The conspiracy theory economics of Bitcoin

Excerpt from Attack of the 50 Foot Blockchain by David Gerard. Join the mailing list for updates!

The gold standard – an economy with a finite money supply – was accepted mainstream monetary policy up to the early 20th century, when the debts from World War I made it infeasible. Even the winners in World War I tried to back all the paper (that the economy had actually run on since the late 1600s) with gold until the 1930s. But they suffered manic booms and devastating busts, over and over, because there was too much economic activity for the gold on hand.

It took until the Great Depression for governments to accept that managing the money supply – injecting money every now and then, managing interest rates, requiring banks to be backed – was not optional, and that they just couldn’t do that on gold. Countries recovered from the Great Depression pretty much as they left the rigid gold standard behind, because managing your money supply works much better and is much more stable. A version of the gold standard lingered in the form of the Bretton Woods system until 1971, but rigid backing of currency with gold had been delivered the fatal blow by World War I and then the Great Depression.

But a standard mode of pseudoscience is to adopt and fervently defend a discarded idea, and “gold bugs” were no exception, ardently pushing the version of the gold standard that had just been demonstrated utterly inadequate to a functioning economy.

(Gold bugs are frankly bizarre. There are lots of rarer metals than gold, but you never hear about “rhodium bugs” or “scandium bugs” or even “platinum bugs.”)

The John Birch Society is an American far-right fringe group that has long claimed that inflation comes from central bank increase of the money supply – in fact, they try to redefine “inflation” to mean this – for the purpose of stealing “value” from the people, and that this is why the gold standard was abolished and the Federal Reserve founded.1 Eustace Mullins furthered these ideas amongst conspiracy theorists with the 1993 reprint of his 1952 book Secrets of the Federal Reserve, in which he blames the Fed’s creation on “the Rothschild-controlled Bank of England.” (Mullins was also famous for his anti-Semitism; every time Mullins said “banker” he meant “Jew,” but this mostly isn’t consciously the case amongst Bitcoiners, who only occasionally rant about Zionists.)

These ideas had also been propagated in the mainstream by Ron Paul in the wake of the 2008 credit crunch and the quantitative easing (just printing money, to kick-start the economy) that followed. Though Paul isn’t a fan of Bitcoin – he wants a return to actual gold after he abolishes the Fed.2

Old ideologies come back when they fill a present desire and there’s an opening for them. So these claims, somewhere between incorrect and nonsensical, showed up full-blown in Bitcoin discussion, proponents straight-facedly repeating earlier conspiracy theories as if this was all actually proper economics. Because if it is, then maybe they’ll get rich for free!

In this context, and particularly in Bitcoin discourse, you’ll see many words that look like English but are actually specialised conspiracy theory jargon. “Liberty” means only freedom from government; “tyranny” means only government; “force” and “violence” mean only government force and violence; “open societies” is a code word for “free market without regulations”; “freedom” means “free market without regulations” and only that.

Pure commodities – gold and silver – haven’t done the job of money well for a few hundred years, and Bitcoin wants to be money but was set up to work like a commodity. Nakamoto put a strict limit on the supply of bitcoins: there will only ever be 21 million BTC. So advocates claim Bitcoin is thus, somehow, sufficiently similar to gold to serve as a “store of value” in the desired manner, even “an Internet of true value” (whatever “true” means there). This is despite its extreme volatility making it almost useless as a store of value, and despite it being way harder to use as money than any currency should be, even for its few use cases.

Bitcoin ideology bought into the entire Federal Reserve conspiracy package. The Fed is a plot to use inflation to steal value from the people and hand it to a shadowy cabal of elites who also control the government; the worldwide economy is in danger of collapse at any moment due to central banking and fractional reserve banking; gold – sorry, Bitcoin – has intrinsic value that will protect you from this collapse. Advocates repackage and propagate these ideas almost verbatim, even when they almost certainly don’t know who or where they trace back to.

Conventional economics views inflation – a decline in money’s purchasing power – as a phenomenon of consumer prices, consumer confidence, productivity, commodity and asset prices, etc., which a central bank then responds to with monetary policy. Printing more money can cause inflation, but it’s not the usual cause. The conspiracy theorist view is that it’s the central bank intervention causing the inflation. Bitcoin ideology assumes that inflation is a purely monetary phenomenon that can only be caused by printing more money, and that Bitcoin is immune due to its strictly limited supply. This was demonstrated trivially false when the price of a bitcoin dropped from $1000 in late 2013 to $200 in early 2015 – 400% inflation – while supply only went up 10%.

Nakamoto’s 2008 white paper alluded to these ideas, but the 2009 release announcement for Bitcoin 0.1 states them outright:3

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

Bitcoin failed at every one of Nakamoto’s aspirations here. The price is ridiculously volatile and has had multiple bubbles; the unregulated exchanges (with no central bank backing) front-run their customers, paint the tape to manipulate the price, and are hacked or just steal their users’ funds; and transaction fees and the unreliability of transactions make micropayments completely unfeasible. Because all of this is based in crank ideas that don’t work.

A week after Bitcoin 0.1 was released, Jonathan Thornburg wrote on the Cryptography and Cryptography Policy mailing list: “To me, this means that no major government is likely to allow Bitcoin in its present form to operate on a large scale.”4 In practice, governments totally did, and treated it like any other financial innovation: give it room to run, make it very clear that regulation still applies, give it a bit more room to run, repeat. The advocates’ ideas of how governments work were already at odds with completely predictable reality.

(I’m still baffled at the notion that the governments of first-world countries are somehow fundamentally against the idea of people doing well with innovations in finance.)

1 The conspiracy theory is most famously set out in Robert Welch. “The Truth In Time”. American Opinion, November 1966.

3 Satoshi Nakamoto. “Bitcoin open source implementation of P2P currency”. P2P Foundation forums, 11 February 2009.

4 Jonathan Thornburg. “Bitcoin v0.1 released”. Cryptography and Cryptography Policy mailing list, 17 January 2009.