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A “currency” is like “art”: it is anything that we
use as “currency.” At times, cigarettes and small candies have served as
currency. Tobacco was a currency in colonial Virginia. In Ancient Greece,
iron pots and tripods once served as a sort of currency. Ancient Chinese used
gardening tools as currency.
Some people use bitcoin as a means for transactions
in goods and services, so it is, for them, a currency.
But is it a good currency?
The Bitcoin project is an odd combination of very
advanced, Ph.D-level computer science, regarding
encryption and record-keeping, and very primitive,
sub-kindergarten-level monetary understanding.
What do we want from a currency? What are the characteristics of an ideal
currency, and how do we manifest those in a practical, real-life system?
I think it is easy to see, today, that cigarettes, candies, iron pots and
gardening tools are not ideal for use as currency.
Today, there are two basic ideals: one is a currency that is as stable,
reliable, predictable, and inert as possible — a universal constant of
commerce. The other ideal is a currency that you can actively manage to
produce certain economic effects, or other government policy goals.
Bitcoin does not serve either of these functions.
It is certainly not stable, reliable, predictable and inert. Nor is it a
suitable platform for active economic management.
In practice, the first ideal, or the “Classical” ideal — of a stable and
inert currency — was most often realized through a gold standard system. The
second ideal, or “Mercantilist” ideal — of an actively-managed currency — is
realized as today’s floating fiat currencies.
In both of these cases, the base money supply is adjusted, on a daily basis,
to attain the policy goal. In the case of a gold standard system, the base
money supply is adjusted via an automatic mechanism similar to a currency
board, such that the currency’s value maintains its defined parity
relationship with gold bullion.
In the case of the floating fiat currency, the base money supply is adjusted
on a daily basis to achieve whatever economy-fiddling monetary distortion
goals the currency managers have.
In the case of Bitcoin, the monetary base is not
adjusted at all. It grows steadily. According to Wikipedia, at present, 25
new bitcoins are introduced every ten minutes. This
will be halved in 2017, and halved again every four years until a hard limit
of 21 million bitcoins is reached in 2140.
Obviously, there is no daily adjustment system here — not a gold
standard-type system, or a floating-fiat type system. When supply is
inflexible, then the value of the currency depends almost entirely upon
demand. The value of the currency can vary wildly, depending on demand, just
as the value of Impressionist paintings, vintage baseball cards, rare stamps,
or other collectibles can vary.
In the period 1775-1900, as the United States grew from a small experiment
into a world power, the demand for U.S. dollars increased immensely. The gold
standard system of the time naturally adjusted for this increase in demand,
by increasing the supply of base money, such that the value of the dollar
maintained its gold parity at 23.20 troy grains of gold per dollar, or
$20.67/oz.
The number of dollars in existence increased by 163 times, from $12 million to
$1,954 million. During this period, the amount
of gold in the world increased by 3.4 times due to mining production.
Bitcoin today is quite similar to Milton Friedman’s
calls for a Constitutional Amendment to increase the money supply by some
fixed rate, typically around 3% per year. The result of this would be about
the same as Bitcoin today, which is to say: total chaos.
Milton Friedman’s monetary understanding, alas, was not very good.
The most interesting thing about Bitcoin is not
that it is a good alternative currency — as a currency, it is garbage — but
that it illustrates the great enthusiasm people have today for some kind of
alternative to the monopoly floating fiat currencies imposed upon us by
tyrannical governments.
Also, Bitcoin has introduced a number of computer
science approaches that could be helpful in the creation of a truly useful
alternative currency.
Actually, we have many currency alternatives today. Any country’s currency,
among the hundred-plus now available, could be potentially used as an
alternative currency in the United States or elsewhere.
The problem is, these other currencies — the Philippine peso, Malawian
kwacha, Cambodian riek or Syrian pound — are also
fiat junk, no better than dollars or euros. Much the same is true of the
hundreds of “community currencies” in existence in the United States, which
are basically dollar adjuncts, or worse.
The best alternative currency would be one based on gold — a currency that reflects the Classical
ideal of a universal constant of commerce, rather than the Mercantilist ideal
of government economic manipulation expressed in today’s fiat currencies.
That would be a truly useful alternative. Bitcoin,
alas, is just another failed experiment.
(This item originally appeared at Forbes.com on April 18, 2013.)
http://www.forbes.com/sites/nathanlewis/2013/04/18/bitcoin-combines-ph-d-level-computer-science-with-sub-kindergarten-level-monetary-understanding/
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