However, I find it difficult to believe that anyone who has written critically of the dangers of bitcoin would prefer an economy where private cash transactions are illegal.
government...printing money...the currency as a whole is debased
bitcoins...are generated at a predetermined rateRemember, it's only bad if an elected government does it.
government...printing money...the currency as a whole is debased
bitcoins...are generated at a predetermined rate
Just to be clear, I have no stake in Bitcoin as a technology or as a brand. Bitcoin, or the desire for something like it, is a natural consequence on The War on Some Drugs, and the War on Cheap Overseas Pharmaceuticals, and the relentless overreach of the United States government.
During the 1970s, the Federal Reserve Act was amended to require the Board and the FOMC "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Also in that decade, the Act was amended so that the member governor proposed by the President to be Chairman would have a four-year term as Chairman and would be subject to confirmation by the Senate (member governors per se each have 14 year terms, with a specific term ending every two years) (Section 10). The Chairman was also required to appear before Congress at semi-annual hearings to report on the conduct of monetary policy, on economic development, and on the prospects for the future.
Mayor West: No serious person owns these as anything other than wacky novelty, because their value is wildly speculative and they have already had their security publicly compromised several times; no serious vendor will ever accept them as payment because they know exactly what's going to happen when the IRS eventually reads the New Yorker article about them; and widespread discussion of how awesome they are appears to be solely the purview of crypto-obsessed anarcholibertarians who think the math is cool, while also insisting that their value couldn't possibly be a speculative bubble, and also that the gold standard and a deflationary currency system are somehow worth returning to.
But the fact that the network has to work so hard to compute the cryptographic hashes that secure each block of transactions is a kind of value, since anyone wanting to contest the transaction history would have to work at least that hard.
As we consider the digital-currency phenomenon that is Bitcoin, bear in mind that there are, broadly speaking, two accounts of the origin and history of money. One is elegant, intuitive and taught in many introductory economics textbooks. The other is true...
This brings us to the second theory of money, which Goodhart calls the "C View," standing for "cartalist" (chartalist is a more common spelling). To simplify radically, it starts with the idea that states minted money to pay soldiers, and then made that money the only acceptable currency for paying taxes. With a standard currency, tax assessment and collection became easier, and the state could make a small profit from seiginorage.
The state-coin connection has far more historical support than Menger's organic account. As Goodheart points out, strong, state-building rulers (Charlemagne, Edward I of England) tend to be currency innovators, and he could have easily added Franklin D. Roosevelt's taking the U.S. off the gold standard in 1933 or Abraham Lincoln financing the Civil War with newly issued greenbacks. The inverse is true too: When states collapse, they usually take their currencies with them. When Japan stopped minting coins in 958, the economy reverted to barter within 50 years. When the Roman Empire collapsed in Western Europe, money creation splintered along new political borders.
If money came about independent of states, as according to the M View, one would think it would outlast transient political structures. Historically, however, this tends not to be the case, a strong argument in favor of the C View.
How does this relate to Bitcoins? The electronic currency, introduced in early 2009 and popular with libertarian geeks, online gamblers and Internet-based drug dealers, is having its moment. Perhaps influenced by the banking crisis and deposit haircuts in Cyprus, Bitcoins have seen their value skyrocket in the past month, from around $33 a Bitcoin on March 3 to just over $140 today, and more than doubling in the past two weeks.
Although the creators and heavy users of Bitcoins tend to be skeptical of the security and value of state-issued fiat currency, the state-centered account for how money came about actually helps explain why Bitcoins have been fairly popular. Only with powerful computers and sophisticated digital cryptology can a private currency come close to working along side traditional monies.
If the requirement for money, whether it be metallic coins, paper backed by coins or paper backed by government promises, is that it has to be portable, durable and divisible, then Bitcoin fits the bill...
It's a remarkable success, but it won't be the future of money. Even putting aside security problems -- not surprisingly, a digital currency is a favorite target of hackers -- there's the potential that Bitcoin will turn from a way of doing anonymous, simple digital transactions and into a speculative-asset investment item, especially if it continues to soar in price. That might promote hoarding of Bitcoins by early adopters and choke off the marketplace...
Here's where a state could easily step in by just... printing more money, so that economic activity is not choked off by scarcity or hoarding. This would be totally consistent with the C View, where money is created by states to facilitate economic activity. But since Bitcoins can only be produced at a predetermined rate, deflation is a constant possibility, or that Bitcoins turn more into a commodity people buy than a currency people use.
Unlike a government fiat system, the currency also fails to provide society with a shared mutual interest for holding it. In the case of the dollar, the euro, or any other official tender, regardless of the currencies' value on the open market, holders can always be sure that tax liabilities can and must be settled in the units. This cannot be said for Bitcoin. The system is neither affiliated to a tax system, nor has recourse to the national wealth pool of any particular country.
Above all else, though, Bitcoin's worst sin is probably that it is intentionally designed to be deflationary — the very thing the system's advocates, who tend to come from the Libertarian side of the political spectrum, believe makes it so robust. The deflationary trend is achieved by means of computer protocols which adjust the economic incentive for the community to code new Bitcoins, in a way that ensures a predictable and stable rate of supply over time. At 21m, the number of units in circulation will be capped.
Bitcoin enthusiasts adore that supply is predetermined in this way, and relish in the idea that it can never be meddled with by a third party.
But a currency backed by nothing but fanaticism is unlikely to survive in the face of such rigidity. The supply constraint only heightens the chances that the emperor's new clothes will eventually be revealed as lacking.
Furthermore, when supply is finally capped, wealth will be concentrated amongst the earliest entrants so decidedly that the incentive to cash-out will become all pervading. Bitcoin miners, instead of making money from seigniorage, will be reduced to making money only from transaction fees. At this point it is said the incentives to defend the system will be diminished in favour of cheating it instead.
Given Bitcoin's dependence on maintaining an almost cult-like follower base, it's no wonder that so much has been invested in the movement's cybernetic foundation story and the myth of its pseudonymous architect Satoshi Nakamoto.
Yet, whilst preaching the idea that central authority can be replaced by a faceless yet mystical organism can come across as appealing to those predisposed to cult beliefs, it does not make for a viable alternative currency system.
Money may be memory. It may even be a belief system. But it is also a system of real-wealth allocation. Gigabytes distributed willy-nilly on the internet will never achieve that unless backed by real national wealth in the form of a government fiat system, or by being collateralised by a borderless resource like energy.
Given that, it's no surprise central banks aren't openly worrying about Bitcoin (yet). Though it must be said, there's definitely an argument that they should be reviewing how they might better plug the digital e-money vacuum instead.
At the end of my big piece on bitcoin, I conclude that we need "a universal payments system with no friction or interchange costs", which can learn from bitcoin's mistakes. And this morning, the company responsible for one possible such system — OpenCoin, which is responsible for developing Ripple — announced that it has closed its angel funding round, with support from the likes of Andreessen Horowitz, Lightspeed, and Founders Fund.
I've been playing around a bit with Ripple, and I think it's extremely promising. It's very early days yet, but Ripple already has clear advantages over bitcoin, and if various merchants and developers start to converge on the Ripple ecosystem — which, like bitcoin, is all open-source — then I think it could genuinely become the first real way for anybody in the world to pay anybody else in the world, immediately and about as frictionlessly as possible.
The sudden drop in the value of Bitcoins, the hot new Internet currency, has added urgency to the question of whether Bitcoin is the way of the future, or just another bubble. Not to keep readers in suspense, the answer is a bubble, but a particularly interesting example of one. In particular, Bitcoin represents what ought to be the final refutation of the efficient-markets hypothesis, which still guides most regulation of financial markets.
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