Digital Gold Standard?


The digital currency, Bitcoin, has been designed such that only a fixed amount of it can be created (“mined” is the technical term). In other words, the total amount of Bitcoins that can ever be created in the world is a certain fixed number. It’s like saying that the total money the world can have is, say, $100 trillion.

Back in college, I remember reading Ayn Rand’s views on the gold standard. In case you’re wondering, the gold standard was a system that demanded that paper money must be backed by gold. What this meant was that a country couldn’t print money unless it had the gold to back it up.

When Nixon sounded the death knell for the gold standard, critics like Rand worried that it would give governments the right to print money indiscriminately to pay off government debt or to finance populist schemes. That’s a fair criticism, but I remember my dad’s counterpoint when I’d mentioned Rand’s argument to him (I paraphrase from memory):
“Why should the total supply of money in the world be tied down to the availability of one particular item (gold) in the world? What if we invent new things tomorrow? Isn’t the gold standard saying that we can’t print more money for those new things unless we found more gold in the world? How does such a system make any sense in a world where new goods are produced all the time?”

I think my dad’s argument is valid for Bitcoin as well. How does it make sense that the total Bitcoin supply in the world be fixed when new goods are being produced all the time? If Bitcoin were to become the global currency, wouldn’t it effectively be a digital gold standard?

I think this creates a major problem for Bitcoin: if its supply could be increased, who would decide when and by how much? In the existing financial system, such an increase in money supply is decided by the government. So is that a fatal problem for Bitcoin? Or does this just mean that someone is going to have to design a new digital currency that has some inbuilt mechanism to increase the money supply based on whatever criteria?

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