Imagining World War I… Under Bitcoin

2014 marks the centennial anniversary of World War I. The world was a different place a century ago, but in at least one respect, they are becoming similar– the gold standard of the early 20th century era is much like the new cryptocurrency Bitcoin, which is scarce by design and a good store of value. In the spirit of learning from the past, it is useful to consider what would have happened if the biggest monetary trend of 2014 had been in existence in 1914– would it have prevented inflation? Brought peace? Stopped the growing authoritarianism?

Let’s begin with the start. When Archduke Ferdinand was assassinated, Europe was tied to the gold standard, by which fiat currencies had to be redeemable in gold by a fixed exchange rate. The gold standard had fueled much of the competition among countries leading up to the war. Following the experiences of Spain in the Americas, colonies were sought as a way to obtain precious gold from the ground of non-European nations. Britain spent most of the 18th century subscribing  to the ideology of mercantilism, which saw trade deficit as a literal reduction of national power. Since gold was of scarce supply, the reasoning went, and exports led to the movement of gold out of the country, self-sufficiency in trade was to be pursued at all costs.

During the war, countries financed their efforts by issuing war bonds, informing their citizens that it was their duty to buy them. Extravagant bond drives exalted individuals to patriotism by giving their money to the war effort. Because gold was stored in predominantly British and American banks, a run on one of the bank caused the British government  to raise exchange rates,+ limiting the flow of gold out of the currency. Germany, among others, abandoned the gold standard in 1914, and did not manage to get back on it for many years after the war. The resultant inflation is said to be one of the factors that gave rise to Hitler’s success.

Now imagine what would have happened if Bitcoin had been in existence during this time. Because of the cryptocurrency’s designed scarcity (there will only ever be 21 million Bitcoins in existence), it largely replicates the international dynamic of the gold standard. Having Bitcoins means increased power vis-a-vis other states, as “Bitcoin-rich” countries can afford to buy more weapons while decreasing the ability available to other nations. This may not matter in times of peace, when regular currencies can be freely traded, but in times of war, the ability to anonymously purchase weapons from arms-suppliers at a guaranteed price would be a big draw.

Furthermore, metaphorical “colonies” can also be mined with the cryptocurrency. Under Bitcoin’s design, “mining” is the act of putting computational power towards solving cryptographic hash functions, which have the effect of verifying transactions, but which also reward successful miners with Bitcoins. If a country like Germany that was running out of gold found itself in this situation, it would most likely devote significant computational resources towards “mining” Bitcoins. But the computational power would then be huge– reducing the capital available to productive industries and fueling an arms race among countries to mine more of the currency. Computers would literally become an arm of the military without producing anything of value.

This, of course, would still not prevent any of Germany’s problems. If anyone with a computer can store their wealth in an anonymous currency, obtaining money from citizens could become a lot harder. The Germans would be particularly amenable to doing this, since the primary benefit of Bitcoin is that it avoids inflation. No matter how high the German Frank rose (and prices doubled and tripled during the war), Bitcoin would only ever appreciate.

So what can we conclude about the shape of the Great War if Bitcoin had been in existence? It would not be a cosmopolitan world, as many propose, as long as tensions existed between countries. If a gain to one led to a loss to another, countries that were at war would have an incentive to stoke nationalism to prevent the flow of currency out of the borders. Furthermore, massive amounts of computational power would be eaten up by the idle pursuit of mining the currency. These actions may have the effect of verifying transactions, but the level would surpass all reasonable expectations.

And yet the war would most likely end sooner. With inflation eating away all national currency savings, individuals would be quick to move their remaining money into Bitcoin, for safe storage and away from government eyes. This would sharply limit the amount of funds available to buy war bonds, and the government would run out of money almost immediately after inflation started. Thus, Bitcoin may turn out to be the ultimate preventor of war. As long as governments can’t inflate their way to industry, funding a war would be entirely a question of motivating citizens.

History repeats itself. Let us hope that we can reflect on our investments before they have the chance to turn on us.