The Nashian Re-Solution to Saifedean’s Bitcoin Standard and George Selgin’s Complaint For an Elastically Supplied Domestic Money

10 min readJul 23, 2018


George Selgin recently put up this challenge to the bitcoin community (and notably @nickszabo4:

The article he is endorsing is a relatively balanced review of Saifedean Amous’s book “The Bitcoin Standard”. The review counters Saifedean’s sentiments that a Bitcoin Standard would be optimal by evoking a reference to Selgin:

The Cato Institute’s George Selgin, a leading figure in the modern “free banking” school, maintains for different reasons that bitcoin’s fixed supply makes it ill-suited to becoming the monetary standard. He thinks a growing labor force under a fixed supply of money would be especially problematic: Average compensation would be driven down over time, and workers would find this unacceptable.

Frances Coppolla had this to say about the tweet:

Readers can remember she simultaneously argued that Bitcoin’s supply is not finite (and perhaps hyperinflationary) because of the alt-coins that are create while also saying Bitcoin cannot serve as a financial crisis hedge because there are nowhere near enough.

Saifedean was obviously compelled to respond:

Saifedean’s points are close to mine:

George is speaking to the reality of a universally held and used deflationary currency and the ramifications of out of control deflation:

The idea is that there is good deflation and bad deflation and Saifedeanians will argue the deflation Selgin is pointing to is bad deflation because it is born from out of control credit expansion prior to the contraction:

On Fractional Reserve Banking

This is the important part of the argument where we can understand why the two views seem irreconcilable but also immovable. George is pointing to the local view and explanation that if there was a great deflationary spiral it would be quite detrimental if the banking system could not be inspired to counter the looming credit contraction . The basic idea is that the gold supply was more elastic than bitcoin and did not impose such a deflationary mandate as a Bitcoin standard would:

Saifedean somewhat steelmans and gives Selgin the axiom that FRB is a necessary and product of the free market and then asks why it could not exist on a “Bitcoin standard”:

And it is George’s only contention that it can (and would and must). That under a “Bitcoin standard” there still must remain the ability, or perhaps simply the possibility, that banks would be able operate with fractional reserves:

Saifedean notes that the views are not mutually exclusive:

Selgin grows tired:

Saifedean doesn’t think fractional banking will arise but he claims to be sincerely interested in any contention or explanation as to why it would be necessary (Selgin feels he’s explained already):

I think Selgin is arguing that there needs to be the ability to control the trend of the money or to be able to counteract to cycles of intense deflation. The reason I am slightly confused here is because I am quite sure Selgin argues for a slightly deflationary Fed policy. I think his contention with Saifedean is that if the Fed locks its money supply it cannot cool deflation if it became necessary:

Saifedean reasserts the cause of the difficulty was FRB in the first place.

George does seem to agree that a deflationary end can be favorable but he seems to have a slight Keynesian orientation by the Nashian definition (…a “Keynesian” would favor the existence of a “manipulative” state establishment of central bank and treasury which would continuously seek to achieve “economic welfare” objectives~Nash, Ideal Money):

What is the Fractional Reserve Banking debate All About?

Let’s look at the common accepted definition of fractional reserve banking from wiki:

Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities.[1] Reserves are held as currency in the bank, or as balances in the bank’s accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.[2]

A recent writing I did as a recap to a dialogue with a sincere “big-blocker” is quite relevant. Rizun had conflated two concepts that I think a lot of people that advocate for the banning of fractional reserve banking conflate:

Risen is unaware that the problem of fractional reserve banking is not that your deposits get unwillingly lent against. He refers to “custodial accounts” as if this can imply that the accounts are lent against. Custodial account or bailments (or warehousing) are not deposits that banks can lend against:

George disambiguates:

That is to say there is a want for some holders of assets and wealth to store the physical medium they own for safe keeping. This is what Selging is explaining that a custodial account implies. Rizun is using the world custodial and trying to imply a fractional reserve type scenario. Fractional reserve, however, doesn’t happen to people unwittingly. It is an evolution of bailments in which those that have extra savings gain opportunity when they are able to have a bank lend to borrowers:

Fractional-reserve banking allows banks to act as financial intermediaries between borrowers and savers, and to provide longer-term loans to borrowers while providing immediate liquidity to depositors (providing the function of maturity transformation).

I would be quite surprised if Saifedean’s argument is truly that savers should no longer be lending their money out. Now its not just lending of course. Opponents of FRB will say lending is fine but not the money creation process that can ever increase the supply of the money:

At least one textbook states that when a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan.[3] This process is called “deposit multiplication”. However, as explained below, bank loans are only rarely made in this way.

The proceeds of most bank loans are not in the form of currency. Banks typically make loans by accepting promissory notes in exchange for credits they make to the borrowers’ deposit accounts.[17][18] Deposits created in this way are sometimes called derivative deposits and are part of the process of creation of money by commercial banks.[19] Issuing loan proceeds in the form of paper currency and current coins is considered to be a weakness in internal control.[20]

The money is created by credit since there are savers that want to be investors and ventures that the banks can invest in and finance with credit. Saifedean is saying this process has always been encouraged to get out of hand and Selgin is saying it is quite obviously necessary.

A Re-turn and Re-visit to Ruritania

The resolving point can be found in Selgin’s thought experiment about Ruritania which is a narrative of an economy that evolved from a free market (and retained that freeness). In his explanation of how a free market would evolve the lending practices self optimize and the demand for money is perfectly and properly served.

From the Nashian orientation the idea is that an internationally apolitically issued currency gives the markets the barometer needed to properly assess the trustworthiness of the issuers of the respective major currencies. It is a global consideration quite in line with Selgin’s free banking theories.

Selgin explains the mechanism by which the money expansion is kept in check on a free market. Although his view is in regard to a local economy we can think of the competing private banks as competing nations with an international settlement unit with little to no friction:

… a solitary bank in a free banking system cannot pursue an independent loan-pricing policy. A “cheap-money” policy in particular would only cause it to lose reserves to rival banks. Also, no bank would be able, by overissuing, to influence the level of prices or nominal income to any significant degree, since the clearing mechanism rapidly absorbs issues in excess of aggregate demand, punishing the responsible bank. Consequently, the structure of nominal prices would not be indeterminate. Assuming stationary conditions of production, free banks face a determinate schedule of nominal money demand which strictly limits the extent of their issues.

A Central Banking Re-solution

A Bank of Canada Research paper I recently did a review and summary on is also very relevant. The paper explains that having an internationally held settlement unit creates a floor and a ceiling by which a monetary authority can influence money supply using monetary tools:

Thus, the cost of gold arbitrage in effect determined a policy corridor in which a central bank could set its bank rate different from other bank rates.

Much like the end game of Selgin’s Ruritania the paper explains that as the cost of arbitrage using the monetary “standard” (ie gold or bitcoin etc) decreases towards zero the policy corridor shrinks.

The paper puts forth these 3 conjectures in regard to a Bitcoin standard and the subsequent statement about them is crucial to understand for the above debate that took place:

Conjecture 1: In the long run, inflation would not be zero. Instead, there would be moderate deflation that would increase over time until reaching a rate of deflation equal to the negative of the rate of growth of world output around 2026.

Conjecture 2: There would not be periods of deflation followed by periods of inflation as was the case under the gold standard.

Conjecture 3: Price levels of the various countries would be highly, but not perfectly, correlated, much as they were under the gold standard.

The important point that a Bitcoin standard does NOT imply that the money supply is fixed:

My reasoning is that under the Bitcoin standard, just as under the gold standard, the money supplies of different countries would not necessarily move together, although the more tightly a group of countries are linked in terms of trade and finance, the more closely their money supplies would be linked.

The Nashian Orientation: Re-Solving Selgin and Saifedean

Nash’s work highlights the difference between a locally observed inflation rate and an international (or Olympian or Nashian etc.) view. That there could be observed a local value trend of X while the international valuation of that currency is not X.

What Ideal Money explains is that if something like Bitcoin became the inflation target for all major currencies, that is that they all governed their supplies such that exchange price trends were long term relationally stable, then Bitcoin would become a beacon or signal that highlighted the “health” of each respective economy and the currencies that represent them.

Selgin is arguing not that Bitcoin’s deflationary nature is bad on its own but that if the US (for example) adopted a 1 to 1 policy of issuing USD per bitcoin held they would give up their ability to avoid a BAD kind of deflationary spiral.

From a Nashian orientation of having a beacon we can understand this different. If the US economy, for whatever reason, started into a bad deflationary spiral and the demand for money was not being met as currency was being hoarded and not flowing (or for others reasons etc.) this would result in an negative international valuation.

The markets would want to see the proper money supply to serve the demands of the economy and so the reduced efficiency would show up in an international distrust of the USD (and the US economy). This would be reflect in the desire in the international desire to hold Bitcoin over USD.

But if the US economy started to contract and halt, and the world wanted to not hold USD, it would seem there would be less deflationary pressure as people moved to hold a more “healthy” savings option than USD and so there seems to be an equilibrium that would be returned to.

An Ideal Money Standard

I wrote the first line to the wiki entry for Ideal Money but the second line was not written by me. I could not get the author to explain how they came to understand this but I basically agree with it (although the Helen Rey explanation I link to later seems more accurate and up to date):

Ideal Money (to be considered different than defining ‘ideal money’ without capitals) is a theoretical notion promulgated by John Nash (Nobel Laureate in Economics) to stabilize international currencies. It is a solution to the Triffin dilemma-the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also serving as world reserve currency.

With the role that the USD plays in the world today many people depend on the USD as a savings hedge versus their own respective state currency and at the same time the USD is considered the world reserve currency as it is used for high value settlement among many nations and international institutions (although this role has perhaps been changing).

It gives the US certain privilege in the world but as the Triffin dilemma notes they cannot seek wild monetary policies without great ramifications. Being the world reserve currency puts a special burden on the US.

Then it is quite conducive with Selgin’s complaint that on a non FRB Bitcoin standard independent monetary policy cannot be used to save an ailing economy. On a US reserve currency standard the US is limited to how much they could respond to their own economy with majorly disrupting the global economy.

On Mismatched Maturities

I intuitively understood Helene Rey’s talks about how the mismatch in balances of the US in regard to the global economy has set up the world for a potential global run on the US as a world bank:

However, I wasn’t sure if I understood what “mismatched balance sheets” (or mismatched maturities etc.) means and now I think understand it to simply mean that the savers that invested their money to be lent out by banks might want to recall their savings at a time that is inconvenient for the bankers and the receivers of loans.

This is what Helene points out is potentially happening with the investments among nations that are typically served through USD.

Where Saifedean and Selgin Agree

It is a simple re-solving point that both Selgin and Saifedean agree that free markets are self optimizing. Saifedean believes there will be no fractional reserve banking but I think what he really means is that banks won’t be able to increase the credit supply to a point where the local money used is observed to be inflationary from an international orientation (ie otherwise why not just hold bitcoin?). George is simply arguing that the Fed would need to be able to increase its money supply if it were to hold a strong international valuation comparable to Bitcoin’s expected deflationary nature.

The missing orientation is a transition from the USD as a reserve currency to Bitcoin fulfilling that role allowing the US perfect freedom from its previous responsibilities. If we can imagine such a transition then we could see that Bitcoin wouldn’t have the hyperdeflationary expectation that maximalists tout and instead we would see nations with differing money supplies but all asymptotically trending towards a stable international valuation.

As I understand this should satisfy both arguments and certainly Selgin’s:

What is Nick Szabo’s view?