Reservation Principle

The term "reserve" refers to a hoard of capital, as distinct from that portion of savings which is invested. Both states and people hoard capital to satisfy expected liquidity requirements. The term "reserve currency" refers to a state hoard, as required for settlement of accounts with other states. Money reserves of people within a state generally consist of the state's issued money - primarily notes or fiat, with a lesser amount in coin.

States buy reserve currency from people using monopoly money, foreign exchange controls and direct taxation. Using their own money discounts purchases by the amount of seigniorage. Foreign exchange controls restrict or prohibit use of the reserve currency as money. By treating the reserve currency as property but not money, the state creates a tax on the apparent capital gain in the reserve money when it devalues its money against the reserve money through monetary inflation. Official exchange rates below market value create another tax on use of the reserve currency.

A "gold standard" is one in which the state collects gold as a foreign exchange reserve, and individuals reserve in claims to a "standard" amount. The U.S. Dollar was established as redeemable in gold at $20.67 per ounce​ in 1834. For 100 years the state bought and sold gold at this rate. In 1934 the Dollar was devalued by 60%, to $35 per ounce. At this point its redeemability (by people) was abrogated, and it was made unlawful for them to hoard or contract in it. This irredeemably was extended to other states in 1971, officially ending the gold standard in the United States. No longer a debt of the state, the Dollar transitioned from a representative currency (i.e. note) to fiat.

The U.S. primary foreign exchange reserve is gold (74.5%) with the remainder in foreign currency and equivalents, whereas citizens primarily reserve using the Dollar. A state's own notes or fiat are not generally usable as its own foreign exchange reserve, as the state can abrogate or devalue its payment. The U.S. Treasury reports that it hoards over 8,000 metric tons of gold, worth approximately $400,000,000,000. The purchasing power of the U.S. Dollar note in 1834 was about 30 times that of U.S. Dollar fiat in 2019.

The purpose of a reserve currency is to tax. The state first buys the reserve money with negotiable promissory notes, then issues more notes than it has money in reserve, then abrogates the notes and retains the reserve. The devaluation of the notes is the result of excess issuance (seigniorage) and is a tax on those who hoard them. The state collects the reserve money into its hoard, which represents its ability to settle its own debts with other states. While people do still hoard the reserve money, it is subject to onerous constraints on its use in order to preserve the tax benefit of the state's monopoly money. These constraints tighten as the level of the tax rises.

The use of gold as a state reserve offers no monetary benefit to individuals who must still trade in monopoly money. As shown in Reserve Currency Fallacy, Bitcoin as a state reserve can do no better. However, unlike gold, Bitcoin's definition is in the hands of those who accept it in trade. With the bulk of actual bitcoin acceptance in the hands of the state, with people trading in money substitutes, there is nothing to restrain the state from introducing both arbitrary inflation and censorship.