DEMONETISATION OF GOODS

As we have already discussed in this essay, the main problem of modern society is the monopolisation of the money market under state power. It allows the unlimited expansion of money in the economy and the allocation of new units of money to politically connected elites. All that increasing the money supply in society achieves is a redistribution of wealth from savers to borrowers and owners of scarce goods. In a world of unreliable and easy money, those who profit most are those who borrow money to buy scarce commodities such as real estate, company shares, precious metals, property and, most recently, bitcoin.

As the quantity of money increases, the price of scarce goods rises, as their supply is much lower than that of easy money, and the demand for them increases year by year as people start to use them as store of value, thereby gaining a so-called monetary premium. The monetary premium is a term for the added value we attach to a good over and above its industrial value, because in addition to its intended role, the good also partly fulfils the role of money in terms of storing our purchasing power. Real estate has been a fine example of a monetary premium on goods over the years, as people have started to buy it as an investment to improve their wealth and earn a return in the form of rents. The price of real estate is rising rapidly due to the growing investment demand from people who have a surplus of easy money and want to invest it in something that preserves its purchasing power better than a savings account.

The problem with a monetary premium on goods is that it artificially increases their market price and prevents those who need them most from buying them. Individuals who want to buy a property to live in have to pay an extra premium, which often requires taking out loans and paying interest that puts people in debt for life. There is only one solution to this problem: to find a reliable means of money that preserves the purchasing power of savers and destroys the need to monetise commodities. This is where our understanding of bitcoin as the best store of value we humans have ever had comes into play. Bitcoin’s money supply is strictly limited, which means that in the long run it has no inflation and thus does not eat into savers’ purchasing power. In 2024, its annual supply will grow by less than 1%, making it the lowest inflation commodity in the economy and making bitcoin the most reliable store of value.

The first consequence of bitcoin adoption is therefore the erosion of the monetary premium of commodities, as individuals will start to convert their investment assets into bitcoin, whose value will rise faster in the market than that of other commodities. The reason for this lies in bitcoin’s economic characteristics, as it is a commodity with a strictly limited amount of units that can be sent through communication channels, and its marketability is increasing day by day. Buying a property is very risky because it is subject to several external factors such as regulation, a falling property market, very limited divisibility into smaller units, taxation, changes in political regimes and extremely slow sales. If we want to sell a property, we need to find a buyer who is willing to pay a huge amount of money to buy it. But the marketability of bitcoin is much higher, as there are countless individuals on the exchange who are willing to buy a piece of our bitcoin assets within minutes.

Bitcoin thus devalues monetised goods to the point where their market value correctly reflects their actual role. This means that goods will become increasingly cheaper for bitcoin savers, thus reducing economic inequality significantly, along with poverty levels. This will make the world much more like the gold standard era, where the middle class held most of the wealth and differences between people were minimised. Bitcoin can compound this, as its economic properties are several orders of magnitude better than gold.

THE RISE OF FREEMASONRY

Another consequence of the shift to sound money is the guarantee of individual sovereignty and freedom, and a reduction in the scope of government. In today’s world, the majority of the population is dependent on the government to “look after” their well-being through benefits, child allowances, state grants, pensions and countless other taxpayer-funded state expenditures. The problem with this type of economic system is the pervasive dependence on the public purse and the declining capacity to save. As the Treasury fails to finance the purchase of scarce goods, while at the same time pushing up their market prices through inflation and bad investments, people are also increasingly dependent on borrowing. In this way, the authorities, through the political apparatus and the financial system, enslave their populations, who pay ever higher taxes, levies and interest on the loans that the banks make on the cheap, without having to hold sufficient deposit reserves.

The authorities can be imagined as a giant parasite, slowly sucking the blood of its host, in return offering it apparent security and empty promises. All the services provided by the public sector are much more efficiently provided by the free market. Ask yourself when the public sector has ever delivered any service perfectly and efficiently. In exchange for free health, education, administrative and other services, we get long queues, poor quality of service, bored professors who chew over the same textbooks without animating their students with up-to-date information and stimulating them to think with their heads, and civil servants who multiply like bacteria on a toilet bowl, their efficiency comparable to that of a washing machine in removing stubborn stains from the laundry detergent.

WHO IS BITCOIN FOR?

Bitcoin is not for everyone. It is especially not for those who have transferred responsibility for their lives to a large extent to the state apparatus and have become dependent on it, like a son in an Oedipal relationship with his mother and in a combative disposition against his father, who is trying to destroy this complex. These people will fight with all their might against money, which will shift responsibility to the individual and reduce the parasitic scope of power. Quitting this kind of addiction will be similar to quitting addictive substances, but a little easier, as bitcoin is accompanied by a steady increase in purchasing power that encourages addicts to get well and allows them to have a better quality of life.

Bitcoin is primarily for those who are already strictly critical of the authorities and understand the consequences of state interference in the economy. It is also for those who have been declared pariahs by the authorities and have had their access to the financial system restricted. Sooner or later, however, bitcoin will be suitable for all those who want to keep even a fraction of the wealth they produce, as rising inflation and taxation will soon seize most of our possessions, while the accelerating rise in the price of easy money units will make it impossible for individuals to buy the basic necessities of life.

Bitcoin is a luxury good in the current Western world, where we have a number of financial and other instruments that allow us to maintain a part of our purchasing power without our standard of living significantly decreasing day by day. Yet our purchasing power is melting like an ice cube, leaving increasing numbers of people living month to month and paycheck to paycheck without saving enough money for a rainy day. But the situation is very different outside the Western world. Inflation is normal, sometimes even desirable, in third world countries, where regimes often fall into hyperinflationary crises, where state money becomes completely debased and serves only as a poor whoring tool. Everyday shopping in the shops is marked by piles of money carried around in bags, with crowds of people crowding outside the store at all hours of the day, as prices can rise and food stocks can be depleted by the end of the day.

In third world countries, bitcoin is not a luxury good, but an escape route from deadly poverty and hunger. As a result, we have seen the legalisation of bitcoin as an official means of payment in the Republic of El Salvador, which experienced a hyper-inflationary collapse of its currency before dollarisation. Salvadorans have very limited access to the financial system, which means that most economic activity is conducted in cash. Even more depressing is the prevailing global situation where almost 2 billion adults are unbanked, which covers about half of the adult population and does not include minors, whose access to the financial system is even more limited. Bitcoin represents the only glimmer of hope for these people to rise from the poverty line through economic activity. It allows individuals to become their own bank simply by installing an app on their mobile phone. They can then immediately start doing business with the developed world without restrictions, censorship or reliance on financial institutions. Time will tell what the long-term consequences of this revolutionary invention are, but in the present we can witness the tectonic changes that bitcoin, with its relatively low market capitalisation, is causing in society.

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At its core, blockchain technology is simply a distributed database to which new transactions are added in the form of blocks. This information is sealed using cryptography, and the blocks are linked in time sequence via hash values. After the bitcoin network successfully accomplished this, a large number of programmers began to look for other potential applications of this technology. The very idea of block chaining originates from the previous millennium, and it was related to time-stamping documents. The first practical use of this idea appeared with the creation of bitcoin in 2009. Satoshi Nakamoto used the technology as a mechanism for achieving mutual consensus between nodes in the network. The charm of his invention is not only the achievement of consensus, but the mechanism that ensures it.

CONENSUS

In order for the network to reach consensus on a new block of transactions, Nakamoto incorporated the 256 cryptographic algorithm into the blockchain technology, which ensures that miners must use a sufficient amount of computing power to calculate the hash value of the new block. At first, new blocks could be mined using traditional computer chips, but then the difficulty of mining gradually increased, which required the use of graphics cards, and finally led to the invention of very specific computers that are optimized only for computing SHA256 (secure hashing algorithm 256) of cryptographic formulas. This means that a special supply chain has developed in which many companies compete to build ever more powerful computers whose sole function is to mine bitcoin.

Mining computers use enormous amounts of electricity to operate, a common observation by opponents of bitcoin technology, saying that the network consumes too much energy and thus harms the environment. The truth is that computers themselves have no more emissions than all other electronic devices, as they do not emit carbon dioxide, but only heat. They buy electricity from the grid, just like all households and businesses, and in the process finance power plants that are discovering more and more efficient ways of generating electricity.

The consumption of electricity converted into cryptographic energy through the SHA256 function represents this Proof -of-Work mechanism. This mechanism ensures that no one on the network can cheat when mining new bitcoin blocks, because for each block calculated, they have to spend a large amount of capital dedicated to mining equipment and paying bills for electricity consumption. Since the electricity is obtained from natural energy sources, this ensures that no miner can calculate new blocks without cost. The proof-of-work mechanism thus represents a bridge that connects the bitcoin digital network to the material world, since changing information in the blockchain requires energy obtained from material resources. This helps us understand why the Bitcoin blockchain is so resistant to external influences, as it cannot be tampered with by anyone without having to invest a huge portion of their wealth in the mining process.

Wealth alone does not provide an individual with any decision-making power. The decision-making power comes from the total amount of hashing power possessed by the individual mining computers. With this power, the individual competes with the entire mining network, whose computing power exceeds the computing power of the entire global computer network. It’s true – Bitcoin’s total hashing power on the network exceeds the hashing power of all the other computers in the world combined.

In addition to the difficulty of the mining process, the network is protected by a social layer of protection. The nodes connected in the network determine the version of the bitcoin software in use. The only way to achieve a radical change to the Bitcoin protocol is for the majority of nodes in the network to adopt a revised version of the software and broadcast it to the network. This achieves a consensus on which version of bitcoin is in use. This means that nodes will not accept a version of bitcoin that they believe poses a threat to their assets.

NETWORK SCALABILITY

Forking the main blockchain is the only way to upgrade the network, since the software cannot be changed once the blockchain was published. A fork creates two separate chains that share a history of blocks and transactions. Nodes in the network then voluntarily decide which version of the chain to manage. The version with the most users becomes dominant, forming a consensus. There are two ways to split a chain: soft fork and hard fork.

A soft fork is merely a proposal to improve the code, which is backwards compatible and does not create a new cryptocurrency. The newly formed chain is consistent with the fundamental parameters of the network. Nodes decide whether to update their software to the new version and thus determine the success of the upgrade. If the improvement proposal gathers enough support from miners and nodes within a certain time, it takes over most of the mining power and reaches consensus, and the old chain is terminated. Otherwise, the new chain is terminated. A soft fork is similar to upgrading the operating system on our Apple phone, where the phone remains within the same ecosystem and only the software is updated.

A hard fork is a fundamental software change that is not compatible with the old version of the chain. It creates two completely separate chains with different cryptocurrencies competing for supremacy. They differ in the fundamental parameters of the network, such as the mining algorithm, block size, coin supply, etc. A hard fork is thus similar to trying to exchange our Apple phone for a Samsung phone with a new operating system. The new version is not compatible with the old one.

Many cryptocurrencies, such as Bitcoin Cash and Litecoin, are merely hard forks of the Bitcoin chain. Their market capitalization and amount of mining power, however, determines their performance. Bitcoin remains the most powerful and largest computer network in the world without experiencing a single successful hard fork. This illustrates its resistance to fundamental changes in the main parameters of the network. In the past decade, we could witness many attempts to change the bitcoin “constitution”, but without success. Its community is aware of the importance of the integrity of the network and the randomness of its creation. Any fundamental change would pose a potential risk for further changes that could harm its users.

BLOCKCHAIN: YES OR NO?

As can be concluded from the previous paragraph, ensuring consensus within the bitcoin network is extremely expensive and energy-consuming. This is the price that must be paid to establish a completely independent, decentralized information system, which certainly cannot be tampered with by anyone without following its rules. Many wonder if there are other applications of blockchain technology that could potentially be better than the existing bitcoin. Thus, many developers and investors began to invest in the development of various ways of using the distributed blockchain data chain. In doing so, however, they encountered a number of problems posed by avoiding the centralization of the database, which in the vast majority of cases raised the costs of the blockchain beyond its actual benefit. The only truly beneficial use of blockchain where its benefits far outweigh its costs is the bitcoin network. The creation of an independent monetary system, resistant to the intervention of the authorities and other external influences, is important enough to justify the distribution of the accounting book among its users and demands a high consumption of electricity.

A problem that arises with other applications of blockchain technology is that it is extremely difficult to achieve decentralized consensus despite the distribution of the database among users. In order for users to agree with each other, it is not enough to provide them with the right to vote, but we must equip this right with material costs. If we do not provide this, a group of users may accumulate a sufficient amount of decision-making power to obtain a majority decision-making right. The only way to prevent depraved human nature from interfering with the monetary system is to bind this process to mathematical and physical laws, which are immutable to us. Since this is extremely expensive, we have two sensible options: choose a decentralized blockchain and accept the high administration costs, or choose a more affordable and efficient centralized database. Our decision is based on the importance of the problem we want to solve.

So far, we have not discovered a problem that would justify the use of a decentralized database with a proof-of-work mechanism whose costs would not exceed the benefits, except for the creation of a monetary protocol. It is also possible to implement a blockchain with another consensus mechanism, but only this one combines the worst features of both systems in the vast majority of cases. Not only is it inefficient and expensive, but a blockchain with another consensus mechanism very quickly falls victim to the centralization of decision-making power.

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The initial reward for a newly calculated block of transactions was 50 bitcoins in 2009, but this dropped to 25 bitcoins in 2012, 12.5 in 2016, and 6.25 in 2020. The next halving will occur in the first half of 2024, and only 3.125 bitcoins per block will be issued. There are 32 such halvings, after which the issuance of new coins ends and bitcoin becomes the first monetary system without inflation. The last halving is said to have occurred sometime in the first half of the 22nd century. The total number of issued coins will be just under 21 million. Due to the mining algorithm, the Bitcoin network represents the only asset whose monetary policy is completely transparent and predictable. This means that we can know at any moment how many coins are in circulation and what their current inflow is.

The economic consequences of this technological phenomenon are unknown: it is the first commodity whose supply does not adjust to demand, but operates according to a predetermined schedule. As the system halves the annual inflow every four years, ceteris paribus, the market price of bitcoin automatically begins to rise. Selling pressure from miners is cut in half because the same amount of miners are fighting for a smaller amount of coins. With constant demand, this creates buying pressure, and bitcoin enters a new business cycle of rising prices. The increase in value is also influenced by external macroeconomic factors: inflationary monetary policy of central banks, commercial use of bitcoin, development of the network and improvement of the user experience.

STORE OF VALUE

Why Is Bitcoin’s Coin Offering So Special? As we have already established, the algorithm for issuing new coins is a logarithmic function. This means that the amount of new coins compared to the existing supply decreases exponentially with each halving. The amount of newly issued coins in the current four-year period is thus twice as low as in the previous period, where the block reward was twice as high. This ensures that in the first bitcoin mining period, where the reward was 50 coins, 50% of all coins were issued. In the next four year period, where the reward was 25 coins, 25% of all coins were issued , etc. This means that already in the third period more than 75% of all coins were issued, and in the current fourth period there are already more than 19,000,000 bitcoins available, or 90% of the entire supply.

The new coin inflow in the current period is 6.25 bitcoins per block, 900 per day and 328,500 per year. This means that the current inflation of new bitcoins is about 1.73%, considering the total supply of 19,000,000 bitcoins. With the transition to a new mining period, in which 3,125 coins will be issued per block, 450 per day and 164,250 per year, the inflation of new coins will drop to less than 1% compared to the stock of already issued coins. This means that bitcoin will become the most inflation-resistant commodity in the world, whose only competition is currently gold, whose annual inflation is somewhere between 1 and 2 percent.

What are the implications of this feature of the bitcoin network for its users? The limited supply means that the entire economic value held in the bitcoin network in the form of digital coins loses less than 1% of purchasing power per year, a figure that halves every four years. Already in the coming period, the inflation of new coins is negligible, and bitcoin preserves our purchasing power over time better than any other good in the economy. This allows participants in the system to keep assets and accumulate savings, the purchasing power of which grows over time, as every year the supply of goods on the market increases, and the inflow of bitcoins decreases. Our assets thus gain value over time, while the price of goods in bitcoin units falls. This turns the current economic reality on its head, as the supply of new dollars and other fiat currencies increases every year, and money loses purchasing power. The price of goods on the market in currency units thus increases every year, despite increased production, which makes savings and saving impossible, and thus forces unreasonable consumption.

Bitcoin encourages saving and accumulation of capital, which can then be invested in production processes that improve quality and increase the quantity of new products on the market. This is true because we have invested a larger amount of capital in production processes than we would have in the absence of savings. Headless investments lead to bad investments, in which the capital is not invested optimally, and this leads to a smaller amount of lower quality products.

MEDIUM OF EXCHANGE

In addition to being an extremely good store of value, bitcoin also represents a very efficient payment network with its own means of payment. Many critics point to bitcoin’s limited capacity as a payment medium, as transactions are only carried out every 10 minutes, and their volume is limited to a few thousand, which is much less than the number of transactions processed by the Visa or MasterCard networks. These critics do not understand the structure of the Bitcoin ecosystem, which contains several layers: the first layer represents the main Bitcoin network with a block chain, which really does not allow for high transaction liquidity. The charm of the technology lies in its upgradeability with the help of higher layers, which give the network enormous dimensions.

The second layer of the ecosystem contains payment channels that allow transactions to flow parallel to the blockchain and are simultaneously attached to it in such a way as to maintain compliance with the rules of the bitcoin network. This payment network is called Lightning and refers to a payment technology that relieves the main block chain with the help of payment channels and enables a practically unlimited amount of transactions of any value . We open a channel by writing a transaction to the main blockchain, which locks our coins into the network and allows us to send them across all the Lightning Network channels we’re connected to. Only the first transaction that opens the payment channel and the coin balance at that time is recorded in the main blockchain, and the last transaction that closes the channel, unlocks the coins and updates the balance. This system is similar to the payment system in restaurants, where food and drinks are recorded, and everything is settled only when we leave.

The Lightning Network is just one type of upgrade to Bitcoin’s ability to process payments. At higher levels, centralized alternatives can also do this, including conventional payment networks such as Visa and MasterCard. It is true, we can connect the bitcoin network to already existing payment networks and give it wings in this way.

UNIT OF ACCOUNT

A final important economic dimension of the bitcoin network is its pricing efficiency. We named the smallest building block of the bitcoin network a satoshi, in honor of its creator, and it represents 0.00000001 bitcoin. In other words, 100,000,000 satoshis make up one bitcoin. This is more than enough for the needs of the current economy; however, when the value of one bitcoin grows to the point where one satoshi would be too large to account for low-value goods, the decimal point can be moved back n places with a few software changes. This property of the network represents another major difference with the existing fiat system: Bitcoin’s supply is strictly limited upwards, while its divisibility is unlimited downwards. On the other hand, the supply of fiat currencies is unlimited upwards, while their divisibility is limited to only two decimal places. From this it follows that these two monetary systems are fundamentally opposite, which also represents the opposite implications of their adoption.

The fiat system, through inflation, allows wealth to be redistributed from the hands of the poor to the hands of the rich, who are closest to the fiat trough, while at the same time monetizing debt and encouraging users to borrow and spend more. Through deflation, Bitcoin forces users to save and accumulate capital, thereby enabling investments without borrowing and at the same time increasing the purchasing power of all its users over time. As the value of bitcoin increases relative to the value of other goods, all users benefit, as their share of the total coin supply does not decrease due to the absence of inflation.

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At the height of the economic crisis in 2008, an anonymous programmer published his first public record on a cryptographic forum. In it, he presented the idea of creating an independent money based on peer-to-peer technology , called Bitcoin. It was intended to offer a solution to the biggest problem of digital money, i.e. absence of information rarity. The nature of the information is such that we cannot guarantee that the sender will lose it during transmission and that the recipient will own it in its entirety. In practice, this is most evident when sending an e-mail – each e-mail sent is only a copy that the sender still keeps on his computer. Without an intermediary to ensure that the sender’s e-mail is deleted with certainty, we cannot guarantee that the recipient will be the sole owner of this message. Of course, this is not a problem when we are talking about the communication of information; occurs when we want to transfer a value. The problem of the need for an intermediary also represents the eternal problem of human nature: the need for trust.

The problem of creating digital money thus meant the problem of avoiding the need to trust an intermediary to prevent double-spending of information. Online banks and payment service providers thus ensured that the sender could not spend the sent money himself, since he was essentially sending only digital information in the form of zeros and ones.

BITCOIN

Bitcoin is a new form of digital money that is completely transforming the monetary infrastructure. It is the first monetary system that we humans designed ourselves. Its main feature is decentralized control. Since bitcoin is just a software record that can be loaded onto a computer, its software can be operated by any individual with access to the Internet. Anyone who has a copy of the bitcoin software loaded on their computer participates in deciding on the changes. This ensures a high level of system security, which is extremely difficult to change, as the majority of users must agree to the changes.

Since the system is distributed among its users, this bypasses the need for a central authority to ensure the validity of the information stored in the system. Bitcoin represents a ledger in which the balances of users who send coins called bitcoins to each other are constantly updated. New transactions are written into a block of transactions created by miners of new blocks, and their validity is checked by nodes. A node is any computer that runs the bitcoin software and verifies the authenticity of the information. Miners, on the other hand, are special computers that solve a cryptographic equation that creates a new block of transactions, and in return they are rewarded with new coins and transaction costs. So miners perform an activity for which they are rewarded, and their work is monitored by nodes. In this way, the system achieves decentralization, as each participant in the system checks all others and all others check him. At first glance, this seems very complicated, but cryptography simplifies this problem, since the hash value of new blocks enables easy verification of the validity of information.

The charm of blockchain technology is that it creates a time sequence of information based on cryptography, which is only valid if the hashed values of the blocks in the chain match. Thus, when adding new blocks of transactions, it is only necessary to check their compliance with the hashed value of the previous block. If the new hashed value matches the previous one, the mining computer has calculated the equation correctly and receives a reward for the work invested. This system is called proof of work, and it refers to the amount of electrical energy used that the computer converts into hashing power to calculate cryptographic equations.

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When researching the development of monetary technology, one very important trend can be observed: the new money that replaced the old had an ever-higher stock-to-inflow ratio. This means that the better money was always more resistant to increasing its supply, which meant that it had a lower rate of inflation. Thus, stronger money always displaced weaker money. Precious metals replaced increasingly primitive forms of money such as glass corals, stones, shells, salt, cattle and copper. The biggest battle was between the precious metals silver and gold, and many countries used them simultaneously, on this bimetallic standard, for centuries. However, since gold had a higher supply-to-inflow ratio than silver, and was also more difficult to destroy or use in production, over time it also supplanted silver.

The better money served its role, the more the civilization that used it could develop. With this, people gradually developed more and more advanced forms of money, which reached a peak towards the end of the 19th century, when most industrialized countries were on the gold standard. This period was known throughout the world as the golden age of prosperity, during which most of the most important technological inventions on which the world is based today were created. Gold’s supremacy was overshadowed by his greatest weakness, i.e. the inability to transfer gold through the telecommunications network, which in a globalized world had an extremely low marketability through space. This flaw proved to be his Achilles heel.

THE GOLD STANDARD

We reached the peak of human civilization at the end of the 19th century, when most of our civilization simultaneously used one monetary means – gold. This did not require any coercion or consensus from the authorities and politics, but was an organic evolution of monetary technology chosen by the free market. Based on experience over time, people realized that gold serves the role of money most effectively, and began to use it en masse in trade.

This period represented the fastest transition from poverty to the prosperity of Western civilization. Unemployment was rapidly drying up, turning into something optional that people decided to do when they judged they had enough gold savings to avoid work. The movement of prices during the 19th century was constant, as the price index at the end of the century was almost the same as at the beginning, which meant that people’s purchasing power remained the same, allowing them to afford better quality goods and witness many new inventions , which significantly increased prosperity.

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HUMAN ACTION

Humans act to satisfy our needs, because the amount of goods and our time in the world is limited, but the amount of our needs is not. Human needs are endless, so we must economize our time to provide the most important first, and only then attend to others. Each individual has a different scale of needs, so they will also have a different order of satisfying them. The highest value for an individual is provided by goods that enable him to satisfy his most important needs. From this we can quickly conclude that value is not something objective and uniform for all individuals, but rather subjective for each individual. This is the starting point of praxeology – the science that studies human behavior.

Praxeology represents the foundation of Austrian economic theory, which is based on the subjective value of goods that serve to satisfy human needs. This method is the most effective way of studying economics and enables the explanation of many hitherto unexplained phenomena in the market, such as price theory, inflation, the paradox of diamonds and water, the interest rate, etc. Because our time on earth is limited, we humans act by trying to efficiently satisfy as many of our needs as possible. Human civilization and the economy develop from this, which is the mechanism by which we solve the problem of lack of goods.

So, as we have already established, time preference is always positive, as it is the relationship between the importance we attribute to the present compared to the future. Nevertheless, we must pay special attention to the difference between high and low time preference.

HIGH TIME PREFERENCE

A high time preference means that the present is much more important to us than the future, as a result of which we will have a short-term view of the world and want to consume as much goods as possible in the shortest possible time. Animals, due to their instincts, have an extremely high time preference, because due to their lack of consciousness, they have no idea of the future. For this reason, they mostly prefer to consume the entire catch in the present without saving anything for the future. Likewise, animals very often choose conflict with other members of their species instead of cooperation, as they profit by doing so at that moment, either with a greater amount of food or a greater choice of sexual partners.

People who have a high time preference live in a similar way. They steal rather than buy, consume today rather than leave something for tomorrow, create conflict rather than build long-term relationships and consume rather than save. The problem with this kind of behavior is that it prevents cooperation and encourages conflict, so that people do not share their work with others and do not devote themselves to the activities in which they are the best (specialization), but instead have to produce most of the goods themselves and make sure that no one else steals. This produces a much smaller amount of goods and increases the prevalence of violence and conflict, and civilization has no chance to flourish.

LOW TIME PREFERENCE

This brings us to another view of the world, viz. low time preferences. A low time preference means that the present is only slightly more important to us than the future, and we have a more long-term view of the world. People with a low time preference prefer to buy goods rather than steal them, thereby supporting the economy and providers. They prefer to eat only as much food as they need and save the rest for rainy days. They prefer to invest in long-term relationships and save their assets rather than start a conflict with others. They prefer to focus on the activities they are best at and share the work with others instead of stealing from them. So everyone produces what they are most efficient at and buys the rest on the market from others. This produces a greater amount of diverse goods and encourages mutual cooperation, allowing human civilization to flourish.

Thus, we can see that, despite the positive time preference, a civilization that pays attention to the future functions more optimally than one that focuses only on the present. A low time preference is both a condition for the emergence of civilization and the main factor that distinguishes us from the primitive people of antiquity. A society with a dominant high time preference, on the other hand, is directed back to a primitive state, as it impulsively consumes capital and encourages violence. The story of human civilization is thus the story of the gradual lowering of time preference and the accumulation of capital, the division of labor with specialization, and the development of new technologies.

MONEY AND TIME PREFERENCE

So what role does money play in determining a civilization’s time preference? The central one. Since money is the driver of the economy and one half of every economic transaction, it is the central asset that enables the creation and existence of civilization. When humans discovered or invented money, we were able to divide our labor and specialize in the activities we were better at than others. With this, we started to produce a larger quantity of goods, which we were able to invest in more extensive production processes, which brought us an even larger quantity of better quality goods.

The quality of the money that stored our production value determined the purchasing power that individuals had available to invest in larger production processes. The more value we could save, the better goods we could produce. This is most reflected in the inventions of the 19th century, when the vast majority of the developed world was on the gold standard. Gold enabled the greatest flourishing of human civilization in history – the Industrial Revolution. It stands behind all the modern inventions and goods that the digital age brings us.

Money is thus the main factor that determines the time preference of a civilization, and the ethical standard of society is closely related to it. The more resistant money is to inflation and confiscation by the authorities, the better it enables us to save assets and thus lowers our time preference. This comes from the awareness that our savings will be rewarded with higher purchasing power in the future, which allows us to devote ourselves to investing in processes that will pay off over time rather than immediate consumption.

INTEREST RATE

Understanding the importance of time preference leads to an explanation of the formation of the interest rate on the free market. The money market, where demand and supply of loans meet, is strongly marked by a dominant time preference. The lower the average time preference, the more people are willing to lend money to businessmen who will invest it in the hope that their business will be profitable. Time preference also expresses the relative predictability of the future. The more stable the economy, the more predictable the future, which allows us to take a long-term view of our lives. Thus, lenders increase the supply of loans, which lowers its price, i.e. interest rate.

The interest rate reflects the additional price that borrowers have to pay to lenders to lend them capital today instead of borrowers having to save it themselves. Interest is thus a compensation to the lenders for investing their savings in the production processes performed by the borrowers. By decreasing the time preference of lenders, the interest rate of loans on the market also decreases, since only they are more willing to invest their savings in long-term production purposes than to spend them in the present, as they believe that this will pay them more interest. If the borrower makes a profit, he can repay the loan and enrich the lender by paying the interest.

Thus, we can see that the interest rate is not something that is determined by the central bank, but simply the price of loans on the market, which at the same time reflects the time preference of society. The history of civilization shows a long-term downward trend in the interest rate, which reached its lowest point sometime around the turn of the 19th and 20th centuries, when most industrialized countries were on the gold standard. The trend reversed with the transition to the era of easy fiat money at the beginning of World War I, when central banks took control of the money market and began centrally planning the interest rate.

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In this essay, we will review the basics of monetary terminology, the history of money and try to foresee the development of monetary technology in the 21st century. century. Let’s start with an overview of the basic characteristics of money.

MONEY IS TECHNOLOGY

Like other inventions of human civilisation, money is just technology. It is the idea of how best to meet certain human needs. Money thus does not refer to a specific product or activity, but to the mental idea of how to improve the efficiency of the exchange of goods we exchange with each other in order to meet our needs. We want money not because it can directly satisfy our needs, but because it indirectly enables us to satisfy them. To analyse the question “What is money?” we need to explore its main characteristics. This can be done by dividing monetary technology into the three main roles it plays:

EXCHANGE AGENT

Money is a tool we humans invented to facilitate trade with other members of a primitive economy. Before the invention of money, the dominant form of trade was direct or barter. This meant that each individual had to find someone who was willing to exchange what they owned and wanted to get rid of, in exchange for their goods. Since an exchange always involves unequally valued goods from the point of view of the two exchangers, it must be the case that each of them values the other’s good more than his own, otherwise the exchange would not take place. The problem arises when the owner of the good we want to acquire does not want to receive in return the good we are offering. As we can see, direct trade is a very disadvantageous way of trading, as it is based on the mutual contingency of needs.

Money is the tool that solves this problem by establishing a medium of exchange, i.e. the use of a means to facilitate the exchange of goods. In addition to goods intended for immediate use or investment, we have thus included in the economy a special type of goods that serve only indirect exchange and that we do not want to consume or use in production processes. Money is not accepted to be consumed or to satisfy other needs, but because it is the most desirable means of facilitating future exchanges to secure goods for consumption or for use in production. This brings us to the first feature of monetary technology – the exchange agent.

STORE OF VALUE

Another characteristic of money is that it preserves the value of our work over time. The more durable and resilient money is, the better it holds its value. Bananas are a poor store of value, as they rot and perish. Precious metals, on the other hand, are highly resistant to decomposition and therefore retain their value for longer. Good money is money that keeps its value over time. The problem arises when money is not just a victim of decomposition, but increases in quantity with new production. For example. Steel, despite its remarkable resistance to decay, does not serve the role of money as well as gold, one of the rarest metals in the Earth’s crust. If the amount of new units of money increases each year, it means that our share of the units in the total stock is getting smaller and smaller. This means that we can buy fewer goods with the same amount of units of money than we could in the past, because each new unit of money in circulation increases the price of other goods expressed in units of that money. This phenomenon is called monetary inflation, and it involves an increase in the quantity of units of money compared to the existing stock, which lowers an individual’s share of the total stock. In this way, those who produce new units of money benefit, while everyone else loses. So what is actually happening in the process of monetary inflation is a redistribution of individual wealth within the economy. Those who have the power to increase the amount of money thereby devalue the shares of all those who are unable to do so. This phenomenon is called the Cantillon Effect, and is now known as inflation in the broader sense of the word. Since we do not consume or use money in production, increasing the stock of money does not increase our welfare, but merely changes the ratio of purchasing power of individuals. It is an excellent way of stealing wealth and impoverishing the population.

UNIT OF ACCOUNT

The last role that money plays is that of price calculation. Through the widespread use of the medium of money, prices for goods are developed in the market, calculated in units of money. Money also serves the purpose of accounting for goods in one universal unit, rather than having to constantly convert them from one unit to another. In its absence, transactions would require an infinite number of prices in units of all possible goods, e.g. 1 apple = 2 pears = 3 bananas, etc. The problem is not just the quantity, but the constant traceability of the converters of the different units, which means that all these ratios would fluctuate from day to day, making efficient conversion and thus trade impossible. The problem stems from the fact that the supply of and demand for various goods change every day, and so do their prices. This is because the value of goods is entirely subjective, with each individual assigning a different value to goods. Value is therefore derived from the behaviour of individuals within the economy, who value goods on the basis of their current needs, which are constantly changing.

Prices in units of currency also fluctuate on a daily basis, but are still expressed in units of a single currency, which makes things easier for the everyday buyer. Uniform prices allow individuals to do the economic math, i.e. make economic decisions based on their purchasing power, which is reflected in the relationship between the prices of goods and the amount of their wealth. This lets you know how much you can afford that day, so you can optimise your spending and set your savings level.

Inflationary money, which loses its value rapidly, continuously pushes up the prices of goods on the market, making it harder for individuals whose purchasing power is depreciating over time to become economically productive. Deflated money lowers the price of goods, which means that buyers have more purchasing power over time and can afford more goods on the market. This allows them to economise their consumption and invest some of their wealth in larger-scale production processes that produce more and better quality products. The charm of gold as a medium of exchange was that the price of goods on the market, expressed in units of gold, was constant or gradually declining, allowing buyers to afford a larger quantity of goods when they saved in gold. Saving is a precondition for consumption.

FIVE QUALITIES OF GOOD MONEY

An asset that effectively serves all three of the above roles of good money must have the following characteristics:

• Sustainability (resistance to decomposition and external influences)
• Portability (the difficulty of moving money through space)
• Divisibility (divisibility into units small enough to allow microtransactions)
• Convertibility (units of money must be homogeneous and not differ from each other)
• Scarcity (money must have a sufficiently high ratio of stock to inflow. The stock refers to the total existing stock of money in the hands of individuals, while the inflow refers to the annual amount of newly produced units of money.)

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