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.
previous piece in this series.
3. Money, Money Supply And Banking
Now onto the third point that gets everybody riled up on Twitter: What is money, what is money printing and what is the money supply? Let me start by saying that the first argument that made me critical of the political economy of Bitcoin-as-money was the infamous, sacrilegious chart that shows that the U.S. dollar has lost 99% of its value over time. Most Bitcoiners, including Michael Saylor and co., love to share this as the bedrock of the argument for bitcoin as money. Money supply goes up, value of the dollar comes down — currency debasement at the hands of the government, as the story goes.
this was being achieved even though money supply was not growing (officially the U.S. was under the gold standard but we know it was not being enforced, which led to Nixon moving away from the system in 1971).
Okay so where does money come from and were 40% of dollars printed during the 2020 government stimulus, as is commonly claimed?
Neoclassical economics, which the Bitcoin standard narrative employs at various levels, argues that the government either borrows money by selling debt, or that it prints money. Banks lend money based on deposits by their clients (savers), with fractional reserve banking allowing banks to lend multiples higher than what is deposited. It comes as no surprise to anyone who is still reading that I’d argue both these concepts are wrong.
thread by Alfonso Peccatiello (@MacroAlf on Twitter) explain.
borrows them from the central bank. There are capital, not reserve, constraints on lending but those are beyond the scope of this piece. The primary consideration for banks in making loans/creating money is profit maximization, not whether it has enough deposits in its vault. In fact, banks are creating deposits by making loans.
eurodollar market (eurodollars have nothing to do with the euro, they simply refer to the existence of USD outside the U.S. economy).
Jeff Snider gave an excellent run through of this during his appearance on the What Bitcoin Did podcast for anyone who wants a deep-dive, but essentially this is a network of financial institutions that operate outside the U.S., are not under the formal jurisdiction of any regulatory authority and have the license to create U.S. dollars in foreign markets.
This is because the USD is the reserve currency and required for international trade between two parties that may not have anything to do with the U.S. even. For example, a French bank may issue a loan denominated in U.S. dollars to a Korean company wanting to buy copper from a Chilean miner. The amount of money created in this market is anyone’s guess and hence, a true measure of the money supply is not even feasible.
This is what Alan Greenspan had to say in a 2000 FOMC meeting:
budget surpluses and paying back its national debt. However, since by definition someone else had to be getting more indebted, the U.S. household sector racked up more debt. And since households couldn’t create money while the government could, that increased the overall risk in the financial sector.
Bitcoin As Money
I can imagine the people reading till now (if you made it this far) saying “Bitcoin fixes this!” because it’s transparent, has a fixed issuance rate and a supply cap of 21 million. Here I have both economic and philosophic arguments as for why these features, regardless of the current state of fiat currency, are not the superior solution that they are described to be. The first thing to note here is that, as this piece has hopefully shown thus far, that since the rate of change of money supply is not equal to inflation, inflation under BTC is not transparent or programmatic and will still be subject to the forces of demand and supply, power of the price setters, exogenous shocks, etc.
Money is the grease that allows the cogs of the economy to churn without too much friction. It flows to sectors of the economy that require more of it, allows new avenues to develop and acts as a system that, ideally, irons out wrinkles. The Bitcoin standard argument rests on the neoclassical assumption that the government controls (or manipulates, as Bitcoiners call it) the money supply and that wrestling away this power would lead to some true form of a monetary system. However, our current financial system is largely run by a network of private actors that The State has little, arguably too little, control over, despite these actors benefitting from The State insuring deposits and acting as the lender of last resort. And yes, of course elite capture of The State makes the nexus between financial institutions and the government culpable for this mess.
But even if we take the Hayekian approach, which focuses on decentralizing control completely and harnessing the collective intelligence of society, countering the current system with these features of Bitcoin falls into the technocratic end of the spectrum because they are prescriptive and create rigidity. Should there be a cap on money supply? What is the appropriate issuance of new money? Should this hold in all situations agnostic of other socioeconomic conditions? Pretending that Satoshi somehow was able to answer all these questions across time and space, to the extent that no one should make any adjustments, seems remarkably technocratic for a community that is talking about the “people’s money” and freedom from the tyranny of experts.
Bitcoin is not democratic and not controlled by the people, despite it offering a low barrier to enter the financial system. Just because it is not centrally governed and the rules can’t be changed by a small minority does not, by definition, mean Bitcoin is some bottom-up form of money. It is not neutral money either because the choice to create a system that has a fixed supply is a subjective and political choice of what money should be, rather than some a priori superior quality. Some proponents might say that, if need be, Bitcoin can be changed through the action of the majority, but as soon as this door is opened, questions of politics, equality and justice flood back in, taking this conversation back to the start of history. This is not to say that these features are not valuable — indeed they are, as I argue later, but for other use-cases.
Therefore, my contentions thus far have been that:
- Understanding the money supply is complicated because of the financial complexity at play.
- The money supply does not necessarily lead to inflation.
- Governments do not control the money supply and that central bank money (reserves) are not the same thing as money.
- Inflationary currencies do not necessarily lead to a loss of purchasing power, and that that depends more on the socioeconomic setup.
- An endogenous, elastic money supply is necessary to adjust to economic changes.
- Bitcoin is not democratic money simply even though its governance is decentralized.
In Part 3, I discuss the history of money and its relationship with the state, analyze other conceptual arguments that underpin the Bitcoin Standard, provide a perspective on the Global South, and present alternative use-cases.
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.