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Bitcoin & Property Rights

What is Money?

Many assume we know what money is because we all have to deal with it daily. If we manage our financial affairs well in that our income is consistently more than our expenses, we can add bit by bit to our savings pot and assume that we are doing a good job. We can relax happily in the knowledge that all is well in our world and that if we just continue this way, our future will be secure.
 
However, this pleasant fantasy is disturbed when despite our careful planning, we watch in horror as our expenses start to creep higher. We then scramble to find ways to increase our income. Whether this means attempting to ask our boss (suffering similar dilemmas) for a raise, considering a side hustle (which seems to be all the rage at the moment), or in the absence of those hard choices, starting to draw on our carefully acquired savings.
 
“After all, this is the rainy day that I always warned to prepare for – hopefully, things will get back to normal soon and it will all be ok”.
 
Sadly, these warning signs have been seen many times throughout history. Just not in our lifetime, particularly if you live in the West. The concept of price inflation that then evolves into hyperinflation is not an experience any of us have had to suffer – thankfully.
 
But what if it is now our turn?
 
Unless you have had cause to delve deep into finance and monetary history, your understanding of our current money system will likely be limited. In a world where we are encouraged to specialise, it is unlikely that you would explore too deeply into how the other complex systems of our world work.
Bitcoin & Privacy

However, MONEY affects everyone; no one can escape it. 

Your ability to have more or less of it will significantly dictate the comfort of your life. Humans are compelled to chase for more it, even if only to survive and feed our families. for this reason, it benefits everyone to know exactly what we are dealing with regarding money.

In my quest to understand money, I began looking for a definition; this search led me to further terms that require an additional search for meanings. Words such as Commodity Money, Fiduciary Money and Commercial Bank Money. Descriptions such as fungible, portable and durable. The list goes on…

Money and Property Rights

When I finally moved past all the ‘noise’ by referencing history, I realised that money is just the means we use to exchange value with each other. What economists term ‘a medium of exchange’. It may sound basic, but it is the means we employ to trade with each other. There may be many other complicated descriptions, but they have come about because our money doesn’t work this simply anymore and most of us have absolutely no idea what is happening behind that financial curtain.  

So allow me to enlighten you…

The first person to study our propensity to trade was Adam Smith, who wrote the book ‘The Wealth of Nations’ in 1776. The beginning of his book focused firstly on trade because this was his foundation for understanding money. 

In doing this, he made several key observations. 

His first and most fundamental observation is that buying and selling are only possible if both the buyer and the seller are allowed to own private property. The buyer needs to own something to offer this to the seller in exchange for their product or service. The seller also needs to be able to receive private property, which an enslaved person may be denied, for example. 

He also explained that buying and selling needed to be voluntary. The aim of the exercise is that both parties benefit from the transaction, the buyer values what he receives to a greater degree than what he gives in exchange. In this way, both parties benefit from the trade.

Money and Property Rights

In addition, he observed that this transaction needed to be honest if it were to thrive. If a seller accepted a chicken for their services, for example, but the chicken died the next day. The new owner may be able to eat the chicken for dinner (depending on why the chicken died), but he certainly wouldn’t be able to keep it to lay eggs and wouldn’t be able to use it to pay for something from someone else. In this situation, the trade would be disappointing for the seller. It would damage the buyer’s reputation in the eyes of the seller and perhaps many other people if the seller decided to tell everyone about it. So not only does the product or service being offered need to be of good quality, but the means offered in exchange must also be of good quality if this trading system is to flourish and thrive. 

In 1776 when Adam Smith published his book, silver was the most common means of exchange. At this point in history, the silver coinage in use was already deteriorating, as seen in the picture below. This coin from 1770 has a red/brown tint to it due to the copper it has been mixed with, effectively diluting the amount of silver contained in the coin. 

Money and Property Rights

In his book Adam Smith reported that the British pound was now just 1/3rd silver, the Scottish Pound was 1/36th Silver and the French Pound, and Penny was 1/66th silver. I found this very interesting because 1776 was just eleven years before the start of the French Revolution, which began in 1787. Many people don’t realise that this revolution was intimately tied to problems with money in France. This report of the severe debasement in the French currency in 1776 shows how long it can take for the full effects of currency debasement to play out.

Eventually, to address their economic problems, the authorities in France decided to revalue all of the land and property and issue currency notes, known as Assignats, to act as the French Currency. Those in the city who knew what was happening could make beneficial trades by exchanging the Assignats for real property and made out like bandits. The working people and those with unsophisticated small businesses were devastated. The debilitating effects of poverty and how it can bring out the worst in human nature are parodied by the Inn Keeper and his wife in Les Miserables, a reflection of how terrible things were for the French at this time.

Inn Keeper - Les Miserables

Adam Smith was keen to point out that commerce performed honestly promotes the virtues of trust, hard work, thrift, punctuality and honesty. Humanity will always be wired to reward those who help them solve their problems. 

As people are inherently creative, they derive great satisfaction from resolving those problems and, in turn, being rewarded for it. Smith was keen to point out that prosperous nations have happy, industrious and generous individuals. These successful people are also likely to seek the best return on their savings and ensure that their savings are well protected so that their hard-earned efforts will serve them well should they be in a situation where they couldn’t work for some time. 

Products and services, then, are the key to wealth. The ‘medium of exchange’ is how we facilitate purchasing them. As a result of this observation, Smith made a rather astute comment:

Money and Property Rights

This is a crucial insight because as our current money system appears more and more flawed, arguments about money start to escalate as to which is the best form of it. In a situation of rising inflation and loss of purchasing power, people struggle to understand where they should store their wealth. 

Ultimately it comes down to what you will be most able to pay for goods and services in the future. Is it gold, where you need a bank or institution to hold it? Or is it the US dollar, which is no longer tied to gold but managed by the might of their military and the deals that they have arranged to buy oil in the Middle East? Or maybe now we have something better? 

Smith was also keen to comment on prices. In a market where you are dealing with individuals who hold property and their transactions are voluntary, price is an important signal indicating competition in the market. 

Money and Property Rights

If a price increases, there is more competition for the goods or services. The market will gravitate to providing goods or services of a higher price as it suggests a greater reward. When the market operates optimally, the price will decrease as more people gravitate to provide this service, reflecting the greater supply. The supply will only continue for as long as the rewards for a particular good or service are more significant than the costs.

The problems begin when these price signals start to become distorted. With a monopoly, for example, they can hold back supply to artificially inflate the cost because they are the only provider of a good or service. Similarly, they can artificially fund the supply, as currently happens with most countries’ welfare systems and the military. The free market would not support the costs of most welfare and military services at a price (nil in some cases) currently delivered to the public. Hence, governments have to boost their funds artificially to keep them going. 

In Adam Smith’s time, governments had not yet invented welfare services and military services were limited by what the public would tolerate paying for them. So he could analyse how trading worked without any of these artificial influences. As a result, he determined these factors are interrelated like cogs in a wheel – as shown below. All of which depended on what Smith called ‘The Great Wheel of Circulation’ or, in other words, our money. This Wheel of Circulation allows the whole system to operate smoothly. When the Wheel of Circulation has integrity, the rest of the system has integrity. Once you lose the integrity of one part of the system, the rest is affected too.

Money and Property Rights

The 1800s were incredibly prosperous for Europe and are what facilitated the industrial revolution. By the 1800’s many of these ideas had become common knowledge. At this point, banks had developed the role of storing the gold of the population and issuing notes against their value to allow money to flow more easily in the economy – an innovation Smith encouraged. By having this means of the gold standard to build trustworthy relationships, Great Britain conquered the world. 

So, where did it all go wrong? 

Pepe - Where did it all go wrong?

This is not a story that is very well known, or rather, well understood. Although many of us will be familiar with the overall story, critical information appears to have been omitted; it certainly was from my childhood education, information that sheds a whole new light on the events of the 20th century. 

The source of the demise was World War I. With no clear victor in the early stages and no one willing to admit defeat, the government needed more funds to continue the war. At the time, wars were paid for by raising funds from the population through issuing bonds. Crushingly the request for funds via war bonds was initially a complete failure in London, with only 1/3rd of the amount being raised through bond sales. Eventually, to meet the increasing expenses of the war, key individuals along with the recently centralised banks around Europe came up with a plan to temporarily suspend the amount of gold held by the bank against the amount of currency in circulation. In this way, World War I was allowed to continue in a way never before seen in history and ended up being one of the most devastating conflicts ever known. In addition, when agreeing to suspend the gold standard temporarily, part of the reasoning was that whoever lost the war would be held responsible for restoring countries to the gold standard. This burden fell on Germany, ultimately leading to the Weimar hyperinflation and the rise of Hitler and World War II

Russia, a country that wasn’t part of Europe, tried a similar trick. Still, as their currency was already weak, it collapsed sooner – making the population ripe for the ideas of their revolutionary leaders. Without a better explanation for their poverty, the Russian leaders persuaded the workers that they were poor because the wealthy had taken all the money. Therefore, it was time for a new, more enlightened government to confiscate property from everybody so that the new set of leaders could distribute it in a fairer way. 

Lenin Speech

Sadly though, these leaders tricked the workers because, as we have learned from Adam Smith, property rights are the key to trading. Without property, trade becomes impossible, and individuals lose the ability to save. As an argument, this was the ultimate betrayal for the workers because saving is the only opportunity that workers have to get ahead. Without their property rights, their ability to prosper was now fatally compromised.

The Bolshevik Revolution finally established the concept of Government Central Planning in the world.

With the proliferation of currency devaluation, these ideas spread to Europe, so we currently have in the West this uneasy mix between the central planning ideas that began in Russia and the free market ideas described initially by Adam Smith.

Money and Property Rights

The problem with central planning is not so much whether governments should plan or not; the critical question is – ‘Whose plan are we following’. Democracy has evolved with the idea that we can push back against any Central Planning ideas that prove unpopular. Still, when our voting powers come down to two parties that both seem to implement the same policies, it becomes increasingly difficult to believe that we as a population can change anything. 

The politicians responsible for creating laws go along with the plan and achieve their positions via a popularity contest. They are motivated to keep the greatest number of people happy. Difficult decisions that require the ability to say no fade away; they favour plans that seem to please the majority and usually need money above and beyond the expected to affect these plans. I go into this in more detail in my book Truth Decay – How Bitcoin Fixes This.

Truth Decay - How Bitcoin Fixes This - small
Truth Decay - How Bitcoin Fixes This

With the ever-increasing expenses of this strategy, the government have to engage in management of the economy, so that daily prices seem reasonable. Only increasing slightly at a set inflation target of 2%, whilst in the background, financial engineering of the debt grows exponentially to handle the actual costs. 

This situation completely destroys the market’s accurate price signals, ending all economic rationality. Calculations are utterly redundant as the primary data has become thoroughly corrupted, and there is no way to know the real and actual opportunity costs.

The extent of US debt reflects this, which is now increasing exponentially. This chart shows an additional $7 trillion added to their debt in the last two years. If you cannot imagine how one trillion dollars looks, I suggest you watch the video at the end of this newsletter for an animation that shows it clearly – prepare to be mind-blown!

Money and Property Rights

Although the creation of this debt may lead to a case of ‘out of sight, out of mind’ for the general population, it is setting us all up for a devastating set of circumstances. Hyperinflations throughout history have been the critical triggers for revolutionary change, and in the absence of an understanding of their cause, populations have ended up with very dysfunctional leaders. For example, Nero was known to fiddle whilst Rome burned, as the collapse of the Roman Empire was due to the debasement of their gold coinage. As explained earlier, currency debasement in France led to the creation of assignats and then the French Revolution. As a consequence, France ended up with Napoleon as a leader. The attempt to settle war reparations in Germany led to the Weimar hyperinflation and the rise of Hitler. 

In hyperinflations, the most astute return to the soundest form of money with which they are familiar. In Weimar Germany, the wealthy population ran to Gold. This was sensible as their most recent memory of sound money was the gold standard of Europe. In more modern hyperinflations, however, such as in Romania, Zimbabwe and Venezuela, the money of choice has been the US dollar, which has been the most trusted currency in recent times. With US debt accelerating exponentially though, where will people run if the US dollar collapses?!

Weimar Republic Hyperinflation

Ultimately, the form of money we choose will radically adjust our society. Our monetary systems act as a framework, and their natures fundamentally colour the systems we operate.

To illustrate, if we return to Adam Smith’s idea of property rights. Under a physical gold standard, property rights are granted and withdrawn by a king. In addition, physical property can easily be stolen using violence. For example, when William the Conqueror invaded England, he divided the land among his friends, and these Lords became the new aristocracy. However, when these Lords fell out of favour, the king could equally easily withdraw such property. Similarly, when Henry the Eighth persuaded the population of England that they couldn’t trust the Catholic Church anymore, he tore down the monasteries of England. As a result, their treasures ended up in his treasury.

Henry VIII

Presently, we have a fiat standard. With this, property rights are granted and withdrawn by the government. The government  will provide you with a lease for a plot of land to own a house, but with this comes a property tax bill that you cannot influence or escape. Whilst the benefits of owning the home outweigh the bill, owning a house works well, but what if this dynamic suddenly flips? Currently, there is a narrative circulating via the World Economic Forum that we are all going to ‘Own Nothing and Be Happy’. When considered in light of Adam Smith’s thoughts on property rights and prosperity, this phrase could not be more ludicrous!

Money and Property Rights

Fortunately, we are not doomed to this fate. 

Bitcoin, which works without a centralised third party, is a form of digital property that facilitates the granting and withdrawing of property rights by the sovereign individual, not a dictatorial king or a tyrannical government. As a result, we are entering a period where those who own Bitcoin can use it as a tool in trade to build trustworthy relationships. With such technology, we can facilitate a new form of revolution and a new dynamic for humanity, never before seen in history. 

Money and Property Rights

The software design of Bitcoin gives us a potential new form of money that is very difficult to remove through violence and almost impossible to steal through fraud. 

In the terms of Adam Smith, it has potential to return integrity to ‘The Great Wheel of Circulation’ and, as a consequence, resolve corruption elsewhere in the system.

Therefore, it is not incumbent on us to petition governments to take more from the rich to give more to the poor. With Bitcoin, it is our mission to restore personal sovereignty to the workers and the producers because this, my friends, is how we truly make the world a better place.

Until next time enthusiasts!

Victoria

Play Video about Bitcoin as a New Form of Money

Bitcoin as a New Form of Money

Watch my presentation on Bitcoin as a New Form of Money, given at the Avon Valley Event near Bristol, on 2 July 2022.

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