Gold vs. Bitcoin
SAIFEDEAN AMMOUS: We're going to get to a point where there's going to be 21 million bitcoins and that's it and there's nothing else that anybody can produce. This makes it more of a gold than gold.
Bitcoin improves on gold, Bitcoin's fixed supply means that it is the first liquid commodity or liquid asset ever invented that has a supply that is truly fixed. You can't make more of it. I think this is a point that is not emphasized enough about Bitcoin.
From an engineering perspective, it's decentralized and the fact that it exists as a neutral protocol that for all practical intents and purposes, nobody can really change.
MARTY BENT: I am Marty Bent, founder of tftc.io here for Real Vision today, sitting down with Saifedean Ammous, economist and author of "The Bitcoin Standard." Saife, how we're doing today.
SAIFEDEAN AMMOUS: Very good. Thank you so much for hosting me, Marty.
MARTY BENT: I'm very happy to be sitting down with you here today in a foreign land in Real Vision, but very excited about the conversation.
SAIFEDEAN AMMOUS: Likewise.
MARTY BENT: We're here to talk about the gold standard versus the Bitcoin standard. We've been having brief conversations about this leading up to this. I think the best way to start is to describe how the world came to a gold standard originally and how that got bastardized to an extent.
SAIFEDEAN AMMOUS: Yeah, I think the interesting thing I discussed in my book about the gold standard, my book is about the Bitcoin standard. However, about 70% of the book is dedicated toward discussing the monetary history and primarily, gold. I think learning about gold and the gold standard is extremely significant for Bitcoin for a couple of reasons we'll get into in a bit.
I think the interesting thing about gold is that it became a global monetary standard without anybody having to politically decide upon it. Governments recognized gold as money, but it was the market that chose it as money before governments recognize that and the choice of gold emerging as the global monetary standard was not a political decision. Political decisions recognize that the reality of the monetary choice.
The world previously had used copper, silver and gold but by the end of the 19th century, practically the entire planet was using gold as money and people who were still on silver had suffered enormously from the massive devaluation of silver. What we saw was the spontaneous market monetization of gold as a universal monetary medium used all over the world. That primarily in my mind goes back to the stock to flow ratio of gold, the fact that gold has the lowest percentage increase in its supply reliably year in year out.
This is how it has operated because of its chemical properties, which mean that its existing stockpiles don't rust, don't corrode. All of the gold that we've been piling up for thousands of years, all the gold that we've accumulated over thousands of years of gold production, all of that is sitting somewhere there. People hold it, and it's very valuable. They take care of it. Nothing can ruin it. It can't trust, it can't corrode, it can't evaporate. Therefore, the stockpiles of gold continue to increase every year.
Every year, we just add more gold to the stockpile that we have, and we don't consume any. The quantity of gold that exists is very larger. Every year as we're adding to it, the addition that we add every single year is small compared to the existing stockpile. That means that every year, the primary market for gold is made up of people who already own the existing supply, selling to people who want to buy some of that.
The market is made up of holders buying and selling, but there's very small section of the market that's made up of new supply of miners, providing new supply. This, I think is the key property that made gold a monetary standard and made the gold successful as money because it means that should its price rise, the only way for people to make more of it or is to bid up the price further and to buy more of it from people who hold it. Therefore, it's useful as a store of value because people who hold it don't have to worry about some new way of increasing the supply, which increases the available supply in the market and brings the price down.
Therefore, with gold mining, being consistently and reliably a small percentage of gold supply and percentages are around 1% to 2% every year. Every year, we add around 1% or 2% to the global stockpiles of gold. Every year, we make a little bit more, but every year, we get a bigger stockpile. The growth rate continues at around 1% to 2% per year. This means that every-- on any given day, the quantity of gold that's being bought and sold is largely made up of people who hold it.
I think this is what I argue in my book was the primary reason why gold won out over other monetary metals. Silver was more popular. It was used by more people-- at the beginning of the 19th century, it was common that poor people-- or the richer people would be the ones who use gold and it would be used for major transactions. Silver was more the poor man's money. More people used silver, more people held silver and yet it couldn't hold on to its monetary role because I think because of the stock to flow.
MARTY BENT: You mentioned two things there, its durability over time and again its stock the flow, so scarcity. How did the market throughout history come to coalesce around the gold standard? What other monies were they using? You mentioned silver there, but how did the gold standard take over and how did it basically get washed away over the last hundred years?
SAIFEDEAN AMMOUS: Yeah, I think the contention that I make in my book is that we didn't even need for anybody to consciously make the decision that they wanted to go on gold, economic reality imposed this decision on the world, simply through the fact that people who chose other things as money, in the long run, watch the value of their money corrode and lose its value. The only store of value that remains at the end of the day will be whatever is good at storing value.
If you think about it a long enough timeline, several centuries, even if people had absolutely no conception of what works well as money and they didn't even learn about it, over a long enough timeline, people randomly allocate their choice of money over random metals. Over a long enough timeline, money will end up being gold just because if people put their money in copper, it's trivial for copper miners to flood the supply of coppers, bring the price down and then effectively take away the stored value in the copper from the people who stored in it by increasing the supply.
Gold is the only thing that resists that. If we have random wealth allocation by people, over a couple of hundred years, at the end that, because of all the inflation that happens in the supply of all the other monies, the wealth allocated to gold will be the only wealth that has held on to its value. In my mind, I think by the late 20th century, what started happening was more and more people were moving toward gold and the reason for it was because of the development of new methods of payment, wherein you no longer needed to use the physical gold itself for payment, or the physical silver coin itself.
Instead, you were using financial instruments backed by it, so either paper notes or bills, or letters of credit from banks, or all different financial instruments that were utilized by banks in the 19th century that did not involve the physical movement of gold, and that's where the term the gold standard came in-- that you're transacting with papers or credit obligations that are denominated in gold without having to move the physical gold around.
Once this became possible, once people were using this extensively, the monetary case for silver was lost. There was no longer any reason for anyone to use silver because the reason people were using silver in the first place was because it was less valuable than gold, making its smaller value coins useful for small transactions. But now that you're no longer using the coin itself, you're using instruments backed by the coin, there's no reason why you would want your instruments or your paper backed by the easier money, by the money that is easier to inflate, you'd rather have it in the harder money.
In the 19th century, we witnessed as individuals and countries started to move more and more toward gold, and perhaps the tipping point, some people think of it as the cause-- it's not I could think of it as the cause but it's the trigger or the tipping point was the Franco-Prussian War in 1817 when the Germans who were on a silver standard- - and Germany was the largest economy left on the silver standard, when the Germans asked the-- after the war, the Germans asked for their indemnity from France in gold, and then used that to go on the gold standard. Took French gold and use it to go on the gold standard.
Once that happened really tipped the balance in favor of gold and against silver. Since then, the price of silver has been on a nonstop decline against gold. It used to be at around 14, 15 to one, the exchange rate of silver to gold, 15 ounces of silver for one ounce of gold or something like that. Today, it's closer to 100 almost, and it's just been continuously declining. I think what we see is just the demonetization of silver. Silver is now is an industrial metal, and even though some people still use it as a monetary metal, the use of it as a monetary amount is almost entirely insignificant toward its market price. Because it's not a monetary metal, the amount of value in it stored is very little and it is used heavily in an industrial way.
We see this reflected in its stock and flow ratio. It used to have the second highest stock to flow ratio after gold, but it's now declined. In my mind, I think the market wants one money. There's no such thing as a second the money, it's only partial form of barter. The market will tend to word money on its own, and that's how gold eventually became money. However, it later were to lose its monetary role precisely because of this advantage that it had over silver because of how the way it monetized silver meant that it was being used as money effectively, having to trust central banks.
The gold-- once you were using financial instruments that were backed by gold, then where the gold was stored and how transactions denominated in gold were processed and settled and cleared between financial institutions became far, far more significant than it did before. It gave the people who run these payment and settlement network an enormous amount of power and leverage over the control of gold. In effect, you could say that really once we moved toward the gold standard, it became much easier to compromise gold's high stock to flow ratio, because it was much harder to keep track of how much gold there was and people could issue more paper receipts than there is gold.
Effectively, governments-- the temptation of taking over the central banks was too strong for governments. Governments took it over and then realized they could use it to finance wars. There's what happened in World War I. Since then, they have not been willing or able to give up the temptation of resorting to the printing press. It's been, in my mind, the reason why 20th century was the century of the state of Rise of the Nation state, than the rise of this idea of the nation state as somebody is-- it's almost the replacement of your father and mother, it's there to protect you and to provide for you and to educate you and to take care of your health and all those things.
Everything that we had usually associated with a family has been thrown on the nation state because the nation state, once it has this magic printer, there's no limit to what it can do. There's no limit to what its citizens think it can do. There's no limits to what its politicians wants to promise its citizens. The 20th century was this century of politicians, governments taking advantage of the printing press, voters being duped into thinking that this is a free lunch that government money doesn't-- government spending doesn't have an opportunity cost, that government can just conjure up resources and we've had entire crank schools of thoughts being invented to popularize these ideas like the Keynesian economists who tell you not to worry about tomorrow, because we're all dead in the long run.
This really, I think gold fans would like to say this is a failure of central banking and a failure of governance. I think-- and I used to think that way. There's nothing wrong with the gold standard. It's just that governments have mismanaged it. I think there's definitely a point in that. I think once Bitcoin came around, and you start thinking more about it from an engineering perspective, you start thinking there is something wrong with the gold standard, which is that governments can mess it up if they choose to. It would be nice if we had something that was immune to the control of the government.
MARTY BENT: Yeah. It's very centralized, if you will. For one point, there was a gold fixing desk. That's how they would fix the price of gold every day.
SAIFEDEAN AMMOUS: Yeah. Well, yeah, exactly.
MARTY BENT: To think that something that should be apolitical and open to the market has been so centralized and I think that's what Bitcoiners would argue is that the gold standard was bastardized by centralization. I guess it's a good segue naturally into the properties of Bitcoin and how a Bitcoin standard would compare it to a gold standard. What traits does Bitcoin have similar to gold? How are they different? How are they potentially better or worse?
SAIFEDEAN AMMOUS: Yeah. I think the two differences, the two main ways in which we can distinguish between gold and Bitcoin, the first one is in terms of the stock to flow ratio, Bitcoin for me, the reason I was fascinated with it initially was when I found out that its supply continues to decline over time. To think that eventually it reaches zero, that there's no more supply growth when we're going to get to a point where there's going to be 21 million bitcoins and that's it and there's nothing else that anybody can produce.
In a sense, this makes it more of a gold than gold. It makes gold like silver meaning the second highest stock to flow of a commodity. It's quite interesting what the market is going to think of this because in a couple of years, Bitcoin's supply growth rate will be lower than gold and then eventually, it's going to be zero. It'll be interesting to see whether this is more important for the market than the tradition and the history and the physicality that comes with gold and whether Bitcoin is going to continue to grow as a result of this.
That for me is astonishing. In fact, Bitcoin improves on gold in this regard because Bitcoin's fixed supply means that it is the first liquid commodity or liquid asset ever invented that has a supply that is truly fixed. You can't make more of it. It is completely irresponsive to demand, then I think this is a point that is not emphasized enough about Bitcoin. The supply of Bitcoin every day is being increased according to the preset schedule that was set about 10 years ago-- 11 years ago, and every day, it increases by that amount, regardless of how many people are trying to use Bitcoin or how many people want to buy it.
Tomorrow, if 7 billion people want to use Bitcoin, we're only going to be making 1800 bitcoins. If only 7 billion, so sorry, if only seven people want to use Bitcoin, that will also mean only 1800 new coins are being produced every day. That's just the way that the program works. There's nothing like it, because with everything else, you can always dig deeper, you can always find more.
This is quite interesting because it means that maybe Bitcoin is going to become a harder form of gold and it's completely irresponsiveness to demand is going to just make its price continue to increase more and more. This is one way of thinking of it. However, I'm not entirely sure this is the most important thing that Bitcoin has going for it. I'm not entirely sure that this on its own would be enough for Bitcoin to succeed. I think what is-- from an engineering perspective, if you want, what is necessary for it to succeed is the fact that it is decentralized and the fact that it exists as a neutral protocol that for all practical intents and purposes, nobody can really change, nobody can affect.
This is truly astonishing, because if my analysis-- and it's not originally my analysis, but if the analysis that I mentioned about why gold failed, why we moved off the gold standard, if that is indeed correct, then Bitcoin was designed, you could argue, specifically to get around this one failure that the gold standard have had or has actually we should say, it still has it- - which is the need for physical central settlement in highly centralized operations. I think the key thing to understand when comparing the two is what is the cost for you if you wanted to set up a business, a bank, call it, or call it Central Bank, whatever it is.
You wanted to set up a business that is able to send this money and settle across the world. If you're able to offer final clearance with, say, between the US and China, in a monetary commodity, I think it's useless to think about what is the cost of setting this up to understand the real value of Bitcoin's proposition. If you want to set it up using government money, effectively, you have to be part of a national monopoly in every country that is essentially the central bank and the private banks-- and it's a closed monopoly that is not really open for people to enter or exit quite easily.
If you want to use it with gold, you'd need to build a network of banks around the world that are able to physically settle and physically move gold across the world. Obviously, we won't be making physical movements of gold for every transaction, but you will have a central bank in a city or in a country that settles with another central bank at the end of the day or week or month, with an actual physical shipment of gold. That's extremely expensive to think about sending gold from the US to China.
We can remember a few years ago when Germany tried to repatriate some of its gold from the US and it costs several million dollars and it took several years to move German gold from the US to Germany. You can see something similar happened with if we have a global monetary system built on physical gold, you'd have a very expensive global settlement network.
That wouldn't necessarily