gold is less than the market price of gold per ounce. Accordingly, when the price of gold rises, its production becomes more profitable, draws new gold miners into the market and makes new methods of gold mining economically viable. This, in turn, increases the flow of gold until the forces of supply and demand are in equilibrium. Thus, while gold is the hardest form of physical money, it does not have absolute hardness, since changes in demand for it cause both a supply response and a price response, which means:

Increasing demand for gold increases its price
The rise in the price of gold stimulates gold miners to increase its inflow
Increasing the flow of gold increases its supply
The increase in the supply of gold puts downward pressure on its price

Thus, changes in the demand for gold are partly reflected in its price and partly in the flow of supply. This price elasticity of supply is valid for all physical goods.

For any practical purpose, as we shall seelater, the Earth always has a lot of natural resources that can be mined, assuming that it takes the right amount of time and effort to obtain them (this will be useful to us later as an argument in support of one important point when we consider the effect of changes in demand on price bitcoin).

Final settlement [1]

The advantage of gold is also that it acts as a tool forfinal calculations. While the use of public money requires confidence in the monetary policy and creditworthiness of the issuing authority or payment intermediaries, known ascounterparty risk, the act of physical possession of gold includes all the factors of trust and authorization necessary to use it as money. As a result, gold becomes a self-sovereign form of money.
This is best understood using the generally accepted accounting equation identity:

Assets = Liabilities + Equity

When you own gold freely and withoutrestrictions, then it is your asset and no one else's liabilities, meaning that your personal balance sheet consists of a 100% gold asset with 0% liabilities and 100% equity (since no one else has a claim on your gold asset ). Gold makes itbearer instrument, which means that any person inphysical possession of an asset is considered its legal owner. This timeless and flawless nature of gold is the reason that it still serves as the base money and the final settlement system of central banks around the world.

In the 19th century, the term "cash" referred tothe gold reserves of the central banks, which at the time were the dominant self-sovereign money commodity. Cash settlement refers to the transfer of physical gold between central banks for final settlement. In the modern era, central banks can only settle with physical gold, and they still do this periodically, since this is the only form of money that does not require trust in any counterparty, is politically neutral and gives its owners full sovereignty over their money.

This is why gold retains its monetaryrole today, since only the provision of a bearer instrument can truly become the final repayment of the debt. In this original sense of the word cash, gold is the only form of dominant cash that has ever existed (although bitcoin is well suited to fulfill a similar role in the digital age, more on that later).
Unfortunately, the combination of gold's self-sovereignty and its physical form would lead to the demise of the gold standard.

Centralization of gold [1.4]

By the end of the 19th century, all industrialized countriesthe world has officially switched to the gold standard. Through hard money activities, much of the world has witnessed unprecedented levels of capital accumulation, free global trade, low-key government and improved living standards.
Some of the most important achievements andMost of the inventions in human history were made during this era, which became known as the "Belle Epoque" in Europe and the "Gilded Age" in the United States. This golden age, made possible by the gold standard, remains one of the greatest periods in human history:

“The Belle Époque is a period characterized byoptimism, regional peace, economic prosperity, the pinnacle of colonial empires, and technological, scientific and cultural innovation. The arts flourished in the atmosphere of this period. Many masterpieces of literature, music, theater and visual arts have received recognition. "

Since nowadays many societiesThey agreed on gold as a universal store of value, they experienced a significant decrease in trade costs and the accompanying increase in free trade and capital accumulation. The Belle Époque was a period of unprecedented global prosperity. However, the hard-money gold standard that drove it suffered from a serious flaw: transactions with physical gold were cumbersome, costly, and unsafe. This disadvantage is associated with the physical properties of gold, since it is heavy, insufficiently divisible and not very convenient for transactions.

Gold is expensive to store, protect and transport. It is also quite heavy per unit volume, making it difficult to use for day to day operations.

As mentioned earlier, banks have built their owna business model around solving these problems, ensuring the safe storage of people's gold reserves. Soon after, banks began issuing paper notes that were fully redeemed in gold. Carrying and handling paper notes backed by gold was much easier than using real gold. Offering superior utility and convenience, banknotes have enjoyed great success. All of this, along with government programs to confiscate gold from citizens (such as US Presidential Executive Order 6102), have contributed to the centralization of gold holdings in bank vaults around the world.

Unable to resist temptationBy expropriating wealth by manipulating the money supply, banks soon began issuing more banknotes than their gold reserves could justify, thereby initiating the practice of fractional reserve banking. This banking model facilitated the creation of money without any “skin at stake”. Governments took notice of this and began to gradually take over the banking sector, forming central banks, since this model allowed them to participate in seignorage, a method of deriving profit directly from the process of money creation (emission):

The ability to control this process wastoo seductive for governments to ignore. Total control over the money supply gave those in power a mechanism for constantly extracting wealth from their citizens. The virtually unlimited financial wealth that the printing press provided provided those in power with the means to silence dissent, fund propaganda, and wage endless war. The underlying economic reality is that wealth cannot be generated by falsifying the money supply, it can only be manipulated and redistributed. Civilization itself relies on the integrity of the money supply to provide a solid economic foundation for free trade and capital accumulation. Once tight control was established over the prevailing monetary order, the next logical step for central banks was to begin a complete rejection of the gold standard.

Abolition of the Gold Standard [1]

By 1914, most major economies beganprint money in excess of their gold reserves at the start of World War I. Unsurprisingly, this had many negative consequences, some of which appeared immediately, while others did not come immediately. The abolition of the gold standard immediately led to the complete destabilization of the unit of account on the basis of which all economic activity was measured. The exchange rates of national currencies now floated relative to each other and became a source of economic imbalance and confusion. As a result, the price signals were distorted, which are now expressed in various government currencies with rapidly fluctuating exchange rates. This made the task of economic planning as difficult as trying to build a house using an elastic tape measure.

For a world that is getting biggerglobalized and technologically sophisticated, freely floating exchange rates represented a significant step backward and gave rise to what is commonly referred to as a “partial barter system”. Now, people wanting to buy goods from other people who lived on the other side of any number of imaginary lines called national borders would have to use more than one medium of exchange (their own currency and foreign currency) to complete the transaction. To some extent, this revived the problem of mismatching needs, which money should have solved in the first place. Today, more than five trillion US dollars (US $ 5,000,000,000) are exchanged daily in foreign currency, forming an annual market that is worth more than twelve times global GDP.

This industry is purely parasitic -it enriches bankers and sucks real value out of society in the form of global trade friction, market distortions, and transaction costs. For this reason, it is excluded from GDP calculations and exists solely because of inefficiencies caused by centrally controlled capital markets and the absence of a global, politically neutral hard money system. The resulting friction in world trade has fanned the flames of war.

Governments take control [1,3]

As the wars of the 20th century raged, so too didprinting presses. Governments with their central banks continued to increase their power with each new note printed as their citizens became poorer and poorer. The death blow came in 1971, when most countries, as a result of a unilateral decision by President Nixon in the United States, finally and irrevocably broke their ties to gold. Which brings us to the modern form of dominant money:government fiat money.

Fiat is a Latin word meaning decree, order or permission.

This is why government money is commonly referred to as “fiat money,” since its value exists solely through government decree:

This is an imperative moment: it was the ownership of gold (sovereign, hard money) that gave governments the right to determine the value of their paper money (soft money) in the first place. National governments could only achieve "sovereignty" because they drew this power from the possession of gold.

Paradoxically, people were forced to refusefrom the gold standard and accept soft government fiat money just because of their belief in gold as a solid monetary good. This provides evidence that it is possible to create an artificial asset and endow it with monetary properties, whether through decree or through natural selection driven by the market. Governments did this by taking gold from their citizens, which gave them the power to create paper money and decree the value of it by force. As we will see later, Satoshi Nakamoto did this by creating bitcoin and putting it on the market as independent sovereign money, competing freely for the trust and faith of the people based on its own merits.

Central banks have also begun to participate inpropaganda campaigns, proclaiming the end of the monetary role of gold. However, their actions sounded louder than their words as they continued to accumulate and store gold, a practice that continues to this day. Gold remains the exclusive instrument of final settlement between central banks. From a strategic point of view, having large gold reserves also makes sense for central banks, since they may decide to sell reserves to the market in case gold starts to rise in price too quickly and jeopardize the value of paper money. With a monopoly position protected and backed up by tender laws, propagandists, and sufficient control over the gold market, central banks were free to print money as they wished. This transcendental privilege gives central banks exceptional power and makes them extremely dangerous entities.

In the words of former US President Andrew Jackson at the Constitutional Convention in 1787:

“I believe that the institution of banks is more dangerous thanarmed army. If the American people ever allow private banks to control the emission of their currency, first by inflation and then by deflation, then the banks and corporations run by the bankers will take all their property away from the people until their children wake up homeless for some time. then the continent conquered by their fathers. Power over the issue of money should be taken away from the banks and returned to the people to whom it belongs by right. "

Unlike the flow limit associated withgold mining, there are virtually no economic restrictions preventing the government from printing more paper money. Since the production of additional units of currency requires virtually no cost (no skin in the game), government money — the softest form of money in world history. As might be expected, the money supply grew rapidly, especially at the height of the war. In earlier times, for societies based on sound money systems, as soon as the tide of war shifted in favor of one belligerent over the other, peace treaties were immediately negotiated, since war is an extremely costly affair. On the other hand, the fiat money printing press gave governments the ability to use the combined wealth of the entire population to finance military operations while secretly taxing them through inflation. This provided a more secret, implicit method of financing the war than overt taxation or the sale of wartime government bonds. Wars began to last much longer and became more brutal. It is no coincidence that the centenary of total war coincided with the centenary of the institution of the central bank:

As you might expect, soft governmentmoney has a terrible reputation as a store of value. This becomes abundantly clear when we consider their inflationary impact on the price of gold. An ounce of gold in 1971 was worth 35 US dollars, and today its price is more than 1200 US dollars (the decline in the value of each dollar by more than 97% is entirely due to inflation). Based on these numbers, it is not hard to see that gold continues to grow, as its supply increases at a slower pace than the supply of the US dollar (government fiat money). The ever-growing supply of government money means that its currency is constantly depreciating as wealth is stolen from the owners of the currency (or assets denominated in it) and passed on to those who print or receive it before others.

This redistribution of wealth is known as “cantillon effect": The main beneficiaries of an expansionary monetary policy are the early recipients of the new money, who can spend it before it gets into wider circulation and drives up prices.

As a rule, this is why inflation causesdamages the poorest and helps the bankers closest to the liquidity center (the government printing press) in the modern economy. Such a centrally planned money market is completely contrary to the principles of free market capitalism.

Free market capitalism versus socialism [1]

In a socialist system, the state owns andcontrols all means of production. This ultimately makes the government the sole buyer and seller of all capital goods in its economy. This centralization drowns out market functions such as price signals and makes decision-making highly ineffective. Without accurate pricing of capital goods that signals their relative supply, demand, and relevant market conditions, there is no rational way to determine the most productive capital allocation. Moreover, there is no rational way to determine how much to produce each of the capital goods.

The scarcity is the starting point of the entire economy,and decisions made by people are meaningless without the “skin at stake” in the form of cost or compromises. A study done without a price tag would show that everyone wants to own a private island, but when the price is quoted, it turns out that very few can afford to own a private island. The point here is not to trumpet the victory of free market capitalism over socialism, but to clearly explain the difference between the two ways of allocating resources and making production decisions:

Free market capitalism places trust in price signals
Socialism trusts central planning

A free market is a market in whichbuyers and sellers are free to enter into transactions on terms determined solely by them, where entry into and exit into the market is free and no third parties can restrict or subsidize any market participants. Today, most countries have well-functioning, relatively free markets. However, all countries of the world today are engaged in centralized planning of themoney market(also known as the financial capital market).

Currently, no country in the world has a free market for money, which is the most important market in any economy.

In a modern economy, the money market consists of marketsborrowed money... These markets match savers to borrowers,using the interest rate as a price signal. In the free market for borrowed funds, the supply of borrowed funds increases with interest rates as more people are willing to lend their savings at a higher price. Conversely, the demand for borrowed funds decreases with an increase in interest rates, since fewer people are inclined to borrow funds at a higher price:

Please note that the interest rate ona free capital market is always positive due to the natural positive time preferences of people, which means that no one will part with money unless they get more money back in the future. These natural market forces are artificially manipulated in every money market in the world. All money markets in the modern world are centrally planned by central banks, which are responsible for "managing" the market for credit funds using monetary policy instruments.

As banks today are also engaged infractional reserve banking, they lend not only customer savings but also their demand deposits (funds available to customers on demand, such as checking accounts). By providing a demand deposit to the borrower while keeping it available to the depositor, banks can effectively create new, artificial money (part of the process of making money from the above material). Central banks have the ability to manipulate the financial capital market and can artificially increase the money supply by:

Reducing interest rates, which increases the demand for borrowing and money creation by banks
Lowering reserve requirements, allowing banks to lend more money than their capital reserves allow
Acquisition of government debt or other financial assets with newly created money on the open market
Softening credit criteria, allowing banks to boost lending and money creation

In the free market for money, the exact amount of savingsequal to the exact amount of credit available to borrowers for the production of capital goods. This is why the availability of capital goods, as we saw in Harold and Louis, is inexorably associated with reduced consumption. Again, scarcity is the starting point of the entire economy, and its most important consequence is the notion that all decisions involve trade-offs.

On a free financial market, an alternativethe cost of saving is the lost profit from consumption, and the opportunity cost of consumption is the lost profit from saving is an undeniable economic reality.

No amount of central planningcan change this fundamental economic reality. This is why centrally planned markets always suffer distortions (called bubbles, surpluses, or deficits) because policy programs run counter to the underlying forces of the free market. Despite this, central banks continue to try to “manipulate” these market forces in order to achieve politically established strategic goals. More often than not, central banks try to stimulate economic growth and consumption, so they increase the supply of credit and lower the interest rate. When artificially suppressing the price of borrowed funds (interest rate), producers take on more debt to start projects than there is savings to finance these projects. These artificially low interest rates do no good to the economy, but simply distribute distorted price signals that induce producers to embark on projects that, in practice, cannot be financed with existing savings. This creates market distortions (in other words, inflates another bubble), in which the cost of deferred consumption is less than the cost of borrowed savings. Such a distortion can persist for some time, but will inevitably entail disastrous consequences, since economic reality cannot be deceived for a long time.

An excess supply of borrowed funds, notbolstered by actual deferred consumption, initially encourages producers to borrow because they believe the funds will enable them to purchase all the capital assets they need to succeed in their project. As more producers borrow and bet on the same amount of capital goods, inflation sets in and prices rise. At this point, market manipulation takes place as projects become unprofitable after capital goods prices rise (due to inflation) and suddenly start to fail. Projects like these would not have been launched in the first place if it were not for the distortions in the money market created by central banks.

A Simultaneous Economy-Wide Failuresuch over-stretched projects are called a recession. The boom and bust business cycle that we are all used to in today's economy is an inevitable consequence of this centrally planned market manipulation. The United States and Europe saw an illustration of this process when the dot-com bubble of the late 1990s was replaced by the housing bubble of the mid-2000s.

Free market capitalism cannot function without a free market for money.

As with all well-functioningmarkets, the price of money should be formed on the basis of the natural interaction of supply and demand. Healthy markets require functional nervous systems because market participants must have accurate price signals to make effective decisions. Economic fundamentals clearly show that central bank intervention in the money market is the root cause of all recessions and business cycles. By imposing an artificial price, in this case the interest rate on loans, central banks suppress the natural price signals that coordinate fund allocation decisions between savers and borrowers. Their market manipulation creates market distortions and downturns. Attempts to correct the recession by injecting more artificial liquidity into the system will only exacerbate the distortions that caused the crisis in the first place, and burst new bubbles.

Centralized proposal planning only“Soft” money and its pricing mechanism can lead to large-scale disruptions in such an economy, as the economy based on hard money remains firmly rooted in economic reality and resists market distortions.

Alignment with natural market forces such as demand, supply and price signal is the main reason that free market capitalism has prevailed over socialism.

Failure of government fiat money [1,3,4]

Seeing that governments are forced to resort toEnforcement measures such as the confiscation of gold and the use of legal tender laws to get fiat money to be accepted can safely say that soft money is inferior and doomed to fail in the free market. This extreme inadequacy of government fiat money has come to the fore in the global mind since the Great Recession that began in 2008. With gigantic market distortions triggered by artificially low interest rates and no skin at stake by credit rating agencies, US subprime real estate has become the biggest bubble in recent history. As soon as it burst, it caused the consequences of this crisis to be global and systemic, and central banks around the world (as one would expect) began to increase the money supply in an attempt to rebuild their shattered economies.

Instead of calling it what it really is, central banks are now deceptively calling the act of printing money quantitative easing.QuantitativeeasingQE). As we have already found out, an increase in the money supply does not create any real economic value, it only causes market distortions and contributes to the irrational redistribution of capital. Injecting liquidity into an economic system in recession provides only an illusory, temporary relief. Printing money delays and exacerbates the inevitable correction, as economic reality cannot be cheated indefinitely. Regardless of the real state of the economy, the central bank continues to step up its efforts to manipulate the market like never before.

Here is the amount of government fiat money printed by the world's largest economies since 1986:

It was in the midst of the Great Recession that the unknowna man with the pseudonym Satoshi Nakamoto introduced an open source software project called Bitcoin to an online group of cryptographers. There have been many attempts to create digital cash over the past twenty years, but none have been successful. At first, few in that group took Bitcoin seriously. However, in the end, Nakamoto managed to convince several other cryptographers to join the project, and the Bitcoin network was born.

After ten years of near-flawless operation, the Bitcoin network has grown from $ 0 billion to $ 80 billion in value stored on the network, and has a combined transaction volume of $ 1.38 trillion. US dollars.

It is obvious that this money technology is currently competing successfully in the market and is being used by many for real purposes.

***

Thank you for reading the first part of the Money, Bitcoin and Time series and invite you to read the rest of this essay, which covers:

Part 2: Bitcoin — its nature and significance in the history of money*

Part 3: Time — a look at its value and how the history of money might play out*

________________________________________

* Translation of the rest of the parts will appear on BitNews soon *

Works used in this essay and additional materials for review

[1] A Brief History of Money, or Everything You Need to Know About Bitcoin by Seyfedin Ammus (excellent work on which much of this essay is based)

[2] The Rational Optimist by Matt Ridley

[3] “Risking my own skin. The hidden asymmetry of everyday life ", Nassim Nicholas Taleb

[4] Bitcoin Bullish Trend by Vijay Boyapati

[5] “The era of cryptocurrencies. How Bitcoin and Blockchain Are Changing the World's Economic Order ", Paul Vigna and Michael Casey

[6] “Sapiens. A Brief History of Humanity ", Yuval Noah Harari

[7] "Bitcoin is a Decentralized Organism", Part 1 and Part 2 by Brandon Kittem

[8] "PoW Algorithm Is Efficient" by Dan Held

[9] "The fifth protocol",Naval Ravikant

[10] Bitcoin Social Contract, Hasu

[11] Antifragility by Nassim Nicholas Taleb

[12] Address to Jamie Dimon, Adam Ludwin

[13] “Placeholder. Dissertation Summary ", Joel Monegro and Chris Berniski

[14] Diffusion of Innovation, Everett M. Rogers

[15] Why America Is Not Capable of Regulating Bitcoin, Beautyon

[16] "Hyperbitcoinization" by Daniel Kravish