Lyn Alden cover photo

Will Bitcoin Replace Central Banks with Lyn Alden | What Bitcoin Did Podcast

Check Out What Bitcoin Did’s Episode Page and Show Notes 

Key Takeaways

  • The United States created the Federal Reserve in 1913 with its primary mandate being the lender-of-last resort to other banks
  • Central bank intervention in the U.S. market caused economic contractions to be less frequent and less severe but has ultimately reduced the long-term stability of the current monetary system due to long-term debt accumulation 
  • Centrally controlling interest rates – the cost, or price of money – is the ultimate price control that affects every other market
  • There are multiple things converging in this decade: the conclusion of the 70-year long-term debt cycle, the Fourth Turning, fractures in globalization, and the conclusion of a multi-decade commodity cycle 
  • The volatility of the gold chart during hyperinflation in 1920s Weimar, Germany resembles the volatility of the bitcoin chart today
  • Transitions to new monetary systems happen regularly throughout the history
  • Bitcoin is a new type of money that is unusually “hard”, in the sense that it cannot be easily debased because it is hard to create more of it, unlike modern fiat currencies 
  • Many people assume that the perpetual expansion of money supply is the natural law of the universe; they never even consider a world on a hard money standard
  • Bitcoin has opened Pandora’s box of returning to a hard money standard, but one that would be even better than the gold standard because of improvements in technology 


  • Lyn Alden (@LynAldenContact) is a macroeconomist and investment strategist who provides institutional-level research in plain English via her Strategic Investment Newsletter, which has tens of thousands of readers, and on her website
  • Lyn Alden joins the What Bitcoin Did podcast to discuss the history of central banks in the United States and to analyze whether or not Bitcoin will replace them
  • Check out these Podcast Notes from Lyn’s appearance on The Investor’s Podcast  
  • Host – Peter McCormack (@PeterMcCormack

The Emergence of the Federal Reserve 

  • The Coinage Act of 1792 recognized gold and silver as legal tender in the United States
  • There was disagreement among the Founding Fathers on if the U.S. should have a central bank
    • Alexander Hamilton was pro central bank because he was in favor of a strong federal government
    • Thomas Jefferson was anti-central bank because he was more in favor of state rights 
  • Alexander Hamilton’s faction prevailed and the U.S.’s first central bank received a 20-year charter
    • The purpose of it was to do banking activity for the federal government
    • It was a small institution with limited operations  
  • The first banking charter expired after the 20-year period and Alexander Hamilton was not around to renew it (he had died in a duel) 
    • There was a period in the U.S. with no central bank
  • After the War of 1812, the U.S. decided to create a central bank once more
    • Similar size, capabilities, charter, and purpose to the first one
    • The charter expired after 20 years, which began the era of free banking 
  • The Period of Free Banking: private money issuance that separated state and money
    • Private note issuances of gold and silver from private institutions (banks)
    • Banks of various tiers of creditworthiness issue notes redeemable for gold or silver
      • Example: A note issued by a reputable bank in New York might be “worth more” than a note issued by an unknown bank from out West due to differences in the note’s liquidity, the solvency of the issuer, and ultimately trust
  • The emergence of the Federal Reserve started in the early 1900s:
    • Free banking in the U.S. was messier than free banking in other parts of the world
    • There were several banking failures in the U.S.
    • J.P. Morgan (the person himself) was a banker in the U.S. that was acting as a lender-of-last-resort for failing banks
    • In 1913, the U.S. effectively created an institution to replicate J.P. Morgan’s banking services and called it the Federal Reserve 
      • Primary mandate: be the lender-of-last-resort if there was a large run on banks
      • Have sufficient reserves to backstop liquidity if there was a nationwide credit contraction 

The First Cracks in the Central Banking System 

  • The Federal Reserve was and is still today, a pseudo-private institution that was owned and operated by a mix of people and institutions from the public and private sector 
    • Capitalized by the banks and by the people 
  • In response to the crisis in 1929, that led to the great depression, the government asserted more influence over the Fed and created things like FDIC insurance, etc. 
    •   The government also took the gold from the Fed and transferred it to the U.S. Treasury 
  • “The Federal Reserve is not really federal and it has no reserves.” – Lyn Alden 
    • The Fed creates reserves, but it doesn’t have reserves
    • It creates reserves out of thin air 
  • Determining the effectiveness of central banks in the U.S. depends on who you ask
    • Economic contractions became less frequent and less severe, but at the cost of long-term stability due to long-term debt accumulation 
    • Centrally controlling interest rates is the ultimate price control that affects every other market

Bretton Woods & What Happened in 1971

  • The U.S. was on a gold standard in the 1800s and 1900s
    • Bank notes were redeemable for gold
  • 1934: The U.S. passed a law that made it illegal for Americans to own gold, and notes were no longer redeemable for gold
    • Americans were forced to turn their gold into the bank and were given notes equivalent to the value of the gold they turned in 
    • The government effectively repriced the value of gold overnight
    • The government now owns a lot more gold (reserves), so it can create a lot more dollars
    • This was a form of default 
    • The dollars were still “backed by gold” but Americans could no longer redeem their dollars for gold
    • Foregin creditors (institutions and central banks) could still redeem their dollars for gold
  • After World War II, the United States was in a favorable position to lead the free world 
    • Many countries shipped their gold to the U.S. during the war to protect it from theft in the event of a German occupation of their lands
    • With the exception of Pearl Harbor, U.S. territory was largely unaffected by the destruction of WWII
  • 1944: Following WWII, 44 countries convened in Bretton Woods, New Hampshire to create a new global monetary system, which is now referred to as the Bretton Woods system
    • Dollars were redeemable for gold, and other countries would peg their currency to the dollar 
  • American gold holdings decreased throughout the 1940s, 1950s, and 1960s while the amount of dollars in the system was increasing
    • It became apparent that these trends were not sustainable 
    • Far too much paper currency was created in relation to the gold that “backed it”
  • The French called the U.S.’s bluff and sent over a battleship to collect their physical gold 
    • Other countries followed the French’s lead and mandated redemption as well
  • 1971: President Richard Nixon announced the “temporary” stoppage of gold redemption for foreign creditors 
    • “Temporary” became permanent

The Problems of Easing Constraints on Money Creation 

  • Money is a technology 
    • As technology advanced, the abstraction from real money (gold) to representative forms of money (paper currency) also advanced
    • Claims on gold can easily be devalued overnight 
  • The necessity of central banks is largely based on the technology available during a given period

The Long-Term Debt Cycle, Fourth Turning, & Globalization + Commodity Cycle 

  • Central banking is largely responsible for the long-term debt cycle
    • We are at or approaching, the conclusion of a 70-year long-term debt cycle enabled by price controls via interest rate manipulation  
  • Fourth Turning: trust erodes in public and private institutions that were created over the course of generations due to advances in technology
    • Institutions become corrupted and/or new technology makes them obsolete 
  • Globalization and the Commodity Cycle: the arbitrage of geographic labor, energy, and commodities 
  • We are at the point in each of these cycles where inflation becomes inevitable and difficult to control 
  • Additionally, there has been so much debt built up in the economy that central banks cannot really raise interest rates to combat inflation 
  • The 1940s was the last period that resembles the current environment from a fiscal and monetary perspective 

Will Bitcoin Replace Central Banks?

  • Bitcoin is a new type of money that has been discovered that is unusually “hard”, in the sense that it cannot be easily debased because it is hard to create more of it 
    • It has a high stock-to-flow ratio 
    • It is decentralized and peer-to-peer
      • Long-term thinking: why would you want to hold any money other than bitcoin?
      • Short-term thinking: it’s volatile, it’s new, and it’s small enough that governments could impose certain frictions to limit its adoption 
  • Bitcoin could take a “pretty big chunk” of the global monetary share if it continues to work and gets past a couple of challenges 
  • In theory, a free banking system could emerge using Bitcoin 
    • Reserves would be easier to verify than on a gold standard 
  • The current decade might be a stagflationary decade of high inflation and little economic growth 
    • Stagflation reduces faith in central institutions
  • A hard money standard enabled by Bitcoin could have deflationary effects on the world
    • The deflationary impacts of technological advancements would be allowed to proliferate and goods and services would become cheaper 

Hyperinflation in Weimar, Germany & Bitcoin Today 

  • People often erroneously jump from identifying stagflation to predicting full-blown hyperinflation like what happened in Weimar, Germany in the early 1920s
  • The price of gold, denominated in the German mark, was incredibly volatile during this period of hyperinflation 
    • Looked like a sine wave
    • Down 80% one day, up 1,000,000% the next 
    • Weimar officials tried several times to save the mark, and their efforts resulted in massive volatility, as seen below:
  • The gold chart in Weimar, Germany resembles the Bitcoin chart today
    • Weimar: the collapse of the mark to gold
    • Today: the smaller collapse of fiat currencies to bitcoin

Can Bitcoin Become a Global Money?

  • Any complex monetary system requires layers
    • Bitcoin is the base layer
    • Lighting Network or Cash App, for example, are built on top 
  • Different users will use different layers depending on their unique security needs and trust in various third-parties
  • Transitions to new monetary systems happen regularly throughout the history
  • Bitcoin has opened Pandora’s Box of returning to a hard money standard, but one that is even better than gold 

Why Inflation is Required in the Current Monetary System

  • A shark must keep swimming or else it drowns; the current monetary system requires inflation or else it collapses 
  • Much like how a meticulous garden requires constant maintenance or things start to get out of control, the current monetary system requires constant intervention or things start to get out of control  
  • The current monetary system requires money supply to grow quickly enough to support all of the debt, which causes monetary inflation 
  • Many people assume that the perpetual expansion of money supply is the natural law of the universe
    • They never even consider a world on a hard money standard

The Unknown Future of a Bitcoin Standard 

  • Bitcoin blends technology with economics and energy 
  • Programmable, peer-to-peer money is a building block for innovations that we cannot yet predict, much like how the creation of the iPhone led to Uber
  • Bitcoin can completely transform energy markets 
  • There is no “Bitcoin community”; it is decentralized and has gotten big enough that many different layers have developed
    • Cypherpunks, venture capitalists, the have-fun-staying-poor crowd, environmentalists, investors, etc. 
  • Understanding Bitcoin from an economic and technical perspective takes time, which is off-putting for some
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