The Flawed Monetary Theory of Craig Wright

Craig Wright, the Australian mathematician and serial academic credential achiever, is widely associated as Satoshi Nakamoto. Andrew O’Hagan wrote The Satoshi Affair, a long account of the events leading up to Wright’s public failure to prove he is Satoshi.  Wright gave O’Hagan personal access to write his story.  In the end O’Hagan asked Wright:

‘Just out of interest,’ I said. ‘If you are a fraud … How hard a fraud would it have been to perpetrate?’


‘It would be the best one in human history,’ Craig said. ‘It’d be Ronnie Biggs on steroids times a million. I invented a new form of money. Who has ever had anything to do with money that wasn’t to do with government? Who has ever really succeeded?’  

After the May 2, 2016 Satoshi proof failure, Wright left a final post on his blog lamenting that the burden of proof was more than he could handle, apologized, and said “goodbye”.

Today, Wright is once again publicly active in the crypto space.  As of March 2017 Wright has filed 51 patents relating to crypto currency and seeks to file about 400 patent applications.  He is accessible in interviews, conferences, papers, and on his twitter account.  Dr. Craig Wright is Chief Scientist of nChain, a company that is actively involved in the propagation of Bitcoin Cash.  For his doubters the fraud continues.

Regardless of what anyone thinks about Wright, his monetary theory, coincidentally, is the foundation for bitcoin and all cryptocurrency.  That is worth examining.

While technological innovation continues to expand in great leaps with Moore’s law, the cyclical nature of monetary policy remains unchanged.  There are only two types of money.  Stable money that retains its value, and unstable money that does not. Empires are built on stable money and collapse on unstable money.  The continuous cycle between stable and unstable money defines the evolution of monetary theory.  

By the late 1600s the monetary world evolved to a gold standard.  Sir Isaac Newton became Warden of the Mint in 1696 and established Great Britain’s bimetallic system in 1717.  Newton linked British currency at a defined weight of gold and silver.  The rest of the world followed Great Britain’s example in some form for the next 300 years.  Governments that maintained gold standards achieved stable money.  Stable money under gold standards was intellectually accepted without wide academic explanation.  This continued through the early 1900s until the rise of economics as a hard science.  The U.S. maintained its gold standard, with minor deviations, from 1792 to 1971.  Today, academia has abandoned all knowledge and understanding of gold standards.

This website explains the intricacies of why gold is the monetary standard of reference.  Other websites, writers, and books explain the same.  The conclusion based on historical evidence is that since gold remains stable in value and acts as the monetary reference, it is not possible to ignore gold and maintain stable currency.  This is amply evidenced by the monetary chaos, economic stagnation, and cyclical boom and bust that have occurred continuously since the Bretton Woods monetary system based on gold ended in 1971.

Wright elaborates his monetary view in the paper, The illusion of scale in segregated witness.  I describe it as neo-monetarism based on fixed rather than constant money supply.  Milton Friedman advocated the abandonment of Bretton Woods for monetarism based on the theory that a constant increase in the money supply, in line with historical growth rates, would avoid the extremes of the business cycle.  The definition of money supply is problematic since base money, cash and reserves that is 100 percent controlled by the Fed, is the only money.  Friedman included M2 credit aggregates in the money supply which the Fed doesn’t control.  The result was the great inflation and stagnation of the 70s that blew up the global economic system.  Mercifully, the Fed abandoned Friedman’s monetarism in the summer of 1982.

Friedman observed that during the gold standard years the velocity of money was constant and assumed the same velocity constant for monetarism.  Once monetarism ended the stable link with gold, the velocity of money went haywire.  George Gilder explained in The Scandal of Money that currency managers do not control money velocity—regardless of purported outcomes from econometric models, equations, and theory.  Money velocity is ultimately controlled by the people, who vote with their dollars how they want to use them.

Wright advocates monetarism based on a fixed supply of currency.  He adopts the monetarism equation MV=PT in his form of MV=PY.  Where Y = the value that represents the real GDP but which is designed as a measurement of wealth.  This is no different from classical monetarism, despite Wright admitting that wealth cannot be properly measured.  It is the velocity of money that interests Wright.

Friedman’s monetarism, based on M2 aggregates that include both money and credit, flooded the economy with more liquidity than the economy required.  People tried to get rid of their depreciating dollars that were losing purchasing power for something real, as quickly as possible.  The velocity of money increased and Friedman’s eloquent monetarism equation became as irrelevant as his theory.  Today, the Fed has artificially driven interest rates to the zero bound or negative, so holding money has little consequence.  This has driven the velocity of money to new lows.

Wright uses causality between the increase in the monetary base during the Fed’s post 2008 QE and corresponding decline in money velocity as the basis for his theory.  A massive increase in base money during QE resulted in a declining velocity of money, so a fixed supply of base money will result in an increase in velocity, he posits.  This is really the intellectual extent of his monetary theory.  He ignores the historical record of monetarism in the 70s when money velocity increased in tandem with an expansion of base money.

Based on a couple of misinterpreted graphs, a reinterpretation of the monetarism equation along with misunderstanding of the history of monetarism, and neglecting that over recorded history, no fixed currency supply has ever existed in any advanced economy, Wright concludes that as bitcoin’s use and demand increases (velocity), its fixed supply value (price) will increase in a direct linear relationship.  He writes:

At the time of writing bitcoin is valued approximately 2,500 USD. An increase in the velocity of bitcoin making it simple to use and increasing the turnover of bitcoin within the community by a factor of 100 would increase the average price of each bitcoin to an estimated $240,000 USD.

Now I don’t blame anyone for scratching their head and asking themselves, if my bitcoin is $2,500 and going to $240,000 why would I use it for anything other than holding onto it and cashing out after a 9500% gain.  Obviously in this scenario, the velocity of money would not increase but would instead trend toward zero.  This is where cryptocurrency is at today.  It is increasing in speculative value based on its deflationary design while not being used as transactional currency.  Scalability is of course an issue, but even when developers increase scalability the flawed deflationary design will remain.  

In 1775 there were $12 million U.S. dollars in circulation.  It is not possible to imagine that the dollar would still act as circulating medium today if the U.S. government had fixed the dollar supply at $12 million.  Each of the 12 million dollars would be worth $367,000 at today’s monetary base.  No one would use those dollars for transactions but instead only to cash out for wealth.  Of course, then the dollar would be useless as a circulating medium and replaced by something that would function as circulating medium.  The dollar would have no value beyond its paper content.  Yet, this is exactly the premise for deflationary, fixed supply bitcoin that is touted to become the sole global currency of the future.  It doesn’t matter that cryptocurrency is infinitely divisible.  Each division equally increases in value based on its deflationary design and defeats its purpose as transactional currency.

There is no historical record of a monetary system based on a fixed supply of currency.  The Rai stone is referenced as this type of system, but comparing a tiny, isolated Micronesia island chain with a global monetary system is ridiculous.  The fact that you tack on “crypto” to “currency” does not somehow negate the entire history of money.  Abandoning the history of monetary evolution in favor of a theoretical system that has never existed beyond tiny islands, defeats cryptocurrency’s promise to disrupt centralized money control.

More on Craig Wright’s monetary views in Part II.

The Problem with Bitcoin

The Promise of Cryptocurrency

Cryptocurrency Market Valuation

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