Kramer taken to task on Bitcoin by stevoblevo

Allow me to preface by stating my whole grasp of economics I owe to Ron Paul, LRC, and Mises.org.  I have rarely cracked a primary source.  A few years back I read a chapter or so of Rothbard’s Great Depression (probably just the beginning or even preface where I believe he was explaining the boom bust cycle) and I’ve read an article or two on mises.org that may be considered a primary source (Bastiat’s “what is money” recently).  

Recently in researching money, I’ve read snippets of Mises and now I’ve read only some of Rothbard’s What has Government done to our money (a book I’ve been meaning to read, and don’t indend on reading the whole thing for this response.  Only the relevant parts, namely Section II)

Now I’ll let Rothbard do the talking. (emphasis is his)

from What has Government Done to Our Money?, Section II Money in a free society - Chapter 8 The “proper” supply of Money.  page 29

Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not—unlike other goods—confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various “real” utilities, so that an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or “purchasing power.” Our law—that an increase in money does not confer a social benefit—stems from its unique use as a medium of exchange.

An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines.

One nugget of truth hidden in there (even though it’s italicized): Money, (to say nothing of it’s underlying commodity’s non-monetary value) is only useful for its exchange value.  If this is true then why does money need to have a non-monetary value?  It doesn’t at all.  In a society with Gold as the money you don’t desire gold because you can work it into thread, or make it so thin it’s transparent.  No, you want more gold because as money you know you can buy whatever your heart desires.  This (money) is the whole idea of a modern economy and is a must for the division of labor.  

Let me be clear: Money has NO ‘real value’ (outside of exchange).  And money is not “backed” by anything either, currency is.[1]  You see, gold (and money) has no backing it is the backing.  Don’t be confused by the gold-bugs who can’t get past a gold standard to a free market in money.  They think “money” must be backed by something and fail to understand that money has no value (outside of exchange).  

Say we have a small economy where seashells are money and then all of a sudden gold is introduced and becomes money overnight.  What are you going to do with your seashells now that you can’t trade with them?  Are you going to hang on to those seashells assuming they still have the same value even though no one else wants them? Are you then going to say “well, at least I have seashells!” and go hungry?  Absurd!  You will toss your seashells into the sea where they belong; (sure you’ll keep a few pretty ones for novelty but other than that) they are worthless.  And let me be blasphemous and say the same goes for gold.   The true reason why people want a “hard” money is to mitigate the risk of it no longer being money.  In our scenario sea shells can now at least be sold as objects of adornment (or whatever use they actually have) yet will not garner the same value as when it was used as money (especially since people have so many of them left over--the demand will sharply drop while supply remains the same).

Rothbard continued (pg 30):

We conclude, therefore, that determining the supply of money, like all other goods, is best left to the free market. Aside from the general moral and economic advantages of freedom over coercion, no dictated quantity of money will do the work better, and the free market will set the production of gold in accordance with its relative ability to satisfy the needs of consumers, as compared with all other productive goods.

Frederic Bastiat creates a useful analogy of a poker game with winnings under a candlestick to illustrate an example of the supply of money.

Rothbard says more of the same in The Case Against The Fed:

Money, after all, can neither be eaten nor used up in production. The money-commodity, functioning as money, can only be used in exchange, in facilitating the transfer of groods and services, and in making economic calculation possible. But once a money has been established in the market, no increases in its supply are needed, and they perform no genuine social function.

The widespread adoption of another money would serve to allow gold to be used in it’s non monetary way as a consumption and production good.  That would be a benefit to society.  In fact if a money were to be adopted that has no alternative value, no non-monetary value, then every other resource could be used in it’s consumer or producer good role.

Bitcoin has no alternative use.  It’s only use is as a medium of exchange.  Bitcoin is synthetic money, you could say.  It doesn’t occur naturally but comes into existence by man’s design in order to be useful in some way.  It’s like plastic. (not sure what plastic’s initial purpose was yet I’m sure the inventor was looking for certain qualities just as the invention of bitcoin was attempting to gain certain qualities, namely qualities beneficial for a medium of exchange.) Who’s going to say we shouldn’t use plastic because it’s not wood or glass or any other thing that it has replaced.   Who?  David Kramer, that’s who.

From David Kramer:

“many people who are touting it on Facebook are enamored with the fact that it was voluntarily created by the marketplace.  I'm afraid that those people are losing sight of how a real medium of exchange arises in a free market.”

who cares how it arises? the fact is bitcoin is rising.  ‘How’ doesn’t matter.  In fact if bitcoin continues to rise we’ll come up with a new ‘how’ since bitcoin didn’t rise according to your how:

“a medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange, i.e., it was also a good being  bartered for other goods and services. “

Yes, that’s how money first came to be, out of a barter economy, and that makes a lot of sense.  But we don’t barter anymore.  So is that still necessary?  And fiat money only came about by government decree--legal tender laws (fiat means ‘let it be done’ in latin)--removing a currency’s (in this case bank notes called US dollars) link to so-called ‘real’ money or hard money (that which is also a commodity which has use, a non-monetary value).  The fact is fiat money would work perfectly as money, a good and valuable money, were it to remain at a fixed or perhaps slowly inflated/deflated supply (as gold was a good money being at a relatively ‘fixed’ supply yet inflating slowly, although more rapidly in modern times through heavy mining).  The only issue would be to get people to accept it initially which we’ve already been conned and coerced into doing.  Bitcoin is similar to a fiat money in that it is “nothing” and has no use outside of being money. Bitcoin is virtual yet it has not come to any sort of prominence by government decree (read ‘fiat’) and is not forced upon people.

The great Austrian School economists simply suspected gold (or another actual commodity with non-monetary use) would become money again in a market where people were free to choose as it once rose in such an environment.  They thought no one would choose “fiat” money after legal tender laws were repealed.  But that may not be the case for non-’commodity’ money (meaning having no non-monetary value).  People are choosing bitcoin.  In a free market, in each and every exchange of money, both parties are saying ‘let it be done’, that this be used as money.  Therefore all free-market advocates should be enamored with how bitcoin is arising voluntarily; and those clinging to gold as money ought to be astonished at it’s rise.

        Again Kramer writes “Eventually bitcoin will be shutdown [by the government] because of it’s anonymity issues.”  While I’m sure he’s been informed bitcoin is fundamentally NOT anonymous.  (Each transaction is written onto each coin by design[2]), the anonymity is not the reason it will be shutdown.  That will be the excuse given, the so-called “official reason” (e.g. “we must protect the children!”).  But the actual reason would be because the establishment is threatened by it.  I’m sure Mr. Kramer has also been informed that the government may have a very hard time enforcing a ban on Bitcoin since there is no central authority to dismantle as there was with e-gold which Kramer cites.  Bitcoin like BitTorrent is decentralized as a distibuted network spanning the globe.  Bitcoin is a starfish, not a spider.  There is no head; you can cut off a leg and it lives, in fact it grows another one. (what happened to Pirate Bay?)

        Perhaps Mr. Kramer needs to read his own suggested books again.

~stevoblevo


[1]xchange. Often times currency and money are the same (especially before banks) but not always.  Currency includes money-substitutes.  Under the Gold Standard, Gold was money and bank notes were currency.  In fact Gold was money and coins were currency, just a special kind of currency that can actually contain its money-backing if so desired (if a coin does not contain it’s monetary value it is therefore a money-substitute).  This can get confusing because money often times is it’s own currency as well, think a pinch of gold dust or even a gold nugget in the old west.  In modern times we have plastic being used as a money substitute in the form of credit/debit-card.

[2]It’s kind of like the stanley cup in hockey.  each team (read ‘owner’) is written onto the medium itself and when it changes hands a new owner is written onto it.  Only with bitcoin instead of a name written on it a 256 bit key is written on it and you can change your key (read ‘name’) with every new receiving transaction.  That’s where the anonymity comes from. However, if you can find out and match a name to the public key you can track that transaction and follow the money through other transactions to other keys.  This is actually how bitcoin prevents double-spending.