This is a part of the Bitcoin Infinity Academy course on Knut Svanholm's book Bitcoin: Independence Reimagined. For more information, check out our Geyser page!
A Tale of Two Richards#
In the 1680s, on the Emerald Isle of Ireland, a boy named Richard Cantillon was born. He grew up to be a successful merchant and banker and wrote books on economics and monetary theory. He’s best known for noticing the economic phenomenon named after him, the Cantillon Effect, which describes the asymmetric economic effects of inflation.
In a fractional reserve banking system, the financial system that the majority of the Earth’s nation-states currently operate under, new money is created out of thin air when a bank decides to grant a business owner a loan. At a specified date in the future, this loan will have to be paid back to the bank with interest. The amount of money needed to make up for this interest is never in circulation at any specific point in time; therefore, there is a constant need for new loans to be granted. In other words, a need for new money is always present in the system. What Cantillon noticed, way ahead of his time, is that the closer a person is to the money being issued, the less of a negative impact the inevitable inflation following the newly expanded total money supply will have on that person. Inflation will, therefore, always benefit those responsible for the money printing and their friends first. This effect is not limited to money but applies to anything with an increasing supply. There’s inherent inertia in the price discovery mechanisms of all markets. The effects an increased supply of a good will have on its price are not felt directly but gradually as the relationship between supply and demand is altered. If you can produce more of something at a lower cost than your competitors, you reap the benefit of charging a higher price before the market discovers that there’s an oversupply of that something.
One example where the Cantillon Effect can be observed in a commodity other than money is in the value of something as odd as autographed restaurant bills. Sometime in the mid-twentieth century, the by-then world-famous painter Salvador Dali allegedly signed the wreckage of a car he had crashed into in France, instantly making it more valuable than it was before the crash. He had, by then, made such a name for himself that putting his signature on stuff instantly increased the value of whatever thing he chose to honor with his autograph. He was not the only famous painter who did this, though. Several others had figured out that they could pay their restaurant bills by simply signing them. By this act, they magically transformed small pieces of paper into “art.” These autographed bills were then traded among the restaurant’s staff and elsewhere. At first, they could be traded at very high prices, but as the practice became more common, their value naturally diminished. In other words, they became inflationary and therefore decreased in value. The closer you lived to a celebrity painter, the more aware you were of how happy they were putting their names on practically anything, and thus, the more aware you became of how abundant these signed bills really were. In knowing more about the supply of this “good,” you could also predict that they would lose value eventually — not at all unlike how a pyramid scheme works. This is exactly what Cantillon observed. Anything that can be marketed as more scarce than it actually is can be sold at a higher price as long as market participants haven’t yet noticed its abundance. This always benefits you more the closer you are to the source.
In 1971, a more famous Richard did something to the world economy that all of his predecessors had resisted the temptation of doing: he suspended the convertibility of the US dollar to gold. This man’s full name was Richard Milhous Nixon, and he was the 37th President of the United States of America. The US dollar had, until then, been redeemable for gold at a fixed price of 35 dollars per ounce. This price had been the true inter-subjective value of one American dollar since 1944, when representatives from 44 countries met in Bretton Woods, New Hampshire, to sign an agreement that effectively turned the US dollar into the world’s reserve currency. After the Bretton Woods agreement, every other currency could be converted into dollars at an almost entirely fixed rate, and a dollar was considered “as good as gold” by most of the other participating states. It turned out that it wasn’t nearly “as good as gold,” though, as inflation ramped up in the US during the early seventies. Milton Friedman described the inflationary process and laid blame on the printing presses of the Federal Reserve in his 1980 TV series Free To Choose:
“The reason we have inflation in the United States, or for that matter anywhere in the world, is because these pieces of paper and their accompanying book entry for their counterparts in other nations, are growing more rapidly than the quantity of goods and services produced. The truth is — inflation is made in one place and one place only, here in Washington.”
The Federal Reserve had been doing what banks always do — it had been giving out way more receipts for gold (dollar bills) than they could pay for with the gold they actually had in their vaults. When foreign banks became suspicious and wanted to reclaim their gold, President Nixon simply changed the rules and made this impossible. By the time he did, the dollar was already established as the world’s reserve currency, and there was nothing the other countries could do to change this. An ounce of gold is right now, in December 2019, worth 1 464 US dollars. In other words, a dollar’s worth of gold today would be redeemable for less than two and one-half cents back in 1971. Banknotes and coins are rare these days, though, and most of the money in the world exists solely in digital form. Today, money in digital form is easier to conjure up out of thin air than banknotes were in the seventies. The superpowers of the world tirelessly try to outdo one another in this department, now more than ever. Negative interest rates are a testament to this, and the predictions of the eldest of the two Richards described in this chapter continuously prove true as American and Chinese megacorporations take over the world at an ever-increasing rate.
Some say that Bitcoin is too experimental and unreliable. Who are we to blame if no one’s in charge? Well, we’re living in the time of the greatest unreliable monetary experiment ever conducted, and the person to blame is Richard Nixon. It’s that simple. If you look at the statistics, much has changed since 1971. Between 1971 and 2017, the average productivity per hour of labor in the United States grew by 246%, while the compensation for those hours grew by only 115% during the same period. Wealth has been funneled into the pockets of the top one percent and out of the pockets of everyone else at an ever-increasing rate since Nixon’s scheme began. National debts have risen. Housing costs have risen. Everyone’s indebted, it seems. We all live in houses built by our parents and grandparents, but we still owe vast amounts of money to some bank for some reason. Most people just accept the way things are and think that there’s nothing to do about it, but it is not the way the world is supposed to work. We’ve all been robbed, and we’re still being robbed right now. The only way to stop the thievery is to quickly acquire something that is hard to confiscate and will hold its inter-subjective value for a long time.
All of the economic theories that rely on a constant inflation of the money supply have one thing in common. They’re immoral. Whether they “work” or not isn’t the point. If your theory needs to rely on thievery in order to get people to behave in certain ways, it is wrong. Period. A society that relies on the constant robbery of its subjects in its base layer is bound to be corrupted over time. How can anyone trust anyone else if pricing mechanisms are broken? Prices are information, and more than that, they’re supposed to incentivize people to make sound, informed financial decisions so that resources aren’t misallocated or wasted. As long as the world’s currencies are inflationary, we can forget about equality, fairness, or environmentalism.
A corrupt system simply won’t reward honesty. Without a moral foundation, every other socioeconomic issue becomes a mere charade. Mainstream media news outlets constantly focus on trivialities and make us forget the mass theft that created the power asymmetries in the first place. Have you ever asked yourself why TV scheduling is referred to as programming? No one in charge of money issuance has ever been able to resist the urge to enrich themselves at the expense of everyone else. The only way to protect yourself from the greed of the central bankers is to opt out. Ask yourself what ownership really is and which, if any, of your possessions are truly yours. Which of them can’t be taken away from you because of a political decision or a banking crisis? Do you even have any items that fit these criteria?
The realization that every economy on Earth is a pyramid scheme can be very depressing. It forces you to think about how destructive your own behavior can be to those at the bottom of the pyramid. When you notice how unfair the whole system is, it’s easy to become cynical and suspicious of everyone. Try to focus on what works instead and beware of conspiracy theories. Our cognitive biases skew our perceptions, and because of this, the “Don’t trust, verify” approach is always the correct way of tackling a problem.
Don’t guess, look it up! All of it!
About the Bitcoin Infinity Academy#
The Bitcoin Infinity Academy is an educational project built around Knut Svanholm’s books about Bitcoin and Austrian Economics. Each week, a whole chapter from one of the books is released for free on Nostr, accompanied by a video in which Knut and Luke de Wolf discuss that chapter’s ideas. You can join the discussions by signing up for one of the courses on our Geyser page. Signed books, monthly calls, and lots of other benefits are also available.
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