A brief review of El Salvador’s “Bitcoin Law”
On 8 June 2021, the El Salvadorian Legislative Assembly passed a bill, which has now become law, that makes Bitcoin lega...
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In this article, we explore the known (and possible) economic and philosophical influences of Satoshi Nakamoto: the pseudonym of bitcoin’s obscure founder. This is part two of a two-part article series on the influences of Satoshi Nakamoto. For part one (which explores Nakamoto’s technological influences), click here.
Satoshi Nakamoto’s influences – in his own words:
Two months before bitcoin’s official launch, Nakamoto published in a mailing list that the soon-to-be-released cryptocurrency would be “very attractive to the libertarian viewpoint”.[1]
In January 2009, Nakamoto launched version 0.1 of bitcoin and embedded the following message into the coinbase of the so-called "genesis block":
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”[2]
The text refers to an article from The Times – a newspaper in the UK.[3] The article’s content gives us a clue as to Nakamoto’s motivations for bitcoin: certainly a strong disliking of bailouts – but also perhaps of central banking, fiat (government-issued) currency, and even fractional reserve lending.[4] Remember that bitcoin was launched in the wake of the Global Financial Crisis, during which the US government had already been pumping taxpayer money into both failing banks and automobile manufacturers (socialising the losses). One month after bitcoin’s launch, Nakamoto advertised the new cryptocurrency on a web forum, pointing out his problem with the traditional monetary system as follows:
“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible”.
Ayn Rand:
In 1992, Timothy May, a crypto-anarchist and a founding member of the cypherpunk movement (to which bitcoin’s existence may be attributed), published an essay called “Libertaria in Cyberspace”. The essay made the case that cyberspace would be a more hospitable location for a libertarian society than would be anywhere in realspace due to the fact that shutting down cyberspace necessitated shutting down computer-to-computer communication.
Elsewhere, in a cypherpunk mailing list from the early-1990s, May wrote that:
“Ayn Rand was one of the prime motivators of crypto anarchy. What she wanted to do with material technology (mirrors over Galt's Gulch) is _much_ more easily done with mathematical technology”.
In 2015, Nick Szabo[5] gave a talk at a conference in London and named Ayn Rand and FA Hayek as the inspirations of the original cypherpunks. Szabo referenced Galt’s Gulch – an imaginary place from Rand’s fictional novel Atlas Shrugged where “you could form your own independent community and declare your independence from corrupt institutions”. Szabo argued that what May had sought to do with encryption was to create a “Galt’s Gulch in cyberspace” – a place with private money and non-violent ways to protect property and enforce contracts.
In 1973, the first edition of David Friedman’s The Machinery of Freedom was published (now in its third edition). The book explained how an anarcho-capitalist society could work – drawing from legal systems of various societies at different times in history as well as articulating how technologies may be able to replace various functions of government in the future. This book was also referenced as influential to the crypto-anarchist movement on more than one occasion in the cypherpunk mailing list that May directed.
But beyond Friedman’s influential book on anarcho-capitalism, he was also writing about anonymous digital currencies going back at least as early as 1996 (thirteen years before bitcoin’s launch) and dedicated a chapter to the subject in his 2008 book Future Imperfect.
And lastly, in an email response to me as part of my preparation for writing this article, (David) Friedman mentioned that he was probably responsible for influencing his father Milton Friedman (the late Nobel laureate economist), who described in an interview in the 1990s how “ecash” might work over the internet.[6]
In 2002, Nick Szabo, who Nakamoto had communicated with, published an article called “Shelling Out: The Origins of Money”. Szabo’s article references Carl Menger, the so-called father of the Austrian school, and builds on Menger’s explanation for how money is able to emerge naturally through a system of barter and requires no sanction of the state. It is certainly plausible that Nakamoto became familiar with Menger’s explanation for the origin of money – through Szabo’s work – if not before.
Mises wrote a great deal on the importance of a sound money and argued The Theory of Money and Credit that “The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of the governments and political parties”.[7]
However, on free banking (without the presence of a central bank), Mises believed that fractional reserve ratios “in practice would approximate a 100 per-cent gold or silver money”.[8] In his book Human Action, Mises asserted that even a “cartel of commercial banks” could not maintain itself by colluding “for the sake of a boundless expansion of their issuance of fiduciary media” because the negative reputation it would cause for individual bank members of such a cartel would make it not in their interest to conspire in the first place. And as for central bank involvement, Mises argued that “governments interfered precisely because they knew that free banking keeps credit expansion within narrow limits”.[9] Under a central banking system, by contrast, he believed that central banks created a perverse environment in which the commercial banks would be inclined to be irresponsible with their fractional reserve ratios.
However, it is important to point out that despite the historical restraint exercised by commercial banks under a free banking system (in absence of central banks), Mises still believed that even a small amount of fractional reserve lending still set off a chain of events that led to the trade cycle. He wrote:
“The notion of ‘normal’ credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle. Of course, if the additional amount issued is not large, neither are the inevitable effects of the expansion”.[10]
I was unable to find direct evidence that Nakamoto became aware of Mises before the release of bitcoin (although it seems doubtful that he would not have), but at least by mid-2010 (a year and a half after bitcoin’s release), Nakamoto participated in a web forum discussing Mises’s regression theorem.
As previously stated, Szabo has identified Hayek (along with Rand) as one of the more influential figures that inspired the crypto-anarchist movement. Common themes of Hayek’s work – namely the concepts of emerging spontaneous social order and decentralized knowledge and decision-making – are both fundamental to understanding Nakamoto’s thinking and bitcoin.[11]
Hayek’s work that is most directly relevant to bitcoin’s architecture was his book Denationalisation of Money. Hayek argued that the notion that the state’s blessing is necessary for money to work was “superstition” and that money – like law, language and morals – is an ‘undesigned institution’, which spontaneously emerged “by a process of social evolution”. Even more forcefully, he argued that money as legal tender “is simply a legal device to force people to accept in fulfilment of a contract something they never intended when they made the contract. It becomes, thus, in certain circumstances, a factor that intensifies the uncertainty of dealings”.[12]
Rothbard’s view of banks was closer to the traditional sense of banks: warehouses operating as businesses that stored gold and silver for their customers and that issued paper warehouse receipts in exchange for precious metals stored. In this traditional banking system, individuals quickly found it advantageous to exchange the paper warehouse receipts for goods and services in the market for the convenience of not having to carry around the precious metals themselves. Rothbard’s view of banking in the traditional sense (as a warehouse) is distinguished from the fractional reserve free banking school (including from fellow Austrians) in that he believed the practice of issuing more warehouse receipts than there is in gold under the bank’s custody to be “outright fraud” and “counterfeiting”[13] – even in cases when the banks may be honest with the customers about the practice and about the exact fractional reserve ratio.
It is unknown whether Nakamoto saw fractional reserve free banking (with no central bank involved and when banks were honest with customers about the fractional reserve ratio) as necessarily “outright fraud” as Rothbard did. Regardless, Rothbard was an influential, unapologetic advocate of the free market and sound money, particularly of the gold standard, and was arguably among the most prominent opponents of central banking – if not the most. Along with David Friedman, Rothbard was also a leading theorist of anarcho-capitalism (again, relevant to crypto-anarchist movement).[14]
As Menger, Mises, Hayek, and Rothbard were economists of the Austrian school of economics, it is worth mentioning that a 2012 report on virtual currencies by the European Central Bank (ECB) argued that “[t]he theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation”.[15] The report also made the case that members of the bitcoin community today are “inspired by the former gold standard”. Interestingly, Nakamoto indeed himself had made the connection, arguing in the bitcoin white paper that miners in the network receiving a “steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation”. The “steady” and “constant” (yet diminishing) reward for solving blocks (as miners do) suggests that Nakamoto understood inflation, was aware of gold’s proven historic ability to maintain a relatively steady value over time, and that bitcoin’s diminishing issuance and fixed monetary supply could – in some way – mirror a digital version of what gold had historically been able to accomplish.
[1] Although libertarianism as a philosophy takes on various forms, common themes between these forms include: individual liberties, protection of property rights, and free markets (including the free movement of people and goods). In order to achieve these aims, some libertarians seek to achieve them with a government that serves no other purpose than protecting life, liberty, property (in the Lockean view) and pursuit of happiness (in the Jeffersonian view). Meanwhile, other libertarians point out that a government cannot protect rights (through a monopoly on the use of force and confiscatory taxation) without necessarily violating the aforementioned rights, and thus, a truly free society would be one in which rights protection could be offered by competing individuals (or companies) on the market. To understand how rights protection might work in the absence of government, see David Friedman’s book The Machinery of Freedom.
[2] A similar message was placed into the last block before bitcoin’s April 2020 block reward halving, which reads: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue”.
[3] The article can be read in its entirety here (pg. 1) and here (pg. 2).
[4] We will discuss later the Misesian view that fractional reserve free banking, when absent of a central bank, has historically remained restrained in terms of credit expansion.
[5] Note also that Satoshi Nakamoto quite plausibly could have read Nick Szabo’s essay “Shelling Out: The Origins of Money”, which is an account of shell money used by Native Americans in the continental United States existing before the European colonists had settled in the New World. Szabo’s account provides a good case against the notion that money need be sanctioned by a nation state. Szabo’s work on the origins of money overlaps with Carl Menger’s, which I have covered elsewhere.
[6] “Ecash” here refers to electronic currency generally – not the digital currency that used the name Ecash, which we discussed in part one of this two-part article series.
[7] Mises (1971), p. 416.
[8] Rothbard (2008), p. 278.
[9] Mises (2007), p. 447.
[10] Mises (2007), p. 442.
[11] See, for example, FA Hayek’s influential paper “The Use of Knowledge in Society”.
[12] Hayek (1990), pp. 37-40.
[13] Rothbard (2009), pp. 801-803.
[14] However, it is worth noting that Murray Rothbard was not mentioned in Timothy May’s cypherpunk mailing list as David Friedman and Ayn Rand were.
[15] I note that the ECB report incorrectly associated Austrian economists generally as necessarily being anti-fractional reserve banking. That is not the case. It is true that there exists an anti-fractional reserve banking paradigm of the Austrian school – mainly following the late Murray Rothbard. However, there also exists a fractional reserve free banking paradigm of the Austrian school, which advocates allowing banks to engage in fractional reserve lending under a competitive environment yet without the existence of a central bank. The latter is championed by Lawrence White, George Selgin, and Steven Horwitz.
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