Surprise is the beginning of wisdom.
—David Gelernter
To grasp the fallacy of the reigning monetarist creed requires seeing that its baneful effects are not limited to inflation. The point about bad money is not that it converges with the worth of the paper it is printed on. It is worse than that. Falsifying the information basis of all prices, it stultifies entrepreneurs, deceives savers, and fosters tyranny.
Interest rates, for example, register the average expected returns across the economy. With a near-zero-interest-rate policy, the Fed falsely zeroes out the cost of time by nullifying the yield of saving. The Fed tells you that the opportunity cost of spending today is zero, which is true only if you die tomorrow. This deception retards economic growth. Rather than creating new assets, low-cost money borrowed from tomorrow bids up existing assets today. It produces no new learning or value and leaves no way to pay back the debt.
In the name of managing money, the Fed is trying to manipulate investors’ time—their sense of present and future valuations. But time is not truly manipulable. It is an irreversible force impinging on every financial decision we make. The Fed policy merely confuses both savers and investors and contracts the horizons of investment, which in some influential trading strategies have shrunk to milliseconds.1
The critics of freely floating currencies have proposed two mostly complementary solutions: the creation of new currencies and the return to gold, the venerable historic standard monetary element. From the perspective of information theory, the two solutions converge. Each is an attempt to establish a regime of irreversibility—the assurance that transactions or contracts cannot be reversed, counterfeited, or nullified by private actors’ double-dealing or by public entities’ inflating the currency or countermanding contracts. The medium of exchange, standard of value, and store of wealth cannot be subject to arbitrary change from outside.
Irreversibility is a function of time. Government control of the distribution of money and credit gives rise to endless opportunities to rerun the race against time in a way that the government’s favorite children always win. The principal attraction of both gold and recent experiments in digital money is precisely that they give us money as irreversible as time itself.
The second law of thermodynamics ordains that entropy as disorder always increases and cannot be reversed. You cannot reconstruct an egg from an omelet or reuse the energy that heated your house or that flowed kinetically over Niagara Falls. It is entropy that imposes an irreversible arrow of time on the physical world. Thermodynamics runs one way, irreversibly, and defines the essence of time.
Sound money requires hostility to time travel. You do not want someone to go back and re-spend the same money that he has already given you or reverse the transactions that you have made. You do not want your customers to bounce their checks or your bank or the government to bounce yours. Sound money is the equivalent of scientific integrity: the system must not permit the manipulation of data after the experiment has taken place.
Gold achieves irreversibility through its refractory chemistry and the time-based entropy of extraction. As master of the mint in eighteenth-century England, Isaac Newton spent much of his time proving that gold could not be hacked, counterfeited, or reverse-engineered from other elements.2 As Nick Gillespie of Reason magazine has observed, Newton was not an alchemist so much as an “anti-alchemist.”3 Bitcoin and other digital currencies offer similar irreversibility through complex mathematics and software using a time-stamped public “blockchain” of transactions. Latter-day Newtons are constantly trying to hack bitcoin.
Gold and bitcoin both protect the measuring stick from the advance of physical capital or technology and even the learning curves of labor. A metric cannot be part of what it measures. If the measuring stick changes in response to economic progress, it cannot measure that progress. In order to bear creative changes it must not change itself. To be a gauge that is exempt from the turmoil of markets, it must be rooted outside those markets. It must somehow cancel capital, technology, and learning. Like the electromagnetic spectrum, which bears all the messages of the Internet to and from your smartphone or computer, it must be rooted in the absolute speed of light, the ultimate guarantor of the integrity of time.
Dominating our own era and revealing in fundamental ways the nature of money is the information theory of Kurt Gödel, John von Neumann, Alan Turing, and Claude Shannon. Information theory tells us that information is not order but disorder, not the predictable regularity that contains no news, but the unexpected modulation, the surprising bits. But human creativity and surprise depend upon a matrix of regularities, from the laws of physics to the stability of money.4
Information theory has impelled the global ascendancy of information technology. From worldwide webs of glass and light to a boom in biotech based on treating life itself as chiefly an information system, a new system of the world is transforming our lives. Its roots are not in the necessary carriers of predictable physics and chemistry but in the creativity and disorder at higher levels of the hierarchy of life. Information theory operates on the epistemic plane where human beings conduct falsifiable experiments that yield learning and accumulate knowledge.
The lesson of information theory is that irreversible money cannot be the measure of itself, defined by the values it gauges. It is part of a logical system, and like all such systems it must be based on values outside itself. It must be rooted in the entropy of irreversible time.
When the bitcoin innovators Satoshi Nakamoto and Nick Szabo sought to invent new forms of money, they explicitly designed algorithms that nullified the effects of technological advance in computer technology. As Moore’s Law improves the computer systems used to validate transactions and integrate them with the bitcoin blockchain, for example, the “proof of work” challenge in the algorithm becomes proportionately more difficult and the reward smaller.
Bitcoin “miners” could gain their specified rewards, but they could not use their superfast devices to accelerate their own transactions or capture greater personal returns from them. Regardless of the evolution of computer technology, every group of transactions in the blockchain and every new issue of bitcoins would require a ten-minute span to verify and integrate, mine and mint. Devoid of the outside influences of capital and technology, the source of bitcoin value becomes the pure irreversible passage of time.
The bitcoin theorists based this principle on the immemorial experience of gold. Largely by happenstance, gold has mostly canceled capital and technology. As mining and extraction technology have improved, the exhaustion of the “easy” nuggets near the surface has required probing on to ever deeper and more difficult lodes and more attenuated deposits. Throughout history, with few contrary episodes such as the discovery of the Potosi bonanza in Peru in the seventeenth century, the increasing difficulty of mining new, deeper gold has nullified all advances in the technology of mining. As a result, gold has served as a gauge, perdurable and pure, of the time consumed in extracting it.
Gold is the most monetary of elements because its cost is most closely tied to the time entailed in its extraction. All the some 170,000 metric tons of gold that have accumulated through the centuries is still available today. Virtually all the world’s gold reserves are known. This available supply dominates the price. At the margin, gold’s value is determined by hours alone, not labor plus capital.
Today it costs close to $1,200 to mine a new ounce of gold, which sells for about the same amount. As Kwasi Kwarteng has shown, throughout history to the present day, the value of the world’s available gold stock has almost always tracked the value of the world’s GDP, remaining close to 10 percent.5
Despite technological advances and population growth, the stock of gold rises every year, never falls, and has averaged 2.5 percent annual growth for centuries.6 Gold thus has been the only commodity whose future price is always equal to the spot price plus the rate of interest over the time period. A million paper dollars held since 1913, when the Federal Reserve Bank was created, would be worth $20,000 today, down 98 percent. A million dollars of gold in 1913 would now be worth $62 million.7 Aligned with irreversible time, gold is the monetary element that holds value rather than dissipates it.
Many food and housing prices are set by the cost of time and labor. If gold’s value is constant, then all other prices can become variables around that constant. Just as the North Star provides a fixed reference for celestial navigation and astronomy, so gold provides a fixed reference for the value of the galaxy of goods and services.8 Breaking the link of the dollar to gold broke the link to time, devalued labor, and is at the root of the decline in the middle class in America.
When the tie to gold ended in 1971, governments pushed real estate as a haven from dollar depreciation, turning the U.S. economy from an industrial powerhouse into a financial and consumption casino.
Contrast this cancelation of capital in gold and bitcoin with the system of international currency trading that dominates contemporary money. Now at $5.3 trillion per day, currency trading dwarfs all the globe’s stock markets and is seventy-three times greater than all trade in goods and services.9 To deal with the floods of monetary change, banks spend half a trillion dollars on information technology, decisively leading all other sectors in computer outlays.10 The work of maintaining the measuring stick now costs 20 percent more in computer equipment than all the world’s information technology for manufacturing new goods. Moreover, that work yields a volatile but steadily rising proportion of all banking profits.
In other words, our current floating-rate system fails to cancel capital, technology, and learning. Instead capital, technology, entrepreneurial ingenuity, and government power together largely determine the earnings in the financial system. In a form of private seigniorage—the profits from creating money—the largest traders capture hundreds of billions of dollars or dollar equivalents every year from setting the measuring stick. Therefore, it is not a measuring stick at all but a speculative ocean of currencies that banks surf for profits. In what looks uncomfortably like a protection racket, the banks extract these profits as a kind of volatility tax on the companies that use them to hedge currencies.
Moving toward a modern gold standard, complemented by a bitcoin or other Internet digital currency standard, would eliminate all this profitable froth. Under a gold standard, trading imbalances are nearly meaningless. Flowing freely to redress any imbalance, capital is more mobile than goods and services and can determine the balance of trade. Under the gold standard, the world enjoyed some two centuries of ever-expanding global trade and investment without any semblance of balance on the current account. Americans, for example, ran trade deficits year in year out for two hundred years while rising to a century of dominance in the world economy.11 If the United States returns to stable money, rooted in time, the twenty-first century can be an American century as well.
But to fully understand money, we should consider the philosophy behind the most radical experiment in digital money.