Welcome to Bitcoin Study Sessions, Episode 34.
Grant and I continue our discussion of the Satoshi Papers with Chapter 4, The Treasury Standard.
I just wanted to take a moment to say thank you for everyone.
When Grant and I started this, we were just doing it in order to have something to talk about and keep ourselves accountable.
And now we're coming up on 500 subscribers.
So if you would, please like, subscribe, comment, comment.
That's what I was trying to say.
Comment on the content.
And we just really appreciate it.
We're all in this together.
Consider us your friends and reach out if you have any questions.
Thank you.
Hey, welcome back to another episode of what do we call it?
Bitcoin study session.
Bitcoin study session, the Bitcoin reader.
I was trying to think deeply about what we should be called, but we've already determined that, Bitcoin study session.
So that's what we're studying is Bitcoin via the Satoshi Papers, Reflections on Political Economy After Bitcoin, edited by Natalie Smolenski.
This is a collection of essays, and we made our way to the fourth – well, rather the fifth essay.
The first one was the unnumbered introductory essay that kind of gave an umbrella framework for this entire collection.
That framework being what if Bitcoin is a refounding of our nation?
We're doing this podcast on July 5th, so that should maybe resonate a bit.
What does the future of the American project look like after Bitcoin?
This essay is called The Treasury Standard Causes and Consequences by Joshua R. Hendrickson,
who is a professor of economics at University of Mississippi,
on Twitter at RebelEconProf.
I'm also doing this in the morning.
We're inverted.
Usually I'm in the evening and Lucas in Malaysia is doing the morning,
so I'm navigating this through my second cup of coffee,
which barely penetrates the veil, the fog.
But the Treasury standards.
So we're going to today get into the weeds a bit on kind of the macroeconomic or rather monetary theory behind what makes something a global reserve currency, global reserve asset.
In our previous essays, we kind of looked at Bitcoin or rather the environment that Bitcoin has created through the lens of anthropology, through the lens of philosophy, and through a lens of kind of, you might say, foreign policy.
When we looked at easy money, easy wars, how Bitcoin can maybe lead to a lasting peace.
This one, the Treasury Standard Causes and Consequences.
so I'll do what we usually do
give a short summary
and then Lucas and I will discuss this
but
kind of an overarching idea here
is that the state has been with us
for a long time
and nearly as long as it has been with us
it has exercised two monopolies
the monopoly on violence
and the monopoly on currency
and this article, this essay
is really about the relationship
between these two monopolies
and how the monopoly on violence, the monopoly on currency determines, in a way, the type of monetary regime that we have.
Our current monetary regime is kind of what is named in the title of this essay the Treasury Standard.
In this regime, the dollar is the global reserve currency, and the U.S. Treasury is the global reserve asset.
So how did this come about?
Now, at the theoretical heart of this essay, Professor Hendrickson proposes an evolutionary theory, and there's kind of this theory about adoption of monetary regimes that guides the logic of this essay.
The evolutionary theory is evolutionary in that monetary regimes are essentially selected by war.
War is a selection mechanism. If a society is to survive war, it needs to be able to successfully generate emergency financing for war.
When war hits, you need a lot of money fast, and you're likely going to need it in a sort of sustained way, unless you're going to win the war on day one, which usually doesn't happen.
If you don't, then you get beat, and those who lose wars are discarded in the dustbin of history, and they simply don't speak further about what our monetary regime should be.
War selects out failures.
This is an evolutionary process of survival of the fittest.
It selects for those states that can secure financing.
In this way, states need to provide a core function of a state, of course, is a strong monopoly of violence.
and this has led it to assert over time a monopoly on currency
because if a state controls a currency, it has a source of emergency revenue generation.
It can create more currency as a source of emergency funding.
So that is the primary constraint or driver of the evolution of the monetary system
is that money has to be able to serve as an emergency source of war financing
if it is to propagate into the future on the back of the states that survive.
But there are two constraints on this monopoly of money as emergency financing
driving the evolution of the monetary regime.
The monetary regime not only needs to provide emergency funding,
but it needs to anchor long-term demand in order to maintain itself as a source of emergency financing.
If you survive the war but then immediately collapse afterwards in an inflationary or deflationary spiral, then the monetary regime also does not survive.
And the source of emergency funding also needs to prevent kind of potential revolutionaries from having similar capabilities.
If you can win a war through emergency financing, but then internal parties are able to take that emergency financing and cause a revolution, then this society or state also disappears and the monetary regime suffers.
So we get this evolutionary theory that money is essentially – the monetary regime is determined by what could provide an emergency source of financing in the case of war in a way that anchors to long-term demand and also prevents potential kind of upstarts from having the ability to use those capacities.
So this evolutionary theory is kind of applied to history, and we get this general account.
So we begin with money as a medium of account more than a medium of exchange.
Early in the history or prehistory, we see kind of historical documents or references to like cattle or oxen being used to nominate exchanges.
Something is worth X number of cattle or oxen.
And we see the centrality of cattle in the etymology of words we use to talk about kind of payments.
Pecuniary, fee, rupee, these are all words that in some way descend etymologically from cattle.
Metals then emerge after this because they can serve as both a unit of account and a medium of exchange.
It's very hard to – cattle aren't divisible.
If something is worth a quarter of a cow, you can't maintain the integrity of the cow, obviously, and cut off a quarter of it.
Metals, though, do allow for this divisibility.
So they begin to – they kind of take the next – kind of are the next evolutionary stage of money on this cow.
But what is a cow?
It provides an easy unit of a cow.
One cow is one cow.
But what is a precious metal?
It's not one metal.
weight then has to emerge as a way to determine to delineate precious metals as a unit of account
but then this also requires further things like a definition of weight and even more importantly
a party a third party some trusted party to be the scale master to be the one that weighs and
verifies the weight we then have the rise of coinage of these standard units of precious metals
that have been verified by some third party via a seal to say this is one coin and some verified
weight of a precious metal. The next stage is a very important one. This is where the monopoly
of violence begins to intertwine with monopoly on currency. The state takes over the minting
capacity, operates a mint, and becomes the party that says this coin is verified to be this way
and is worth the specific thing that the seal on the coin indicates it's worth.
Then this intertwining of the monopoly of violence, monopoly of currency,
develops further throughout history with the kind of interaction with other technologies and advances.
Banking and financing is a big one.
Coins are heavy, difficult to transfer, and they kind of differ in value across different jurisdictions.
A coin from one area is different than a coin from another area, and people don't know how to interchange these.
So you get the rise of a specialized class of money changers to help people change money, but also to develop another capacity.
capacity, money changers begin to store money and kind of hold, create accounts.
People have accounts with them.
People deposit money with them.
And money changers are able to resolve transactions among account holders without actually having
to do cumbersome transactions.
And as we saw in more detail when we reviewed and discussed Lynn Alden's broken money, this
leads to the rise of banking and financing, banking and finance, where you begin to get
things like bank notes and bills of exchange where credit begins to be exchanged in lieu of
the actual coins themselves. This then begins to diminish the use of coinage because coins are
cumbersome, reduces transaction costs to simply pass a note to somebody else. So banking and
finance is one technological advance that begins to disrupt the state's monopoly on money through
the operation of a mint. Another thing that interacts with this is the military revolution,
specifically gunpowder, which really revolutionizes and changes the way that wars are fought,
making them much more expensive and leading to more open-ended conflicts, which are going to
create a greater demand for a more sustained form of emergency finance. So the new monetary regime
that emerges that kind of takes us from just a government-operated mint
as a form of a monopoly on the currency is the Bank of England.
It's going to take into account banking and finance
as well as the new military paradigm and demonstrate –
well, when I said Bank of England, I really kind of mean the gold standard
as administered by the Bank of England,
which is able to use the gold standard to successfully fight wars.
The Bank of England, in Professor Hendricks' estimation, demonstrates how the convertibility – so one way to use the gold standard to also have a source of emergency financing in times of war is to simply suspend the convertibility of banknotes into gold during a crisis.
So usually you can't print more gold, and so the ability to have emergency financing if you're constrained by gold in the event of an emergency is not great.
You're kind of stuck with the amount of gold you have.
But if a central bank can simply say this note that says it's good for one gold coin, you can't actually redeem it now because we're at war.
the state can then print more money, give more banknotes, and in the short run has a source of emergency financing for war.
As I mentioned, there's constraints on this.
You have to anchor this to long-term demand and also prevent upstarts from utilizing the same source of revenue
if you actually want to not only survive the war but survive the time after the war.
The Bank of England is able to do this because it can, as a central bank, suspend the redemption for gold during the war but then also promise, hey, after this war is over, we're going to actually take these notes back at parity with what they were worth before the war.
So people are then kind of like, OK, we'll go along with this, and money is able to retain its value despite kind of more monetary creation, more money being created.
And as a central bank too, Professor Hendrickson notes that it operates kind of like a poison pill such that revolutionaries, they couldn't say, ah, if you go along with our revolution, then we will forgive all the debts because there's now this central bank that a lot of people are creditors to.
And if you abolish all that debt, there's going to be kind of widespread financial crisis.
The central bank is now systemically important in a way that prevents upstarts and revolutionaries from undermining the state from within.
So in this way, through the paradigm kind of pioneered by the Bank of England of suspending gold convertibility during war, but promising after the war to reestablish parity, the gold standard becomes the source of emergency financing for war that is able to anchor long-term demand but also prevent potential upstarts.
The gold standard, though, continues evolving, and that's what this article is about, about the treasury standard, causes and consequences.
The treasury standard is going to show itself to be superior as – again, this is Professor Hendricks' theory – superior as an emergency source of war financing that anchors long-term demand and prevents upstarts.
The gold standard, this is a story that if you've kind of read about Bitcoin or economic history, you've heard this story, including on this podcast, that the gold standard is suspended.
So here's the telling here.
So the gold standard is suspended in World War I.
Again, this is how the gold standard operates.
During war, you suspend the standard.
You suspend the redemption.
And then after the war, you reestablish.
But then after World War I, the countries were now in kind of a really global economic system. The countries couldn't cooperate on restoring parity to anchor long-term demand, and so we get the Great Depression, rising prices, and eventually another world war.
Bretton Woods, the Bretton Woods Accord
is an attempt then
to coordinate nations
after the Second World War
around a hybrid gold standard
with the US dollar as the global
reserve currency redeemable for gold
but this attempt
fails essentially because
the US refuses to give up
its own domestic and foreign policy
objectives including forever wars
in places like Vietnam
in order to finance these US
engages in policy interventions that lead to the evolution from the Bretton Woods arrangement to
the treasury standard, which is now the prevailing monetary regime. So this process is notably
evolutionary and bottom-up based on trial and error, but also has a top-down or conscious element.
The bottom-up element in this story is that people are incentivized to remove transaction costs,
which spurs innovation in the type of money used in the monetary regime. This is how we get to
banking from coins by the desire to remove the transaction costs from having to transport around
heavy coins. The top-down element is how I began this summary. It's how the state steers money
to better secure its own monopoly on violence. So I'll quote Professor Hendrickson here.
Across the many centuries of the human written record, many state monopolies have come and gone.
Only two state monopolies seem to persist across those centuries, the monopoly over money and the monopoly over violence.
It stands to reason that one might begin the inquiry by examining whether these two monopolies are related.
So this top-down element of the state influencing the direction of monetary regime in order to secure financing for war also has an evolutionary angle.
So the monopoly on money allows the state to have a source of emergency war financing and so to survive and propagate as a victor in a military conflict We see this in the U this top element to secure emergency war financing through the monetary regime
in U.S. policy interventions after World War II, in which we move out of the Bretton Woods system into the Treasury system.
So I'll quote Professor Hendrickson again.
Throughout the post-Bretton Woods era, the U.S.'s commitment to its desired policies was a constant.
At no point did the U.S. reverse course on policy as a result of the fiscal pressure presented by the mass redemption of dollars.
Instead, U.S. policymakers constructed various international agreements and attempted to use international institutions to underwrite the continuation of their policies.
Once it became evident that these solutions were not going to work, the U.S. abandoned the Bretton Woods system entirely.
So the underlying theory, again, is that the monetary regime wins when it allows for securing emergency war financing while also satisfying the two constraints of anchoring long-term demand and preventing competitors.
The evolutionary framework overall is that states are better able to have emergency financing over the long term and better able to survive when they can also provide that long-term price stability and survive military encounters.
To quote Hendrickson, the primary claim – and this kind of summarizes it nicely, so I've kind of tried to reiterate it multiple times because I want to get the central point where I'm at home, but here's Hendrickson really stating it nicely.
The primary claim of this hypothesis that the state monopoly over money is driven by the desire to provide open-ended funding during wars and perhaps other national emergencies.
To maximize the revenue that the state can generate, it must commit to overall price stability in order to anchor money demand.
Along these lines, the state must also prevent competitive monetary alternatives.
So at the end of the day, the Treasury Reserve Standard emerges out of the failure of Bretton Woods. The U.S. would not coordinate with other nations in a way that required it to give up emergency funding for its own national domestic projects or to end its endless foreign wars.
Instead, again to quote Hendrickson, the Treasury Standard, which followed the Bretton Woods systems, was in some sense the natural evolutionary outcome of this process.
It replaced the neutral reserve asset of the past, gold, with the debt security issued by the world's most powerful sovereign.
In doing so, the Treasury Standard replaced the commitment to redemption with a more moderate commitment to relative price stability.
Just to conclude the summary, Hendrickson notes that the Treasury standard has problems, as kind of if you're listening to this podcast or simply are unaware Americans, you probably know.
Historically, financial cost of war was a restraint on war making, but the U.S. Treasury Reserve system has lowered that cost and so lower the incentive to avoid war.
And the second, fragility is built into the system because the reserve asset, U.S. Treasury, is a debt instrument.
So that concludes the summary.
As usual in the summary, I had to leave out a lot of the – specifically the historical detail that backs up a lot of the assertions and that drives this evolutionary narrative and shows how monetary regimes have evolved as four sources of emergency war financing.
by satisfying the constraints of anchoring long-term demand and also preventing competitors.
So definitely, as with all these essays, give it a read so you can really fill out the pictures.
But Lucas, I was curious then what you – I mean just generally first I'll throw it over to you for your thoughts.
I mean what you think about this evolutionary framework, an evolutionary framework that has bottom-up elements.
People are incentivized to choose a money based on the reduction of transaction costs.
but also the top-down elements where it's chosen by states in order to maximize their ability to win wars, essentially.
The saying, always assume incompetence before malice comes to mind,
because he talks about the assumption he carries is that this is not intentional,
that we got here by trial and error, simply by governments trying out different things
and whatever seemed to be the, I would say probably politically,
it was probably whatever politically you could get away with kind of at the time.
I know that kind of makes it sound more like malice,
but basically like whatever you could politically do that's not going to hinder your chances of remaining in power.
And so I think we all would like to feel as though there is something to fight, that there is the evil supervillain hiding in the lair with the concocted Austin Powers scheme.
yeah the creature from Jekyll Island
exactly
by the way I'm getting to that too
so it's
it's kind of to me
it is I think it started
I think he's very right in acknowledging
that it started by trial and error
but you have a feedback
loop and
you try something and it works
and then you try something else and it works
and then you kind of stumble onto this thing where
it's like hey
we've got this mechanism that somehow we were able to sell people on the idea that we're going to take this thing, gold,
and we're going to use it to back currency, and we're going to say the gold is always going to be there in exchange for the currency,
except when you actually need it.
And when you actually need it during war, when it's actually skyrocketing in value because we're printing money like crazy, you can't have it.
So it's kind of like a parachute that only opens when you're on the ground.
And then you're like, oh, it's perfect.
Like it's absolutely perfect.
Then you take it up in the plane, you jump out, and you just go splat.
Yeah, but even on that though, it's like the state has a monopoly on violence for a reason.
Like it means people want the state to have that.
They want an army in order to defend from invasion.
So it's not like it's a bad thing that money is used as emergency war financing and the fact that the redemption of like the banknote for gold, that the fact that that happens during war, if it's a just war, people probably don't care.
And if it's a war for the survival of the nation, that's a good thing, right?
I mean –
I feel like you're setting me up.
If it's a just war, I don't know.
I don't really know what a just war is because the –
The last time we had a just war, right?
Yeah.
The wars we see in Hollywood movies, not the wars that actually occur.
That's a just war.
Yeah.
So I think what I'm trying to get at here is that the, you know, so you stumble on, blind man just kicking rocks all of a sudden stumbles on to a gold mine and then realizes how to make that work to the advantage.
Yeah.
you're able to have this money that's used for emergency funding.
But then my question becomes, who's making the emergencies?
I think that's the really interesting question there, too.
It's like, yeah, everything's a just war if you sell it as one.
We've got to go here.
We've got the global war on terror.
We've got to go to Iraq.
that makes a lot of sense
we've got to go to Afghanistan
now we've got to go to Ukraine
now we've got to go to
everything
here's the thing
it's
they realize
that
every time they throw their hands up
they, who's they?
capital T they
The they
And by this point
Now I am
Onto the evil superhero part
Where I'm like
We've gotten to this point
They stumbled onto this perfect recipe
Where
They realize that every time they declare an emergency
They get to make all this money
And they also
Are tied to all of the industries
That benefit from the creation of that money
And they're tied to the industries
that benefit from the creation of war.
And so all of a sudden now, there's just emergencies all the time.
Everything's an emergency.
So anyways, that's kind of like the, you know, you want to call it the conspiracy view.
But I also think it's like a very logical, reasonable way to look at it.
Like if you were a dude and you could never get a date
and you were just trying out pickup lines
and none of them worked and none of them worked
and none of them worked and then all of a sudden there was this one
and you said it and literally every time you said it
the clothes just blew off of this gal
and now all of a sudden Pamela Anderson or whatever the modern version is
Yeah, you need to update your examples
Yeah, she's like 60 now
But, you know, if all of a sudden you're like
oh, if I just utter these little incantations, you know, emergency, patriotism, justice, community,
for all, rising up, not falling down, then I can get what I want.
Then you just do it.
However, so that's the, like, that's the whatever you call it, the conspiracy view.
What I found really interesting in this was, like, I'd never stopped to consider, like, wait.
Like, why did wait come about?
Like that was probably the most interesting thing to me in this essay was that we had – the saying now is one Bitcoin is one Bitcoin.
But the original saying was one cow is one cow, which actually wasn't – one cow wasn't equal to another cow.
All cows are different and some are older, some are bigger, some are smaller, et cetera, et cetera.
But at least it was a reasonable unit that had some homogeneity.
But then, yeah, you go to, well, we can't just split up a cow because when you split up a cow, it's not a cow anymore.
Now it's supper.
And you can't take supper and put it back together and make it a cow.
So let's move on to something else, on to metals.
And so, you know, they try bronze and they try iron.
And that kind of makes sense because most of those things were in the form of tools.
and those tools were somewhat standard
and you're just basically trading an axe for another...
This axe is basically as good as that axe and it's fine
and you have a unit of account, basically.
But then you go to these metals
that are primarily used for adornment and jewelry and stuff
and it's like there's not really a unit of account.
So how do you have this consistent thing?
And it's fascinating to think about that because there was no scale.
You didn't step on and it told you what you weighed because weight wasn't really a thing.
There was just comparison.
This is equal to this much.
This much gold is equal to this much gold.
Therefore, these two amounts of gold are the same.
And then you just keep going on down the line, right?
Now it's this piece of gold.
Now it's this one.
And so I think that's just really fascinating how the transition away from cows as money to metal as money is what gave us the concept of weight and developed this idea of a system of measurement for mass that had a, you know, had units to it that we, you know, hadn't really explored before.
Yeah, I found that really fascinating.
No, I mean that's an interesting part of this essay is that it gives us an evolutionary account of money.
And so like Professor Hendrickson does do a really good job of tracing not just those very interesting anecdotal tidbits like you mentioned there about weight as a way to determine the unit of account for a precious metal.
But also his really interesting thesis about the intertwining of monopoly of violence and the monopoly over money, how – I mean he suggests in parts I think that like tyranny as a political kind of concept evolves in conjunction with like coinage and the operation of the mint.
Like you get the tyrant because you get somebody who begins to control money.
And then this then has the evolutionary surviving power because once you have like the monopoly of violence wedded to monopoly over the money, you have something that's able to survive with the fittest.
You have a unit, in this case a tyrannical city-state or other political unit, that's able to beat other ones and so propagate.
And so you have an evolutionary story that unites a lot of interesting things.
And just to draw back – to kind of go back to your other point, there is conspiratorial thinking that people are given to when they look at the way that the monetary system operates, how we got to this point.
And I think Professor Hendrickson does a good job of not capitulating to conspiratorial thinking.
He has a general theory of kind of the evolution of money and the transition between different monetary regimes.
But he does note that it is both bottom up.
It is both driven by kind of technology, driven by the incentives that people have to reduce transaction costs.
But there is a top-down element.
It has been driven by states making – kind of doing specific policy interventions.
It's not conspiratorial because it's kind of trial and error. States are like trying to increase their emergency funding capacities and they're just trying different things.
But, you know, there is an intentional element as to how we got to the U.S. Treasury system monetary regime, even if that intentionality was kind of a stumbling forward in search of the best system to provide the U.S. with this kind of radical emergency funding power.
Okay, so, yeah, we're kind of on the same page a little bit. So what I'm saying is that it didn't begin conspiratorial, but it became that way.
Yeah, yeah.
That's enough.
Right.
I think that's legitimate.
I do believe that that is legitimate, that what is a conspiracy?
Conspiracy is just a – it's basically a plan that other people don't know about that you can use to do something that's in your best interest, not theirs or whatever.
That absolutely occurs.
and so I think that that's always just been the case
whenever you have representative leadership
that there's always this quid pro quo thing going on in the back room
and it can be limited
when the money is tied to something that is redeemable
and that redemption is able to stand
and there's a physical element that's holding it back
only this much gold, only this much Bitcoin,
but when there's no element back.
One of the things that I want to talk about was the...
So the monopoly on power,
you know, monopoly on violence,
and the monopoly on money going hand in hand,
is that the premise that...
I feel like, you correct me if I'm reading into this wrong,
but I feel like what the author is stating is that
the money is understandably needed to be expandable in this way
to provide for emergency funding in order to fight wars that come upon.
My impression of history is that half the wars are started by somebody else and half the wars are started by you basically
Yeah, yeah.
So, I think, and I think that a lot of times you can look at the reason for war and you can go, oh, well, what is, we learned this from Jason, like, so, okay, so what's the definition of war?
It's a power projection competition between two or more competitors, and they're competing over the access to and the ability to deny access to resources.
And let's say you're just a nice little peaceful country, but you do have a government that has the ability to feed itself a little kicker by making its own money.
And then that goes on and it goes on and it goes on, and eventually it gets a little out of hand.
And now all of a sudden you've got an inflated system where people can't afford stuff.
And really what you need is more gold to back that money.
And where can you get more gold?
Well, you can go take it from someone else.
And so you can go Star Wars.
So basically what I'm saying is that I don't necessarily agree.
I agree with half of what he's saying, where he's saying that the money is needed to be expandable in order to fight these wars.
But I would also put forth the idea that the wars are fought because the money is expandable.
Yeah.
It is a cause as well as a symptom.
Yes.
And he agrees with you here.
So I described it badly.
So first of all, on the evolutionary theory, war is simply a selection mechanism.
War is neither good nor bad, but it's inarguably the case that the winner of the war is the one who survives in the future and that the winner of the war therefore determines what the future monetary regime is going to look like.
Whether it's a just war or an unjust war, it's not the case.
For example, if a country gains a monopoly over its currency and becomes suddenly very belligerent and invades all of its neighbors who don't have monopolies over their currency and wins those wars, those are wars of aggression.
Maybe they're unjust wars. That's irrelevant. It's simply the case that it has propagated its conception of the monetary regime.
It has spread its own monetary technology. It determines what the future will be because that which survives determines what is going to be the case in the future.
That's how evolution survived the fittest. The fittest is not the most just, not the one that prosecutes the nicest or the most just wars.
It's those who win the wars and emergency war financing, whether a just war and unjust war, emergency war financing helps people win and so helps people convert the future into like their vision of what the future is going to be or like just to propagate into the future.
Does that make sense?
Yeah.
Well, it's a system that once one person adopts it, everybody else has to, right?
This is my – I think we've talked about this before.
This is like one of the few things that I don't really understand about what's going to happen.
I mean, there's a lot I don't understand about what's going to happen.
But I don't have a clear picture in my mind of what the world looks like if a country goes on, let's say the United States goes on a pure Bitcoin standard.
Yes.
And China does not. Then there will be a reasonable amount of time, years, maybe even decades, probably a decade or so, where the one country, the United States, would be actually kind of limited.
because they wouldn't be able to start throwing all kinds of money out at war,
and China would still have enough legitimacy to create a ton of debt
and go out and maybe attack and fight at war.
I know the author addresses this a little bit where he talks about one of the –
You have to, looking at money, one of the things that makes the money useful is that you have to back figure.
If it's not going to be worth something in the future, why would it be worth anything now?
And that's like how somebody who thinks about things thinks, but a lot of people don't think about things.
A lot of people feel about things.
and so I could see the scenario where it's like yeah the U.S. is going to adopt Bitcoin as a
treasury standard that's awesome China is going to keep inflating fiat awesome in five years the
U.S. is going to be 20 times richer than China it's going to be the global dominant superpower
once again and everything's going to be great but then it's like what happens for the next five years
during that time
because there's still going to be a lot of people
that believe in China
This is a question we had in the last essay
so easy money, easy wars, the evolution of war
finance, forever wars and the prospects
of a Bitcoin piece
and the author posed this question
is it simply unilateral disarmament
if one country
goes on a Bitcoin standard
and to put it in terms of Hendrickson's essay
does a country give up
the evolutionary advantage
of a source of emergency war financing
if they adopt a Bitcoin standard.
And I think that's an open question.
Do you hamstring yourself as a nation state?
Maybe it's good for the people involved.
People don't want war,
but it's not whether you want war or not.
It's whether you could win the war
when war happens.
And so that's an open question.
I think one of the,
there's always variables in these open questions
because it's not just,
will Bitcoin act like gold and constrain emergency funding in a way that in the past led us to get off the gold standard in order to better prosecute wars?
But like Bitcoin and its attendant technologies like cryptography and just the nature of Bitcoin.
So there's as an evolutionary theory, there's both a bottom up and a top down angle.
The bottom-up angle is that that which reduces transaction costs is going to better serve as money, as a medium of exchange.
And so if Bitcoin and layer twos or whatever can reduce transaction costs, there is that bottom-up force.
It then becomes a matter of the top-down policy interventions.
Will the state resist something that seems to reduce its ability to engage in emergency war financing?
Yeah. You would think it would.
I mean, just like not even thinking about this in any sort of like negative or spiritual terms.
But I mean, the state is an organism, and if this is something that will harm that organism by limiting its freedom, limiting its ability to do whatever it wants, then it would understandably fight that.
I wanted to ask you, do you think that, so let's assume that it is the case that adopting Bitcoin as a treasury standard is a unilateral disarmament where you're limiting your ability to create emergency funding in order to go to war.
Let's assume that is the case.
So does that make the case to avoid Bitcoin or does it make – I think it makes the case to accumulate in quiet and do it in secret.
Yeah. No, no. I guess I don't think so. We've reached the point evolutionarily where the ability to have emergency financing to prosecute wars is actually making us less secure as a nation.
These forever wars are things in the past. Maybe there were you need to have emergency financing because if the Mongol horde appears over the distant hills, you got to mobilize quickly and pay people and get things together to survive existentially.
We no longer fight existential wars. And in fact, the wars that we do fight seem to pose existential risk to us.
So I think just from the evolutionary angle of that which survives, propagates, and defines the new standard, if Bitcoin restrains our emergency war financing in the sense that we no longer fight forever wars, that's actually something that I think will conduce to an evolutionary success in the long term.
So I think Bitcoin, even if it does reduce emergency war financing, in some sense will only do so – will tend to do so in relation to kind of these voluntary foreign excursions.
I do think of an existential threat arose, things like paper Bitcoin and things will – there will be systems that arise to allow us to prosecute the just existential war.
you had a line in there
that kind of struck me
and I want to talk about that for a second
or maybe get you to go deeper into it
which is like
we no longer fight existential wars
in fact the wars we fight
are existential to us
is that what you said?
are threats
are existentially threatening to us
are existentially
can you unpack that a little bit
because I'm trying to understand
it just seems like
I mean it just seems like – so in the past perhaps there was a time – maybe this is like a kind of really general and abstract version of history.
There was a time where if you weren't able to fight a war, your neighbor would invade you and wipe your civilization off the face of the earth.
And your women would be taken.
Your children would be made slaves and the men would be just brutally murdered.
Now it seems like we don't really have those existential wars in that sense, maybe due to an uneasy detente around possession of nuclear arms.
But it seems like the wars we do fight, like in Vietnam, Iraq, Afghanistan, are actually making us less secure and or not making us more secure enough in a way that would justify us engaging in them.
And so like if in the past we had to have emergency war financing to preserve our very existence, it now seems like having this excess emergency war financing power is what is a threat to our existence because we begin to engage in wars indiscriminately, wars that actually make us less secure as a people.
yeah it's almost as though if you go around the world enforcing democracy at the point of a gun
somewhat indiscriminately you start to make enemies yeah and people don't like you as much
and you kind of create uh you know that that's a okay i'm glad i'm glad i asked that question
because that's a really great line and you had a really great explanation for it so
So basically it's that we used to have a threat that if we were not able to win a war, we would literally cease to exist.
And not just the soldiers, but the entire civilization.
Or not civilization, but the entire culture or ethnicity or whatever.
But now the wars that we fight, we don't face this threat of being wiped out.
But what we do seem to be doing is by continuing to fight these wars, we are making ourselves more and more insecure against the world.
So we go to South America and we use the CIA to help unseat someone that we don't like politically.
And in the course of doing so, we create a drug trade.
And then that drug trade becomes something that moves into America and the citizens start to suffer as a result.
And then it also empowers the rise of narco cartels.
And so that empowers those mutual enemies.
So then you've got narco cartels that are joining forces with China.
And so now all of the people that you've upset in the course of trying to get your way
have chosen to maybe band together and somewhat come at you on different fronts and stuff.
So, yeah, I think that's a really good take. It's very Nishian of you. There was a lot in that line. I'm very impressed.
Well, and that's just one aspect of – so if we're considering like why – how we might move to a Bitcoin standard from a treasury standard if the Bitcoin standard would seem to constrain our ability to raise emergency war financing, that seems like a problem on Hendrickson's evolutionary theory and also just a problem that someone might consider if they want to say, well, how can our nation survive?
And so the response, again, is we no longer fight existential wars, and the wars that we do fight are kind of prodding the bear to come and attack us.
Another thing, another aspect of the treasury system that might prompt us to move to a Bitcoin standard, I'll just read Hendrickson, a quote from Hendrickson here, a paragraph, and this will get us to another one of the points as to maybe how the Bitcoin standard improves things in a way that would cause it evolutionary to supersede the treasury standard.
Quote,
to keep up with the growing demand for reserves.
High levels of debt increase the likelihood that the U.S. will resort to inflation
at some point in the future when tax revenues prove insufficient for repayment.
The very possibility that the U.S. will resort to inflationary finance
makes the system susceptible to a self-fulfilling prophecy among debt holders.
And so another point then is just maybe the instability of the treasury system itself, and this actually is explained in Hendrickson's theory.
Recall that his overall theory is that the monetary regime is that – the prevailing monetary regime will be that which allows for the best source of emergency war financing that also anchors long-term demand and protects against competitors.
And so maybe the treasury standard is not going to successfully anchor long-term demand because people see the inflation in the cards.
And as you noted, this idea of backward induction, if in the future you think that something is going to be worthless, you begin to get rid of it now so that you're not the person in the future who is holding the worthless thing.
There's this argument right now that stablecoins are, I'm sure you've heard this recently, Trump and Besson, I think, talking about this.
But there's this argument that stablecoins are basically going to save the dollar because people want stablecoins and stablecoins are backed by U.S. treasuries.
And so the more demand there are for stable coins, the more market there is for U.S. treasuries, which right now the market is imploding.
Like the bond market is, you know, we are on the precipice of a global bond crash.
All of the signs are there and you're starting to see a ton of like just structural weakness.
and Japan seems to be probably going to be the first to go off the cliff.
But it's fascinating because the thing that kicks the can down the road and saves today
is the thing that will eventually kill it.
Because if you create more of a market for U Treasuries then they just going to print more money And if you just going to print more money then you just going to have to continue to play this game of we have to keep lowering interest rates in order to keep paying
And by the way, somebody, I think this is very important to understand.
We're not paying off debt.
We've never paid off debt.
We've refinanced debt.
But we don't pay it off.
We don't, you know, they said, you know, like,
We need to pay down to debt, and Trump is talking about this right now, that rates should be at 1%.
If rates were at 1%, it would save trillions of dollars because we got this debt that we got to pay off.
It's like, we're not paying off debt.
We are refinancing debt.
And the only way to keep this game going is to have the money be cheaper in the future than it is in the present,
which means to have lower interest rates, which inspires people to get rid of the money faster.
and getting rid of the money faster is akin to exactly what you're talking about,
which is if it's worth less in the future, why would I have it now?
And so it merely incentivizes people, I think,
to move even further away from and faster towards an alternative.
And we've talked about this before.
The second that $11 were created when there was only $10 of gold, the system was doomed to fail.
There's no going back.
There's literally never been a fiat currency that has existed in the past or exists.
I mean, well, yeah, 4,000 fiat currencies.
Almost all of them are gone.
everyone that exists is down 99%.
It is a system that is built for one purpose
and it's to feed
feed today at the expense of tomorrow
so that you starve tomorrow.
And you, yeah, so
You do such a
It's a system built not to feed
on Hendrix's estimation
it's a system built to feed wars
that we might have today, right?
It's the fiat money system.
And it emerged like reasonably as a way to do it.
It actually was the victor in an evolutionary selection contest
of what is the technology that's going to help us with wars.
I mean, it emerged as the victor because we can have $11 of value today
and use all of that to buy gunpowder.
That we draw out of the future.
Right, yeah.
And then in the future, we try to anchor long-term stability
by promising to return to parity in the future
and by making these commitments to restrain inflation, etc.
Yeah, but parity is not like, yeah, parity is not parity.
If it's, hey, we're going to give you the same amount of gold
that you would have got when there was only a third as much money, right?
I'm glad you said gunpowder, though.
That, by the way, is one of the coolest things in this essay
is this realization that...
So when you use weapons for war
that are one-time use only,
then all of a sudden your cost of war skyrockets.
When you've got a sword and a shield,
and you've got one sword and you've got one shield,
and you use the same damn thing for ten years.
And then you think about a guy who's carrying an M60,
and he's rocking in through tens of thousands of dollars of ammunition.
It's really fascinating to think about.
Not only did gunpowder enable a different type of warfare,
that's obviously true,
but it also, due to the nature of the one-time-use-only aspect
of bullets and bombs and gunpowder itself,
Like it rapidly and exponentially increased the cost of war.
I never considered that.
It was really fascinating.
Right, and that's one of the drivers of the evolution of the monetary regime is the need to finance not just war but ever more costly wars.
And as you know, yeah, gunpowder, it is a fascinating part of the essay.
I mean, it's not just like it's the one-off nature of firing a bullet, but also suddenly all the fortifications we previously had, all the castles and stuff, now obsolete.
You have to redesign your fortifications to survive the cannon.
All of the boats we previously used, they were designed for speed, for ramming and boarding.
Now the navy has to be redesigned for really large ships that can carry cannons.
the infantry not only has this like one-off shot that they use and then have to reload but now they
have to like do a bunch of drilling to learn how to like operate these weapons and it becomes more
costly to field standing army so all of these like gunpowder revolutionizes warfare in a lot
of different ways and all of these ways make it a lot more costly yeah and there's so much more
ways too you know like if you if you're carrying a sword and a shield then you're not like leaving
bullet casings laying around and there's not um you know there's not uh bomb bomb components and
stuff like it's just really fascinating and like kudos to the guy kudos to the guy for uh for
putting this out there because that's really cool um i love it when people make me realize something
about history that is like,
this was an inflection
point, but not in the way
you think.
You think that gunpowder is
this inflection point because it's like,
oh yeah, now I can stand a long ways away
and I can shoot you and you've got your
stupid little sword and you're not going to get me.
You think that that's like, oh yeah, I can
see how that would change the face of warfare.
But yeah, this
aspect of the cost of it
is really fascinating that I've never
considered. And like all the essays
in this anthology,
I mean, this is a scholarly work,
and it stands in the back
of a lot of great scholarship.
So these claims, like,
about the nature of warfare,
all these things,
for example, footnote 62,
it's one of those footnotes
where it takes up more of the page
than the text on the page.
In a good way,
this is not something
where you have to, like,
you just, like, okay,
if I want to see
the historical support
for the role of war
and the development of the state
and kind of want to dig myself
into this there's a bunch of i mean just like excellent citation he does a good job of in the
main body of the text extracting the relevant arguments you don't have to dive into the footnotes
if you don't want to but they are there for again if you really want to to see what the backing is
and go further into the theme so he cites a he actually cites a couple people that um i'm thinking
of Selgin, George Selgin, and David Graber, that kind of oftentimes, I would say, fall
outside of the, that their work is not necessarily what people in the Bitcoin community are drawing
from, or at least not directly.
that they're, you know, like, for instance, the last one or two ago that we did,
you know, that was literally just a argument kind of against Graeber's 5,000,
first 5,000 years of debt book and the conclusions he came to.
So, yeah, I think that's interesting because he, I saw, like, who he was citing.
and I was like oh this might be
this might not be something that
I appreciate because I've read
some of that other work and
I think I got into it
with George Selgin on Twitter
a while back
I think that's true
and I didn't
understand him I just did not
understand what he was talking about
yeah I mean he's a scholar
this guy did really good
Selgin is a scholar as I understand
the history of private banking and has just like really has gone deep into that theme.
Lynn Alden discusses his work as well.
And so I think that among the Bitcoiners who really do a deep dive into kind of economic
history, they see his discussion of private banking as very relevant to like the not like
that money is not necessarily a product of the state.
like the charter list will want to say money is only money if the state says it is money
and then the person who's read Selgin could say but look at all these like the history of private
banking there were these bank notes that were issued by these private banks and um and then
yeah graber definitely a fascinating person this in hendrickson here he does give the deep history
where he momentarily when he's talking about the evolutionary history of money he moves through
that stage where perhaps money was
simply credit or money
originates as debt and not as barter
kind of you know there's that debate
is money initially
invented or whatever to satisfy
the double coincidence of once or is
you know is it preceded actually by
something like debt or social credit or
something and so I mean Hendrickson
definitely cites all the relevant people
does a good job discussing them and so
helps put the pieces together in a very cool way
yeah
I really enjoyed it
Yeah, again, to kind of bring my side of it to a close, this anthology has a collection of essays that talk about money and power and government and state and debt.
And it's all about Bitcoin and none of it's about Bitcoin.
Like, it's unbelievable how good these people have done at breaking down from an academic standpoint.
And maybe it's just because I'm not used to reading academic papers.
But, you know, these are academic papers that are, they're not just stuffy.
They're good reads.
They're really good reads.
and you learn a lot.
You learn a lot about history.
You learn a lot about the inflection points
caused by technology.
You learn a lot about
basically like path dependence.
You know, like this thing leads to another
thing which takes you there.
Again, kudos
to Natalie Smolenski for putting this thing
together and to
rebel econ prof
Josh Hendrickson
or Hendrickson? Hendrickson, right?
I've been saying Hendrickson, so I sure hope that's
I think it's Hendrickson.
Okay.
Yeah, kudos to him.
Yes, Hendrickson, yeah.
Yeah, great, great job.
That's about all I've got.
What about you?
What else would you like to talk about?
No, I think a fascinating part of this anthology is that it's reflections on political economy after Bitcoin.
In two of the essays, Smolensky's and now Hendrickson's really don't talk about Bitcoin at all directly.
It is just like here is the situation of political economy.
On Smolenski's end, like anthropologically, what does it mean to consider the nature of money now after Bitcoin?
And then Hendrickson here, what is the current monetary regime we have and what is a viable theory to explain how we got here, the evolutionary theory he gives.
So yeah, I love it because it's not just – I mean it's deep enough.
It's so deep that you talk about Bitcoin without actually having to utter the name of Bitcoin, and it really does help your understanding.
There's, I guess, two things I want to note from – there's obviously a lot of things in the essay we weren't able to touch on, and Lucas and I don't have expertise.
We don't have academic kind of foundation in a lot of these subject matters, so we do our best.
But read the essay for yourself. See what you think. Engage with the thoughts. Rebel Econ Prof is on Twitter. Natalie Smolinski is on Twitter. We're on Twitter. Read these things. See what you think and engage in the conversation.
Two things I did want to note from the essay just to entice maybe to go further into it.
There's a section called A Brief But Necessary Diversion Through Financial Bubbles.
And so if you're interested in the history of financial bubbles, the author, Josh Hendrickson, does try to explain – like we tend to think of these things as kind of like irrational exuberance.
Like asset prices are way out of whack for just like whatever reason, failures of human rationality.
Prices are deviating from fundamental value.
But Hendrickson does a good job, I think, incorporating these into his theories and showing these as kind of the trial and error failures in evolutionary history as we work our way towards the monetary regime that's best going to satisfy emergency war financing with long-term stability that prevents upstarts.
So there's that section, which is good, and also the point which you've encountered in other things we've read that here, the monopoly of violence and the monopoly on currency is getting so and so tight with the treasury sanctions that now we have economic warfare.
We actually wage war through financial sanctions using the system that we've built, the U.S. Treasury system.
So violence is becoming money with the system that we have.
And he does a really good job of talking about how we've used sanctions offensively and kind of give some historical accounting, including the most recent iteration against Russia with the war on the Ukraine.
So that's all I got.
The brief history on bubbles, that was talking about John Laws Bank and the South Sea Company, right?
That's pretty fascinating.
So just for, I mean, talking to you, talking to the people that are listening.
So the South Sea Company was this effectively government-sponsored company that was created to bail out the government.
that was given exclusive rights to trade in South America.
I think one specific country, but I can't remember.
And so basically what happens is that Bank of England goes broke
and this company is created to buy the bank's debt
and use the, yeah, to buy, it's not the Bank of England,
The country is going broke.
This company is created to buy their debt, use the debt to back shares in a newly formed company that's like a speculative thing.
Hey, we're going to go trade in South America and we're going to bring back all kinds of wealth.
And so you should buy shares in this company.
And so first off, what they do is they're able to create money.
And so they create money and they buy their own shares, driving the price up.
and creating this bubble. That's fascinating.
The other thing that's fascinating is that what the South Sea Company was really doing,
this is in 1711, 1720 is when the crash happened.
But what they're actually doing is slave trade,
is that they had the exclusive right to take African slaves to this country
and among limited trade capacity, which I just find interesting because there's so much talk about slavery,
and it's always at this one specific period in the United States.
But if you actually look through history, then slavery has occurred everywhere,
everywhere and everyone pointing the finger is always in need of a mirror when it comes to that.
So I thought that was pretty fascinating. I did not know that about the South Sea Company,
so I got to learn that today. Yeah, there's a lot of, in the South Sea bubble, the Mississippi
bubble, these experiments in consolidation of government debt, they're really interesting
phenomena. And so yeah, if you're interested in that, give this essay a read as well.
awesome all right well i have to go say goodbye to some boys from brazil that are throwing
themselves a party and uh you have to go greet the morning i gotta gotta greet it here with
four or five more cups of coffee until i've approached something like the rebirth of human
consciousness within myself touching the black monolith to that is coffee you woke up significantly
during the course of our talk.
You started, man.
You were wobbling like Rocky in the 12th round.
Now you're ready to rock.
Now I'm ready to do this conversation.
Let's go.
All right, guys.
Thanks for being here.
We'll talk to you later.
All right.