#033 The Satoshi Papers: The Treasury Standard: Causes & Consequences

In this Bitcoin Study Sessions episode, Grant and Lucas delve into Chapter 4 of the Satoshi Papers, titled "The Treasury Standard," discussing the evolution of monetary systems with a focus on war financing and state power. Key Topics: Evolutionary theory of monetary regimes The Treasury Standard Monopoly of violence and currency Historical monetary systems Summary: Grant and Lucas discuss "The Treasury Standard: Causes and Consequences" by Joshua R. Hendrickson, which examines the state's monopoly on violence and currency and how this relationship shapes monetary regimes. The essay posits that the current monetary regime is the Treasury Standard, where the U.S. dollar is the global reserve currency and the U.S. Treasury is the global reserve asset. Professor Hendrickson proposes an evolutionary theory where war acts as a selection mechanism for monetary regimes. Societies that can successfully generate emergency financing for war are more likely to survive. Therefore, states seek a monopoly on currency to create emergency revenue streams. This evolutionary process is constrained by the need to anchor long-term demand and prevent internal threats from utilizing the same financing capabilities. The evolutionary theory is applied to history, tracing the evolution of money from cattle to metals to coinage. States began to take over the minting of coins solidifying their power and the intertwining of their monopoly of currency with their monopoly of violence. Banking and finance emerged as a way to reduce the cumbersomeness of coins, disrupting the state's monopoly. The military revolution, especially gunpowder, increased the demand for sustained emergency finance. This led to the gold standard administered by the Bank of England, which allowed for the suspension of gold convertibility during crises, providing emergency financing while promising to restore parity after the war. This system also acted as a poison pill against potential revolutionaries by creating systemic importance. The gold standard evolved into the treasury standard due to failures after World War I and the Bretton Woods Accord. The U.S. prioritized its domestic and foreign policy objectives, leading to the Treasury Standard, where U.S. Treasury debt became the global reserve asset, replacing the commitment to redemption with a commitment to relative price stability. The treasury standard is problematic, as the U.S. Treasury Reserve system has lowered the cost of war and lowered the incentive to avoid war. And the system's fragility is built in because the reserve asset is a debt instrument. The discussion touches on whether adopting a Bitcoin standard would be unilateral disarmament, limiting a nation's ability to finance wars. Lucas suggests accumulating Bitcoin in secret and questions who is creating the emergencies that require war financing. Grant argues that the wars we fight are existentially threatening and that Bitcoin might restrain unnecessary conflicts, leading to long-term evolutionary success. The discussion highlights the instability of the treasury system and the potential for a self-fulfilling prophecy among debt holders due to expected inflation. The nature of warfare and the impact of gunpowder on war costs are also discussed. Overall, the discussion agrees that while the intention of the state may not have been to create an emergency war financing machine, it has evolved that way to serve the interests of those in power and maintain their grip on violence and currency.