The Scandal of Money: Why Wall Street Recovers but the Economy Never Does - George Gilder (2016)
Chapter 7. What Bitcoin Can Teach
Bitcoin . . . is the perfect form of money for the Internet because it is fast, secure, and borderless. . . . Essentially, bitcoin mining decentralizes the currency-issuance and clearing functions of a central bank. . . . [It] has ushered in a wave of innovation in currencies, financial services, economics, distributed systems, voting systems, corporate governance, and contracts.
—Andreas Antonopoulos, Mastering Bitcoin (2015)
Today the established theories of top-down money face serious challenges from digital alternatives on the Internet and from the perennial appeal of the case for gold. Both of these forms of money offer escape from the centralized regime of monetarism. Both offer monetary systems that affirm Friedman’s cogent theories of freedom rather than his erroneous ideas of control.
Gold has been ascendant in Asia, which has become the new spearhead of world economic growth and capitalism, with tax rates generally between one-half and one-third of those in the West.1
Meanwhile, around the globe, transactions are shifting toward the Internet. Although online purchases remain between 6 and 7 percent of all commerce, Internet trade is expanding rapidly.2 On the Internet, technological change accelerates, digital currencies like bitcoin and its imitators are gaining ground, and impatience mounts with the prevailing mazes of bureaucratic moneys, fees, finagles, security rigmaroles, defaults, and escrows.
To buy something on the Internet, you often have to give the supplier sufficient information—credit card number, expiration date, address, security code, mother’s maiden name, and so on—to defraud you or even to usurp your identity. This information therefore has to be protected at high cost in firewalled central repositories and private networks, which are irresistible targets for hackers.
With transactional overhead dominated by offline financial infrastructure, micropayments are uneconomic, and the Internet fills with mendacious free goods, bogus contracts, and pop-up hustles. Some 36 percent of web pages are spurious, emitted by bots to snare information from unwary surfers.3 At the same time, Silicon Valley moves toward an “internet of things,” sensors and devices—from heart monitors and “smart grid” gauges to automated cars and heating systems—linked across the net and needing secure automated transactions without offline intermediaries. Reform of world money is less a far-fetched dream than a rising imperative. Gold and digital currencies converge to provide a new solution to the enigma of money. Although there are many potential rivals, bitcoin is the most complete and tested form of digital currency that does not require centralized management. Rooted in time, it shares the stability of value that has made gold the quintessential monetary element.
To the Internet, bitcoin introduces an acutely needed new security model based not on privacy but on publicity. Privacy just invites hacking of the central repositories that provide it and the supposedly secure networks that protect it. Bitcoin is a public ledger of transactions that cannot be abused or manipulated or falsified, because it is published on potentially millions of computers around the world.
The bitcoin ledger uses mathematical hashing tools to incorporate in every new transaction identifiable time-stamped traces of every previous transaction ever conducted in bitcoin since the “Genesis block” in 2009. Because each new block of transactions bears a mathematical fingerprint of all previous blocks, it cannot be changed without changing all the blocks. Because each transaction is verified and propagated to all the computers on the network, it cannot be reversed or changed without hacking a majority of all the computers on the network.
Making the revelation of personal information unnecessary, bitcoin can be used on any network, however insecure. On top of the existing convention of seven layers of Internet infrastructure, it builds a new layer of functionality—a layer 8—just as the hypertext transfer protocol (http) builds on the transmission control protocol/Internet protocol (TCP/IP) network layer. This new transactions layer allows for the separation of the security and identification functions from the network. Based on new breakthroughs in information theory, security can be heterarchical rather than hierarchical—distributed on millions of provably safe devices beyond the network and unreachable from it. It is a security paradigm diametrically opposed to the existing morass of passwords, user names, PINs, personal tokens, and post-hack fixes on the network.
In a bitcoin transaction, there is no more need for the disclosure of personal information than in a cash transaction. With no personal information transferred—but all such information preserved—there is no need to restrict the transaction to protected networks, encrypted “Swift” banking transfer lines, or ATM networks. Wi-Fi or Bluetooth or your cellphone link suffices. Names and passwords and other authentication details do not need to be stored. An effort to hack one of the computers and change the blockchain ledger would be pointless, as the correct ledger would exist on myriad other computers.
Gold, however, remains the leading player. In fact, bitcoin’s mysterious, pseudonymous founder, one “Satoshi Nakamoto,” specifically mimicked gold in developing his digital money, which becomes more difficult to “mine” with the passage of time. Its value, like gold’s, is ultimately based on its scarcity. It is not a competitor with gold but an Internet money that simulates the properties of the monetary metal and offers a path toward a gold-inspired standard for the net.
Understanding any kind of money still requires coming to terms with the meaning of gold. In the new information theory of money, the crucial clue turns out to be the deeper significance of Friedman’s error: the role of velocity.
The most sophisticated writing on money today has come out of the research on digital currency and cryptology that engendered bitcoin. In the ten years before bitcoin’s launch in January 1999, Nakamoto expounded his thinking in thousands of posts on cryptographic bulletin boards on the net. In order to develop bitcoin, this movement first mastered and then transformed the theory of gold. In the process, it cast new and penetrating light on the importance of velocity and time.
The leading philosopher of the movement is Nick Szabo, who named his first proposal for a digital currency “bitgold.” A shrewd analyst and historian of the evolution of money, Szabo in the 1990s threw a wrench into the Drexlerian nanotech movement, with its dream of building new molecules from scratch using nano-replicators, offering a prize to anyone who could create a macro-replicator out of Lego blocks or other toy-like potential replicators. If you can’t build a macro-replicator, you probably cannot build one with nano-pincers and electron microscopes.4 There was no one to claim the prize. Since then Szabo has been focusing on the easier enigmas of money and gold.
Though he denies it, Szabo has long been suspected of being Satoshi Nakamoto, and several analyses have shown his prose above all others to conform to the idiosyncrasies of Nakamoto’s bitcoin paper. Known in the early 1990s for his canny ruminations on strategies for network anonymity and pseudonymity, Szabo now writes a pithy, original, and very occasional blog on money matters called Unenumerated5 but is otherwise scarcely or skittishly represented on the Internet.
According to Szabo, money succeeds not because it can capture all the dimensions of multifaceted value but because it obviates the need for such impossible calculations. Although much free-market thinking holds that money measures the value of goods, that assumption is simplistic. The value of goods can far exceed their price. Much of the value in an economy comes from what economists call “consumer surplus”—the difference between what we actually pay and what we might have been willing to pay.
Money can never be an accurate gauge of the intrinsic worth of goods and services. It facilitates exchange. Any way of freeing an economy from preplanned barter is an enormous benefit. “Measuring something that actually indicates value is hard. . . . Measuring something that is related to value and immune to spoofing is hardest of all,” writes Szabo. “To create anything of value requires some sacrifice. . . . Since, . . . absent a perfect exchange market of globally optimized barter, [we can’t] directly measure the value of something, we may be able to estimate it indirectly by measuring something else.”
That something else, Szabo saw, is time: “Time measures input rather than output . . . sacrifice, rather than results.” Szabo understood that the recognition of money as time freed the slaves. The invention of reliable and recognizable timepieces—clocks and bell towers—liberated workers from the bondage of piecework, which entails regimentation to count the pieces and favors quantity over quality, slavery over free labor.
Time as money is a crucial insight behind the value of gold and the creation of bitcoin as a form of digital gold. But the theory is incomplete without an understanding of velocity. According to Szabo, velocity is the critical element differentiating money from commodities. Over the course of human history, various commodities evolved from mere consumables into collectibles and thence into wearable décor and jewelry. On occasion, in a phase change, beads made out of clam shells became “wampum.” Thus we “shell out clams” to buy things. As Szabo explains, that change into money occurs when the value of a thing as a medium for transactions eclipses its value as a collectible, or as Szabo puts it, when it increases “the ratio of velocity to current value.” He points to the history of New Amsterdam (as New York was originally known), where a seventeenth-century Dutch entrepreneur had his bank arrange a large debt in wampum. The Indian baubles had crossed the velocity barrier to become a vessel for indirect transactions—real money.
Many people believe that money must begin as a commodity like wampum or gold and then evolve into a transactions medium. But once wampum became money, Szabo argues, its role as jewelry was eclipsed, becoming as irrelevant as gold jewelry is irrelevant to gold money. Money is not something else. It is not a commodity. It is intrinsically a unitary measure of value.
Many critics thought Nakamoto had ruined the system by refusing to guarantee results. They wanted his computational puzzles as a “proof of work” to verify transactions also to accomplish “good works.” They wanted bitcoin’s computations to calculate complex protein folds for cancer therapy or to do search for extraterrestrial intelligence (SETI) calculations for the discovery of other intelligent beings in space or to fathom intricate feedback loops in the models of global warming. But a measuring stick cannot be part of what it measures. A currency generates value by measuring value. If what it is doing is already deemed valuable, money becomes just another self-referential loop, where elites define what should be deemed important.
Gold is money not because it is shiny and beautiful but because it has the properties of a transactions medium necessary to achieve take-off speed as money. As Richard Vigilante of Whitebox Advisors observes with Chestertonian aplomb, “Money is not valuable because it is really jewelry; jewelry is valuable because it is really money.”6
Money is a matter of velocity—the turnover rate of the transactional media. Its value as a transactional medium must exceed its value for other uses or it can never become money. It functions in the frequency domain and can be measured there, with its velocity and amplitude. The power of monetary investments rises by the square of the amplitude of the learning curve they launch.
Szabo’s basic point is the same one I contested with Friedman in China. In economics, velocity rules. In moral terms, velocity equals our freedom. We rule, as we learn.