Category Archives: 4.1.13 BitCoin News
Hello my Friends, as I stated, I am all over this Bitcoin thing. While this article has some negative conotations, I am still very enthusiastic about this. I will as promised keep you up to speed as I get more on the actual use. I just wanted to post a very recent article by a reputable news source.
What The Rise Of Bitcoin Teaches Us About Money
One of the more interesting developments of the modern electronic age of money has been the rise of Bitcoin, a decentralized digital form of money. If you’re not familiar with it or you’re confused by what Bitcoin is, you’re not alone. It’s a fairly new, innovative and complex form of money. And that’s right, Bitcoin is definitely money.
Today’s Dominant Form of Money Versus Bitcoin
Anyone who understands the basic tenets of Monetary Realism know that many things can serve as money and many things DO serve as money. After all, anyone can create money, but the trouble is in getting others to accept it. And since money’s primary purpose is in the means of exchange, just about anything can serve as money as long as it meets that primary purpose. The thing is, there aren’t all that many things that meet that need on a broad level. For instance, lots of people like to claim that gold is money (which it is), but gold isn’t accepted for payment in many places. Therefore, MR says that gold has a low level of moneyness (to better understand the concept of moneyness please see here). Gold is money, but it’s just not a very good kind of money. Bitcoin is actually very similar. If you have Bitcoins you can buy certain things online that only a Bitcoin merchant will allow you to buy. These merchants accept Bitcoins as a form of final payment. To them, it’s a form of money with a very high level of moneyness. But to a company like Wal-Mart a Bitcoin is like a gold bar. It doesn’t give you access to anything in their store therefore its moneyness is virtually nil in a Wal-Mart. Most retailers around the world view Bitcoins similarly.
In the USA, the primary form of money is bank deposits because bank deposits are the form of money that dominate the US payments system. The US payments system, which is maintained by private banks, is the primary playing field for the purpose of exchanging goods and services. In other words, if you want access to the most convenient and widely accepted form of payment (bank deposits), you need to become a member of the US payments system usually by becoming a bank client. This gives you access to credit cards, debit cards, a bank account that allows you to withdraw/deposit cash, etc which allows you to interact on the US payments system. Becoming a bank client is kind of like opening a Ticketmaster account so you can obtain access to the means of exchange to gain entry into a theater performance (you just want access to the tickets that give you access to a performance). In the case of banking, you open an account in order to gain access to the US payments system so you can access the performance that is the US economy. Obtaining Bitcoins is similar in many ways, but very different as I’ll describe below.
Bitcoin is a Truly Endogenous Decentralized Form of Money
Bitcoin is very different from bank deposits. The US payments system is overseen and regulated by the US government. In other words, the government has deemed the US dollar as the unit of account in the USA (in other words, money is denominated in US Dollars in the USA) and the government has given private banks the unique privilege to control and maintain the creation of the bank deposits (denominated in USD) that populate the payments system they operate. This system isn’t decentralized (even though it’s controlled primarily by private entities) because it is regulated by the US government. Bitcoin, on the other hand, is entirely decentralized, unregulated, etc.
Decentralization could be both good and bad for Bitcoin. I think there’s a certain missing element of trust in an online money that has no oversight. One of the key ingredients that stabilizes and maintains the US payments system is the backing of laws that enforce and regulate the proper use of bank deposits. Banks can’t just issue deposits (loans) without working within the regulatory structure of US government law. And the users of bank deposits can’t use this payments system for things that the US government might deem inappropriate. When you legally exchange goods and services on the US payments system there is a certain level of trust derived from the fact that you have a legal system protecting your rights to use that system in a particular way. In other words, the government helps embed a certain element of trust within the system by ensuring that its users operate within strict guidelines and by providing those users with certain protections against fraud, misuse, etc. It’s by no means perfect (some might even argue the government has too much control over the laws binding the payments system), but having an institutionalized form of money helps to solidify the trust that is one component of its viability. Bitcoin has no such integrated legal protections or oversight, which is both liberating, but worrisome in some regards.
Bitcoin is also interesting in that it circumvents the banking system. In the US banking system money is created as debt in the form of loans which create deposits. This means the money supply in the USA is market based (created by banks who compete for the demand for loans), but it’s debt based AND can therefore be costly to utilize. In other words, you have to “pay to play” within the US payments system. By decentralizing their payment system, Bitcoin is able to reduce the costs associated with money. They’re also able to create money that is not directly tied to debt. This is both innovative and liberating.
One of the more interesting elements of Bitcoin is its rise as a purely endogenous form of money. I often refer to bank money as endogenous in that it is created entirely INSIDE the private sector, but even bank money exists on a centralized system (the US payments system) that is regulated by US government law. But Bitcoin is completely decentralized and a purely endogenous form of money. So the decentralization creates a form of money that has grown entirely independent of government and its taxes. In other words, Bitcoin proves that money can exist ENTIRELY for the private purpose for the means of transaction. This not only shows that money can be entirely endogenous and independent of government, but that it can also grow entirely independent of government taxation.
The Bitcoin Money Supply and the K-Percent Rule
Bitcoin’s money supply is also automated. It kind of reminds me of Milton Friedman’s k-percent rule to automate the growth of the money supply. I won’t get into the way the Bitcoin money supply is automated because the computer based growth is WAY over my head, but all you really need to know is that it’s not controlled by a central bank or any bank at all. This is a very interesting approach to managing the money supply. The innovative thinking and creativity behind this concept should be embraced and explored further as money evolves in the future.
Where Does Bitcoin go From Here?
Bitcoin is an extremely interesting and innovative concept that shows that money can be entirely endogenous and exist entirely independent of government. But can it be sustained within our economy without the laws that help bind money as a social construct? Can the element of trust be borne into such a decentralized digital money? And more importantly, is this form of decentralized digital money inherently at odds with the existence of a money system and economy whose primary payment system exists on a government regulated and government taxed playing field? Call me hopeful, but skeptical.
I think the innovation and creativity behind Bitcoin is brilliant. It’s an incredibly cool and forward looking form of money. But money is a social construct and within any nation that social construct is designed in such a manner that it serves primarily private purpose, but ALSO public purpose. In other words, without a system of taxation attached to that money it is at odds with one of the essential components of money as a social construct. After all, it is through taxation that public purpose is generated so a money system that is entirely for private purpose could be seen as being at odds with one of the main purposes of money. The US government organizes and institutionalizes money within the government regulated banking system so that it can maintain a private market based money system that has strict oversight and tracking. This not only allows for enforcement of rules and regulations, but also helps the government ensure that this money can be used for public purpose. A truly decentralized form of money like Bitcoin has no such government attachment allowing for any form of public purpose.
I think Bitcoin can continue to exist as a subordinate form of money with a very low level of moneyness, but if Bitcoin were to grow to a point where it becomes a highly competitive form of money, but circumvents the laws, regulations and taxation of a system like the US banking system, my guess is that the US government will make it illegal for merchants to receive Bitcoins for payment. And then 100 FBI agents get a few thousand Bitcoins each, buy something from US based Bitcoin merchants and parade them out on national TV for the entire nation to see why Bitcoin acceptance results in a $250,000 fine and 5 years in prison. In other words, Bitcoin could very well become a victim of its own success as the US government would never allow another form of money to detract from public purpose due to high levels of monetary competition. Of course, I am referring to the US government, but this view would likely be embraced by many governments around the world.
So Bitcoin is an interesting and extremely innovative form of money, but probably not a viable form on any grand scale since its inevitable competition with the US banking system will likely render it at odds with the goals of the US government. I know the anti-government and anti-banking crowd won’t like that conclusion, but that’s how I view it. A purely private purpose money is at odds with the formation of money as a social construct that partially serves public purpose as the US banking system does.
Hopefully, Bitcoin will continue to exist on a smaller scale so we can see how this de-centralized, electronic, innovative and forward looking form of money evolves. There is much to be learned here and I think the US government should proceed with caution regarding any potential clamp down on this money system. While we wouldn’t want the Bitcoin money system to detract from public purpose I think it is useful and educational to see how this form of money evolves and takes form over time. But I worry that the party could come to an end as soon as the US government recognizes it as a very real threat to the US banking system and the payment system it regulates in the means of public purpose.