Hodler’s Are The Bank of Last Resort In a World of Free Market Banking On The Bitcoin Standard | by Ugly Old Goat | Jul, 2022
The opportunity exists for 10,000 or even 100,000 micro-banks to emerge spontaneously at swap meets operating solely on the Bitcoin STANDARD for those with the courage to act quickly. It Is Time For Hodlers To Relearn The Lost Art of Commercial Banking.
As we witness the predictable cleansing of DeFi, NFTs, and Shitcoin Banks (Exchanges), it is necessary to examine the thinking which brought us here. Why, if bitcoin truly stands alone, has it followed and at times led to the current deleveraging phenomena? This article will focus on the current failure of bitcoin banking and what hodlers can do to fix it.
In The Fiat Standard Saifedeam Ammous used the analogy of overselling seats at a stadium to describe unsound banking. Unfortunately, this is not banking. It describes a segregated or unsegregated warehouse operation depending on how the tickets are sold. There is a real need for self-custody and or third-party private warehousing for bitcoin, but this function should not be confused with banking.
The analogy of the football stadium falls apart except for describing a warehousing operation or a hodl. It assumes stagnate wealth and a zero-sum marketplace (a fixed amount of seating.)
There is also a school of Austrian economics largely influenced by Murray Rothbard that holds that anything less than a 100% gold standard is criminal and if it were possible would submit an entire Nation, including banks, to a 100% gold reserve standard.
There is a similar school in technology that anything less than a 100% Bitcoin Standard is criminal. These bitcoiners with technological backgrounds tend to view gold as a barbarous relic, not unlike John Maynard Keynes, not realizing that sound commercial banking on the gold standard emerged organically, much like bitcoin.
As E. C. Harwood wrote:
“Among the gold standard advocates are found the 100-percent-reserve proponents who would restrict the purchasing media in use to gold and perhaps silver coins or paper currency and to checking accounts directly representing these. They would go back to medieval times before the earliest beginnings of sound commercial banking. How they would cope with the flood of products to be marketed in a modern industrial civilization they do not suggest, nor do they seem to realize that a problem might exist.” -The Lost Art of Commercial Banking
Self-liquidating commercial paper that emerged organically in the markets on the gold standard in the late 19th Century solved this problem. There were no fixed or decreed reserves. Free-market banking determined the money supply. Free-market banking expands the money supply as new wealth is created and contracts the money supply as these goods are sold in the market. This was the innovative gold standard that emerged during the 19th Century Gilded Age.
Sound commercial banking did not emerge from banking the unbanked which seems to be the vision of The Crypto World. In most cases, the unbanked are unbanked for a reason. There is little reason to expect this will change.
“The proper functioning of a commercial banking system is vital for the development of capitalistic economies. Its two primary functions are savings and lending, which revolve around making a profit between the interest rate paid on savings and that charged on the loans. But banks can lend either by drawing from the deposits/savings they collected or by creating new money. Harwood posits that the discriminating factor is to create new money only when such money goes into productive investments, which is when this money increases the quantity of goods and services in circulation (i.e a company builds a plant to manufacture cars) and not when this money finances consumer spending or any other non-productive investment (i.e an individual gets a loan to buy that car). In the first case, the banker can create new money because this is non-inflationary. In the second case, the purchase shall be rather financed by drawing from savings/deposits because creating new money — not offset by an increased amount of productive goods — would be inflationary.” (Andrea Biaconi, Bold emphasis in the original.)
This need is becoming evident with the collapse of The Crypto World and the emergence of The Bitcoin Standard. Competition in this new venue has opened the door to relearn the lost art of commercial banking for small and large producers alike, but especially the small producer without access to the fiat money standard. Herein lies the hope of The Bitcoin Standard’s emergence.
Further, with sound commercial banking new wealth creation is encouraged because low-interest and even no-interest loans are available to producers that are not available to consumers.
Unlike what we are witnessing in The Crypto World today where so-called decentralized finance (DeFi) promises wealth through money creation, a sound commercial bank first requires wealth creation. Only then can the money be created because it is secured by this new wealth.
New wealth coming into the market is not limited. It is unlike assigned seating or limited seating in a stadium and is more like a swap meet. It ebbs and flows. It is more like an empty field with participants bringing folding chairs, tents, food services, haircuts, computers, cars, car parts, tools, clothing, and a plethora of other items, including gold and bitcoin, and unlimited goods and services filling the empty field that can be purchased and carried home are the event’s end.
The spectators are not just spectators, but participants. Yet entrepreneurial bankers observe two things:
First, while wealth producers are coming to the market with an inventory of the particular wealth produced, their suppliers and workers have yet to be paid. Until these suppliers and workers are paid they have little or no money to buy additional things offered in the market.
Sure, they have their folding chairs, tents, pizza stand, barbershop, clothing, computers, and a plethora of other items including a small horde of gold, silver, bitcoin, and dollars, but nothing represents a portion of the real wealth contribution they made at work last week and is now being offered at swap meet by their employer or contractor.
Second, what standard or accounting unit should be used to facilitate trade? Folding chairs? Tents? Pizzas? Haircuts? Gold? Silver? Bitcoin? Dollars?
Pizza and haircuts were quickly ruled out.
Dollars seemed a possibility. They are recognized and legal tender. But banking in dollars is controlled from the top down by the legacy system. Sound commercial banking is a forgotten art from a bygone era and is impossible to implement under the current state charters and federal regulations.
Gold seemed a reasonable option since it has the highest stock-to-flow ratio of any commodity and has been used as the standard in the past. But theft and divisibility are lagging.
Bitcoin seemed a better option since it has a known fixed supply, is divisible into units as small as SATS, and is not easily stolen or confiscated. So Bitcoin was settled upon.
But one SAT is too small to be useful since the value measured in fiat dollars was just 0.0002 dollars. Any meaningful value measured in fiat dollars required 100 SATS which is the equivalent of 2 cents with a bitcoin price of $20,000. Since this was the first meaningful standard between dollars and bitcoin, 100 SATS was agreed by the participants as THE STANDARD.
Artist Rendition of Swap Meet Bitcoin Standard Coupons
Now that the STANDARD has been adopted the first problem can be addressed by young innovative banking entrepreneurs.
These new bitcoin bankers begin to estimate the value of the goods being offered in the market by wealth producers, and then offer to issue non-inflationary specie in STANDARDS secured by the new wealth creation.
In turn, the new wealth producer pays his suppliers and workers prior to the swap meet so they can redeem this specie at the upcoming swap meet.
Now whether this swap meet specie money is based on the 19th Century Gold Standard (not gold, but the gold standard or yardstick) or it is based on the 21st Century Bitcoin Standard (not bitcoin, but the bitcoin standard or yardstick), or both, part of the wealth claimed could be gold or bitcoin since they are also available at the swap meet.
When the swap meet closes at the end of the day, end of the week, or end of the month, the wealth producers reduce the specie creation from the proceeds of the sales of their particular wealth sold at the swap meet by repaying the loan.
The suppliers and workers leave the swap meet with a variety of new wealth and save the unused specie for use in a future market. (float)
This primitive description of sound commercial banking is a far cry from the bitcoin banking we are witnessing in today’s liquidity trainwreck where money is created from nothing, promoted with a high-interest return, backed by hype, a Rube Goldberg Machine and more money creation, rather than any real wealth, and is aptly named a virtual asset.
The opposite occurs with sound commercial banking. The scenario I am about to describe does not happen in Tokenville. It cannot happen.
This is because if the value of an inflation token is driven higher, it is not withdrawn from the market. It is simply passed on to a sucker that can only hope to do the same.
Not so with sound commercial banking.
With sound banking, the worst-case scenario is a short squeeze where during the course of the swap meet, the price of bitcoin is driven sharply higher. Let’s say 2x, 10x or 100x or even 1,000x. It matters not the multiple or even the time frame.
At some point, the swap meet bank may find the need to suspend redemption of STANDARDs into bitcoin just like Jimmy Stewart in It’s A Wonderful Life!
Is the swap meet bank insolvent? According to Murray Rothbard and a decreed fiat 100% reserve standard, the bank is insolvent because it is unable to redeem the STANDARD specie issued into bitcoin.
No, the bank is not insolvent. While it may be necessary to temporarily suspend redemption of the STANDARD into bitcoin, the 10x or 1,000x price increase enables HODLERS with self custody to purchase 10x or 1,000x more real wealth offered at the swap meet.
For sound banks suspension of redemption into the STANDARD is a temporary situation that self-corrects naturally and quickly so long as the market is free to operate if suspension happens at all and sound commercial practices are followed.
The market mechanism of a higher STANDARD value means much less non-inflationary purchasing media is created as the price of the STANDARD is rising. The market forces themselves make suspension of redemption less likely and a rare exceptional occurrence.
This is because as the price of the STANDARD increases new deposits from hodlers flow into the swap meet bank to take advantage of windfall purchasing power of 10X or 1,000x earlier in the day, week, month, or year.
The self-correcting free marketplace regulates the money supply, not a fiat reserve.
What reserves are required to operate a sound bank on the STANDARD? I have no clue. Anyone who does is operating from “a pretense of knowledge.” Most likely it will depend on the type of new wealth being produced. Certainly, the banking needs of a wheat farm are much different than that of a car manufacturer. And as market conditions change reserves will correspondingly change.
Merchants are free to issue their own notes. The first banks evolved from merchants offering new wealth on the gold STANDARD. Only later did commercial banking become an industry in its own right.
The bitcoin blockchain is not required for sound banking on the STANDARD. Lightning Network is not required. Although, both are utilized in final settlements. Centralized accounting procedures suffice. Seignorage shifts from a government monopoly to the issuing banks or merchants. It is conceivable (and this author believes likely) that the float alone is enough to keep a sound bank profitable eliminating interest entirely for short-term commercial loans.
Free bitcoin STANDARD banking develops trusted third parties addressing the scalability issue. Just as gold acted as the governor of the gold standard, bitcoin is the governor of THE BITCOIN STANDARD. In free-market banking, bitcoin legal tender is not only unnecessary but becomes a political anathema opening the door to Bitcoin Crony Capitalism.
Just as little gold reserves were required for the organic emergence of sound commercial banking under a gold standard, very little bitcoin reserves are required in bitcoin banking so long as the notes issued on the bitcoin standard represent real wealth.
As purchases are made the non-inflationary purchasing specie is retired and adequate reserves remain balanced. If the value of bitcoin rises sharply in relation to other things hodlers learn of the windfall and rush to the market to purchase the new wealth they could not previously afford.
In this sense self-custody hodlers act as the decentralized bank of last resort. Self-custody hodlers willingly bail out the sound banks and are enriched for doing so, while unsound banks are diminished or fail entirely.
Self-custody hodlers provide added liquidity in free-market banking by exchanging their digital fixed supply asset for the new supply of tangible assets that comes with wealth creation in free markets with sound money and free banking.
This is not a sum zero game, but a win-win-win-win for the wealth producers, their workers and suppliers, the bankers who fill the gap, and hodlers who save for the future and provide liquidity when needed.
Nor is this description like the unsound practices today in The Crypto World where money is created ex-nihilo without representing any new wealth entering the marketplace.
In Tokenville the value of the specie does not increase but devalues over time. High rates of return are promised that can not be sustained, devaluing the shitcoins of Tokenville all the more.
In a very real sense Sound Commercial Bitcoin Banking paves the way for what Parker Lewis terms The Definancialization of Money.
Self-custody bitcoin HODLERS are the bank of last resort on a free market bitcoin sound commercial banking standard. This is why bitcoin provides hope. Sound commercial banking is a lost art that must be relearned and applied to bitcoin by this generation from the bottom up, not the top down.
When Reason Magazine asked E. C. Harwood, “Critics of the gold standard say there isn’t enough gold to go around to permit trade to expand as it otherwise would. How do you respond to that charge?”
“That’s exactly why there was the cultural evolution of commercial banking — because there wasn’t enough gold to take care of all the transactions. So they devised commercial banking. No economists started it off, though; there was never an economist alive who had the wit to think that up. It just evolved because it was obviously necessary — obvious to a banker. He’s got a gold reserve, and he can create more claims against it and not go broke provided those claims are covered by an equal value of something else.”
The opportunity exists for 10,000 or even 100,000 micro-banks to emerge spontaneously operating solely on the Bitcoin STANDARD at swap meets for those with the courage to act quickly practicing sound commercial banking.
Just as bitcoin emerged organically, spontaneously, without permission, and without regulation, so can free-market banking emerge from anyone willing to assume the existential risks which will become evident with success, just like with bitcoin.
Bitcoin, The Innovation, provides a means to relearn the Lost Art of Sound Commercial Banking and create useful specie in transparent ways never before possible.
Yes, mistakes will be made in free-market sound money banking on The Bitcoin Standard. That is how we learn. Like Ethereum, this new generation of Bitcoin Standard bankers will run around and break things. But unlike Ethereum, the underlying BITCOIN STANDARD is sound. The damage will be limited while the benefits are unlimited. For those Ethereum Devs who have learned your lesson, The Bitcoin Standard awaits you.
Some banks will fail, but bitcoin and The Bitcoin Standard combined with sound banking principles will emerge from men who have integrity and are willing to put into practice those things they know and teach.
UGLY OLD GOAT
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