Given the recent interest expressed by the incoming administration in Bitcoin, I read The Bitcoin Standard by Saifedean Ammous. The first 7 chapters of the book analyze economic history. These chapters are devoted to praising the gold standard – “sound money.” The final 3 chapters discuss Bitcoin.

The author paints a glowing picture of the 19^th century and early 20^th century under the gold standard but ignores the economic instability that led to repeated booms and busts, also known as depressions or recessions.

Ammous rejects the legitimacy of the creation of money by governments, which has occurred through much of history, including the early classical period of Greece and Rome as well as the medieval period. He talks critically of government creation of money up to the present, although money creation has shifted from governments to private corporations, i.e. banks. Ammous fails to distinguish between government and central banks, treating them as one. However, Richard Werner describes in Princes of the Yen that central banks often operated at odds with government policies.

The author largely attributes all economic events throughout history to the gold standard or the departure from the gold standard. Ammous ignores other major causes of social and economic dysfunction, such as the now unrestrained power of corporations to concentrate wealth, reducing democracy to a shadow of itself.

His premise is that growth can continue forever because resources are infinite, limited only by the efforts people make to extract them. But the author ignores the consequences in terms of climate change, and exploitation of Indigenous people as well as people in developed societies who are at the low end of the economic and social spectrum.

Ammous seems to worship the concentration of wealth through unearned income—simply by “investing” money, i.e. lending, and watching one’s wealth grow. Oh, he does admire the hard work of creating Bitcoin, but there is no other mention distinguishing between legitimately earned income, which occurs from being productive in the world, and unearned income, arising from lending.

He fails to realize that the concentration of wealth is destructive to democracy and liberty. Our money system naturally concentrates wealth. Societies must make intentional efforts to constrain the concentration of wealth for democracies to survive. These mechanisms include progressive taxation, regulation of the marketplace, and a money system that distributes rather than concentrates wealth.

In my opinion, tax reform is essential. Although it is tricky to decide what is earned and what is unearned, unearned income should be heavily taxed. Sales taxes should not be restricted to buying physical goods people need for survival. Financial transactions should be taxed, and estate taxes should be high. Peter Barnes, author of Capitalism 3.0: A Guide to Reclaiming the Commons, suggested that no more than 50% of an estate should go to one’s children with the rest going to children of the needy. In ancient times the wealthy were buried with their wealth rather than passing it on to their children.

Efforts to constrain wealth through marketplace regulation have languished in recent decades largely because corporations have appropriated power from governments, which, however imperfectly, do represent the people. While some anti-trust efforts have recently been exerted, the real need is to reverse the Citizens United decision and revoke corporate charters of the corporations that fail to serve the public interest.

Currently, all money, except coins, is created by and recirculated through banks as they lend. Banks lend to those who already have excess money which results in the concentration of wealth. The inherent debt tied to every dollar borrowed into existence via bank credit gets passed on to every domain of production and consumption further exacerbating inflation. Thus, we get mathematically an ever-increasing rise in prices and costs of things tied to such a money system. Monetary reform could stop this by calling for government creation of money and spending it on physical and social infrastructure to support the economy, thus distributing it for everyone’s benefit.

The Federal Reserve Board of Governors is responsible for the majority of money creation. The bankers who run the Federal Reserve are not directly responsible to the people; they cannot be unelected. They are not held accountable for their role in the current exponential growth of the money supply. Monetary reform proposals like the American Monetary Reform Act set up an independent agency within the government whose only function is to advise Congress on how to control the money supply appropriately. Representatives can be unelected by the voters if Congress ignores the advice and unacceptable levels of inflation occur. It allows Congress to take advantage of expert advice while retaining control of monetary policy.

In Our Money: Monetary Policy as if Democracy Matters Leah Downey writes “…central banks are constrained by the market-based banking structure of the financial system and by the interests of commercial banks. The consequence of the infrastructural power of private finance is that the US monetary system is built to serve the wealthiest in society.” She argues that having an independent central bank determining policy undermines democracy itself.

The last three chapters of Ammous’ book are useful. He carefully describes how Bitcoin works and its strengths and weaknesses as a currency. He makes the case that Bitcoin differs from the cryptocurrencies that have followed. Bitcoin miners, now numbering perhaps a million, control Bitcoin. Any changes in Bitcoin rules have to be approved by a majority of the miners. Attempts to change the rules, mostly to make Bitcoin faster, have failed, because of the tradeoffs involved.

The tradeoffs would have made it easier for the wealthy to take over the system and change its rules for their own benefit. As a result, what are called forks have occurred, in which new cryptos with altered rules have emerged, while Bitcoin remains unaltered. Ammous argues that each of these alterations makes the cryptos easier to be taken over by a few. The result is fraud. A quick search for “cryptocurrency and crime” shows many of the losses have come from problems with the crypto exchanges, rather than with the cryptosystems themselves. Bitcoin appears to be less vulnerable to problems than the derivative cryptos.

Bitcoin is attractive in part because it permits international transactions free from currency exchanges. These currency exchanges currently skim off money from transactions that represent a significant drain on the economy. A uniform national or global currency needs to have the force of law behind it—to prevent or at least minimize fraud. Global law is not currently up to such a task. National currencies prevail. The need for a transnational currency spawned the Euro. The Euro has mostly served well, but whether it has appropriate law behind it to withstand political stresses is still an open question.

Matt Levine, in the article “The Only Crypto Story You Need” (Bloomberg, 2022) points out that of the three features crypto offers, 1) security, 2) scalability, and 3) decentralization, cryptos can offer only two of the three. This is called the “blockchain trilemma.” If scalability is desired, the design of the system sacrifices either security or decentralization, or both. If either security or decentralization are desired, scalability is lost.

Ammous acknowledges that Bitcoin is not scalable and will never become digital cash that can replace current cash and credit transactions. The internal processes that make Bitcoin safe, at least for its miners, make it too slow.

Every Bitcoin transaction has to be entered into the Bitcoin distributed ledger; the mining process takes 5 to 6 minutes with sophisticated computer resources. Miners compete in this process because the first to complete it is rewarded by receiving an allotment of new Bitcoin. Several transactions may be handled together in what is known as a block, then those transactions must be verified in the ledger by other miners.

Ammous recommends that Bitcoin become the U.S. reserve currency, where its slowness would not be a problem. That proposal has now been introduced as legislation in the U.S., the BITCOIN Act, S. 4912 of 2024, introduced by Senator Lummis of Wyoming. It would have the Secretary of the Treasury purchase up to 200,000 Bitcoins over a 5-year period to serve as a “Strategic Bitcoin Reserve.” At the price of Bitcoin as of January 5, 2025, $98,500 per Bitcoin, that represents a purchase of $19.7 billion. However, the price of Bitcoin, which is a function not of any intrinsic value, but only of the demand for it, will certainly rise with the initiation of government purchases.

The proposed bill expects $6 billion of the profits of the Federal Reserve banks per year, which already goes to the Treasury, to be directed toward the “Bitcoin Purchase Program”. Directing them to the “Strategic Bitcoin Reserve” fund would only take it from other uses.

The proposed bill will also redefine the value of gold certificates held by the Federal Reserve banks from the value they were assigned at the time of issuance to current gold prices. The revaluation of gold certificates would increase the value of the Federal Reserve Banks’ holdings from the current $11 billion to $695 billion. The increase of $684 billion would be transferred to the Treasury. This seems to amount to the creation of money by law, by the Government, which will impact the money supply. This may contribute to inflation without creating much-needed physical or social infrastructure.

In Section 4(f), Retention of Forks and Airdrops, the proposed bill, in effect, defines “Bitcoin” as including all of the other derivative cryptocurrencies that have resulted from forks in Bitcoin. Given the track record of the various cryptocurrencies, this is an abomination. It is simply a way for those invested in those money-making schemes to guarantee that the Government will bail them out when the cryptos fail, so the investors don’t lose their money.

Bitcoin supporters argue that Bitcoin will always keep its value because the total to be mined is limited to 21 million Bitcoins. What will happen when all the Bitcoins are mined remains uncertain. There will no longer be motivation for miners to keep working, except for the fees they collect in entering transactions, such as when Bitcoin changes hands or is bought or sold. Transaction fees will certainly rise and provide income. These fees may rise so high that people could find other ways of financing transactions.

Interestingly, the miners do not set the transaction fees. Each person requesting a Bitcoin transaction offers a specified fee for the service. Miners tend to first service those offering the highest fees. Does it make sense to have such a system serve as a reserve currency?

As of December 24, 2024, 19.9 million of the possible 21 million Bitcoins have already been mined. As more Bitcoins are mined, the reward of new Bitcoins for processing transactions decreases. It started at 50 Bitcoins per block solved. It now stands at 3.15 and will decrease to 1.625 probably in 2028. It will continue to decrease. Miners may continue their work to profit from the transaction fees if the demand for Bitcoin continues.

Bitcoin supporters argue that the limit of 21 million is what provides its basis as a sound currency. It can’t be devalued by printing more thus causing inflation. But it presents the opposite problem. If a limit to the money supply is reached while the economy continues to grow, the result is deflation. The Federal Reserve avoids deflation like the plague. Deflation leads to busts. People don’t like inflation because prices always rise before wages, but they really don’t like deflation because wages typically fall before prices. The gold standard was abandoned because its supply failed to keep up with economic growth. Bitcoin as a currency would cause the same problem.

A better way is to have the money supply match economic productivity to avoid inflation or deflation. This can be done with government issuance of money, if precautions are taken in law to prevent the government from falling prey to the error of creating too much money too fast, especially in nonproductive ways.

Bitcoin was introduced in 2009. Since then, it has enormously increased its value as an asset. Its use as a currency has not seen that kind of growth. Bitcoin has been a desirable asset because the demand for it has increased its value, even though it has no intrinsic value. It lacks the features desirable in a currency, namely, a steady value. Bitcoin’s use as a currency grew between 2009 and 2017 but has since been flat at about 10 million transactions per month, despite continued economic growth. It is an asset, like a stock or a bond, but it is not a serious contender as a currency.

Historically there have been many alternative and supplementary currencies serving various communities under various conditions. As a private, supplementary currency, Bitcoin may do little harm if it is only used by a limited number of users. It will only serve the wealthy. What is important is that it remains totally separate from government. Currently, the U.S. Government is said to hold 207,000 Bitcoin.

The cryptos want banks to get heavily invested in them so that when they fail, which they will (e.g. FTX), they will threaten to take the banks with them and cripple the payment system essential for the economy. That way they will have the government over a barrel and get bailed out, a reprise of 2008.

One solution is to forbid both banks and the government from investing in crypto. A more thorough solution is to separate bank lending from the payment system as monetary reform calls for. Let the banks lend, but let them lend money they actually have, as nonbanks do now. But end money creation by banks. Let banks take the full consequences of their lending with no bailouts. It will change their behavior. Have money creation and the payment system handled by the government. Government is accountable to its people. Then the banks can fail if they get too greedy, as history indicates that they always do, and the payment system is protected. Such separation is recommended by Robert Hockett, in his book, The Citizens’ Ledger: Digitizing Our Money, Democratizing Our Finance. Another legal scholar, Saule Omarova, suggests this in her paper, “The People’s Ledger: How to Democratize Money and Finance the Economy.” Hockett’s proposal puts control of the money system in the Treasury; Omarova’s puts control in the Federal Reserve. Personally, I lean toward Hockett’s proposal. The Federal Reserve represents the banking industry. Hockett’s proposal is closer to the American Monetary Reform Act.

The details about blockchain in the last chapter of Ammous’ book are interesting—specifically how blockchain is so inefficient because of its proof of work through user consensus, and that its use is justified only because it eliminates the need for a third party in managing the money system. But if the third party can be held responsible for its actions by the users of the money system as should occur in a functioning democracy, maybe we don’t need the inefficiency and enormous energy expenditure of blockchain to handle our money system.

At the moment Bitcoin functions more like an asset than a currency. Bitcoin’s value oscillates and whether it will continue to be in demand and rise in value, remains uncertain. As an asset, Bitcoin has no intrinsic value. If it fails as a currency because other ways of making international payments turn out to be as easy or easier, demand for it will likely drop. The worst thing about cryptocurrencies is that they contribute nothing to the real economy. Unlike investments in companies producing things in the real economy, they do not contribute to the production of goods and services. They are just a way to make unearned money with no social value.