WHY BITCOIN?
BitcoinReality vs. Central Banks.
The Monetary Evolution for Humanity
For My Baba´s Soul, All Children, and Humanity in Total Peace.
Part 1:
Prelude:
I could have never imagined in my life that one day, I would be analyzing and elaborating on the structural and criminal aspects of the global Central Banks and its controlled fractionalized reserve banking systems in bed with the governments worldwide. Yet, however hard I try in my research, there seems to be no matching description for the crimes and chain-reaction of damages committed to humanity- by the monetary-centralized banking cartels — , which could be subsumed under an existing criminal and punishable offense.
This jurisprudential work is not only a fundamental taboo-breaking enlightenment of knowledge and comprehension.
[Strictly recommended and indispensable reading: Andreas M. Antonopoulos, Mastering Bitcoin-Programming the Open Blockchain (2017); Saifedean Ammous, The Bitcoin Standard-The Decentralized Alternative to Central Banking (2018).
Here are some articles of the author, based partially on the publications: Keyvan Davani, https://medium.com/@keyvandavani/https-medium-com-keyvandavani-bitcoin-pandoras-goldbox-opened-human-right-to-hardest-money-2ffdadf13ff4; https://medium.com/@keyvandavani/the-logical-and-ethical-solution-bitcoin-and-austrian-economics-d4cc99b3128c;]
Humanity has finally the one and only logical, effective, and ethical solution to the deeply rooted causes of so much unimaginable human suffering, pain, wars, inequality, exploitation, poverty, standstill of scientific-technological development and evolution, and (modern) slavery.
Science and technology, specifically computer-processing soft- and hardware (i.e.: microchips), internet, distributed peer-to-peer (compressed) data transfer, cryptography, blockchain, and much more, have evolved with an unbelievable rate of speed in the last few years and decades.
There are no coincidences: humanity is finally at the precipice of an evolutionary leap, maturing into a totally transformational society and global civilization with holistic intelligence, comprehension, knowledge, intellect, spirituality, knowledge, science, and technology — even beyond the doctrine and dogmas of false or outdated assumptions, which we humans humbly need to get over with.
Since childhood, we all have been more or less brainwashed and indoctrinated with an unnatural intellectual-emotional mindset and behavioural conditioning as to never question the theories, models, and structures, with which we have been force-fed through family, society, media, and the compartmentalized educational institutions.
The more we grow up to become a socially acceptable member of society, we tend to forget the really essential questions, which free-minded children usually ask their parents: “Why”?
Other questions, such as “Cui bono?” (“Who benefits?”), are stigmatized as (“shameful”, “disgraceful”, “respectless”) guilt-loaded taboo-questions.
With the understanding of the essence, purpose, and transformational monetary architecture of Bitcoin, humanity has no other choice than to ask exactly these questions (Why? Cui Bono?). For the first time in human history, we can free ourselves from the “mysterious” shackles of the (privately owned) central banking-controlled and manipulated slavery.
Posing the question of “Who benefits?” is even forbidden — especially with respect to the internationally dominating US-Central Bank — the (privately owned and “occult”) Federal Reserve System — and its legal monopoly of the US-Dollar-money supply, unless if you want to be smeared and marginalized as a “conspiracy theorist”. Yet, the centralization, secrecy, and the political-legal untouchability culminates in the privately owned and controlled Bank for International Settlements (BIS)- later to be discussed in detail.
Bitcoin with its absolute scarcity of 21 millions coins to be mined in totality until the year 2140, and its difficulty adjustment — for the prevention of inflation — , is already the reality of the truth of our evolving totally DEcentralized, censorship-resistant, open, borderless, immutable, and trustless (not a single intermediary) network-consensus-civilization with the freedom of a monetary value-structure of Austrian Economics, based on the hardest money, store of value, medium of exchange, and fungible unit of account. Who would have ever thought that a digital, cryptographic, and peer-to-peer “cash” on a globally distributed ledger, the blockchain, could one day become more precious than the relative scarce gold?
Why? It always depends on the invested time, ressources, and applied technology, which make the mining of gold relatively difficult, which make its production limited, and its long-term value relatively more stable than silver. It is of no surprise that every monetary unit we are or used to be familiar with — the dollar, pound, mark, franc et al. — began on the market simply as names for different units of weight of gold and silver.
What is Inflation in Truth?
If you or I had the technical possibility to print more fiat-cash-money (i.e.: $, €) or to generate more of our digital fiat-money in our bank-accounts and centralized database-ledgers of the various banks worldwide, we would be swiftly arrested, prosecuted, and thrown into jail for counterfeiting. Yet, this is exactly what the central banking structures with their “fractional reserve banking”- system are doing — by order of magnitude. You guessed it right: it does not stop here. The reality of the damages and consequential chain-reaction of damages is beyond the imagination of most people. A spectrum of criminal acts of of scale, but not limited to: theft, embezzlement, fraud, corruption, (mass-) murder, fabricated wars, money-laundering, trafficking of drugs and children — all by the order of magnitude. Let us, for the sake of a simple comprehension of inflation, quote Rothbard (“The Mystery of Banking”): “To put it another way: a continuing, sustained inflation — that is, a persistent rise in overall prices — can either be the result of a persistent, continuing fall in the supply of most or all goods and services, or of a continuing rise in the supply of money.
Since we know that in today´s world the supply of most good and services rises than falls each year, and since we know, also, that the money supply keeps rising substantially every year, then it should be crystal clear that increases in the supply of money, not any sort of problems from the supply side, are the fundamental cause of our chronic and accelerating problem of inflation. Despite the currently fashionable supply-side economists, inflation is a demand-side (more specifically monetary or money supply) rather than a supply-side problem. Prices are continually being pulled up by increases in the quantity of money and hence of the monetary demand for products.”
Rothbard´s understanding and analysis that the world of micro- and macro-economics are not two mysteriously separate worlds, is explained in a very clear language to be comprehended by every human being (which is unfortunately not even taught to economic students): “…But when they get to the “macro” chapters, lo and behold! supply and demand built on individual persons and their choices disappear, and they hear instead of such mysterious and ill-defined concepts as velocity of circulation, total transactions, and gross national product.
Where are the supply-and-demand concepts when it comes to overall prices? In truth, overall prices are determined by similar supply-and-demand forces that determine the prices of individual products…An increase in the supply of money, then, will lower the price or purchasing power of the dollar, and thereby increase the level of prices. A fall in the money supply will do the opposite, lowering prices and thereby increasing the purchasing power of each dollar…So prices, overall, can change for only two reasons: if the supply of money increases, prices will rise; if the supply falls, prices will fall. If the demand for money increases, prices will fall; if the demand for money declines, prices will rise. The purchasing power of the dollar varies inversely with the supply of dollars, and directly with the demand. Overall prices are determined by the same supply-and-demand forces we are all familiar with in individual prices. Micro and macro are not mysteriously separate worlds; they are both plain economics and governed by the same laws.”
Henry Hazlitt [Economics In One Lesson (1946), pp. 188–189.]is one the few gifted economists, who can make a 7-year old child understand the stupid and catastrophic fallacies caused by the voodoo-economics of “Keynesianism & Co.”. Let us focus on inflation with Hazlitt´s words: “Before we consider what the consequences of inflation are in specific cases, we should consider what its consequences are in general. Even prior to that, it seems desirable to ask why inflation has been constantly resorted to, why it has had an immemorial popular appeal, and why its siren music has tempted one nation after another down the path to economic disaster…There is a second group, less naive, who see that if the whole thing were as easy as that the government could solve all our problems merely by printing money…So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings disastrous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the over-expansion of some industries at the expense of others. This involves a misapplication and waste of capital…It is impossible, moreover, to control the value of money under inflation.
For, as we have seen, the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 percent increase in the quantity of money will mean a 50 percent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money…All this explains why, when super-inflation has once set in, the value of the monetary unit drops at a far faster rate than the quantity of money either is or can be increased.
When this stage is reached, the disaster is nearly complete; and the scheme is bankrupt… The more sophisticated advocates of inflation, in brief, are disingenuous. They do not state their case with complete candor; and they end by deceiving even themselves. They begin to talk of paper money, like the more naive inflationists, as if it were itself a form of wealth that could be created at will on the printing press. They even solemnly discuss a “multiplier,” by which every dollar printed and spent by the government becomes magically the equivalent of several dollars added to the wealth of the country…
For inflation throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it. We are all accustomed to measuring our income and wealth in terms of money. The mental habit is so strong that even professional economists and statisticians cannot consistently break it. It is not easy to see relationships always in terms of real goods and real welfare….Who among us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with some pre-inflationary period? … He is of course not blind to the rise in the cost of living. But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his money salary had been reduced to give him the same reduced purchasing power that he now has, in spite of his salary increase, because of higher prices. Inflation is the auto-suggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people.”
With simple, elegant, and logical-analytical explanations, Hazlitt connects the dots between inflation, deficit-spending, debt, and taxation, which we actually should have comprehended as children: “Deficit spending, once embarked upon, creates powerful vested interests which demand its continuance under all conditions. If no honest attempt is made to pay off the accumulated debt, and resort is had to outright inflation instead, then the results follow that we have already described. For the country as a whole cannot get anything without paying for it. Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man. But the situation is even worse than this, because, as we have seen, inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor may be more heavily taxed by inflation, in percentage terms, than the rich. For inflation is a kind of tax that is out of control of the tax authorities. It strikes wantonly in all directions. The rate of tax imposed by inflation is not a fixed one: it cannot be determined in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after.
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”
So, now let us go back to the question of the criminal nature of inflation, but before we talk about your hard earned inflationary fiat-money, a comparison to the counterfeiting of other products, such as gold, is important for further understanding. Counterfeiting is naturally fraud- a highly criminal offence. When a counterfeiter mints brass or dilutes a gold-coin with other inferior metals and sells them as gold, he cheats the seller of whatever goods he purchases with the brass or whatever metal. Every subsequent buyer and seller of the inferior and cheaper metal is cheated in turn. But it will be instructive to examine the precise process of the fraud, and see how not only the purchasers of the brass but everyone else is defrauded and loses by the counterfeit.
You understand now that the process of inflation — printing more money or lending out of your bank deposits as credits with a much higher ratio into circulation- is done systematically by all (commercial) banks, which is literally what counterfeiting is: it steals from and injures all the legitimate, existing fiat-money-holders by having their purchasing power diluted. In short, counterfeiting defrauds and injures not only the specific holders of the new money (coins, cash, digital fiat-money) but all holders of old money — meaning, everyone else in society. As Rothbard describes it nicely: “Counterfeiting, and the resulting inflation, is therefore, a process by which some people — the early holders of the new money- benefit at the expense of (i.e., they expropriate) the late receivers. The first, earliest and largest net gainers are, of course, the counterfeiters themselves…Thus, we see that when new money comes into the economy as counterfeiting, it is a method of fraudulent gain at the expense of the rest of society and especially of relatively fixed income groups. Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but now why this has happened. And the inflation of counterfeiting does not even confer the benefit of adding to the nonmonetary uses of the money commodity”.
Rothbard concludes logically: “Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combating this activity by inventing superior detection devices. The difficulty is far greater than that.”
The fact is that commercial banks- meaning: fractional reserve banks — create money out out of thin air. They do the same thing as counterfeiters, because counterfeiters, too, create money out of thin air by printing something, called money, or as a warehouse receipt for money.
This is how the banks extract resources from the public, from the people with the hard-earned money, having worked hard for it. Fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the total balance of the legal system: the law fails to treat the receipts as counterfeit.
Now the logical and legitimate question arises for every bank-depositor like yourself: what happens, if there is a “bank run”- all depositors demanding their money at the same time? Rothbard put it another way with his words: “…a bank is always inherently bankrupt, and would actually become so if its depositors all woke up to the fact that the money they believe to be available on demand is actually not there.”
A very short historical insight: as late as World War I, the general public in Western world rarely used bank deposits, because most transactions were settled in cash, and workers received cash rather than bank checks for wages and salaries. After World World II, under the force of decades of special support and privilege of government, checking accounts became used nearly worldwide. Due do this change, a bank can issue fraudulent and inflationary warehouse receipts just as easily in the form of open book deposits as it can in bank notes. Effectively, the bank, instead of printing fraudulent, uncovered bank notes worth your deposited money and lending them them to a loan-borrower, it can simply open up a new or larger account for the borrower, and credit him with a specified amount, thereby, at the stroke of a pen and as if by magic, increasing the money supply in the country by the same amount. As Rothbard said:
“In the real world, as fractional reserve banking was allowed to develop, the rigid separation between deposit banking and loan banking was no longer maintained in what came to be known as commercial banks. The banks accepted deposits, loaned out its equity and the money it borrowed, and also created notes or deposits out of thin air which it loaned out to its borrowers. On the balance sheet, all these items and activities were jumbled together. Part of a bank´s activity was the legitimate and productive lending of saved or borrowed funds; but most of it was the fraudulent and inflationary creation of a fraudulent warehouse receipt, and hence a money surrogate out of thin air, to be loaned out at interest”.
So, the following (legal, criminal, and contractual) questions are inevitable for you, as a depositor: are the banks allowed to be debtors to their depositors and noteholders rather than bailees retaining someone else´s property for safekeeping?
If the banks were to be treated like any other business and the governmental “regulation” were to be applied equally to banks, then the banks must pay their debts promptly or else be declared insolvent and be put out of business — but unfortunately this system of free banking is not the reality of the truth. Without going into the details of explanations, let it be said in Rothbard´s words: “The mere existence of bank competition will provide a powerful, continuing, day-to-day constraint on fractional reserve credit expansion. Free banking, even where fractional reserve banking is legal and not punished as fraud, will scarcely permit fractional reserve inflation to exist, much less to flourish and proliferate. Free banking, far from leading to inflationary chaos, will insure almost as hard and non-inflationary a money as 100 percent reserve banking itself”.
Fact is that continuing, never-ending fear of a bank run will provide a healthy “checks and balances” on inflationary bank operations, even though the bank run allows for a considerable amount of credit expansion and bank inflation before retribution arrives. It happens, long after inflation has caught hold and the damage can be felt.
Free banking, then, will inevitably be a system of hard money and virtually no inflation.
The reality, in contrast, is the ruling central banking structure, and its essential purpose is to use government privilege to remove the limitations of free banking on monetary and bank credit inflation. The central bank is one way or another in collusion or working tightly together with the government, be it owned, controlled, and/or operated by the government. Whatever the circumstances, the Central Bank receives from the government the “monopoly privilege” for issuing banknotes or cash, while other privately-owned commercial banks are only permitted to issue demand liabilities in the form of checking deposits. In some cases, the government treasury itself issues paper money as well, but usually the Central Bank is given the unique privilege of issuing paper money in the form of bank notes (i.e: Federal Reserve Notes). It is indeed a perverted condition that the entire financial system is made to depend on the supervision of the state (“which historically has been the first to benefit from profits obtained through the non-fulfillment of the safekeeping obligation in the monetary-deposit contract”). [Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., p. 152.]
Whatever the degree of illegitimate and criminal the government has proven to manifest through the sanctioning and de facto-legalization of the (central) banks´ caused damages, it seems at the end of the day that “the authorities can legalize any institution, no matter how legally monstrous it may seem.” [Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., p. 152.]
It should be clear that, even under central banking, if the public is unwilling to hold any money in bank deposits or notes and insists on using only gold, the inflationary potential of the banking system will be severely limited. Even if the public insists on holding bank notes rather than deposits, fractional reserve bank expansion will be highly limited. The more the public is willing to hold checking accounts rather than cash, the greater the inflationary potential of the central banking system.
Yet, what if the feared bank run becomes reality and many or all depositors demand redemption, either in gold or in Central Bank notes, as this kind of bank happened under the American banking system until 1933? In contrast to free banking, the Central Bank — as a lender of last resort — stands ready at all times to lend its powerful prestige and resources. As we have seen many times, the Central Bank stands ready to bail out banks in trouble, to provide them with reserves by purchasing their assets or lending them reserves.
In essence, the Central Bank serves exactly this purpose: as a global central banking cartel, the central banks coordinate the banks so that they can evade the restrictions of free markets and free banking and inflate uniformly together, which is more than welcome and lobbied for by the banks. It is their permanent ticket to inflation and easy money.
The only remaining limitation on credit inflation is the legal or traditional minimum reserve ratio a bank keeps of total reserves or total deposits.
In the United States since the Civil War, these minimal fractions are called “legal reserve requirements”.
The decisive factors of the money supply under central banking are reserve requirements and total reserves. The Central Bank can determine the amount of money supply at any time by manipulating and controlling either the reserve requirements and/or the total of reserves of the the commercial banks. The logical deduction: one method for the Central Bank to inflate bank money and the money supply is to lower the fractional reserve requirement. Raising reserve requirements, then, is contractionary and deflationary; lowering them is inflationary. The day-to-day instrument of the Federal Reserve is the control and “fixing” of the money supply and to determine total bank reserves.
The focus should be to put an end to inflation: all that needs to be done is that governments freeze, better abolish, central banking altogether. If that seems to be so hard, then, as a transitional step, the Central Bank should be prevented from making further loans or especially open market purchases. It is this simple, but you can imagine why it is not done.
The “controversy” amongst the free-banking advocates and central-bank promoters:
De Soto´s explanation in the context of the “controversy” between free-banking advocates and central-bank promoters: “First, a free-banking system, by its very nature, even under optimal conditions, would be prone to occasional, isolated bank crises which would harm customers and holders of banknotes and deposits. Therefore, under such circumstances, there is a need for an official central bank with the power to step in to protect noteholders and depositors in the event of a crisis. This argument is clearly paternalistic and aimed at justifying the existence of a central bank. It ignores the fact that when support is provided to those hit by a crisis, in the long run such support merely tends to further hamper the smooth running of the banking system, which requires constant and active supervision and confidence on the part of the public. Supervision is relaxed and confidence bolstered when the general public takes for granted the intervention of the central bank to avoid any damages in the case of a bank failure. Moreover bankers actually tend to exercise bank´s support should they need it. Hence it is quite credible that the existence of a central bank tends to aggravate bank crises, as has been revealed even recently in several cases. The ‘deposit insurance’ system in many countries has played a major role in fostering perverse behavior among bankers and in facilitating and aggravating bank crises. Nevertheless, from a political standpoint the above paternalistic argument can become extremely influential, even nearly irresistible, in a democratic environment. At any rate, this first argument marks the beginning of the false start in the free-banking/central-banking debate, in the sense that the argument would be meaningless if traditional legal principles were respected and a 100-percent reserve requirement were re-established for banking. Under these conditions, no harm would be done to holders of banknotes and deposits, who would always be able to withdraw their money, regardless of the fate of their bank.
There the paternalistic argument that a central bank is necessary to protect the interests of injured parties makes no sense. If we follow the logic of a fractional-reserve banking system, this first argument in favor of a central bank is at least very doubtful, while in the context of a free-banking system based on traditional legal principles and a 100-percent reserve requirement, it is completely irrelevant.
…Experience has shown that far from defusing economic crises, the advent of the central bank has exacerbated them….In contrast, the existence of a central bank, a lender of last resort, may prolong the process of credit and monetary expansion much further in relation to the independent process which would be set in motion in a free-banking system. It is impossible to ignore the contradiction inherent in the institution of the central bank, which was theoretically created to curb monetary expansion, maintain economic stability and prevent crises, but which in practice is devoted to providing new liquidity on a massive scale when banks face crises and panics. If we also consider political influences and the inflationary processes and their distortion of the productive structure have been aggravated and the historical result has been much more severe and profound economic crises and recessions than those which would have arisen in a free-banking system. Therefore we can conclude that this second argument in favor of the central bank is groundless, since the very existence of the central bank tends to exacerbate economic crises and recessions…There is no doubt that crises and recessions provide politicians and technocrats with an ideal opportunity to orchestrate central-bank intervention. Therefore it is obvious that the very existence of a fractional-reserve banking system invariably leads to the emergence of a central bank as a lender of last resort. Until traditional legal principles are re-established, along with a 100-percent reserve requirement in banking, it will be practically inconceivable for the central bank to disappear (in other words, it will inevitably arise and endure)….Therefore it is paradoxical to claim that the correct treatment of economic and bank crises depends on the existence of a central bank, when the central bank is ultimately the main culprit in dragging out and exacerbating crises…The only way to end this vicious circle is to recognize that the origin of the entire problem lies in fractional-reserve banking”. [ Jesús Huerta de Soto, “Money, Bank Credit, And Economic Cycles” (2012), 3rd ed., pp. 636–637.]
With this knowledge and understanding, I can totally agree with de Soto that the simple re-establishment of general and sound legal principles (100-percent reserve requirement) would prevent a free-banking system from causing any negative effects on economic processes, and only with this simple principle of a 100-percent reserve requirement the most common excuse and pretext for creating a central bank would disappear. We will learn later on, why the decentralized, network-consensus-based and trustless (“Do not trust! Verify!”) architecture of the hardest money, medium of exchange, store of value, and unit of account - Bitcoin — makes this whole exhaustive discussion about fractional-reserve banking (with whatever intellectual-academic doctrines and nuances, i.e. free-banking system, currency-school), 100-percent reserve requirement and the inherent cry for the establishment of a central bank obsolete forever.
To be continued…in Part2:
The Criminal Nature of “Fractional-Reserve Banking” and Credit Expansion:
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