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Let’s have the debate on gold

by Kurt Schuler August 29th, 2012 11:56 pm

Steve Horwitz has a post at Coordination Problem. Since he has not brought attention to it here, I will do it for him.

I detect in the article to which Steve was replying, and in other recent articles by liberals and conservatives alike, an unhealthy attempt to foreclose debate about the gold standard. So you think it would be a bad idea. After the experience of the last several years, not just in one or two countries, but in quite a few of the richest countries, are you really so sure that fiat money is superior to the gold standard? As I pointed out in my previous post, Britain is now in a slump longer than it suffered during the Great Depression. If circumstances like these aren’t enough to make you reconsider the potential desirability of the gold standard, are there any circumstances that would? If the answer is “no,” we can conclude that you are mere dogmatists.

Among those wishing to foreclose debate I see many clever scribblers, but nobody who shows evidence of having studied in detail the history and workings of the gold standard, as it existed both inside and outside the United States. If you adopt this attitude and you have not read at least a dozen scholarly books on the gold standard,* you can’t even begin to claim expertise on the subject and your opinions are no more worthy of notice than your opinions on aeronautical engineering.

*Some of them, not all equally correct but worth reading: William Adams Brown, Jr., The International Gold Standard Reinterpreted; Barry Eichengreen, Golden Fetters; Eichengreen, editor, The Gold Standard in Theory and History; Ralph Hawtrey, The Gold Standard in Theory and Practice; Lawrence Officer, Between the Sterling-Dollar Gold Points; Melchior Palyi, The Twilight of Gold; the U.S. Gold Commission Report; Leland Yeager, selected chapters of International Monetary Relations. As far as I remember, all of these focus on central banking; I know of no book that gives other monetary authorities their due.

131 Responses to “Let’s have the debate on gold”

  1. avatar Remarkl says:

    I'm having a hard time figuring our whether I am eligible to comment. I haven't read a dozen books on this subject, but I don't want to foreclose debate. I'm not clear on why one needs credentials to disagree but not to agree. I guess life's just not fair.

    I do think the gold standard is an obsolete technology that existed only because there was no less bloody way - you are aware of the blood spilled in the quest for gold, right? - to prove that money was created for good reason. With the advent of the free press and the telegraph, the silence of the watchdogs became an adequate replacement for the metal. I can think of nothing that the gold standard can accomplish that freezing the debt ceiling - also a terrible idea, but still better than tying the currency to plundered yellow dirt - not accomplish.

    But by all means, make the contrary case.

  2. avatar Paul Marks says:

    There is no "technology" problem with using gold as money Remarki.

    Electronic transfers of ownership mean you do not have to walk around with a bag of "yellow dirt" if you do not want to.

    Although if you really regard gold as valueless "yellow dirt" will you please send me all your gold, after all if it has no value to you......

    However, there is a problem with a gold "standard".

    Either gold is the money or it is not.

    There is no problem with using debit cards and so on (electronic transfers of ownership and so on deal with that), but the word "standard" implies that gold is NOT the money, that it is a "standard" for something else that is the money.

    This is not obscure technical point - it is very practical.

    For example New York Federal Reserve chief Benjamin Strong (following the FUNDEMENTALLY FALSE monetary ideas of Irving Fisher and others) created a vast credit-money bubble in the late 1920s.

    A vast credit-money bubble that inevitably led (as all such credit-money bubbles do) to a BUST - in this case the bust of 1929.

    Benjamin Strong was the Alan Greenspan of his day - and his policies had the same result. Credit-money expansion (the "boom") and the inevtible bust.

    And Benjamin Strong did this at a time of BALANCED BUDGETS Remarkl. So much for your theory that freezing the debt (although you also say this would be a "terrible idea" - why?) would prevent boom-busts.

    You confuse FISCAL policy (reducing government spending to balance the budget - a very good idea, not a "terrible idea" apart from the Keynesians who believe in the utter nonsense that government deficit spending is "good for the economy"), with MONETARY policy.

    Gold-as-money (or silver as money - or any commodity that buyers and sellers freely choose) is about preventing credit-money boom-busts. In short if people wish to lend out gold they must first HAVE THE GOLD (the real SAVINGS) they wish to lend.

    "Advancing credit" may be fine if one is (for example) a shopkeeper letting people have goods "on credit" in the hopes of future payment. But when that shopkeeper comes to restock his shelves he had better have got paid - otherwise his business is at an end. As for "advancing credit" when one has neither money (cash) OR goods (as modern banker, i.e. basically a conman, does) - that is just building a fairy castle in the air (an effort to lend "money" at a LOWER RATE OF INTEREST than real SAVERS would demand for their SAVINGS) - it always ends in tears, the "boom" turns (MUST turn) to BUST.

    The only thing that can be said for it is that if there is no government intervention (no ban on "discounting" bank drafts and so on, no "suspension of cash payments" and no CENTRAL BANKING) then credit-money expansion "booms" will be of limited size - the boom will soon turn to BUST (government intervention DELAYS this - but it also makes the boom-bust vastly BIGGER). Without government intervention credit bubbles (i.e. boom-busts) will still exist (i.e. dishonest, or deluded, bankers will still try and build fairy castles in the air - still try and lend out "money" at an interest rate lower than real SAVERS would demand for their SAVINGS), but these credit bubbles (these boom-busts) would be far smaller and less harmfull.

    As for what a gold STANDARD is about....

    Well as Benjamin Strong proved (indeed as had been proved even before the existance of the Federal Reserve - with the credit-money expansion boom-busts before 1913) a gold STANDARD is so vague and woolly as to be of only limited interest. Partly because there are so many different definitions of what a "gold STANDARD" actually means.

    • avatar Martin Brock says:

      You're right to distinguish money from the standard of value in promissory notes that may become money. People commonly confuse the two when gold is a standard, because gold coins circulate alongside the notes as a medium of exchange, and both are therefore money simultaneously; however, imagining the standard as a valuable good backing the notes is a fundamental mistake. Valuable collateral of all sorts secures the notes.

      Suppose I have 50 ounces of silver. I want to buy things in my local market, but merchants in this market price their goods relative to gold rather than silver. Furthermore, I can't easily exchange my silver for gold, because little gold exists in my neighborhood. Gold tends to flow away from the neighborhood, toward Ft. Knox for example, drawn away by various statutory forces.

      So I go to market and explain my predicament to one of the merchants. I don't have gold, but I do have silver, and I'm willing to exchange some silver for the merchant's goods. Since the merchant prices goods in gold, we must agree on a price of silver in gold, and we agree on the market price at some credible, public exchange.

      Fifty ounces of silver is a lot to carry around, so I don't carry the silver to market. Instead, the merchant agrees to accept my promise of silver, and having no other use for silver himself, he agrees to leave the silver in my possession. I sign the bill of sale, and this bill becomes a note promising my silver.

      The note is essentially a warehouse receipt for my silver. The merchant and I both understand this fact, but the bill doesn't actually specify an amount of silver. It specifies the price in gold of the merchant's goods. It is nonetheless a "real bill", because sound collateral with a comparable value backs it.

      Because I am a trustworthy accountant and do not promise more silver than I can deliver, even given routine fluctuations in the relative value of gold and silver on the exchange, other merchants will also exchange their goods for my notes, and so the notes become a medium of exchange in the market. Merchants accepting my notes effectively deal in my silver, but they continue to price their goods in gold.

      I know your objection to this system. People dealing in silver should clearly understand that they're dealing in silver, so these bills should specify values in silver rather than gold. The notes should not promise gold, or seem to promise gold, even if backed by silver with the same price in gold, even if silver backing the notes is more valuable than the gold promised when the notes are created.

      I accept this objection in principle, but I don't agree that these merchants, well understanding their own business as described here, necessarily inflate a credit bubble by accepting notes promising goods other than gold, based upon the value of these other goods relative to gold, while still valuing their own goods relative to gold, and I don't agree that an expanding supply of these notes necessarily encourages any malinvestment or a business cycle.

      I also agree that "gold standard" has other uses, including a statutory standard in which gold and notes promising gold are a fiat money commanded to circulate by a central authority rather than being adopted, or abandoned, only at the convenience of proprietors in a free market. I attribute instabilities in this system to these monopolistic central authorities rather than the system itself.

    • avatar Remarkl says:

      "You confuse FISCAL policy ... with MONETARY policy."

      Fiscal policy IS monetary policy. What would happen if the government printed all the money it spent and did not collect taxes? Hyperinflation, a MONETARY phenomenon. Q.E.D.

      • avatar Martin Brock says:

        A state printing all the money it spends without collecting taxes does not imply hyperinflation. The inflationary impact of this policy depends upon the state's share of total spending. Expecting a state to limit its share of total spending when it prints a fiat currency and raises no taxes might be unrealistic, but that's a separate issue. A state could, in theory, spend a fiat currency into circulation without taxation or inflation if the spending created enough public goods.

        • avatar Remarkl says:

          "A state could, in theory, spend a fiat currency into circulation without taxation or inflation if the spending created enough public goods."

          Wouldn't "not taxing" in that situation be a policy decision? If so, and the decision followed from the recognition that there is no inflation to prevent, wouldn't that be a decision about monetary policy?

          • avatar Martin Brock says:

            I suppose not taxing would be a "fiscal policy", and the spending would also be "fiscal policy". Effectively lending to the state at zero percent interest for an indefinite term might be called "monetary policy", but conventional usage of these terms don't apply at all here.

            My only point involved inflationary effects of the policy.

  3. avatar Keith Weiner says:

    Kurt: I agree with most of what you say, save the part about the dozen books on the gold standard. I get that this topic--like aeronautical engineering--is one that requires specialized knowledge. But perhaps there is another way to say that?

    I think we are at a stage where we need to welcome such debate. Why? Because it is a major improvement from the previous phase of the airy wave and dismissal. Now they cannot ignore gold any more. And the problem for them is that their positions are specious and they are ignorant. Paper money is collapsing, it is the elephant in the room--and everyone knows it.

    Take Remarkl's comment, for example (sorry to pick on you). He says gold is "obsolete"? Why? A typewriter is obsoleted by a computer. Why? IT PERFORMS THE SAME TASK but in a a better way. OK, but does irredeemable paper money perform the same task as the ultimate extinguisher of debt? No, paper money cannot extinguish debt, it only transfers it around and allows it to accumulate. What is our proof? Debt at all levels of the system has been growing EXPONENTIALLY since 1971 when Nixon plunged us into the worldwide regime of irredeemable paper money.

    Remarkl then attempts to link gold money to murder because people killed over gold. So? Does this make gold itself guilty of crimes? People have killed over food, oil, and indeed almost every human value including love. This is an example of a specious attack.

    Keith Weiner,
    President Gold Standard Institute USA

    • avatar mofo. says:

      Why is fiat money irredeemable? I can use my paper money to buy gold any time I like. Whats more, rather than depend on a government to redeem my paper money (subject to the usual whims of government) i can use the much more efficient and fair free market.

      Free Markets > Gold standard.

      • avatar Martin Brock says:

        Free markets imply that I use the standard of my choice and you use the standard of your choice.

        • avatar Remarkl says:

          "Free markets imply that I use the standard of my choice and you use the standard of your choice."

          Including the free choice by each of us to use the SAME standard in order to achieve synergistic, plus-sum advantages for EACH of us. What should "free" prisoners do in a prisoner's dilemma?

          You can say it's a trick question, that there are no "free" prisoners, but that's the point: life presents plus-sum opportunities that are best played through coordination, situations in which "freedom" is best EXERCISED by surrendering autonomy.

          This is the great soft underbelly of faux libertarianism: blindness to the possibility that coordinated cooperation - surrendering autonomy to the extent, say, of obeying traffic lights, or using a common currency standard chosen my politically responsible delegates - is an EXERCISE of liberty and not a curtailment of it.

          "Free" markets does not imply anything: it's a descriptor not prescriptor. You can look at a market and call it "free" or not FOR PURPOSES OF achieveing some particular desideratum. But you cannot say that "free" markets MUST have some particular attribute without reference to a goal to be achieved thereby. And the case must still be made for a goal that would required idiosyncratic money standards in a robust trading economy.

          • avatar Martin Brock says:

            Using a common currency is advantageous, and sufficiently free people will choose only a few currencies ultimately, though the most common currency among a group of free people will change from time to time.

            If the desire for synergies and to reduce transaction costs dominates currency choice, then people living in Buffalo, NY and Toronto, ON use a common currency, but they don't. In reality, a border between nation states separates these people, even though national culture hardly separates them at all, and people on each side of the border use a currency imposed by a state. The advantages of a common currency only make the state's burden of imposing a monopoly easier. It obviously doesn't permit people in Buffalo and Toronto to share a currency.

            People on two sides of Niagara Falls, subject to states on either side, will cooperate as best they can given the constraints imposed by the two states preventing them from adopting a common currency. This fact is no argument against a common currency or against competition leading to a few competing currencies, one of which is most common in the region now separated by this statutory border.

            No. Using a common currency imposed by a state is not an exercise of liberty by definition. Calling this decision "an exercise of liberty" is Orwellian. You can argue for a statutory monopoly on various grounds, referring to some prisoner's dilemma if you like, but a currency imposed by a statutory monopoly is a forcible imposition regardless of its merits.

            The soft underbelly of servile subjection to a state is the pretense that a free choice exists where none exists, a pretense obvious to anyone with his eyes open at a border between states.

            Of course, "free" is a descriptor and not a prescriptor, but it's not a meaningless descriptor. "Freedom" is always relative to forces constraining choice, but this fact is beside the point. I can meaningfully describe my choice of the U.S. dollar as a currency as "not free", because I imagine a world in which the state dominating my neck of the woods does not impose a currency.

            I will never be free of Gravity, but I can conceivably be free of a state imposing a currency, and while I can conceive of this freedom, while I can imagine the advantages of this liberty, I will. If you want to discuss the goals of this libertarian reform, we can do that. If you want to discuss the practicalities of currency competition in a robust trading economy, we can do that too.

            Currency competition has never been more practical in the history of humanity. The reasons are technological, not political.

          • avatar Remarkl says:

            "You can argue for a statutory monopoly on various grounds, referring to some prisoner's dilemma if you like, but a currency imposed by a statutory monopoly is a forcible imposition regardless of its merits."

            Of course it's forcible. That's what coordination IS: force agreed to. You may say that you were given no choice about living under our government, but the founders HAD a choice, and they CHOSE this one. The First and Second Amendments provide a means for you to CHOOSE another. That was an exercise of their liberty, so, no, what you are citing "by definition" is license, not liberty.

            The traffic laws are forcibly imposed by a monopoly, but that does not render them objectionable. There must be some OTHER reason to protest the imposition of a common currency, i.e., it must fail to serve its synergistic purpose or be inferior to another, less constrained way of achieving those synergies.

            I do not refer to "some prisoner's dilemma," as if it were some sort of magical incantation. I am referring to the nature of the world, in which there are commons and there are tragedies of them when autonomy is mistaken for liberty, when free people choose orneriness over cooperation for their mutual benefit. The prisoners' dilemma is what government is all about. Unless you understand and address the problem of plus-sum games, you really cannot talk constructively about public policy economic or otherwise.

          • avatar Martin Brock says:

            Coordination may or may not involve force, and coordinated force is not self-justifying in my way of thinking.

            The government subjugating is my government only the sense that it is the government subjugating me. I am not one of "the founders", and I have little reverence for them. Everyone subject to a forcible imposition is subject to a force founded by someone else. The Bill of Rights was largely a dead letter when I was born fifty years ago, and I have little reverence for it either.

            "License" describes a state's permission to act, so describing a liberty this way is Orwellian.

            Particular traffic laws are not objectionable to me. Incredible burdens imposed on my children are.

            No. The burden of defending a particular forcible imposition rests with proponents of the imposition. I can tell why I favor currency competition, on utilitarian grounds, but I need not tell you why the state should not enforce a currency monopoly in my way of thinking. You need to tell me why it should.

            I never suggest any magical incantation. You refer to a "prisoner's dilemma" without specifying one, so I can only refer to "some prisoner's dilemma" in reply. If you want to argue for a statutory monopoly of money based upon the tragedy of commons, go ahead, but this argument is not obvious to me. You can just as easily tell me that the trail of tears was justified without specifying an argument in its favor, but vague allusions to unspecified arguments are not persuasive.

          • avatar Remarkl says:

            " If you want to argue for a statutory monopoly of money based upon the tragedy of commons, go ahead, but this argument is not obvious to me. "

            Why would anyone would want there to be more currencies than the smallest number that will enable trade among an adequate range of willing traders? Every trader wants customers, and every trader wants to be paid in something that can be used to buy something else. It seems to me obvious that a single, universal currency achieves that result best. There are, however, obstacles to that approach across political boundaries. So let's stay within the political boundaries of one monetary sovereign, in this case the USA.

            If you and your buddies want to trade only in gold coins, one of two things happens. Either we ALL adopt gold coins as money, because you have a monopoly/monopsony position that enables you to call the tune, or your circle's goods, services, and custom exit the market for the rest of us. I would argue that most economic participants lack the power to call the tune on the currency. Thus, your insistence on your preferred currency makes the market less robust for lack of your competitive entry. If enough competing circles circles form - there is no reason to believe that yours would be the only one - the market becomes burdened by transaction costs as I try to dope out whose product costs less by measuring your price in apples against a competitor's price in oranges, and I lose business as a significant number of people what to do business in their own preferred currency and not mine.

            That is a tragedy of the commons: the single-currency marketplace is the commons, and the selfish withdrawal of goods from it causes it to collapse. Of course, no one would want that result. You would want your currency to "win" the competition, so that it is accepted by more merchants and the marketplace is not destroyed by the competition among currencies. But the competition is flawed because of how hard it makes it for customers to transact business while the circles duke it out. As a result, aggregate sales drop, businesses fail, etc., etc. The game destroys the prize. That is what a tragedy of the commons looks like.

            Within a common currency regime, competition drives price to cost and refines offerings to customers' preferences. But competition on price is a positive feature of a market economy. Consumers do not want to have to work any harder than they have to to figure out who has the best price. They understand that misleading advertising is part of life, but at least they have a common denominator into which to translate already mismatched quotes. Imagine comparing car rental fees, the quintessential apples and oranges of the existing regime, under a multi-currency regime. I'd rather walk.

          • avatar Remarkl says:

            There are typos in my last comment, for which I apologize. "what" for "want" toward the end if the third paragraph is the worst.

            This site really could use a preview/edit feature.

          • avatar Peter Surda says:

            Why would anyone would want there to be more currencies than the smallest number that will enable trade among an adequate range of willing traders?
            Even on a free market, it could happen that the acts of exchange are too heterogeneous and an increase in the number of media of exchange would lower average transaction costs. Similarly as there are nowadays multiple operating systems. But yes, I'll admit this is more an exception than the rule. Normally, I would expect the size of the network to be the dominant influencing factor in competition among media of exchange (as Austrians and plenty of non-Austrians do, but they don't necessarily formulate it the same way as me).

  4. avatar Per Kurowski says:

    I am not for a gold standard, on purpose, but I believe that the gold standard has a way to impose itself, when needed. That said a debate is quite timely… since recently we have witnessed one of the intellectually most confusing theories ever on this issue, and I refer to that of having “In God we trust Treasury notes” to be included simultaneously with gold among the “safe assets” by the IMF… If Treasury notes are not backed by gold…isn´t either or?

    http://subprimeregulations.blogspot.com/2012/04/great-risk-of-risk-aversion.html

  5. avatar Peter Surda says:

    Even if agree that gold is superiour to fiat, a gold standard would still leave several problems unfixed:
    - elastic supply of money, whether through credit expansion/contraction or through government intervention
    - requires legal reform for switching (abolishing of legal tender laws is insufficient due to the network effect), which apart from the political issues brings about the question of logistics, exchange rates and so on

    Medium of exchange with an inelastic supply and super-low transaction costs, such as Bitcoin, fixes both of these problems. Sufficiently low transaction costs make it more difficult for bank liabilities to become substitute media of exchange, and they also make it easier to overcome the network effect, even in the presence of legal tender laws.

    • avatar Martin Brock says:

      The supply of bitcoins can never exceed 20 million, so to compete with the dollar as a medium of exchange, the purchasing power of a bitcoin must be vastly greater than it is now, by many orders of magnitude. Bitcoin prices must be low enough that people can possess enough bitcoins to buy what they currently buy. With hundreds of millions of people eating every day, the price of a day's food must be a tiny fraction of a bitcoin, but at the current bitcoin/dollar exchange rate, the price of a day's food is more like one bitcoin.

      If I expect bitcoins to rise so precipitously in value, even over a decade or more, why wouldn't I accumulate them rather than spending them? Why wouldn't I buy bitcoins as long term investments and spend dollars instead while the appreciation occurs? Are you accumulating bitcoins?

      Bitcoins ultimately must become a medium of exchange to have any utility, because they have no other use, yet to become a widely used medium of exchange any time soon, they must appreciate rapidly by orders of magnitude. If they appreciate this way, accumulating them is more rational than spending them, but if people accumulate them rather than spend them, they aren't a medium of exchange.

      I suppose bitcoins could challenge dollars as a medium of exchange only over many decades, even centuries. Then the appreciation could be slow enough that spending bitcoins rather than accumulating them could be rational, and they could have utility as a medium of exchange as the appreciation occurs. Do you expect this very gradual adoption of bitcoins as a medium of exchange?

      • avatar Peter Surda says:

        Your point about the price makes sense. However, if the demand for Bitcoin increases, this would also cause an increase in price, as the supply is inelastic. So the problem fixes itself.

        The competition between media of exchange occurs at the level of transaction costs. Irrespective if people are motivated to accumulate bitcoins, the would still be motivated to spend them if that was the medium of exchange with the lowest transaction costs.

        Bitcoins already are a medium of exchange, the daily transaction volume of the Bitcoin network, based on their market price, is about 2 million USD. In addition to this, there are out-of-band transactions on the exchanges, which are also in the range of millions of dollars per day. The usability of a medium of exchange is not a derivative of the price (even some Bitcoin proponents hold this erroneous opinion), but of liquidity. Steeper bid/ask slopes on the exchanges, services that allow a smoother interworking between Bitcoin and fiat increase liquidity, and types of activities which are penalised by the state or that suffer from the banking oligopolies lower the network effect of fiat and thereby the threshold for switching (critical mass).

        With respect to the adoption curve of Bitcoin, I'll make another post below.

        • avatar Martin Brock says:

          The price of bitcoin in dollars is not the issue. The price of anything in bitcoin is the issue. Because the supply is inelastic, when demand for bitcoin increases, the price of everything valued relative to bitcoin falls.

          For bitcoin to replace the dollar, the price of a carton of milk in bitcoin must ultimately be tiny, like 0.0001 bitcoin or something, because there aren't enough bitcoin for everyone buying milk on a daily basis to hold enough bitcoin to pay a higher price. The current price of milk in bitcoin is orders of magnitude greater, so the price of milk in bitcoin must fall by orders of magnitude for bitcoin to compete with the dollar as a currency, i.e. the purchasing power of bitcoin must rise by orders of magnitude.

          If a bitcoin in my digital wallet appreciates while a dollar in my digital wallet depreciates, how does spending the bitcoin benefit me? At this point, the bitcoin transaction cost is much greater for me, because hardly anyone accepts bitcoin and I must convert it dollars first, but if the transaction costs were the same, wouldn't I spend the dollar first?

          The average daily volume on mtgox, which dominates the trade, is closer to $500,000. The volume rarely exceeds $1 million and has exceeded $2 million only 3 or 4 times in the last two months. That's still impressive for a currency created by a man known only by a pseudonym, and I follow the market with interest myself, but the bitcoin/dollar trade interests me less than the bitcoin/everything else trade. If speculation dominates the trade at this point, then bitcoin is not yet valued as a medium of exchange. Buying something with dollars to speculate on its future price in dollars doesn't make it a medium of exchange.

          But I am interested to read your thoughts on the adoption curve.

          • avatar Martin Brock says:

            To be clear, I should say "desire to accumulate bitcoin increases" rather than "demand for bitcoin increases". One can demand bitcoin either as a medium of exchange or as an appreciating good. A theory of economics and finance should carefully distinguish these uses. A business model should too.

            Identifying both of these uses with "money" seems mistaken to me. Only the first use is monetary. If you hold something expecting its value to increase, you aren't holding it only to exchange it for something else. People buy things, like antiques, hoping for appreciation all the time, but we don't call an antique "money", even if the buyer has no other use for it.

  6. avatar Martin Brock says:

    Why must I choose between fiat money and a gold standard?

    If only gold coins minted by the Treasury and notes promising gold issued by Federally regulated banks are still the exclusive legal tender for paying taxes and other statutory rents while the state at every level spends half of GDP, and if the state continues to sell entitlements to tax revenue more valuable than all publicly traded companies combined, and if all existing, dollar denominated debt is suddenly payable in these statutory notes promising by statutory fiat, how is this gold standard not a fiat money system?

    If you haven't read a dozen scholarly books on the history of silver as money in the United States, are you entitled to an opinion on this issue?

    Let's have the debate on competing currencies and genuinely free banking.

  7. avatar Remarkl says:

    Keith -

    You are not picking on me - you are discussing with me, I hope.

    We are talking here about gold as a backing for paper money, not gold AS money. The backing for a currency is a technology for delivering to the offeree of money information about the credibility OF the currency. Convertibility ties the paper to scarcity. That is its technological function, that is the function that a free press and electronic communication do better. The "ultimate extinguishment" of debt seems to me a theological notion of no practical utility relative to what, say, paying my mortgage in fiat money does for me.

    People kill for material goods because they NEED them. People don't kill for typewriters. We don't need gold any longer badly enough to kill for it or die for it. That is one of its worst negative externalities.

    • avatar Keith Weiner says:

      Remarkl: I think we should be talking about gold as money. If people want to expand credit by depositing it for interest, that is their choice to suit a human need of exchanging wealth for income.

      Redeemability is not about scarcity per se, though obviously if gold were lying about on every shoreline in the world it would not be precious. It is about the idea that if debt cannot be extinguished, then it only grows. Exponentially. Take a look at a a chart of US government debt since 1971. Exponential. Unsustainable. There is no mechanism in the system for a debt to be extinguished. It is all borrowed at interest. Debtors must be able to pay this interest, or else the collapse begins to cascade. So the debt must increase by at least the amount of the vig. Until debtors cannot pay any more no matter what, and then there is a catastrophe. No, this is not academic and certainly not "theological".

      The fact that people kill to take valuable things is not an argument that the government should use force to remove valuable things from anyone's possession! As to people not killing for gold, I suggest you think about what would happen if you walked down the street in a bad neighborhood openly flaunting gold. People still kill for it. This is not an "externality" and among the less serious arguments against gold that I have seen.

  8. avatar Remarkl says:

    Keith -

    The blood spilled over gold seems to have you spooked. It's the only argument you feel obliged t o insult each time you fail to debunk it. (If your counterarguments made any sense, you would let them validate themselves, like gold coins. You are, instead, validating your arguments by fiat. That cannot be pleasant for you.)

    You say that redeemability is not about scarcity, but you fail to show why not. Debt cannot grow exponentially if money is scarce. Gold keeps money scarce. So do votes. The same political cowardice that makes it impossible to prevent unsustainable lending also prevents strict adherence to gold. You sound like those leftists who (used to?) defend communism on the grounds that it had never truly been tried. It cannot be tried, as it is too easily hijacked. Ditto the gold standard: politically, it only lasts until it becomes inconvenient. Once, debasement was the only technology for eroding the gold standard. Now we have fiat money, a much better tool. But the standard fails when it fails; only the method of killing it changes.

    • avatar Keith Weiner says:

      Remarkl: I don't see any there, there. Some people kill because they feel that the only way to succeed is to make someone else lose. This has nothing to do with gold. And as I pointed out, it occurs with gold even today when gold is officially banned as money.

      Gold is not "scarce". Measured properly--as a ratio of stocks to flows--it is the most abundant commodity maybe with the exception of water. Debt in irredeemable currency must grow exponentially as I explained above, and when it stops then the system collapses.

      Communism has a problem. It leads to exponentially increasing dead bodies. It *cannot* be practiced.

      Gold per your statement has a different problem. The voters eventually want too many goodies and so government obliges them by abolishing gold so they can print money to buy goodies. Gold has been successfully used. For long, long periods of stability and prosperity, relative to the times before or since.

      I will leave you with a quote:

      "“The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.” -- Ludwig von Mises, _The Theory of Money and Credit_"

      • avatar Remarkl says:

        Keith -

        Your quote makes my point: the gold standard is too feeble a political institution to last. So why bother? (At the end of the day, ALL money is fiat money so long as there is someone empowered to issue fiats.)

    • avatar Peter Surda says:

      Ditto the gold standard: politically, it only lasts until it becomes inconvenient.
      Exactly. Good money must be able to resist manipulation by both politicians and the banks. Gold already failed in that, and the proponents of gold have not provided a solution to this.

  9. avatar Peter Surda says:

    If people want to expand credit by depositing it for interest, that is their choice to suit a human need of exchanging wealth for income.
    This is incomplete. Credit expansion is not created by gaining interest on deposits, but by accepting forms of money that are not fully backed by specie (which may or may not be accompanied by interest payments) as substitute to money. Furthermore, credit expansion creates negative externalities (for example, as the full reservists Austrians claim in the Austrian Business Cycle Theory, the credit cycle) that affect all the users of that particular money, even the specie-owners.

    In addition to that, using gold (specie) as money has comparably high transaction costs and is unlikely to gain any meaningful amount of demand as a medium of exchange. Even if there is a hyperinflationary collapse, creating coins with the appropriate denominations and amounts to conduct trade involves a logistical problem. Of course, on a free market, we can expect this to be fixed eventually, but in the meantime, the would be an imbalance between supply and demand, and other types of money, which have lower transaction costs, can gain market share much faster.

    A cryptocurrency like Bitcoin can handle these issues more gracefully. Due to its low transaction costs, the demand for an alternative Bitcoin-denominated medium of exchange is dramatically limited, and as long as you have an electronic device that can access if not internet then at least single purpose gateways (such as the one proposed by bitcoincard), the logistics becomes much easier.

    It is important to realise that merely because something has a high value and high demand (gold), that is not sufficient to make it into a dominant medium of exchange. Technological aspects influence the transaction costs as well.

    • avatar Keith Weiner says:

      Peter: I was referring to the motivation and process that leads men to expand credit, i.e. to exchange coin for paper redeemable in coin.

      Not all credit expansion causes booms and busts. Counterfeit credit is the culprit (http://keithweiner.posterous.com/inflation-an-expansion-of-counterfeit-credit).

      The problem with bitcoin is that it is just another irredeemable currency, albeit not based on fiat.

      • avatar Peter Surda says:

        Peter: I was referring to the motivation and process that leads men to expand credit, i.e. to exchange coin for paper redeemable in coin.
        The motivation of people to earn interest leads to fractional reserve banking. The motivation of people to decrease transaction costs causes fractional reserve banking to evolve into credit expansion, assuming that bank liabilities decrease transaction costs.

        Not all credit expansion causes booms and busts. Counterfeit credit is the culprit ...
        You conflate fractional reserve banking (issue of financial instruments with shorter maturities than the loans granted) with credit expansion (accepting these liabilities as a medium of exchange). These are two different phenomena having two different causes, even if we assume that FRB is a prerequisite for CE.

        The problem with bitcoin is that it is just another irredeemable currency, albeit not based on fiat.
        I noticed that some fans of the Austrian school seem to think that "backing" determines whether money is good or not. This however does not have support in the writings of Austrian economics. The Austrians argue that money arises through a catallactic process (which is valid for Bitcoin). The issue of redeemability arises with respect to money substitutes (i.e. whether the substitute is a money certificate or a fiduciary medium). But Bitcoin is not a money substitute so there is no redeemability issue. Bitcoin is specie, similarly as gold. Neither are backed by anything.

        • avatar Martin Brock says:

          Bitcoin is not quite equivalent to a commodity like gold, because gold has intrinsic value, i.e. it has value other than its value as a medium of exchange. In a free market, gold's use as money competes with its other uses.

          Even Federal Reserve Notes have value other than their value as a medium of exchange. They are valuable to the state as an instrument of state police. They are valuable to me, because I owe taxes payable only in U.S. dollars, and I wish to be friendly with the people monopolizing nuclear weapons around here.

          Bitcoin truly has no intrinsic value. It is the sort of "competitive fiat money" that Hayek hypothesized, but "fiat money" is misnomer in this context. The word "fiat" means "by decree" rather than "without intrinsic value" or "useful only as money". A fiat money can have intrinsic value, and money with no intrinsic value need not be fiat money.

          Bitcoin is an interesting experiment, but I don't expect bitcoin to become a common medium of exchange, because bitcoin is too much like gold and also not enough like gold.

          Like gold, the supply of bitcoin does not respond elastically to demand for money, so prices in bitcoin are not stable.

          Notes promising bitcoin could respond elastically to the demand for money in principle, but a system of credit in bitcoin is not stable either.

          People expecting bitcoins to become more valuable hold the currency, so a feedback loop exists. More valuable bitcoins lead to fewer circulating bitcoins leading to still more valuable bitcoins, leading to insolvency as debtors cannot obtain the bitcoins they owe, until bitcoin ceases to be an effective medium of exchange and standard of value in credit contracts altogether.

          Gold has similar problems as an exclusive standard of value in credit contracts, with a monopoly established by the state. If gold competed with other currencies, these problems don't exist, because people switching to other currencies break the feedback loop.

          Unlike gold, bitcoin has value only as money. If people abandon gold as a medium of exchange, it remains valuable for its other uses, so a fall in the value of gold, as people use it less as money, has a floor. If people abandon bitcoin as a medium of change, it's just a lot of esoteric bit sequences with no value whatsoever. This difference amplifies the price and credit instabilities.

          Of course, that's only a theory. I'm happy to wait and see what happens with bitcoin.

          • avatar Martin Brock says:

            I intended "useful as an instrument of state policy".

          • avatar Peter Surda says:

            The Austrian school does not support the concept of intrinsic value. What can be argued is that Bitcoin is neither a consumer good nor a producer good. This however is not such a big deal. Media of exchange are a type of network good, the more liquid they are, the higher their price, irrespective of their functionality as a consumer/producer good. If the demand for Bitcoin as a medium of exchange vanishes altogether (which is not likely anytime soon, as that would require another medium of exchange with even lower transaction costs), then the price would go to zero instead of the price created by their use as a consumer/producer good. But we have no idea what the analogous price would be if gold, for example, was not liquid anymore. It could have just as a dramatic effect on those who hold gold as a store of value. The idea that the demand for Bitcoin would vanish because it can't be used for anything outside of the network (i.e. is a pure network good) is the equivalent of the idea that demand for internet, or the English language, would vanish because they are also pure network goods. It's silly. This can only happen if a superiour alternative appeared, or if external factors dramatically increase the critical mass.

            If however you argue that the ability to pay taxes creates some level of demand for fiat (and thus makes it into a producer/consumer good, depending on the definition), analogously you should also concede that the ability to resist taxation also creates demand for media of exchange that can fulfill this function better than the alternatives (as it could be with Bitcoin). I would also go as far as argue that if Bitcoin is not able to resist the state, then it's useless. The ability to resist the state is an example of a reduction of transaction costs. Paradoxically, if the technological advantage remains, the stronger the state regulates the economy, the higher the demand for Bitcoin becomes, because fiat is affected by this regulation to a larger extent than Bitcoin.

            Bitcoin-denominated bank liabilities do not respond to demand for money (at least not to the extent as fiat/gold), because these liabilities do not decrease transaction costs. Bitcoin is form-invariant, practically any medium able to store 64 bytes of data is usable a form of Bitcoin. There are already Bitcoins made of brass/silver/gold (see http://www.casascius.com ), paper, plastic and all kinds of exotic materials, and there are theoretical proposals for others. Changes in demand would therefore have to reflect themselves in a change of price.

            The issue with highly appreciating price with respect to credit contracts would only arise if Bitcoin was used as a unit of account. I don't expect this to happen before the price volatility decreases (i.e. it kind of creates a self fulfilling prophecy).

            The feedback loop for price exists, however in the past there was a service called Bitcoinica, which allowed taking of short positions. I believe the technical term for the type of activity they were conducting is called liquidity arbitrage. I argue that this increased liquidity and decreased volatility (at least the empirical data is consistent with this interpretation). Unfortunately Bitcoinica is now in liquidation due to poor management and I don't see any other provider with sufficient market share. After Bitcoinica shut down, the price increased, but volatility as well (and liquidity decreased). Hopefully there will eventually be mature services that stabilises the price. If implemented properly, liquidity arbitrage generates revenue (and, as Bitcoinica, allows then payment of interest on deposits, as deposits decrease the necessity to hedge positions on open market).

            I have been working on economic research of Bitcoin for some time and am preparing a paper (although looking at it, it might be more a book than a paper). If you are interested, you can email me to bitcoin@shurdix.com and I'll notify you once it's available. Also I'm presenting a small part of the research at the London Bitcoin Conference in about 2 weeks.

          • avatar Peter Surda says:

            My comment is awaiting moderation, presumably because there's a link or an email address in it. Moderator, please review and approve if possible.

  10. avatar Martin Brock says:

    @Peter Surda

    All value is subjective. In my vernacular, the "intrinsic value" of a good used as money is the market value of the good when it is not used as money. In numismatics, the "intrinsic value" of a coin is the market value of the coin's constituent metals, so I'm only generalizing from this usage. Goods not used as money have no "intrinsic value" in this sense. Bitcoin also has no intrinsic value, even though it is used as money, because it has no other use.

    I don't see how bitcoin now has a low transaction cost. To buy something with bitcoin at this time, I must pay a four percent commission to convert dollars to bitcoins after driving to my local CSV to send a moneygram. If you know a less costly method, I'd like to know it too. I'm thinking of contributing money to dailyanarchist.com, but the proprietor has decided only to accept bitcoin, and I don't have any.

    After this conversion, I can convey bitcoins to someone else accepting bitcoins at very low cost, essentially zero marginal cost since I'll pay for my computer and network access anyway, but that's little comfort to me. The total transaction cost is high.

    I wire my kids in college $1500 every month, and the transaction costs me three dollars without a trip to CSV. Sending them the same value in bitcoins would cost me $45 plus the trip to CSV, and since my kids can't buy much with bitcoins, I'd have to send them a bit more so they could exchange the bitcoins for dollars. These transaction costs ignore the risk of capital loss which still seems high to me.

    The internet is valuable to me for countless reasons. Bitcoin is valuable to me exclusively as a medium of exchange. Both are network goods, but both do not have countless uses. I'm not suggesting that bitcoin loses value because it is only a network good. I'm suggesting that it loses value because people don't value it sufficiently as a medium of exchange, and if people don't value it as a medium of exchange, they don't value it for any reason, except possibly as the vehicle for a speculative bubble. People sometimes value irrational exuberance. It just feels good.

    I'm not sure how much bitcoin helps anyone to resist taxation at this point. If it does ultimately, I'm all for it; however, if anyone thinks he doesn't owe sales or income taxes when dealing in bitcoins, he should consult a tax attorney. At this point, if you don't report bitcoin revenue, the IRS probably (or whoever taxes you) can't be bothered with you, but if trade in bitcoin ever becomes competitive with trade in dollars, the state will want to tax the trade just as much.

    I am interested in your paper. I'll stay in touch. Thanks.

  11. avatar Martin Brock says:

    @Peter Surda

    I still don't understand your point about bank notes promising bitcoins not becoming an elastic supply of money because of transaction costs. I don't expect these notes to become money for other reasons, but I don't know what transaction costs have to do with it. Ignoring the deflationary effect of investors accumulating bitcoins and the consequent effect on the solvency of borrowers, credible notes promising bitcoins, backed by valuable collateral, could exist and could become a medium of exchange. These notes would also be electronic, so I'm not seeing the difference in transaction costs.

  12. avatar Paul Marks says:

    Remarkl

    Plenty have people have been killed for fiat money (indeed they are every time there is a murder-robbery).

    So saying "people were killed for gold" is not an argument against gold and for fiat money.

    Still I note you are no longer using economic arguments - perhaps you now accept that for all the flaws of using gold (or some other commodity - for buyers and sellers should be able to choose silver or whatever if that is what they want to make their contacts in - including "Bitcoins") as money (and nothing is perfect in this world) that it is better than fiat money - i.e. money that is nothing but POLITICAL WHIMS.

    For that is what "fiat" (command - edict) monwey is. Presently the Federal Reserve is pumping up the money supply - in a desperate effort to create a phony boomlet to get Barack Obama reelected. Regardless of the crash this credit-money bubble will cause in 2013.

    Is this what you want - a monetary system where the "long term" is November 6th?

  13. avatar Peter Surda says:

    Martin,

    I will reply more thoroughly but it requires a bit of time so please wait for a while.

  14. avatar Paul Marks says:

    The word "standard" confuses the issue - but a free market (at least a free market in a complex and developed economy) depends on buyers and sellers agreeing on what they will use as money - what they will use as medium of exchange and store of value (if something is useless as a store of value it is useless as money - even government fiat notes can be used as store of value, if the fiat money system is not abused too much).

    Gold can be used as money (without the need for government to back it up - as it does with fiat notes, via legal tender laws and tax demands), but so can other commodities (such as silver).

    It is for buyers and sellers in the evolutionary discovery process of the market to work out what they want to use as money.

    See work on this from Carl Menger "Principles of Economics", and Ludwig Von Mises (and on and on).

    Perhaps "Bitcoin", or some such, will replace gold in the future - I do not know.

    But that is for the market - i.e. buyers and sellers engaged in free interaction (civil society) to decide.

    • avatar Remarkl says:

      "if something is useless as a store of value it is useless as money - even government fiat notes can be used as store of value, if the fiat money system is not abused too much"

      That is an important misconception. Money is a medium of EXCHANGE. You can use it to buy things, including stores of value. You can use money to buy gold, collectibles, real estate, future delivery of a commodity or a service. You can use it to buy someone's debt - an obligation to pay you INTEREST along with a return of your money, so that its value will be preserved or increased. Or you can use it to buy a consumable. But if the medium of exchange can be used to BUY a store of value, there is no reason at all for it to BE a store of value. Indeed, the conflation of these two economic functions lies at the heart of the hard-money case, and renders it fallacious at the outset.

  15. avatar Remarkl says:

    "So saying 'people were killed for gold' is not an argument against gold and for fiat money."

    Sure it is. That you don't see the difference between (i) starting a war to obtain backing for currency and (ii) STEALING currency itself is not my problem.

    "Still I note you are no longer using economic arguments."

    "No longer?" If someone makes a claim that does not demand an "economic argument," then I don't offer one. As Keynes might have said, "What do you do, young man?"

    I'm sorry you have so little respect for self-government, what you call "political whims." So long as there are society, there will be politics, and so long as there is trade, there will be a politically mediated choice of COMMON currency. As I said earlier, ALL money is fiat money. So you might as well get used to it.

    • avatar Martin Brock says:

      ... so long as there is trade, there will be a politically mediated choice of COMMON currency.

      I don't expect a market economy at all without forcible property, but international trade exists without a common currency as a matter of fact, and commerce can exist without a universal currency imposed by the state within the borders of a state as well.

      All money is not fiat money, because "fiat money" describes something that we can meaningfully distinguish from other money. Most of the money that people use these days is fiat money, but that's a separate issue. If every state on Earth enforced hereditary slavery, I could still meaningfully distinguish states, however fanciful, not enforcing this practice from states enforcing it.

  16. avatar Remarkl says:

    "All money is not fiat money, because 'fiat money' describes something that we can meaningfully distinguish from other money."

    You can distinguish ice from liquid water. But they are all H20. All (official) money is fiat money because all monetary sovereigns have the power to debase their currency when they find adhering to a base is inconvenient. You cannot escape politics. Convertibility is established by fiat, and it can go away by fiat. So it's fine to say that a currency is or is not "fiat currency" for purposes of what the law today provides, but that is not always the context in which the question arises. If you are concerned about the protection that a convertible currency provides against government profligacy, you must also reckon with the government's ability to end convertibility. It is in that functional sense that all official money is "fiat" money.

    Yes, the world trades without a common currency. Of course, the Europeans found not having a common currency so inconvenient that they cobbled together a politically unsustainable monster just to have one. There are obstacles to using a common currency that sometimes trump the advantages, but the advantages remain.

    Yes, commerce "can" exist within borders without a common currency. Private money is not fiat currency. If you want to agree to settle a debt in quatloos, that's your privilege. But the users of money tend to gravitate toward a common currency because the advantages are real, and those users delegate management of the currency to a committee, which happens to be the same committee to which they have delegated other coordination exercises, aka, the government. There just is nothing so special about money that makes it any different from any other public policy that is regulated to the extent that We, the People, in Congress assembled, CHOOSE to have it regulated.

    • avatar Martin Brock says:

      The distinction between liquid water and ice is very significant.

      Money is a medium of exchange whether or not an officer of a state commands its circulation.

      Cherokees couldn't escape the Trail of Tears, an imposition motivated by the discovery of gold on their land but enabled by the superior forces of the United States government. I drove past the gold domed Capitol of the state of Georgia this morning.

      "Fiat currency" has nothing to do with convertibility in my way of thinking. A fiat currency can promise a commodity. Convertibility does not protect from a profligate government. Government's power comes from the points of many guns, not from an its money monopoly. The money monopoly is an instrument of state policy enabled by the guns.

      No. The world does not trade with a common currency. I travel a lot and have a collection of many currencies, only one of which I may spend in my neck of the woods. People around here accept only dollars, largely because they must pay taxes in dollars. If dollars promised gold, people around here might still accept only dollars for this reason, and dollars would then still be fiat money.

      Settling debts in quatloos is not my privilege, because people around here may not pay their taxes and other statutory rents in quatloos.

      People gravitate toward a common currency, but this gravitation does not explain fiat currencies. Again, you only need to visit Niagara Falls to see that. I often work in Toronto. I'll travel there tomorrow. I'll fly from Atlanta to Buffalo, pick up and car and drive to Toronto. I'll pay for my car in U.S. dollars and pay for my lodging in Canadian dollars, because people in Buffalo and Toronto are not free to gravitate toward a common currency. Ignoring reality doesn't change it.

      I do not delegate my choice over a currency to government. A government rather dictates the choice to me. I do not assemble in the Congress. Congressmen assemble in the Congress. Gladstone fancied himself the people of England. So did Queen Victoria. In reality, both were delusional megalomaniacs.

  17. avatar Paul Marks says:

    Money must be BOTH a medium of exchange and a store of value - see Carl Menger (as well as Ludwig Von Mises) on this point.

    If government keeps "prining" fiat money (or creating it via a computer) then it no longer becomes a store of value (because there is so much of it about) and it is then of no use as medium of exchange either.

    As for the idea that American Indians (or "native Americans" or "First Nations") would not have been shoved off their land if gold had not been money, it is an ABSURD idea.

    First gold would still have been valuable (just as it is now - look at the price of gold now compared to 1933, it is not gold that has risen it is the fiat Dollar that has fallen due to the increase in the amount of Dollars).

    Also most land that Indians were moved off (in the north as well as the south) had no gold on it - it was THE LAND ITSELF that was wanted.

    By the way the politicans who were most opposed to Jackson's Indian policy were hard money men themselves - men like Sam Houston and David Crockett.

    Indeed Crockett was famous for being opposed to Jackson for being too statist (not for being not statist enough) - opposing the "Pet Banks" (State level banks that Jackson put Federal tax money in) and so on.

    When Sam Houston was replaced as President of the Republic of Texas he was indeed replaced by a man who took a hard line on Indians (much to Houston's dismay) - but this man was also a wild spender (in love with government education schemes, "infrastructure" projects and so on) and so more on YOUR political wavelength than on mine. Indeed he led to the de facto bankrutptcy of the Republic of Texas.

    As for David Crockett - he is, of course, famous for even opposing emergency relief (for fire, earthquakes and so on) on the floor of Congress - on the grounds that such spending powers are not mentioned in the Constitution of the United States (the "common defence and general welfare" being the PURPOSE of the SPECIFIC spending powers then listed in Article One, Section Eight there is no "catch all", "general welfare spending power" although the government appointed judges pretend there is).

    Crockett was prepared to spend his own money to help those in distress - but he was not prepared to unconstitutionally steal taxpayers money to do so.

    He actually took money out of his pocket (on the floor of the House of Representatives) and offered it to help those in distress - challenging other members of Congress to do the same.

    Of course the "compassionate" politicians proved to be about as compassionate as Obama and Biden were (with their own money) before they ran for President and Vice President.

    In reality neither economics OR history favour the Progressives.

    • avatar Remarkl says:

      Money must be a TEMPORARY store of value only for the time it takes to buy a real one. That's all it takes for it to be a credible medium of exchange so long as real stores of value are available. Why burden the technology with an added requirement? (And, it's a floor wax!!) It's bad engineering.

      I don't know why you wasted all those keystrokes on the North American Indians. I think Montezuma would be a more useful study. The Conquistadores were not looking for beachfront real estate or land to farm.

      And I have no idea what BHO, Biden or "the progressives" have to do with this conversation. I don't recall arguing for redistribution. Those who put their money in their mattress think that modest inflation (which I believe is the optimal monetary strategy) is a form of redistribution, but it isn't; it's merely the just deserts of freeloaders at the capitalist banquet. You snooze, you lose. You bleeding-heart libertarians need to toughen up.

      • avatar Martin Brock says:

        I agree that "store of value" (or "long term store or value") is not a meaningful of characteristic of "money".

        Money, by definition, is medium of exchange. "Money" names a function that a good performs rather than the good itself. If a person holds a good as a store of value, even expecting the good to appreciate in value, then this person is not using the good as money. If people commonly hold a good, expecting its value to increase, the good ceases to be money.

        That people cease using a medium of exchange when hyperinflation occurs is not evidence to the contrary. The medium is nonetheless money before people stop using it, and people will continue using money indefinitely despite when inflation is modest.

        If the dollar lost 95% of its value overnight, people would abandon it, but when it loses 95% of its value over a century, people hardly notice, and they're arguably more inclined to use this dollar as money, because they will exchange a depreciating, durable good for something else before exchanging an appreciating, durable good.

        But I don't expect an optimal monetary strategy from a statutory monopoly. Only free people can optimize their uses of money. Sufficiently free people will not promise gold when the increasing value of gold (and corresponding deflation under a gold standard) makes these promises counterproductive. If a gold standard is voluntary, people will switch to competing standards under the circumstances.

    • avatar Peter Surda says:

      Money must be BOTH a medium of exchange and a store of value - see Carl Menger (as well as Ludwig Von Mises) on this point.

      The way I read Menger and Mises, store of value is not a defining function of money, but an emergent property of highly liquid goods.

  18. avatar Paul Marks says:

    On the contrary Remarkl - if money is only a "temporary store of value" for just the time it "takes to buy a real one".....

    Then you have the situation of the Weimar Republic (with people rushing with their wages in carts - to buy something, ANYTHING, before the money lost its value).

    Or the situation with Yeltsin in Russia (which FALSELY was used to discredit free enterprise - and led to the rise of Putin) where Yeltsin and co followed the advice of Western "experts" and let the money supply (and banking) rip.

    Or the situation of the French Revolution - where even the death penality did not stop the fiat money losing its value (and its usefullness).

    Or the situation of the Continental Congress - the "not worth a Continental" which led to the Constitutional Convention and the establishment of the hard money regime that you dislike.

    Or the situation of General Peron's monetary policy (pure 100% fiat - with banks just being the servants of the state) which led to the decline of Argentina from the living standards on a par with Canada - down to the Third World.

    It irritates me that the same mistakes (the same faith in government fiat money experiments) are made again and again.

  19. avatar Paul Marks says:

    Monetary policy and fiscal policy can indeed be linked.

    For example, the Federal Reserve is presently "financing" the Federal government deficit (and the Bank of England is "financing" the British government deficit) by producing money (from nothing) and lending it out to the banks (and other such).....

    On the understanding that the money (the money the Fed and so on produce from nothing) will be lent to the Treasury.

    However, this is a TERRIBLE thing do to.

    As is just printing money and using it to finance government spending.

    Although the latter policy at least cuts the banks out.

  20. avatar Peter Surda says:

    Martin:

    ... purchasing power of bitcoin must rise by orders of magnitude.

    I still don't understand why this is supposed to be a problem. The price of Bitcoin already rose dramatically in the past in order to equilibrate demand and supply. The current price is over 10.000 times than, according to publicly available data, its price at the time of formation was. It obviously can happen again.

    If a bitcoin in my digital wallet appreciates while a dollar in my digital wallet depreciates, how does spending the bitcoin benefit me?
    It benefits you if the difference of costs associated with the payment and the costs of replenishing your real cash balance is lower than the difference with a different medium of exchange. That might be the case if you, for example, have regular customers payments in Bitcoin. Even if, for example, Bitcoin appreciates 2% against the dollar, if you pay 3% fee on electronic USD payments during that time, you're still better off spending your bitcoins.

    The average daily volume on mtgox, which dominates the trade, is closer to $500,000.
    This is fluctuating, in August for example the average daily volume was about 872k$/day. If you however check the blockchain statistics, e.g. on blockchain.info, you'll see that there were over 200k BTC daily transactions in August, that's over 2 million USD at current exchange rates.

    But I am interested to read your thoughts on the adoption curve.
    Bitcoin will spread primarily at those areas where the transaction costs of payments are now the highest, whether this is due to regulation or technological factors. Rick Falkvinge wrote a series of blog posts about it last year and I think his assessment is still quite accurate. He lists international trade, merchant trade, unlawful trade and investment.

    I don't see how bitcoin now has a low transaction cost.
    Having low transaction costs does not mean that everyone can immediately benefit from it in all their activities. The internet also did not emerge fully matured with amazon, ebay, google or facebook in the 60s. Indeed, many people did not even have a computer until the 90s or even later. But on the other hand, those services would not be possible without the internet, as they would not be profitable. The situation is similar with Bitcoin. It is at a very early stage with mostly technical oriented features and little fluff, and expertise and investment in the areas that bring it to the masses is not there yet.

    What is important that areas exists where the transaction costs with the encumbent system are comparably high. People conducting business in these areas can benefit from Bitcoin right now. As services develop that provide more comfort for the end user, that will fuel the network effect.

    To buy something with bitcoin at this time, I must pay a four percent commission to convert dollars to bitcoins after driving to my local CSV to send a moneygram.
    Well, the cheapest one I know is to do a SEPA payment to one of the exchanges (which is typically for free) and then buy Bitcoins there. In the US, you can try cash deposit with BitInstant. If it's a higher sum, the fees for wire transfer might be fixed so you'd end up with a lower relative fee.

    You also have the option of buying/selling goods directly for Bitcoin, that reduces your transaction costs too.

    Whenever I meet with Bitcoin users and we have to pay for something, it's usually much easier now that we have BTC. I went for a lunch with a fellower Bitcoiner a while ago, one of us paid the bill (EUR) and the other one sent the corresponding amount with BTC. Or at the Bitcoin conference in Prague last year, we bought Czech sim cards but I didn't have enough Czech crowns, so the fellow Bitcoiners paid for the card and I sent them Bitcoins. You just need a mobile phone with internet access and you can send&receive bitcoins.

    The internet is valuable to me for countless reasons.
    But it wasn't like that in the 60s, was it? I did not discover the internet until about '95, before that, my computer was less useful.

    I'm suggesting that it loses value because people don't value it sufficiently as a medium of exchange, and if people don't value it as a medium of exchange, they don't value it for any reason, except possibly as the vehicle for a speculative bubble.
    A healthy skepticism is alright. But failure to see the potential is not. There were also pundits in the '90s who thought the internet a fad. Some people still don't get linux even now. That's just poor imagination. On the other hand, a lot of companies do invest foolishly and go bust. It happened with the dot com bubble, and we can expect it to happen with Bitcoin too.

    I'm not sure how much bitcoin helps anyone to resist taxation at this point.
    Bitcoin, per se, does not eliminate your tax liability (there is even a book that analyses Bitcoin taxation in the USA, by Bill Rounds / Trace Mayer of howtovanish.com). But it makes it more difficult to find the owner and to confiscate. Cash, for example, is disproportionately used for criminal activity, so heavy regulation and prohibition increases demand for cash. Similarly, it increases demand for Bitcoin. Bitcoin does not have to have an absolute advantage here, only a relative one. SilkRoad for example could not exist without Bitcoin, analogously as ebay could not exist without the internet.

    Even more optimistic is this post by Michael Suede: http://www.libertariannews.org/2011/12/15/it-only-takes-one-country-to-convert-to-bitcoins/

    I still don't understand your point about bank notes promising bitcoins not becoming an elastic supply of money because of transaction costs.
    I explain it a bit in the Bitcoin wiki page on fractional reserve banking, https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin#Austrian_Viewpoint

    ... credible notes promising bitcoins, backed by valuable collateral, could exist and could become a medium of exchange.
    [emphasis added] We need to separate a bit. They could exist, and indeed they do exist. Some are even technologically possible to use as a medium of exchange. But the market participants do not accept them as substitutes, they are used in specific niches. They also introduce a counterparty risk.

    • avatar Martin Brock says:

      I still don't understand why this is supposed to be a problem.

      The problem is that holding bitcoin is not using bitcoin as money, but bitcoin's only sustainable utility is its use as money.

      I can also buy bitcoin expecting its value to rise, expecting someone (a bigger fool?) to pay more for it later, but I can buy anything this way. I can gold or tulip bulbs or beanie babies this way, and people have. If people buy bitcoins this way, they actually impede its use as money, and it has no other use ultimately.

      Beanie babies actually had other uses. My kids wanted them as playthings, but kids are fickle, and when the fad wore off, the price of beanie babies fell to the price of other goods with no other use. A few of the earliest dolls still have some value as collectibles, but even these prices are far below their peak. Most of the dolls, in good condition, are worth a buck or two at a yard sale.

      If bitcoin doesn't become a common medium of exchange ultimately, the value of one bitcoin doesn't fall to a buck or two. The value falls to zero. Before bitcoin can become a common medium of exchange, on the scale of the dollar, the purchasing power of one bitcoin must rise astronomically. If I expect the value of bitcoin to rise astronomically, I don't use them as money. If I buy them only to speculate, I only ride a speculative bubble.

      Maybe this process can occur gradually enough that bitcoin becomes widely used as money while also rising in purchasing power, but this gradual rise is hard to imagine. I rather expect a roller coaster ride ending ultimately in a final bitcoin collapse. People won't use a good with a wildly volatile price as money, and the price must remain wildly volatile for a long time before bitcoin can be widely used as money. Each time a bitcoin bubble bursts, its utility as money falls. Money need not be a long term store of value, but it must have a stable value in the short term.

      While bitcoin is in this wildly volatile stage, a competing electronic currency that also has low transaction costs but does not have such volatile purchasing power can appear, so I don't see how bitcoin can survive this stage.

      The price of Bitcoin already rose dramatically in the past in order to equilibrate demand and supply. The current price is over 10.000 times than, according to publicly available data, its price at the time of formation was. It obviously can happen again.

      That's what people said about beanie babies and tulip bulbs and shares of Enron, and I guess they were right, but speculative bubbles burst ultimately. The question is: how much does the price fall when the bubble bursts? If the good has value other than satisfying people's irrational exuberance, then the price doesn't fall to zero, but the price of a bitcoin has such a floor only if people use it as money.

      Even if, for example, Bitcoin appreciates 2% against the dollar, if you pay 3% fee on electronic USD payments during that time, you're still better off spending your bitcoins.

      I don't pay three percent fees on electronic USD payments. That's the problem.

      Well, the cheapest one I know is to do a SEPA payment to one of the exchanges (which is typically for free) and then buy Bitcoins there.

      Euro transfers are free? How can bitcoin transactions have a lower cost than zero?

      Buying bitcoins with dollars on one of the exchanges is where I bear most of the transaction cost.

      I don't have many euros, and if these transfers are really free to Europeans, they presumably are subsidized by European states; however, the price of a transfer could be vanishingly small ultimately without a subsidy, because euros themselves can exist exclusively as electronic records. The coins and paper notes are only conveniences for particular transactions. The euro itself is already an electronic currency.

      I can arrange wire transfers of U.S. dollars at very low cost. Again, I send my kids in college $1500 this way every month. I send the money from my bank in Georgia to my kids' bank (actually a credit union) in Alabama. My kids then spend money out of their account with a debit card at no cost to them. My bank charges $3 for the transfer, so the cost is 0.2% rather than 3%, and $3 is a flat fee, so I could send $15,000 for the same price, and the percentage would then be 0.02%.

      In other words, dollar transfers are already very cheap and can only get cheaper, even without subsidies, because the dollar itself is already an electronic currency. As a fiat currency, the dollar has other problems, but I don't see how bitcoin competes on transaction costs until it is much more widely accepted, and until it is much more widely accepted, it's in this volatile stage, and while it's in this volatile stage, it doesn't become more widely accepted.

      That's only a pessimistic theory of course. Maybe I'm wrong, but if I'm wrong, then buying bitcoins now must be the investment opportunity of a lifetime. I suppose gold is a better bet, and I'm not accumulating gold either. Unlike bitcoiners, advocates of a gold standard typically expect states to impose it by statutorily changing the terms of countless contracts already specifying an existing fiat currency, effectively substituting one fiat currency for another. I hope that doesn't happen, but it seems a better bet than bitcoin bubbling up to a purchasing power consistent with its widespread use. If bitcoin has a competitive opportunity to replace fiat currencies, then another, more stable, electronic currency can defeat it.

      But I remain interested in bitcoin and will read your links.

      • avatar Peter Surda says:

        The problem is that holding bitcoin is not using bitcoin as money, but bitcoin's only sustainable utility is its use as money.

        These two are merely different interpretations of the same act. It is logically impossible to use something as a payment instrument without wanting to keep it in the first place. But you're right in the respect that the implication does not go both ways: holding it does not necessarily mean it will be good in the future as a medium of exchange. But high velocity is also not a meaningful indicator of the suitability as a medium of exchange, indeed during hyperinflation the velocity dramatically increases before the process ends. The correct variable to look at is liquidity. And liquidity of Bitcoin has for the most part been increasing.

        Beanie babies actually had other uses.

        Beanie babies do not decrease transaction costs.

        If people buy bitcoins this way, they actually impede its use as money, and it has no other use ultimately.

        This is why the ability to short sell is beneficial. It counters bubbles. Earlier this year, while Bitcoinica was still operating, the price was fluctuating very little around 5USD/BTC for several months.

        If bitcoin doesn't become a common medium of exchange ultimately, the value of one bitcoin doesn't fall to a buck or two. The value falls to zero.

        This is only a risk if a medium of exchange with even lower transaction costs appears, or if the trading became more homogeneous (e.g. dramatic liberalisation of markets woldwide). This would make the critical mass of Bitcoin higher compared to the alternatives and the network effect could collapse. So it does not need to become "common", it is merely sufficient that it has a comparative advantages in some types of markets. And it only has an insignificant fraction of the market share of those areas where it has a comparative advantage. There is plenty of potential for growth.

        Maybe this process can occur gradually enough that bitcoin becomes widely used as money while also rising in purchasing power, but this gradual rise is hard to imagine.

        But this already happened with Bitcoin. The price already gradually rose by orders of magnitude, as well as the acceptance (the number of users is unclear but tens of thousands is a conservative estimate). Indeed this is how, according to the Austrians, money historically arose: a gradual increase in liquidity and price. But unfortunately many are oblivious when it's happening right in front of their eyes, because some of its empirical aspects are unusual. It's faster than it happened with gold, and it pops up in specific areas first. But this because we already live in a world where other money exists, and is heavily regulated. It would have developed differently if the state had smaller power and we were on the gold standard. As long as Bitcoin keeps a comparative advantage, liquidity will increase, price will adapt based on demand and this will further fuel the network effect.

        Each time a bitcoin bubble bursts, its utility as money falls.

        Not necessarily. Many people want to buy more when the price falls, and they manage to do that even if there is no short selling. This counteracts the swings. That's not to say that there are no swings, but they become less violent as liquidity increases. I am much more optimistic when liquidity increases than when the price increases.

        While bitcoin is in this wildly volatile stage, a competing electronic currency that also has low transaction costs but does not have such volatile purchasing power can appear, so I don't see how bitcoin can survive this stage.

        You appear to neglect plenty of other factors that influence transaction costs, such as the counterparty risk, regulation, export/import controls or elastic supply. Apart from another cryptocurrency, the alternatives cannot compete in these areas.

        ... speculative bubbles burst ultimately ...

        Yes. However, liquidity and short selling counteract both the highs and the lows of the bubbles.

        If the good has value other than satisfying people's irrational exuberance, then the price doesn't fall to zero, but the price of a bitcoin has such a floor only if people use it as money.

        Again, unless there is a competitor with even lower transaction costs, some level of demand for Bitcoin will persist, irrespective of the bubbles.

        I don't pay three percent fees on electronic USD payments. That's the problem.

        3% is usually mentioned as the processing fees for credit/debit cards, paypal and the like. You probably can do domestic wire transfers cheaper, even without fees, but a wire transfer is for most cases not a suitable merchant tool. It can take several days to process the payment, international tranfers have higher fees, the payment can be reversed, the bank can suspend your account, it can be problematic to electronically integrate your bank's system into your accounting, and so on. As an anecdote, when I moved to Ireland, the bank refused to open an account for me, and wouldn't tell me why. Paradoxically my first job here was at an electronic payment processor, where I learned first hand how technologically backwards the whole banking system is.

        ... however, the price of a transfer could be vanishingly small ultimately without a subsidy, because euros themselves can exist exclusively as electronic records.

        Transaction fees are merely one of the components of the transaction costs. There are plenty of other factors to consider, such as the counterparty risk and the speed of the transfer, availability of open APIs and so on. Furthermore, the bank needs to bear the costs of having to maintain reserves, regulation compliance and so on, and these need to be shifted to the customer somehow.

        In other words, dollar transfers are already very cheap and can only get cheaper, even without subsidies, because the dollar itself is already an electronic currency.

        But this method is not suitable as merchant tool, or for international transfers, or if you need the money quickly, or if you engage in illegal or heavily regulated activity. Or if the bank does not like you for some reason. It is unlikely that dollar (or other fiat currency, or even commodities like gold) would be able to improve in these areas much. Both because there are technological obstacles (e.g. maintenance of reserves), fundamental issues like counterparty risk, or the state's obsession with regulation.

        In the situations I was in, mentioned before (restaurant bill and buying a SIM card in Prague), using Bitcoin to settle debt did have lower transaction costs than the alternatives, even though we were in physical proximity and the countries we came from were using the same currency (EUR). Even lower than using cash, as there is no problem with having the exact denomination. And don't even get me started on the quality of banking services here in Ireland.

        I suppose gold is a better bet, and I'm not accumulating gold either.

        Even if we do end up with a gold-backed currency, it would be a central banking system with a peg to gold. Physical gold has too high transaction costs, so for business people need to use substitutes, and as you mention, the state can intervene in that. And banks can use substitutes to expand the money supply and fuel the business cycle.

        Bitcoin however does not suffer from this. It does not require substitutes and cannot be subverted as easily, as that would create a technological incompatibility and will be, by default, rejected by the nodes on the Bitcoin network, without the users having the explicitly defend themselves.

  21. avatar Paul Marks says:

    Another orgy of government debt buying by the European Central Bank (with money it creates - from NOTHING). And Bloomberg and CNBC are treating this as good news. And, of course, from the point of view of their corporate welfare addicted clients - it is good news.

    If having gold in the monetary system means anything it means STOPPING such things as Central Banks buying government debt with money they create from NOTHING.

    If gold does NOT mean that - if we are just talking about a gold "standard" that would allow the credit bubble building (and the national government and corporarte welfare low interest rate "cheap money") to continue, then it is time to stop talking - for there is nothing there to talk about.

  22. avatar Remarkl says:

    " It is logically impossible to use something as a payment instrument without wanting to keep it in the first place. "

    Keep it how long? Where does capital come from when the medium of exchange rises in value over time? Why take risk if your purchasing power will increase without it? That's why the medium of exchange MUST erode in value over time. If it doesn't, Gresham says that something that does so erode will supplant it in circulation - as paper supplants specie - and if there is no such "something," then savings do not become capital and the economy dies.

    The criteria for being a medium of exchange among traders and being THE medium of exchange for a capitalist economy are different. I will not prefer even an appreciating currency to food and shelter, but I will perfer it over investments intended to make my purcasing power grow. Central banks favor modest inflation because it shakes capital out of the savings tree. Otherwise, we have another tragedy of the commons: we each hoard our golden eggs instead of trading some for feed, and the goose dies.

    • avatar Peter Surda says:

      That's why the medium of exchange MUST erode in value over time.

      Only consumption can increase utility (we'll ignore certain psychological disorders). People do not magically turn into misers when the medium of exchange appreciates. Furthermore, people choose medium of exchange based on transaction costs, there is no reason why an appreciating one should become less favoured for exchanges.

      Gresham says that something that does so erode will supplant it in circulation - as paper supplants specie - and if there is no such "something," then savings do not become capital and the economy dies.
      Gresham's law requires that there is an exchange rate enforced at other than market price. This can only be a result of legal tender laws, whether it's by fixing exchange rates between two monies (e.g. gold and silver) or the requirement to accept money substitutes at par with money proper. Otherwise, arbitrage will move the exchange ratio towards equilibrium.

      I will not prefer even an appreciating currency to food and shelter, but I will perfer it over investments intended to make my purcasing power grow.

      Unless there was a change in the time preference, an appreciating medium of exchange would simply result in a different structure of interest rates (i.e. in general they would be lower for the appreciating medium of exchange).

      Central banks favor modest inflation because it shakes capital out of the savings tree.

      This merely tricks the market participants into thinking that the production goods are more abundant than the amount corresponding to the time preference of consumers, and results in a credit expansion and a subsequent bust.

      Otherwise, we have another tragedy of the commons: we each hoard our golden eggs instead of trading some for feed, and the goose dies.

      This is absurd and I have no idea where people come up with this. People do not en masse decide to starve today if they become convinced that bread will be cheaper tomorrow. Furthermore, the consumer electronics market is an excellent refutation of this claim. By using a computer and an internet connection to post your reaction, you contradict your own claim. You do have access to a computer and the internet, you did not wait indefinitely because they might become cheaper in the future. Even if you didn't buy them yourself (maybe you're connecting from work or a university), the owner did decide to buy now rather than wait.

      • avatar Peter Surda says:

        hmm, I screwed up formating. Is there a way to edit posts?

      • avatar Remarkl says:

        "People do not magically turn into misers when the medium of exchange appreciates. "

        No, but savers turn into non-investors. Investment IS consumption, consumption of the outputs of people who sell capital goods for a living. A medium of exchange that increases in value will not be used to buy cement to build a steel mill. It's got nothing to do with miserliness, but miserliness is hardly the only suppressor of aggregate demand.

        "Unless there was a change in the time preference, an appreciating medium of exchange would simply result in a different structure of interest rates (i.e. in general they would be lower for the appreciating medium of exchange).

        Exactly: they would be NEGATIVE. Try running an economy on negative interest rates. IT CANNOT BE DONE. The collateral goes all splooey. Indeed, the loans do not occur.

        "This is absurd and I have no idea where people come up with this."

        Sounds backwards to me. I have offered you the chance to think about the game-theoretical implications of an appreciating currency for a capitalist economy. Do it or don't do it. I could care less.

        • avatar Peter Surda says:

          Exactly: they would be NEGATIVE.

          They would not be negative, as the relationship between interest rates of various media of exchange is not linear.

          For my Bitcoin paper, I did a simulation for return on investment with an appreciating medium of exchange. It is not a problem, even if you consider taxation and legal tender laws. Investing using an appreciating medium of exchange even results in a higher real RoI than using a depreciating medium of exchange, even if the nominal RoI is minuscule.

          No, but savers turn into non-investors.

          Only if the interest rate was negative, which it wouldn't be.

          Sounds backwards to me.

          You provide neither empirical evidence nor a model for your claims. You also ignore empirical evidence that contradicts your claim. It's all just made up fairy tales.

  23. avatar Paul Marks says:

    "the medium of exchange must erode in value over time".

    Pardon?

    Prices in 1914 were lower than they were in 1814.

    Some states (such as the Republic of Venice) did not debase their coinage over centuries.

    War used to be the great destroyer of money - leading to debasement.

    Now the Welfare State is - although war still helps along.

    • avatar Remarkl says:

      "Prices in 1914 were lower than they were in 1814."

      1814. Wasn't there a war on? Good base year for an honest analysis.

      And then prices went back down and continued to fall right through the boom years of 1837-1843. You remember the Panic of 1837, right? And the wonderful deflation of 1837-1843. Wasn't that a time!

      The nineteenth century, especially after the Civil War, was a great time to be rich. Prices stayed low because capacity grew faster than demand, a pretty good sign of maldistributed wealth. (Ever been to Newport?)

      The US went from 1945 to 2008 without a major financial upheaval of the sort that came and went all the time in the nineteenth century. Don't you even wonder what Van Buren could have done with TARP to save the banking system?

      Not that such a thing was technologically possible, as it wasn't, which is sort of the point: a medium of exchange that declines gradually in value is a goal that could not be reached in the nineteenth century for technical reasons, and the nation suffered accordingly. Yes, they were riding the UP escalator of the second industrial revolution, and much progress was made, but that was despite a crappy currency, not on account of it.

      • avatar Peter Surda says:

        You do realise that the recessions are cyclical, not secular, phenomena, and that they are accompanied by a decrease in the quantity of money (credit contraction), irrespective of the direction of the price level, right? Do you have any evidence at all that in the absence of these, the detrimental effects of recessions still occur? In other words, that a secular decrease in the price level, per se, is causing problems?

        Re: 1837-1847 (wikipedia):

        The end of the Second Bank of the United States had produced a period of runaway inflation, but on May 10, 1837 in New York City, every bank began to accept payment only in specie (gold and silver coinage), forcing a dramatic, deflationary backlash.

        (i.e. a shrinking of the money supply).

  24. avatar Remarkl says:

    "Do you have any evidence at all that in the absence of these, the detrimental effects of recessions still occur? In other words, that a secular decrease in the price level, per se, is causing problems?"

    I don't see the relevance of the question. A PERIOD of deflation is irrelevant to the holder of curency if he expects it to end soon and believes that that policy makers are trying to end it. I am offering a very simple principle: in a risk-based, capitalist economy, The wide-spread hoarding of currency that could be capital is a bad thing - a tragedy of the commons (the risk space being the commons), and a PERMANENTLY appreciating currency is more likely to be hoarded than one that is permanently eroding. Recessions have nothing to do with that notion.

    I have no case studies to offer of a place where POLICY was for the currency to appreciate, probably because no one has ever tried to make it happen. But if your unsupported belief that modest inflation is not the best POLICY goal is subject only to a counterexample from me, you get to continue being wrong for another day. Lucky you.

    • avatar Peter Surda says:

      I don't see the relevance of the question.

      You argue that a secular falling price level is bad, but the empirical evidence you provide feature cyclical decreases in the quantity of money.

      A PERIOD of deflation is irrelevant to the holder of curency if he expects it to end soon and believes that that policy makers are trying to end it.

      Correct. Cyclical and secular changes in the price level have different effect on the behaviour of market participants.

      I am offering a very simple principle...

      You do not provide any discernible principle, just vague claims.

      The wide-spread hoarding of currency that could be capital is a bad thing...

      Again, you provide neither a model nor empirical evidence to support your claims.

      PERMANENTLY appreciating currency is more likely to be hoarded than one that is permanently eroding.

      Only consumption can increase utility. Absent a change in the time preference, the decision to hoard money would simply reflect itself in a flatter interest rate structure. The only way to break this connection is to trick people into believing that the capital goods are more abundant than they really are, and introduce a disequilibrium between the interest rate and the time preference, leading to malinvestment.

      Futhermore, empirical data from the consumer electronics market contradicts this absurd theory of yours. If it was true, noone would buy consumer electronics, and noone would invest in the production thereof. Conversely, you do not provide any examples of secular decreases in the price level having detrimental effects.

      I have no case studies to offer of a place where POLICY was for the currency to appreciate, probably because no one has ever tried to make it happen.

      You must have missed what happened in the UK after the first world war. I'm not claiming that it was a good policy, but to show that it did happen.

      More importantly though, the very concept of "policy" is flawed. It's merely a way for the state to interfere with markets and enrich itself at their expense. There should be no monetary policy. Money should be provided by the free markets and people should voluntarily choose which one to use. The concept of policy requires raising barriers to entry, and production of money with marginal costs below the market price, which creates a redistribution of wealth in the opposite direction as the new money flows.

      Bitcoin also refutes your absurdities. From the first publicly available price records until now, it appreciated over 10.000 times, which gives it an annual change in the price level of over 2100 % if I calculate correctly. Simultaneously, its use as a medium of exchange expanded, contradicting your theory. Furthermore, in a world of Bitcoin, there is no place for the concept of monetary policy. The production rate is predefined and a change would create incompatibility and cause the Bitcoin nodes to reject the modified packets by default. As professor Selgin realised and argues in one of the interviews, a change like this does not increase the money supply but creates a new, competing, currency, and it is up to the market participants whether to switch over or not.

  25. avatar Remarkl says:

    "If it was true, noone would buy consumer electronics, and noone would invest in the production thereof. "

    People buy electronics because electronics have a unique use - as, duh, electronic devices. What unique use does a risk asset have? To make your money appreciate. But if your money appreciates in the vault, why risk it to make it grow? If your hearing fails, you buy a hearing aid whether or not it is cheaper tomorrow. Where is the analogy in the risk space?

    Bitcoin is not a national currency, and entrepreneurs do not use it to capitalize businesses. It is an irrelevant toy. Of course the number of people playing with it has grown. It's fun. But it ain't money.

    • avatar Peter Surda says:

      You fail to address almost all the points I make, and divert attention to the nonsensical. So I'll repeat.

      If your argument was true, noone would invest into the production of consumer elecronics, because the price level of consumer electronics is falling over long periods of time and according to your logic, this results in negative return on investment for those businesses. It's an absurd claim and repeating it does not make it any less. It's a fairy tale made up to justify redistribution of wealth.

      Your argument against Bitcoin fails as well. First of all, it is used for investment, even though not to a large scale. More importantly though, you fail to address that only consumption can increase utility. If money is hoarded instead of invested, this merely reflects itself in a different nominal interest rates and relationship between the prices of capital goods and consumer goods.

      What you call "policy" is just smoke and mirrors designed to fool the users of money. It does not stand to a rigorous analysis.

  26. avatar Remarkl says:

    "If your argument was true, noone would invest into the production of consumer elecronics, because the price level of consumer electronics is falling over long periods of time and according to your logic, this results in negative return on investment for those businesses. "

    I did address this issue very clearly. People invest in the production of electronics because customer will pay for electronics in increasing volumes as they scale. Perhaps you've hear of patents. You get a patent by going first. Then you collect economic rents. The value of the currency and the investor's ability to reduce his price as his sales scale has nothing to do with the value of the currency. If, however, the currency is appreciating, no one will invest in electronics because they won't have to.

    • avatar Remarkl says:

      Sorry, that got garbled. I'll try again:

      I did address this issue very clearly. People invest in the production of electronics because customer will pay for electronics in increasing volumes as they scale. Perhaps you've hear of patents. You get a patent by going first. Then you collect economic rents. The investor's ability to reduce his price as his sales scale has nothing to do with the value of the currency. If, however, the currency is appreciating, no one will invest in electronics because they won't have to.

      As for bitcoin, until it is the national currency and you can use it to build a steel mill, you will not have any evidence to point to in its favor. That seems to be a big issue with you. Why don't you ask as much of your unsubstantiated ideas as you do of mine?

      Confirmation bias is a strong thing. That you cannot see through your own electronics example is pretty good evidence that you aren't really asking very much of yourself.

      • avatar Peter Surda says:

        I did address this issue very clearly.

        Actually you originally didn't. You avoided the question of RoI into consumer electronics. But that's fine, now you addressed that.

        People invest in the production of electronics because customer will pay for electronics in increasing volumes as they scale.

        That's a non sequitur. Increasing volumes do not magically increase the RoI ratio, at best they decrease average cost. In your model, this would require an exponential increase in the economies of scale (as the average cost decrease would have to stay ahead of the consumer price decrease, and this would have had to be going on for about 50 years now. Furthermore, we would not see startups (as obviously they wouldn't be able to profit until they hit large economies of scale). I don't see how empirical data supports your interpretation.

        Perhaps you've hear of patents. You get a patent by going first. Then you collect economic rents.

        Another non-sequitur. In your model, there is a negative return on investment caused by falling prices of consumer goods. Your point about patents would only make sense if they reverted this trend. But the prices of consumer electronics fall regardless of patents.

        The investor's ability to reduce his price as his sales scale has nothing to do with the value of the currency.

        In other words, you now admit that your model only works if a falling price level is not compensated by a change in the cost structure. You mention two factors that, according to you, can cause that: economies of scale and patents. That opens a major hole in your argument, because you neglect that other factors can also influence costs. For example, as I suggested earlier, a change in the interest rate structure.

        If, however, the currency is appreciating, no one will invest in electronics because they won't have to.

        They will invest as long as the interest rate structure corresponds to the time preference.

        As for bitcoin, until it is the national currency and you can use it to build a steel mill, you will not have any evidence to point to in its favor.

        In other words, you argue that if Bitcoin becomes money, people magically turn into misers. Even better, if you expect that acceptance of Bitcoin grows, logically you should invest everything into Bitcoin (i.e. what you describe hoarding), as that will have a higher real RoI than investing a depreciating currency like the USD into a business.

        That seems to be a big issue with you. Why don't you ask as much of your unsubstantiated ideas as you do of mine?

        I am merely attempting to ascertain logical connections between various claims. Whether I favour Bitcoin or not has no effect on its existence or the interesting empirical data it offers, nor the lack of empirical data from you.

        Confirmation bias is a strong thing. That you cannot see through your own electronics example is pretty good evidence that you aren't really asking very much of yourself.

        Whether I am correct or not, you fail to provide a coherent model of your position. My point is merely to demonstrate that your arguments are severely lacking. At least my arguments are consistent, while your arguments are not. That does not make my position correct, merely your wrong.

        Secular decreases in the price level did exist and some still exist. None of them were/are debilitating to the economy as presented by the proponents of inflation. Obviously, correlation does not imply causation. But you have to present factors that explain that influence the different results. I did present mine: distinguishing secular decreases in price level with cyclical changes in the quantity of money, and adaptation of the interest rate structure to the time preference.

        • avatar Remarkl says:

          I have expressed my points, and you have expressed yours. Readers can make what they will of them. We are not going to change each other's minds.

          • avatar Peter Surda says:

            That's a nice excuse for not addressing my points. As far as I can see, I did address your points. We may not agree with each other, but one of us is talking to himself.

          • avatar Remarkl says:

            "That's a nice excuse for not addressing my points."

            I'm glad you liked it. I will not address your points, and, as I said, you are now free to continue to believe they make sense. I appreciate the effort you put into the conversation. But it is over.

          • avatar Peter Surda says:

            Whether I believe my points are correct or not is not relevant from the perspective of the debate. Willingness to confront one's opponent is. I've come to classify people with your behaviour (i.e. people who pretend to debate while actually dodging) as frauds.

            I might be wrong, but you're a fraud.

          • avatar Remarkl says:

            "I might be wrong, but you're a fraud."

            Whatever floats your boat.

  27. avatar Paul Marks says:

    Remarkl - the credit-money expansion associated with war tends to INCREASE prices (not reduce them).

    But pick 1913 0r 1912 (or 1892 or 1893 or......) and you will find that prices were no higher than they were a century before.

    Peter Surda - discussion is only useful with people one fundementally agress with. I know one is not supposed to say that - but it is the truth.

    With people one disagress over details (but agrees on the important things) one can work it out in discussion.

    But if one talks about a matter (or importance) with someone whom one FUNDEMENTALLY is on the opposite side to - well then, sooner or later, the discusssin is going to break down into bitter argument. There will be no light - only heat.

    Learn from my mistakes.

    When whats-his-name hinted to me that he was going to claim that credit-money expansion is NOT about trying to lend money at interest rates lower than real savers would demand (indeed that ONLY an increase in savings reduces interest rates) I should have withdrawn from discussion with him.

    Instead I continued - and LOST MY TEMPER (always a mistake) over what I regarded (and still regard) as his basic, and deliberate, untruths.

    Do not make my mistake in relation to discussion (in your case with Remarkl).

    You have not yet made the mistake that I made.

    It is better not to.

    You fundementally disagree with Remarkl and have a low opinion of him (I do also).

    So withdraw from discussion.

    As I intend to do.

    Let him claim his "victory".

    • avatar Peter Surda says:

      Paul,

      I humbly disagree with you. Even if there is a great difference in assumptions, a debate can be fruitful. It is not very common, but there are people that can do that. Indeed it is when there is a huge disagreement you can find out whether someone is genuinely interested in a debate or a closed minded fanatic, and people can earn mutual respect. It is also where you can learn the most, even if you can't resolve all disagreements. I've had debates like this in the past. Sometimes the other party convinced me, sometimes I convinced them, sometimes we both learned something without significantly changing our positions.

  28. avatar Martin Brock says:

    @Remarkl

    Why would anyone would want there to be more currencies than the smallest number that will enable trade among an adequate range of willing traders?

    The answer to the question well enough explains why a currency monopoly is unnecessary. Why would anyone want a statutory monopoly as opposed to a most common currency among free traders at a given time? Competitive pressure checks the counterproductive impulses of issuers of the most common currency.

    So let's stay within the political boundaries of one monetary sovereign, in this case the USA.

    No single, universal currency exists. Ignoring statutory borders ignores the fact that the U.S. dollar, for example, is not a common currency that people freely choose. If people chose more freely, a single, universal currency still would not exist, but boundaries between groups preferring one currency over another would not be forcible. The boundaries wouldn't be sharp and definite like the geographic boundary between states.

    A monetary system is a social network. People arguably need only one social networking web site, but granting Mark Zuckerberg a forcible monopoly over "social networking" is nonetheless a counterproductive policy.

    If you and your buddies want to trade only in gold coins, one of two things happens. Either we ALL adopt gold coins as money, because you have a monopoly/monopsony position that enables you to call the tune, or your circle's goods, services, and custom exit the market for the rest of us.

    No. People using different currencies trade by exchanging currencies. If the stability of prices in my chosen currency complicate my accounting too much, or if I prefer a different currency for any other reason, I can switch. I can't effectively switch to just any currency. I must adopt one that a sufficient number of other people also accept; otherwise, my transaction costs are too high; however, one currency is not therefore the optimal number in any given population.

    That is a tragedy of the commons: the single-currency marketplace is the commons, and the selfish withdrawal of goods from it causes it to collapse.

    That's not a tragedy of the commons in the usual sense. You can compare a single-currency market to a commons, but the tragedy of the commons then is an argument against the single currency, not an argument in its favor. The monopoly issuers need not care about the consequences of polluting the money supply with notes extending credit recklessly if losses are socialized for example.

    People don't withdraw their goods from a market selfishly. Refusing to trade freely with another person reduces opportunities for comparative advantage, so this refusal is not in my selfish interests.

    Choosing a different currency is not a refusal to trade, any more than choosing a different email service provider is a refusal to exchange email. As long as a channel exists between different service providers, everyone may communicate. If your neighborhood is wired with fiber optics while mine is wired with coaxial cable owned by a different network service provider, we can still communicate through a bridge between the two networks.

    Competition does not make it hard for people to trade, because people want to trade. People prefer the currency that eases their trade. They ultimately abandon even a statutory currency when the state mismanages the currency sufficiently, but a state does much damage in the meantime. If people need not shake off a compulsory monopoly in order to switch, the transition is more gradual and might be avoided altogether for many people using a currency that is only temporarily mismanaged.

    Within a common currency regime, competition drives price to cost and refines offerings to customers' preferences.

    Competition does not drive price to cost. Price reflects the subjective valuation of goods, not the cost of producing goods. If the supply of a good is sufficiently elastic, competition can drive price toward cost, but producers exit the market when price is too close to cost.

    Without competition, the whole idea of "cost" is meaningless. If I can't choose from competing producers, who's to say what anything costs? If a monopoly produces corn, who's to say that the lords of corn production are overpaid, that their castles and personal jets do not contribute optimally to the production of corn? Why are producers of money any different in this respect?

    Figuring out who has the best price while currencies compete is not a lot of work. Existing technology makes the effort trivial. I need not see prices on goods directly at all. I can scan a bar code with my cell phone and see the price in my preferred currency. At Amazon.com, I use a different URL, and I can immediately see prices in Euros or Canadian dollars rather than U.S. dollars.

    With existing technology, people could use different currencies while easily imagining that everyone uses a single currency. If I don't like what I see in my chosen currency, in terms of price stability and the purchasing power of my income, I could switch to another currency in seconds with the touch of a button. I couldn't arbitrarily abrogate obligations to pay in the former currency, but I could cease contracting further in the former currency if enough other people also desired a different accounting standard.

    • avatar Peter Surda says:

      The answer to the question well enough explains why a currency monopoly is unnecessary.

      Well done. This is one of most glaring contradictions in the proponents of monetary "policies".

  29. avatar Remarkl says:

    "Why would anyone want a statutory monopoly as opposed to a most common currency among free traders at a given time?"

    Because to get to a "most common currency" by competition entails the kind of mess that led to the Specie Circular in 1837. We Do have to pay taxes, and the government can't really be expected to wait around to see what currency emerges. I think it was Bill Cosby who had this joke about not naming his kids. He said he just sent them out to play and waited to see what the other kids called them. What you call "monopoly" I call cutting a Gordian knot.

    A monetary system is not a social network. It is how we earn our daily bread. It's efficiency matters more than our freedom to select the money we use. You are simply valuing autonomy over other externalities that you do not, in my opinion, fully appreciate. That makes this an argument about values, which leaves plenty of room for unresolved disagreement.

    That competition drives price to cost is econ 101 stuff. I won't debate it. But I also won't respond to any argument that denies it as a general principle, whether or not there are occasional exceptions.

    "Why are producers of money any different in this respect?"

    Because money is not produced. It's like asking whether the production of touchdowns by players is different from the production of points by the NFL. Things are things. Money is information. There is NO important respect in which they are alike.

    • avatar Peter Surda says:

      We Do have to pay taxes, and the government can't really be expected to wait around to see what currency emerges.

      Another absurdity. Even if government has to collect taxes, it does not need to wait for one ultimate winner of the network effect any more than other participants in the economy. It can, just like any economy participant typically does, choose one unit of account and then decide whether it accepts different ones in exchange as well. Nowadays, in current system of extensive forex services and electronic fund transfers the costs associated with this are negligible, and in the worst case the government can simply request the forex fees be paid by the payee.

      Because money is not produced.

      Yet another absurdity. Of course money is produced. The production process results in the producer of having more money than he had before. Furthermore, if money was not produced, the whole concept of monetary policy you advocate would be meaningless, revealing a contradiction in your position.

      Money is information.

      This does not negate the necessity of producing it.

      • avatar Remarkl says:

        Would either of your first two paragraphs be less persuasive without the first sentence? They would be less revelatory of your (well-earned) insecurities, but would they be more persuasive?

        Run a country for a while and report back on how accepting taxes in multiple currencies works out. We can talk then about the benefits of having the government pick the money.

        Money has to be "produced"? The Fed PUSHES A BUTTON and money appears. Your banker PUSHES A BUTTON and puts money is in your account. That's "production"? Of course not. It's a RECORD of someone's creditworthiness. It's information that says to me that if I give you a widget, I can buy a burger, because, at the end of the day, you will give someone something worth a widget.

        Profits are produced, and wealth is produced, but money? Money is created ex nihilo to keep track of what HAS BEEN created. To the extent that money is anything but an incorporeal shadow of the real world, it is so because of technological limitations on the dissemination of information among human beings. But, no, it is not "produced" in any sense of the word that makes it on that account like any real good or service.

        • avatar Peter Surda says:

          Pushing a button merely explains that the production costs are low. It does not negate the existence of a production process, nor the fact that after the production there is more money than before. Even if we admit that money is immaterial and has purely informational purpose (in this aspect I paradoxically agree with you), that still does not invalidate that it is a good and needs to be produced before it can be used.

          Indeed the large difference between the marginal production costs of money and the market price of money causes a disequilibrium and, if this is done through fractional reserve banking into business loans, the business cycle. This is why Austrians prefer a commodity base, and free competition in production of money; this ensures the marginal production cost equal the market price. This is what happens with production of gold, and an even better example is Bitcoin (there are lower barriers to entry for production, there is a greater flexibility in starting/stopping production, produced bitcoins can be sold immediately and without excessive transportation costs on free market, and because low transaction costs of monetary base make it more difficult to conduct credit expansion).

          Your arguments continue to be absurd, you merely pile up more absurdities on top. Instead of attempting to psychoanalyse me, I recommend you address the flaws in your arguments if you expect to be taken seriously.

          • avatar Remarkl says:

            "Pushing a button merely explains that the production costs are low. "

            Not just "low," but economically insignificant, too low to compete on, immaterial, best ignored. And you you are buildng a competitive edifice on this nothingburger. The question was never whether money had to be "produced before it was used"; it was whether it was "produced" in a sense that made the cost of production meaningful.

            "Indeed the large difference between the marginal production costs of money and the market price of money causes a disequilibrium."

            Money has no market price. Currencies have market prices to the extent people choose to use them as stores of value, but that is an externality that arises from the fact that some currencies can in fact serve as such or accepted in exchange for better stores of value than some others. It has nothing to do with their being "money." The object of the game is to STRIP money of market value so that it will operate solely as a medium of exchange to the extent technologically possible.

            I have been "addressing" the "flaws" in my arguments all along. I apologize for not being a better teacher.

          • avatar Peter Surda says:

            Not just "low," but economically insignificant, too low to compete on, immaterial, best ignored.

            Best ignored for the producers of absurdities like you, lest those absurdities be exposed.

            And you you are buildng a competitive edifice on this nothingburger.

            Monies compete on transaction costs, not on production costs. That brings into relevance the cost of the clearing system. That is strictly speaking not the production cost of money, but still the quantity of money in existence before it is cleared needs to be produced.

            The question was never whether money had to be "produced before it was used"; it was whether it was "produced" in a sense that made the cost of production meaningful.

            The size of production costs does not determine whether the production process exists or not. You invented another absurdity.

            Money has no market price.

            Another absurdity, refuted by the fact that money is present in almost any exchange (apart from barter). It also contradicts the very definition of money as the most liquid good.

            Currencies have market prices to the extent people choose to use them as stores of value, but that is an externality that arises from the fact that some currencies can in fact serve as such or accepted in exchange for better stores of value than some others.

            I fully agree with you here. The price of money is the result of the network effect. Liquidity creates value. Still, that does not support your other claims.

            It has nothing to do with their being "money."

            On the contrary, it has everything to do with that. The price of money is entirely caused by their liquidity.

            The object of the game is to STRIP money of market value so that it will operate solely as a medium of exchange to the extent technologically possible.

            This makes no sense.

            I have been "addressing" the "flaws" in my arguments all along. I apologize for not being a better teacher.
            You've been dodging questions.

    • avatar Martin Brock says:

      Because to get to a "most common currency" by competition entails the kind of mess that led to the Specie Circular in 1837.

      The existence of a mess, in which a government hands out titles to land for increasingly worthless notes, does not imply that currency competition creates this mess.

      We Do have to pay taxes, and the government can't really be expected to wait around to see what currency emerges.

      A state does whatever it effectively forces its subjects to do. If it wants to enforce hereditary slavery, it can't be expected to wait around to see what the hereditary slaves think about it. I grant this point, but I'm not sure how it's relevant.

      Whether or not we must pay taxes, a state can accept any currency a subject voluntarily accepts in payment of taxes, and we can discuss the consequences of this acceptance. Whether or not a state will do so is a separate question.

      He said he just sent them out to play and waited to see what the other kids called them.

      At some point, people themselves decide what they'll be called. Most of us stick with a name our parents assign, more or less, but a person may change this name by adopting a nickname assigned by other kids or even changing his name on legal documents.

      The price of a good is the name of its market value according to a naming convention. What you champion here is more like a Federal Naming Authority assigning every kid a name with no option to change the name later. Cosby's method seems more realistic.

      What you call "monopoly" I call cutting a Gordian knot.

      What I call "monopoly" is exclusive authority enforced by a state. These monopolies are responsible for countless Gordian knots.

      A monetary system is not a social network. It is how we earn our daily bread.

      A monetary system is a social network, but I won't belabor the point with a protracted explanation in this post. I basically make the case here.

      http://www.favorati.net

      I earn my daily bread by developing software. I'd earn my bread this way regardless of the monetary system.

      It's efficiency matters more than our freedom to select the money we use.

      Freedom to select the money we use is not inconsistent with an efficient monetary system.

      You are simply valuing autonomy over other externalities that you do not, in my opinion, fully appreciate.

      A money monopoly creates all sorts of negative externalities. People free to choose may choose as many currencies as they please, so they may choose one if they please. Again, people overwhelming choose Facebook as their social networking web site, though a relatively few people use alternatives, but this fact does not imply that granting Facebook a statutory monopoly is efficient.

      That competition drives price to cost is econ 101 stuff.

      You apparently had an idiosyncratic Econ. 101 professor. More conventionally, producers compete to profit, and profit definitively is the difference between the price of a good and the cost of producing it.

      I won't debate it. But I also won't respond to any argument that denies it as a general principle, whether or not there are occasional exceptions.

      That settles the question then, for you at least.

      Because money is not produced. It's like asking whether the production of touchdowns by players is different from the production of points by the NFL. Things are things. Money is information. There is NO important respect in which they are alike.

      First, you say that money is not produced. Then you compare money to points while referring the "production of points".

      Yes, money is information. I've made this point myself often in this forum, and I produced the web site linked above. Why do you say that information is not produced?

      • avatar Remarkl says:

        "Why do you say that information is not produced?"

        I said that it is not "produced" in a sense that makes the cost of production relevant to its use. Tokens bearing information ARE produced. Bank accounts and paper bills are produced. But the information ARISES. The information HAPPENS. We are not talking about competing tokens. We are talking about competing UNITS. The UNITS cost nothing to produce.

        Have you seen Ricky Gervais's movie "The Invention of Lying"? It envisions a world in which evidence is unnecessary because everyone always tells the truth. In such a world, you would work for someone, and he would tell you that you had earned $100, and you would tell the grocer that you had earned $100, and he would give you $100 worth of food and tell his landlord that he had sold you $100 worth of food, and his landlord would allow him to stay for as long as $100 pays the rent, etc., etc. The MONEY costs no one anything to produce.

        It is the EVIDENCE that costs something to produce. But that is not the basis on which currencies compete. They compete on the basis of the cost of validation, not the cost of production. The choice of backing - a gold standard or fiat - serves an evidentiary role by establishing scarcity. The cost of acquring gold is the resources committed to doing so. The cost of validating fiat money is the cost of the free press whose failure to sound the tocsin signifies that the money is sound enough for most users. But in either case, the cost is for validation of the medium, not production of the tokens or the UNITS.

        As for whether you would earn your daily bread developing software regardless of the monetary sytem, you would PAY for it with the money in that system. More important, you would pay for you retirement with money in that system. How much of your Myspace money did you have to convert to Facebook money when Facebook won the social network battle? How disruptive was it to your life? Structural similarities are not enough to build analogies. Material roles are what matter.

        As a software developer, you have access to intellectual tools that you could exploit outside of the computer lab. Monetary theory is a great place for distinguishing physical and logical devices. It seems to me that you conflate physical money, not jsut specie and bills, but also the electronic representation of money, which is a physical device, with logical money, which causes you to treat the cost of validation as a cost of production, when they are very different things. The behavior of a monetary network may be like the behavior of a social network, but networks in that sense are physical devices, actual network of people doing actual things. The logical roles played by the networks - creating a medium of exchange vs. sharing social information - are what determine such things as whether the network should arise spontaneously, by competition, or by fiat.

        Try applying object-oriented thinking to money. I find that thinking about properties and methods frees me up not to be captured by labels. These are powerful metaphors. Just seeing if you can frame your theories in those terms will help you test them.

        Or not.

        • avatar Peter Surda says:

          But the information ARISES. The information HAPPENS.

          Information does not arise on its own, it is the product of our mental processes when observing empirical phenomena. And both our mental processes and empirical phenomena require scarce resources to come about (and in most cases they also require social interaction). While we can say that information is an emergent property, again that does not negate the physical processes that necessarily must precede it.

          In such a world, you would work for someone, and he would tell you that you had earned $100, and you would tell the grocer that you had earned $100, and he would give you $100 worth of food and tell his landlord that he had sold you $100 worth of food, and his landlord would allow him to stay for as long as $100 pays the rent, etc., etc. The MONEY costs no one anything to produce.

          This would merely mean that the clearing cost is zero. But as I argued above, clearing cost and production cost are strictly speaking separate. And it requires that money already be produced before it is cleared.

          They compete on the basis of the cost of validation, not the cost of production.

          I agree that monies compete on transaction costs, of which validation is a part. But you merely diverted the attention. You produced a non-sequitur. This in no way refutes the existence of the cost of production of money, nor the existence of price thereof, nor the effects that I described (difference between marginal production costs and market price creates a disequilibrium). You ignore the core problem of monopoly money.

          • avatar Peter Surda says:

            Also, the transaction costs are influenced by the changes in the price level. Ceteris paribus, people prefer a medium of exchange that appreciates rather than the one that depreciates. You don't need to trust me or the Austrians if you don't believe me, Paul Krugman wrote a paper where he makes that claim too.

          • avatar Remarkl says:

            Peter -

            My apologies for responding earlier. I don't know what got into me. Please resume thinking me a fraud. I liked it better that way.

          • avatar Peter Surda says:

            I can simultaneously believe that you're a fraud and point out to the absurdity of your claims. Those are not mutually exclusive.

          • avatar Remarkl says:

            "I can simultaneously believe that you're a fraud and point out to the absurdity of your claims."

            Yes, but to whom? I obviously am not going to accept the "absurdity" of my claims. So that leaves other readers. Now, it may be entirely helpful for you to point out to them that I am wrong in some subtle way, but to say that my claims are "absurd" actually insults THEM. How can they be so stupid as not to see through an "absurdity"? Do you really want an audience so dull that you have to tell them when something is absurd?

            There is nothing "absurd" about your ignorance of game theory. It's just something you are wrong about. There is no point in my trying to shame you about it. I just plod along explaining how, for example, people's preference for an appreciating currency leads to hoarding of the currency, which leads to a collapse of investment, i.e., a tragedy of the commons. The people don't see it coming, but the central bank does and acts to prevent it. Of course Krugman knows that people PREFER an appreciating currency. But does he, therefore, ADVOCATE having one?

            You protest that you are some sort of logic cop, but you wouldn't know an enthymeme if it bit you in the ass, something I can safely say because they DO bite you in the ass on a regular basis. If you had taken the trouble to articulate the major premise for your remark about people preferring an appreciating currency - viz., that IF [an explicit list of] other things are equal, the kind of currency people would prefer is the kind of currency they should have - we might discuss whether people always know what's best for them or do in this particular instance. But you did not make that premise explicit. You assumed that we all knew it and accepted it. That's no way for a logic cop to act. One might even conclude, based not on something so vague as refusing to reply to a demand for further explication, but on your not having a clue about how to structure an argument, that YOU are the fraud when it comes to "pointing out" logical errors. Likewise, one might conclude from your petty exercises in literalism - e.g., that there IS a cost of production of money, even thought it is dwarfed by the transaction costs and is, therefore, immaterial - that YOU don't make any logical sense and are a fraud.

            But the fact is that you are not a fraud; you're just wrong about logic and wrong about what it means to be a fraud. You're wrong about so many things. But none of them are absurdities. They are just things you are wrong about. Indeed, if you hadn't been such an obnoxious twerp, I wouldn't even say that you are wrong about them. I would just say they are things about which we disgree. But you have forfeited that courtesy. You no doubt have the ability to understand your errors, but you most assuredly do not have any interest in doing so. Now THAT's absurd.

            You call my ideas absurd for one reason only: intimidation. You want to make the conversation unpleasant. I would ask why you are so afraid of the exchange that you feel obliged to be so aggressive, but I don't care. You have forfeited that courtesy, too. I did not come to this discussion with an agenda to discredit you. For some reason, however, you don't want to discuss or explore. You want to attack and defend. I've been to lots of sites where people go to be wrong together, and I was hoping this would not turn out to be one of them. But, at least by your lights, it is.

            I am going to try to unsubscribe now. You have succeeded in making my experience with this site unpleasant. You can take pride in that, as you seem to be the sort of person who would. But maybe you're as young as you act. If so, I wish you a speedy adolescence.

          • avatar Peter Surda says:

            Yes, but to whom? I obviously am not going to accept the "absurdity" of my claims. So that leaves other readers. Now, it may be entirely helpful for you to point out to them that I am wrong in some subtle way, but to say that my claims are "absurd" actually insults THEM. How can they be so stupid as not to see through an "absurdity"? Do you really want an audience so dull that you have to tell them when something is absurd?

            I hold the opinion that the proper way to participate in a debate is to address the points other are making, irrespective of whether I agree with them or not, or whether they are clever or not. This might seem strange to you but that's how I am. Mentioning absurdities merely serves for classification purposes, it does not actually address the point.

            There is nothing "absurd" about your ignorance of game theory. It's just something you are wrong about.

            This is a non-sequitur. I do not see how anything I said can be either confirmed or refuted by game theory. Your argument with game theory requires that the interest rate is below zero, which I already addressed several times. I agree with you that with an interest rate below zero there is no point in investing.

            I just plod along explaining how, for example, people's preference for an appreciating currency leads to hoarding of the currency, which leads to a collapse of investment, i.e., a tragedy of the commons.

            And I countered by mentioning the connection between time preference and rate of interest, pointing out that even in your model, you yourself admit exceptions, and that the rate of interest can't be negative because the connection between changes in the price level and interest rate is not linear. All of which you ignored.

            But does he, therefore, ADVOCATE having one?

            I did not say he does. Indeed, it shows the perversity of his, and your, position: people voluntarily choose currency which, according to your models, is detrimental for them, and therefore they must be forbidden from making a choice, i.e. forced a currency they don't want. You use your flawed economic understanding to justify force.

            we might discuss whether people always know what's best for them or do in this particular instance.

            This is circular logic. If people are unable to decide form themselves, why should they be able to decide for others?

            But you did not make that premise explicit.

            I indeed did not. That is not the point of my argument. You maneuvered the debate into it. You avoided confronting my arguments and make up new and new points.

            You assumed that we all knew it and accepted it. That's no way for a logic cop to act.

            And now you have the audacity to blame me for the result.

            One might even conclude, based not on something so vague as refusing to reply to a demand for further explication, but on your not having a clue about how to structure an argument, that YOU are the fraud when it comes to "pointing out" logical errors.

            Now you start metaarguing, instead of addressing my points.

            Likewise, one might conclude from your petty exercises in literalism - e.g., that there IS a cost of production of money, even thought it is dwarfed by the transaction costs and is, therefore, immaterial - that YOU don't make any logical sense and are a fraud.

            My argument is not that the cost of production of money is the cause for the production being a production process. Even if it was entirely costless, there would still be a production process, as there is a contrast between two mutually exclusive states: the quantity of money Q1 and quantity of money Q2. The quantity of money cannot simultaneously be Q1 and Q2. The difference between them is the production process. Kindly stop ascribing me arguments that I never made.

            You're wrong about so many things.

            Yet, instead of explaining where I err, you play a game where you avoid confronting my points, divert the debate into new areas in a few successive steps and then start whining. This behaviour is typical for frauds.

            You no doubt have the ability to understand your errors, but you most assuredly do not have any interest in doing so. Now THAT's absurd.

            I attempt to address every single point you make, and even say with which points I agree. You just play a game and pretend to argue. You're the one with no interest in debate, you're just faking it.

            You call my ideas absurd for one reason only: intimidation. You want to make the conversation unpleasant.

            You dodge arguments for only one reason: you're not really interested in a debate. Either you don't want to confront your errors (cognitive dissonance) or you are deliberately toying with me.

            For some reason, however, you don't want to discuss or explore.

            Look in the mirror. You're the one who does not want to discuss or explore, and the fact that you're avoiding confrontation is the best proof of that.

            I readily admit that I might be wrong. But instead of explaining where I err, you decide to play a game. In which I'm not interested.

        • avatar Martin Brock says:

          Have you seen Ricky Gervais's movie "The Invention of Lying"?

          No. But the web site I link models "money" just as you describe.

          It is the EVIDENCE that costs something to produce.

          Right. But user/producers of money themselves can (and will) pay this cost directly and freely, thus producing a public good. Buyers at eBay police dishonest sellers this way through seller reviews. No one pays buyers to write seller reviews at eBay, yet the service is critical to eBay's success. No one pays buyers at Amazon.com to write reviews. No one pays you and me to comment here. No one pays people to write articles for Wikipedia. The web is a cornucopia of public goods created without a state.

          Structural similarities are not enough to build analogies.

          eBay is a better analogy in this sense. My point regarding Facebook involves the utility of granting Zuckerberg a monopoly. The fact that consumers will ultimately choose only a few providers of a service, at a time, does not imply any utility of a monopoly provider. The fact that many consumers will choose the same form of money does not imply that any consumer chooses a fiat money.

          It seems to me that you conflate physical money, not just specie and bills, but also the electronic representation of money, which is a physical device, with logical money, which causes you to treat the cost of validation as a cost of production, when they are very different things.

          It seems so to you only because you didn't browse the site I linked.

          Validation is part of the cost of producing money, but the production of money can be decentralized. Favorati.net, the web site that I developed, doesn't create money. The Favorati (people using the web site) create the money. They do all of the validating, and they do it because they bear the risk.

  30. avatar Remarkl says:

    " It's [sic] efficiency matters more than our freedom to..."

    As this quotation shows, this site needs and "Edit" feature. How could that problem best be rectified? Shall one (or more!) of us create a competing site WITH an edit feature? Or shall we try to put the cyberequivalent of political pressure (whatever that might be) on the MONOPOLY administrator of this site to add one?

  31. avatar Paul Marks says:

    Peter - I think you will find that, for things we really care about, we are all "closed minded fanatics".

    Of course some people are anoying as well, using debating tricks and so on, and some people just get tired and angry - like me.

    It is possible that someone will have his mind changed (about something they really care about) by a debate - but it so rare (and debates are normally such ritual game) that I turn off debates shows as soon as they come up on television.

    Give me one person explaining his opinions (with help from friends - for it is by the process of conversation with friends that one spots weak spots in one's own thinking and ways to correct them), starting with his baseline philosophical assumptions and building up towards practical policy concerns - not the ritual exchange of debating points.

    Although (contradicting myself) I do like to watch someone defend their thesis from attack (something that is no longer publically practiced in most universities - and should be practiced).

    Someone making their case (at proper length) getting attacked (by people who have read the theiss and know the field), and then making full length replies to the attacks.

    That is worth comming to see. And it should be before a large number of people (not a hole in the corner proces).

    Still back to this debate.....

    Money is not wealth.

    Increasing the amoung of money does not increase the amount of wealth - contrary to the "effective demand" fallacy.

    Going back to "Say's Law" is what is required here.

    As for the supposed refuation of Say's Law (by Keynes and his followers).

    As the late Henry Hazlitt was fond of saing (both "The Failure of the New Economics" and the book of essays by various writers "The Critics of Keynes" could still be found in university libraries up to a few years ago - the left has done some de facto book burning since then) - what Keynes did was mis state Say's law and then "refute" his own misstatement. See Hunter Lewis "Where Keynes Went Wrong" for this.

    On lending - for consumption of investment.....

    If there is a demand for higher borrowing, then (all other things beiing equal) interest rates must be allowed to rise - so that there is a reason for people to increase REAL SAVINGS (the source of the money for borrowing).

    Trying to do this by government printing money, or by banks (backed by government Central Banks) playing book keeping tricks, is folly.

    As for the production of money.....

    As Carl Menger pointed out in Principles of Economics.

    Money must start off as a commodity - something that buyers and sellers choose to value, and BECAUSE IT IS A LONG TERM STORE OF VALUE then can use it as a "medium of exchange".

    Money should be moveable, and it should be hard to destroy (by fire, or water, or rust...) and it should (ideally) be able to make up a lot of value in a limited physical space..

    For this and other reasons, over the centuries gold has been a popular choice for money.

    Although silver has also been a common choice.

    Of course any effort to RIG ("fix") the exchange rate of gold and silver is a mistake.

  32. avatar Martin Brock says:

    It is logically impossible to use something as a payment instrument without wanting to keep it in the first place.

    It is definitively impossible to accept something as a "medium of exchange" expecting to keep it, as opposed to exchanging it for something else.

    Obviously, I must keep money long enough to exchange it for something else, but this time is increasingly negligible. When I transact electronically, this time can be practically instantaneous.

    If I accept gold or bitcoin or anything else expecting its value to increase and to hold it for this increase, then I'm not accepting it as a medium of exchange. I'm accepting it as a speculative investment. A good can play both of these roles simultaneously, but a particular unit of a good playing the latter role is not money, even if other units of the same good are money simultaneously.

    But you're right in the respect that the implication does not go both ways: holding it does not necessarily mean it will be good in the future as a medium of exchange.

    A rational expectation of increasing value makes it less attractive as a medium of exchange, because people can use something else, without an expectation of increasing value, as a medium of exchange instead. That's the essence of Gresham's Law. It's not the precise meaning of "bad money drives out good money", but it's the logic behind the process.

    But high velocity is also not a meaningful indicator of the suitability as a medium of exchange, indeed during hyperinflation the velocity dramatically increases before the process ends.

    If velocity is the reciprocal of time held, then I disagree here. High velocity is a definitive indicator of a medium of exchange, but high velocity does not imply hyperinflation.

    Velocity can be high without inflation if a thing is "money" only while it circulates.

    For example, I accept a banknote in trade, and I immediately deposit this note in the issuing bank to earn interest. Upon deposit, the banknote ceases to be money and becomes a part of my investment portfolio. I effectively own part of the capital securing the bank's notes, and as long as I hold this share of the capital, no banknote secured by the same capital may circulate. By depositing the money in the bank, I reduce the money supply.

    To liquidate my holdings, I increase the money supply again.

    Of course, I may liquidate my holding only if you or someone else will accept one of the bank's notes from me, so this decision is not unilateral on my part. More precisely, you and I increase the money supply by liquidating my holding, but you may decrease the money supply soon thereafter, and if you don't reduce it, if you spend the money yourself soon thereafter, then someone else may reduce the money supply again. The money supply expands only while the banknote circulates.

    If I keep $10,000 as a demand deposit for rare contingencies (and I do), it's a mistake to think of this $10,000 as part of the money supply, because it rarely circulates in fact. I pay for this liquidity by receiving a negative real interest rate from the bank. If I held gold in a warehouse instead, I'd pay otherwise. I can pay nothing to hold bitcoins in a bitcoin wallet, but I could also hold a digital claim on the assets of a bank in my own digital wallet and pay the bank nothing, because the bank then owes me no interest for a deposit.

    The correct variable to look at is liquidity. And liquidity of Bitcoin has for the most part been increasing.

    AAA rated mortgage backed securities insured by an AIG credit default swap were very liquid ... until they weren't.

    The market in shares of Microsoft is highly liquid, but shares of Microsoft are not money. How many transactions involving bitcoin are people exchanging other currency for bitcoins because they are accumulating bitcoins speculatively? Even your restaurant bill scenario could fall into this category. Bitcoin seems to play the role of money in your restaurant scenario, but if the party accepting bitcoin is accumulating bitcoin speculatively, the transaction decreases the volume of bitcoin playing the monetary role.

    I'm not sure that short selling solves this problem, because if bitcoin is destined to be widely used as money, on the scale of the dollar, anytime soon, then accumulating bitcoin is rational. Short sellers betting against a rising price systematically lose in this scenario. They can only win by betting against a price rising too rapidly, and that's no mean feat. Short selling counteracts all speculative bubbles in theory, but the bubbles still occur in practice. The point at which the bubble bursts is unpredictable. No information assymetry benefits the short sellers. The short sellers are also speculating irrationally.

    Of course, irrational speculation enriches some people. Some people strick it rich in Las Vegas playing games that are demonstrably irrational from a purely financial perspective, i.e. games with a negative expected yield. Most people lose money in these games, but people keep playing anyway. People might play a speculative bitcoin game indefinitely, but I don't expect bitcoin to become a widely used currency this way.

    Some nation state could declare bitcoin a legal tender, but I don't expect this outcome either. If a state wants to make something like bitcoin a legal tender, it can easily create a digital Statecoin and declare it legal tender or just pass a law limiting the issuance of greenbacks or swapping Treasury securities for title to the gold in Ft. Knox without actually moving the gold. Electronic warehouse receipts for bits of the gold in Ft. Knox could have transaction costs as low as bitcoin in theory, if the state imposes the warehousing costs on taxpayers generally.

    But this method is not suitable as merchant tool, or for international transfers, or if you need the money quickly, or if you engage in illegal or heavily regulated activity.

    Other than illegal activity, why is it not suitable? If a merchant can accept electronic bitcoin transfers, why can't he accept electronic dollar transfers?

    If merchants can start accepting bitcoins, they can also start accepting dollar transfers arranged by customers with their cell phones. The three day waiting period seems to be an arbitrary contrivance of the banking system. I can arrange a same day transfer through my bank for $10 rather than $3, and this price still doesn't depend upon the amount of the transfer.

    Maybe some regulatory requirement justifies this difference in cost, but the price presumably could fall without the regulation. The banking system is only moving bits around in its computers, and given the necessity of networked computers in a modern bank, the marginal cost of providing this service is very small. At this point, I suppose the credit card companies are impeding the innovation somehow. The problem can't be technological, because less developed countries are already moving in this direction.

    These fees apply only to transfers between banks. If you also belong to my credit union, I can transfer dollars from my account to yours at no cost instantaneously. When I transfer money to my kids, I first transfer $1500 from my account in a bank in Georgia to my account in a credit union in Alabama, at cost of three dollars. I then transfer $500 from my account in the credit union to each of my three kids' accounts in the credit union at no cost.

    • avatar Peter Surda says:

      Thank you for your reply, it will take me a while to reply thoroughly. For the time being however, I'd like to reiterate that Gresham's law requires a fixed exchange rate. Please consult wikipedia article on Gresham's law (I'm not posting link because the wordpress then puts the post under moderation), and from Austrians for example Rothbard or Mises.

      This is a quote from Rothbard's The Case for a 100 Percent Gold Dollar:
      The standard argument against private coinage is that the minting business operates by a mysterious law of its own—Gresham's Law—where "bad money drives out good," in contrast to other areas of competition, where the good product drives out the bad.[15] But Mises has brilliantly shown that this formulation of Gresham's Law is a misinterpretation, and that the Law is a subdivision of the usual effects of price control by government: in this case, the government's artificial fixing of an exchange rate between two or more moneys creates a shortage of the artificially under-valued money and a surplus of the over-valued money. Gresham's Law is therefore a law of government intervention rather than one of the free market.[16] (emphasis added)

      • avatar Martin Brock says:

        "Bad money drives out good" applies when the depreciating currency depreciates as a consequence of debasement. More generally, anyone free to use more than one good as money will use the more rapidly depreciating good. A fixed rate of exchange is irrelevant.

        "More rapidly" does not imply an arbitrarily high rate of depreciation. "More rapidly" only distinguishes two goods potentially useful as money, both of which meet common requirements for a medium of exchange. Two such goods will not have exactly the same rate of depreciation. Even if people expect both goods to appreciate, they'll use the most rapidly depreciating (least rapidly appreciating) good as money.

        I am not free to use any good I like as money. I can only use a good that others accept as money, but everyone shares a tendency to use a more rapidly depreciating good as money. You'll accept the more rapidly depreciating good from me precisely because you expect to use it as money rather than holding it.

        For this reason, a slowly depreciating good is not "bad money" at all. It is good money. The appreciating good is bad money, because people prefer not to use it as money. When people choose the more rapidly appreciating good as money for this reason, they are not acting contrary to market forces. They are imposing market forces.

        • avatar Peter Surda says:

          Martin, you just invented your own version of the Gresham's Law. Gresham's Law is merely a specific case of price fixing, as documented by the references. Mises, Rothbard, Selgin (out of Austrians) explain this. Others include Nobel Prize winner Robert Mundell. Searching on google, ssrn or jstor reveals plenty of sources making the same interpretation, yet none making the interpretation you provide. Can you provide any source whatsoever supporting your claim? Otherwise, what you describe, even if it was true, is an entirely different phenomenon.

          • avatar Martin Brock says:

            We've debated the precise meaning of "Gresham's Law" here, so I say "the essence of Gresham's Law" above. If I say "Martin's Law" instead, I seem pretentious, and someone else then tells me that I've only cited Gresham's Law without proper acknowledgement. I'm not disputing anyone asserting that "Gresham's Law" refers exclusively to a state circulating legal tender coins, but I don't discuss an entirely different phenomenon.

            Rather than interpret Gresham's Law, I assert a more general principle. People free to choose between two goods potentially useful as money will choose the more rapidly depreciating (or more depreciated) good. Gresham's Law is a corollary in which the intrinsic value of coins dominates the market value and debasement of coinage is a particular cause of depreciation.

            The strictest interpretation of Gresham's Law is archaic. People long ago demonstrated a willingness to use paper money with hardly any intrinsic value. The metal in a quarter is worth more than a quarter of the value of the paper in a dollar bill, but people don't hoard quarters in favor of spending dollars, because the fiat value of money dominates any intrinsic value. Fiat value is a function of state power.

            I don't assume that money is a legal tender or anything but a good that people use as a medium of exchange. If people freely use a good as money, some people may use one good as money while other people use another, and people may use one good as money at one time and another good as money at other times. People may use one good as money in particular circumstances and another good in other circumstances. What else could "freedom" mean in this context?

            The idea that one good is money universally is fundamentally statist. The idea that we can only reform the monetary system in the U.S. by redefining "the dollar" and thus changing the money that everyone already uses by fiat is also fundamentally statist. Any case for a "100% gold dollar" is a statist case. If Rothbard wants to use gold exclusively as money, even avoiding promissory notes backed by other collateral valued relative to gold, then he's free to make this choice, but I don't want anyone revising the terms of countless contracts I've already signed by fiat.

            If Rothbard believes that everyone would spontaneously adopt his 100% gold reserve standard if permitted to choose, he may argue so, but I remain skeptical of the hypothesis. The only ultimate test is a free market, and a market in which the state's transactions in a particular currency dominate commerce is hardly free in this context.

          • avatar Peter Surda says:

            Martin,

            you provide no evidence and no references.

            People start using paper either because it kicks off through price fixing, or as a financial instrument. This establishes a starting price and makes it even possible that it is used as a medium of exchange. Once it has sufficient liquidity, it can sustain itself through network effect even if the initial push vanishes. People also prefer paper to coin because paper reduces transaction costs, not because it is "less worth". Absent price fixing and a transaction cost advantage, people do not prefer a depreciating paper A to a appreciating paper B.

            Also, due to the network effect, in the absence of regulation, you'd expect that a small amount of media would emerge dominant. It is possible that it will be more than't be one, because, and here I agree with you a bit, the acts of exchange are heterogeneous, and the transaction costs might favour different medium of exchange in different situations.

            I agree with you that Rothbard's position is unrealistic. But where you blame "Martin's Law" for it, I blame transaction costs. Coin has higher transaction costs than paper, and I'm not even talking about electronic transactions. As people's decisions what to use money are based on transaction costs, the usage of coins would need to be enforced on them. Until Bitcoin, the "gold standard" branch of the Austrian school had no practical solution to counter the elasticity of supply. But this solution has now been demonstrated.

            Rothbard actually did not believe that merely abolishing legal tender laws would make people switch to gold. He understood the hurdle presented by the network effect, even if he did not use the term. He criticised Hayek for ignoring this hurdle.

            If your model was correct, everyone would be using Zimbabwean dollars. In particular in Somalia and Iraq after the state collapsed, the demand for paying taxes decreased and legal tender law enforcement became irrelevant. But this is not what we observe. People continue to use local currency, and amend it by currencies that have the lowest transaction costs (which in this case is almost entirely determined by liquidity, i.e. dollars or euros). They do not switch to Zimbabwean dollars.

          • avatar Martin Brock says:

            Evidence and references for what? I concede your assertion that "Gresham's Law" describes an assertion more specific than mine. You need some authority for the logic?

            People use fiat money, because a state commands them to use it. A state may commandeer a commodity money emerging without so much force before substituting paper, but the state's money keeps its value because of the force, not because of any intrinsic value of the tokens. The value of liberty from the state's coercive force backs the money.

            I agree (with Hayek) that something (like Bitcoin) could become valuable as a medium of exchange alone in principle, and the tokens could be paper rather than electronic. My problem with Bitcoin is that its supply does not respond to demand for money, so it requires massive deflation to become a more common currency, and this deflation is not simply a response to increased productivity. Even if productivity falls slowly, Bitcoin requires massive deflation to become a common currency. Sufficiently free people will not promise this good in long term credit contracts.

            Absent price fixing and a transaction cost advantage, people do not prefer a depreciating paper A to a appreciating paper B.

            People prefer not to hold the depreciating good, but "money" is not held.

            My money, by definition, is what I accept in trade only to trade it again soon thereafter. If I must hold money, then I might not use a depreciating good as money, but I need not hold money unless forced. I may instead buy a claim on a bank's capital with money for example. If this bank issued the note I spend this way, then the note ceases to be money at this point.

            Money is not a substance obeying a conversation law like gold or bitcoin. A bank is both a source and sink of money, but we don't need a central bank to play this role. Many source/sinks of money can exist competitively.

            Promissory notes backed by valuable collateral may be electronic and have transaction costs no greater than bitcoin, but their supply is not limited in the same way. The supply is limited only by the collateral that people want to monetize. If you want money from me and I have valuable collateral, then you may accept money backed by the collateral (the right to a stream of income generated by the collateral). The collateral need not be gold or silver or bitcoin or anything else specifically. It must be scarce and durable and easily tracked. That's all.

            The elastic supply of this money is not a problem. It's a benefit. If you and I want to trade on a frontier where no one has any gold or silver or bitcoin or where these goods are very scarce, we may create our own money. We only need valuable goods to create this money. We don't need the permission of someone with particular valuable goods.

            Switching to gold doesn't eliminate legal tender laws either.

            If your model was correct, everyone would be using Zimbabwean dollars.

            No. I would not freely accept a hyperinflating currency, unless I must use it to buy my liberty from armed men for example. Hyperinflation signals the death of a currency, not its acceptability.

            My model only assumes that people have a choice of two goods, both of which are freely accepted as money. A rapidly deprecating good cannot be one of these goods, because I can't expect to trade it before it loses too much value. A more slowly depreciating good can be. Of course, I never know precisely how rapidly any good depreciates, so I don't make this choice based upon precise knowledge of the rate.

            A sufficiently scarce, formerly fiat, paper currency can circulate after a state fails, but another fiat currency can replace it when a new state becomes sufficiently powerful, and if no state ever becomes sufficiently powerful, the paper eventually loses its value by wearing out.

            If the tokens don't wear and if their supply is fixed and if the tokes become increasingly scarce in a monetary role, people switch to something else.

  33. avatar Paul Marks says:

    Private individuals and assciations have provided so called "public goods".

    Lighthouses, sea rescue (such as the RNLI in Britain) and so on.

    "Uncle Sam The Monopoly Man" (and many other works) attack the myth of "public goods".

    As for money - private mints can and did provide gold coins. They were paid by small fraction of the gold that was handed to them - they made the rest into coins.

    This did not end because of evil "private sector fraud" - it ended because Congress banned it in the 1850s.

    Uncle Sam the Monooply Man struck again.

  34. avatar Paul Marks says:

    "Gresham's law" - "bad money drives out good money" is only a problem if there is a RIGGED ("fixed") exchange rate.

    People choose to keep the "good money" (the full weight gold and silver coins) as a store of value - rather useing the "bad money" (the debased coins) to pay their debts (and their TAXES).

    Without legal tender laws and rigged exchange rates - there is no problem.

    It is astonishing how many (otherwise intelligent) people fundementally misunderstand Gresham's Law.

    • avatar Martin Brock says:

      If I expect a good to appreciate more rapidly in value, I hold it as a store of value and use a good appreciating less rapidly to pay my debts including my taxes (assuming that I have a choice). I don't use the less rapidly appreciating good to pay my debts, instead of the more rapidly appreciating good, because the less rapidly appreciating good is bad. Less rapidly appreciating goods are still goods, not bads. I use them as money because I prefer to hold the more rapidly appreciating goods. Accepting a good in trade to hold it as a store of value is not accepting it to exchange it for something else, and money definitively is what I accept only to exchange it for something else.

      Nothing I say here has anything to do with a fixed exchange rate. The precise meaning of "Gresham's Law" is irrelevant. The issue involves what people freely use as money when they have a choice between goods appreciating more rapidly and goods appreciating less rapidly. That people hold the more rapidly appreciating goods a store of value is precisely my point. Money is the hot potato by definition. It flows like a liquid. That's why we call it "liquidity". It has only the current value of goods exchanged for it, not the future value. That's why we call it "currency".

  35. avatar Peter Surda says:

    Martin,

    If I expect a good to appreciate more rapidly in value, I hold it as a store of value and use a good appreciating less rapidly to pay my debts including my taxes (assuming that I have a choice).

    This is where you have a gap. There needs to be a counterparty willing to take your depreciating money for a price higher than the market clearing price. And that's where the price fixing comes in. Without price fixing, the effect you describe does not exist.

    • avatar Martin Brock says:

      I don't assume that anyone accepts a good above its market value. The money is more rapidly depreciating than other goods potentially useful as money, not already depreciated below its market value. I'm discussing a rate of change, not a change that has already occurred. I accept the more rapidly deprecating good as money because I expect to trade it again before it depreciates. Eventually, someone accepts the good without expecting to trade it again at all. At this point, the good ceases to be money.

      In the case of a bank note, the last party accepting the note is the bank issuing the note. Depositing a note in the issuing bank is not using the note as money. The note is not playing the role of money in this transaction, because the bank is not free to spend it. The money disappears into a money sink upon deposit, just as it emerges from this sink when the bank issues the note.

      • avatar Peter Surda says:

        Martin,

        you ignore that the payee needs to prefer the depreciating currency as well. And unless the prices are fixed, he has no reason to do this, as the expected change in value would already have been reflected in the price. Rather, he'd prefer the appreciating currency to a small extent, and this is also supported by empirical data (dollarisation/euroisation) as well as economic papers about Gresham's Law.

        In your model, the payer expects the price to depreciate and adapts his behaviour accordingly, but the payee does not. And once the transaction takes place, the former payee suddenly realises he's been wrong. It makes no sense.

        • avatar Martin Brock says:

          The payee does expect the good to depreciate, but the depreciation concerns him less precisely because he accepts the good as money. Accepting the good as money, he does not expect hold it, so he does not expect to suffer its depreciation.

          The payer accepted the good for the same reason. He hasn't held the good for a significant period of time himself. When a good is money, the payer and the payee might as well be the same person, because the payee becomes a payer soon thereafter.

          Money circulates for this reason. A good that is not circulating this way is not money.

          The value of a good in trade reflects only the depreciation the recipient expects. A carton of milk is always depreciating, but the price is not therefore zero, because the recipient expects to consume the milk before it depreciates. When I accept a good as money, I "consume" it by trading it again.

          Also, market values change continually but can change discontinuously and stochastically. I can expect the value of a good to change in the future, if I hold it, without expecting the value to change gradually. I can also expect the value to change suddenly without knowing the time precisely. I will nonetheless accept the good as money if this unknown time is remote, if the probability of the sudden change is low for the duration of my holding.

          People prefer to hold appreciating goods. If we carefully consider your empirical data about a preference for "the appreciating currency", we'll find that the preference is really for a holding, not a currency. When I deposit dollars in a bank, I am not holding dollars in the bank. I am holding a claim on the bank's capital.

          • avatar Peter Surda says:

            Martin,

            a market participant won't accept something unless you want to hold it. Even if it's short term, the expected price change for that duration is already taken into account with the price at which he's willing to pay. Prices do also reflect intertemporal expectations of changes, something which you omit. In our model, it only affects the payer, but not the payee.

            Absent price fixing, the payee will tend to prefer an appreciating medium, because his estimate about the holding time is imprecise, and that compensates for the uncertainty. Absent price fixing, there is no disequilibrium and no reason why payer should prefer a depreciating currency.

            Money circulates because it is liquid, not because it changes its value. Even if people prefer to hold gold, the reason why they are not using it to pay is that it has high transaction costs, not because it appreciates. Bitcoin, on the other hand, is appreciating faster than gold, and its usage as a medium of exchange is skyrocketing, precisely because it has low transaction costs.

            I repeat, you provide no evidence of your model, and no references of other economists supporting your assumptions. Bitcoin, Somalia and Iraq contradict your model. On the other hand, historical examples where bad money was preferred to good money are accompanied by price fixing.

            Where's the evidence? Where are the references? How do you explain the contradictory evidence?

          • avatar Peter Surda says:

            Or in other words, irrespective of what the payer wants, unless he finds a corresponding payee and they agree on a price, there is no transaction. And there can only be an imbalance if for some reason the price is rigged.

          • avatar Martin Brock says:

            Even if it's short term, the expected price change for that duration is already taken into account with the price at which he's willing to pay.

            If prices reflect the expected depreciation, I don't see the problem.

            If the depreciation during my holding is negligible, it does not affect my economic calculation, because accounting for it costs more than the accounting is worth. The depreciation over the duration of my expected holding can be zero for all intents and purposes, precisely because I accept the good only as a medium of exchange.

            1. Do people never accept a depreciating, durable good in trade?

            2. Do people accepting a depreciating, durable good in trade never then trade the good for something else?

            If the answer to 2 is "no", how can the answer to 1 be "yes"?

            Prices do also reflect intertemporal expectations of changes, something which you omit.

            What is an intertemporal expectation of change? When is an expectation of change not intertemporal?

            In our model, it only affects the payer, but not the payee.
            By "our model", you mean an appreciating medium of exchange? Trading an appreciating good certainly affects the payer, because he surrenders the value of holding the good.

            The payer controls how long he holds the good. So does the payee. If both expect to hold the good for a short time, then it is a medium of exchange.

            Both the payer and the payee want to hold an appreciating (or less rapidly depreciating), durable good longer than they want to hold a depreciating, durable good. That's all I'm saying.

            I want to hold appreciating goods longer than depreciating goods, especially goods useful primarily as a medium of exchange. Don't you?

            ... his estimate about the holding time is imprecise ...

            If the payee expects to deposit his money in a bank paying interest on deposits, the holding time is not imprecise. "Money in the bank" is a misnomer. When I deposit a circulating note in the bank that issued the note, it ceases to be money. The bank then owes me money. Being owed money is not equivalent to holding money. When you owe me money, I hold your labor or something else of value securing the obligation, not money.

            Money circulates because it is liquid, not because it changes its value.

            If money circulates because it is liquid, why is it liquid?

            ... its usage as a medium of exchange is skyrocketing, precisely because it has low transaction costs ...

            I'm not sure that bitcoin's usage as a medium of exchange is skyrocketing, and its transaction costs don't seem low to me.

            I don't use bitcoin at the moment, because my transaction costs are high. I actually want to use bitcoin, but the high transaction costs discourage me. It's not that I haven't investigated the costs. I have.

            Transaction costs may be low, compared to alternatives, in particular contexts, like criminal trade, but speculation could still dominate the bitcoin/dollar at this point, and simply speculating on the future dollar price of bitcoin is not using bitcoin as a medium of exchange.

            How can I measure the extent of bitcoin's usage outside of speculative currency trades? If you can persuade me that bitcoin's usage as a medium of exchange is skyrocketing, I might buy some bitcoins, but I'll be buying them largely to speculate, because I have little other use for them at the moment.

            The black market is large, and transactions are already highly volatile in this market. If bitcoin's usage as a medium of exchange in criminal transactions continues to grow, this speculation could be profitable for a while.

            But when I enter the market as a speculator, I reduce the supply of circulating bitcoins. Right?

            I repeat, you provide no evidence of your model, and no references of other economists supporting your assumptions.

            Repeat it all you like. I'm not denying it.

            The model exists, because we are here discussing it. I don't need evidence of its existence. I don't reference other economists, because I'm making it up as I go along, but there's nothing wrong with that. Is there? I learn everything this way. Even as I study established theory, I must figure it out myself as I go along.

            I'm sure I'm not the first to think this way, but I haven't spent a career carefully documenting all of my ideological influences. If I were an academic economist, I might discover economists arguing similarly and adopt their nomenclature and cite them as good academics do. Michael Sproul has schooled me this way in the real bills doctrine for example. I'm not sure he'd affirm an depreciating money doctrine, but he might provide the academic history you want.

            Bitcoin, Somalia and Iraq contradict your model.

            I'm not sure they do.

            On the other hand, historical examples where bad money was preferred to good money are accompanied by price fixing.

            These examples don't contradict the model.

            Where's the evidence? Where are the references? How do you explain the contradictory evidence?

            I don't have empirical evidence or references, and I'm not really interested in exhaustive, academic research in this area, but your evidence does not seem contradictory to me.

            Or in other words, irrespective of what the payer wants, unless he finds a corresponding payee and they agree on a price, there is no transaction.

            Payees accept my depreciating money every day, but I don't impose any depreciation on them. I accept the same money myself.

            You seem to be saying that my daily experience is impossible.

            "Depreciating money doctrine" could be confusing, because prices need not rise for a money to "depreciate" in this sense. Every unit of milk continually depreciates, but the value of other goods relative to milk doesn't rise, because new units of milk continually replace the depreciating units.

          • avatar Martin Brock says:

            Correction: If the answer to 2 is "yes", how can the answer to 1 be "no"?

          • avatar Peter Surda says:

            Martin,

            once again, people decide what to use as a medium of exchange based on transaction costs. Normally, the dominant determinant of transaction costs is liquidity. Ceteris paribus, decreasing purchasing power makes it less likely to accept a medium of exchange, due to uncertainty of future. Ceteris paribus, price fixing makes it more likely to accept the overvalued (not depreciating, but overvalued) medium in the area where the price fixing is enforced. There is no place here for the phenomena you describe and no evidence for them. The evidence that is available is either inconsistent with your claim, or is consistent with either of our positions.

            Other than your beliefs, do you have anything else to support your position?

          • avatar Martin Brock says:

            once again, people decide what to use as a medium of exchange based on transaction costs.

            If I use a more rapidly appreciating good (MRAG) as a medium of exchange, rather than a less rapidly appreciating good (LRAG), my transaction cost includes the opportunity cost of holding the LRAG rather than MRAG. Doesn't it? Everyone using the MRAG as a medium of exchange bears this cost. Right?

            Normally, the dominant determinant of transaction costs is liquidity. Ceteris paribus, decreasing purchasing power makes it less likely to accept a medium of exchange, due to uncertainty of future.

            Why is the market for an appreciating good more liquid than the market for a depreciating good, all else being equal?

            How do you account for the success of the dollar as a currency in the 20th century?

            Ceteris paribus, price fixing makes it more likely to accept the overvalued (not depreciating, but overvalued) medium in the area where the price fixing is enforced.

            You're discussing Gresham's Law here. I have already agreed that I'm not discussing Gresham's law, and I don't dispute Gresham's Law.

            There is no place here for the phenomena you describe and no evidence for them.

            My imagination is a place for a description of the phenomena, and I'm not sure there is no evidence for it. People all over the world use depreciating currencies every day.

            Other than your beliefs, do you have anything else to support your position?

            I don't need anything else to discuss theoretical assertions. If you don't want to discuss them, that's O.K., but a bitcoiner seems out on the theoretical margins already.

          • avatar Peter Surda says:

            Martin,

            If I use a more rapidly appreciating good (MRAG) as a medium of exchange, rather than a less rapidly appreciating good (LRAG), my transaction cost includes the opportunity cost of holding the LRAG rather than MRAG. Doesn't it? Everyone using the MRAG as a medium of exchange bears this cost. Right?

            If liquidity is equal, these costs do not affect the act of exchange, rather they affect the price. With the minor exception of uncertainty having a small preference towards accepting an appreciating medium.

            Why is the market for an appreciating good more liquid than the market for a depreciating good, all else being equal?

            It is not necessarily more liquid in that particular moment, but the difference in expected value creates a push toward the appreciating medium.

            How do you account for the success of the dollar as a currency in the 20th century?

            US has a large population and large international trade, and compared to most other currencies it holds value better (apart from maybe Swiss Franc and the now defunct Deutche Mark). There are two papers by Krugman that analyse exactly this, and make the same conclusions I'm presenting (liquidity, and to a minor extent, appreciation, determine what currency is used for international trade). If the dollar is already highly liquid, foreign countries prefer the dollar when trading with each other, rather than one of their own currencies, which have lower liquidity. Even thought this technically increases the number of immediate transactions, due to higher liquidity the total transaction costs are actually lower.

            You're discussing Gresham's Law here. I have already agreed that I'm not discussing Gresham's law, and I don't dispute Gresham's Law.

            My point is that you're presenting an entirely different phenomenon, which when explaining Gresham's Law is redundant, and when explaining other situations, unobserved (as far as I can see).

            My imagination is a place for a description of the phenomena, and I'm not sure there is no evidence for it. People all over the world use depreciating currencies every day.

            And, as I explained, this is due to transaction costs (which in most cases, such as these, is determined by liquidity). Apart from hyperinflation, people prefer the national currency even in the absence of legal tender laws. And they do not amend it by depreciating foreign currencies (e.g. Zimbabwe dollars), but by those that are highly liquid (e.g. USD, Euro or Swiss francs). That runs counter to your predictions.

            I don't need anything else to discuss theoretical assertions. If you don't want to discuss them, that's O.K., but a bitcoiner seems out on the theoretical margins already.

            Well, I have a slight edge here, because at least empirically, Bitcoin exists, but the phenomena you describe, don't.

          • avatar Martin Brock says:

            Again, that people don't flock to the Zimbabwean dollar does not contradict an assumption of mine. The assumption involves a choice among goods acceptable as a medium of exchange.

            If the different rates of depreciation don't affect exchange, only price, why does the expected value favor the appreciating good as a medium of exchange?

            You're saying that people have no preference for holding appreciating goods? The expected appreciation is reflected in the price, so expected appreciation has no effect on the goods people hold? Maybe you're right, but the assumption seems counter-intuitive at least. I think most people would be surprised to learn that they don't prefer holding goods that they expect to appreciate.

          • avatar Martin Brock says:

            I enjoy our discussion, Peter. You defend your thesis well. I take the efficient market hypothesis seriously, and a contradiction seems to exist between market efficiency and a preference for holding a good expected to appreciate over holding another good expected to appreciate less, but I'm not sure.

            A trader holds when bids are less than his asking price. A trader's expectation influences his asking price, but it need not influence the bids of other traders, because other traders have different expectations.

            Traders expecting enough appreciation to influence their decision to hold believe that an information asymmetry exists. In the minds of these traders, the current price of a good does not reflect the appreciation they expect because other traders bidding against them do not expect it.

            The price of bitcoin in dollars last summer looks like a speculative bubble. How do you account for it? An absence of short selling doesn't seem to account for it. Why must people sell short to dampen the bubble? Why doesn't ordinary selling dampen it?

            Fundamentally, bitcoin must become far more valuable, relative to the dollar, to become a widely used currency. The only issue here seems to be the limited supply of bitcoins relative to dollars. If I expect bitcoin to be widely used, on the scale of the dollar, any time soon, then I necessarily expect this change in the dollar price of bitcoins. Do you agree to this extent?

          • avatar Peter Surda says:

            Martin,

            regrettably, I don't have enough time to reply thoroughly (I'm at the Bitcoin Conference in London). But at least a bit.

            The price of Bitcoins last summer looks like a bubble, and in my opinion, it was a bubble. There is at least one academic paper that comes to the same conclusion. Short selling, which was not available at that time (and, regrettably, due to Bitcoinica's demise, is still insufficient), allows you to make a leveraged bet that what is happening is a bubble. In the absence of short selling, there is no way to dampen the bubble, it needs to run its course. Sellers notice the bubble, and rearrange their bids to profit from it, which escalates the bubble.

            Which is not necessarily bad, some people make a lot of money on that. But the purchasing power of ideal money should not wildly fluctuate, so it might have a negative effect on the acceptance in the short term.

            I tend to agree that if Bitcoin was widespread, its market capitalisation (and due to inelastic supply, unit price too) would be higher. But this higher price is not the source of acceptance, it's the consequence thereof. In order to become more accepted, it needs to become more liquid, not more expensive. More expensive can just as well be another bubble. Since the price of Bitcoin freely fluctuates on market, and supply is inelastic, I'm not worried about long term disequilibria. Bubbles will eventually pop, they won't be propped up by quantitative easing or bailouts. It would just be better if the bubbles were dampened faster.

  36. avatar Paul Marks says:

    Martin - where people have a "free choice" (your words) over what to use as money, they tend to choose something (normally a commodity) that is NOT fslling in value.

    What you claim appears to be rather close to the opposite of the truth.

    • avatar Martin Brock says:

      You say so, but people routinely use money that is falling in value, and although states encourage this use, states are not all powerful.

      A state can monopolize money, because people naturally favor a single currency (in a given region of space-time) anyway, i.e. a currency is a "natural monopoly". This fact does not imply that a state can force people to use anything at all as money, as the Zimbabwean dollar indicates. The statutory monopoly must satisfy certain requirements to be used as money, and hyperinflation violates one of these requirements. More gradual inflation obviously does not.

      I'm always ignorant of the Truth, but what you claim is the opposite of my everyday experience. For your claim to be true, states monopolizing money around the world must be incredibly powerful. States are more powerful than I like, but that's not the same claim.

  37. avatar Paul Marks says:

    Given a free choice between gold and bits of paper with "Matin Brock" (or "Paul Marks") written upon them. I think I know which most people would choose to use as money.

    The idea that people would freely choose bits of paper (that represent NOTHING - "they represent the full faith and credit of....." as I said they represent NOTHING, just as the French Revolutionary currency that was supposed to represent "all the land and wealth of France" represented NOTHING) is fantasy.

    People do not freely choose fiat currency (it would not be called "fiat" if they did - "fiat" means "command", "order") - they "choose" it because of legal tender laws and tax damands.

    • avatar Martin Brock says:

      A note credibly backed by valuable collateral, and thus credibly promising a commonly valued standard of value, is not just any bit of paper representing nothing/ Such a note need not be made of paper at all. It can be, and already typically is, an electronic record.

      Fiat monies are problematic for many reasons, but this model is not one of the reasons.

      When you substitute "bit of paper" for the subject of discussion, you avoid the subject. a diversionary tactic of this kind is only persuasive to people wearing the same blinders that you wear.

      Why is the title to my house no more than a bit of paper? Why is a share of Microsoft no more than a bit of paper?

  38. avatar Paul Marks says:

    People wonder why I get angry - this is why.

    Martin Brock knows that the fiat money (whether paper or electronic credit) is "backed" by NOTHING. It is just there because of legal tender laws and tax demands.

    Yet Martin you do NOT say that - you say it it is "credibly backed by valuable collateral, and thus credibly promising a commenly valued standard of value".

    You might as well say the fiat money is "backed" by magic fairy dust, kept in a castle that floats in mid air.

    Martin - you know perfectly well that you are just spinning a web.

    Peter Surda THIS is what I regard as a waste of time.

    Not debating over details with someone of good faith.

    But "debating" with people who KNOW what they are saying is nonsense.

    It is "the only reason that interest rates fall is because of people saving more" and "the point of an expansion of credit-money is nothing to do with trying to reduce interest rates" all over again.

    When someone tells you that 1+1=64 and that black is white (and on and on) they are not really being dumb (no one is that dumb).

    What they are actually doing is SPITTING IN YOUR FACE.

    I am tired of being spat upon.

  39. avatar Martin Brock says:

    No. I distinguish fiat money from money backed by valuable collateral and credibly promising a commonly valued standard of value. Fiat money does not require this backing, because the value of liberty from the state backs it. I'm not part of any conspiracy you imagine.

  40. avatar Martin Brock says:

    Peter, I look forward to your comments when you have the time. Good luck with the conference. I really am very interested in bitcoin, despite the devil's advocacy here.

    In the absence of short selling, there is no way to dampen the bubble, it needs to run its course.

    If people holding bitcoins today offer their bitcoins at yesterday's price or if buyers will not pay a higher price, the bubble does not inflate.

    A short seller offers to sell at yesterday's price tomorrow without actually holding any bitcoins today, so he expects a different change in the value, but the person asking a higher price today presumably need not expect a higher price only today. He may not share the short seller's expectation of tomorrow's price either. Someone is always right in retrospect, but in prospect, everyone is betting on when a bubble bursts.

    People have different expectations of the changing value, and these expectations affect their behavior. When asking prices are systematically lower than bids on a given day, the price falls or bitcoin circulation slows or some combination thereof, but money circulation generally does not slow. People holding bitcoins in this scenario are not ceasing to use money. They are using something else as money. That's the point.

    Sellers notice the bubble, and rearrange their bids to profit from it, which escalates the bubble.

    Right. People offering bitcoins for dollars, expecting the price to rise, ask a higher price. That's exactly the psychology I assert. A person holding two goods trades the one that he expects to appreciate least. He trades the good with the lower expected rate of change at each instant. His expectations may change continually, but that's a separate issue.

    Which is not necessarily bad, some people make a lot of money on that.

    I have no problem with short selling, but I don't see how it solves the problem. A short seller bets on a falling price tomorrow, but someone divesting today can bet similarly.

    But the purchasing power of ideal money should not wildly fluctuate, so it might have a negative effect on the acceptance in the short term.

    Yes. People hold a medium of exchange only for the short term by definition. Only short term price stability matters until people begin trading promises of money in the future. Bitcoin presumably must be used in credit contracts to be a widely used currency.

    But this higher price is not the source of acceptance, it's the consequence thereof.

    I agree. The question is: how does acceptance become so high when the only value of bitcoin, other than as a speculative bubble bath, is as a medium of exchange? The inelastic supply makes the price bubbly, and I don't see how short selling solves that problem. Short sellers are no more omniscient than the people holding bitcoin expecting a bubble's inflation to continue.

    To become more widely used, instead of the dollar, the dollar price of bitcoin must rise, and the bitcoin price of everything else must fall. If I expect bitcoin to become widely used any time soon, accumulating bitcoin expecting this appreciation seems rational, but should I expect bitcoin to become widely used any time soon? That's the question.

    The answer seems to involve a contradiction in terms. Maybe I'm only missing your point, but you haven't resolved the contradiction for me. If I expect bitcoin to become widely used, I expect its price in dollars to rise, but if I expect its price in dollars to rise (without expecting the dollar to go up in hyperinflationary smoke), then I will hold bitcoin and spend dollars and must also expect others to do likewise, but while I expect people to hold bitcoin this way, I don't expect people to use it more as a medium of exchange, because these people are using dollars as their medium of exchange.

    In order to become more accepted, it needs to become more liquid, not more expensive.

    I must have enough bitcoins in my wallet on a given day to buy what I want on a given day, and so must everyone else. At current bitcoin prices, a hundred million people using bitcoin primarily as money cannot have enough bitcoins in their wallets for this purpose, so wider use implies more valuable bitcoins (lower prices denominated in bitcoin). Without knocking some zeros off of dollar prices by fiat, bitcoin cannot replace the dollar as a currency until the price of bitcoin in dollars rises by orders of magnitude.

    More expensive can just as well be another bubble.

    Bubbles burst more quickly than they inflate, and short term price stability is a fundamental requirement for a medium of exchange. Bitcoin lost a third of its dollar value in a day less than a month ago. Maybe this instability would disappear if bitcoin were more widely used, but the instability itself impedes wider use. That's the problem.

  41. avatar Paul Marks says:

    Martin - I never used the word "conspiracy".

    What I am saying is that when you type "backed by valuable colleratal and credibly promising a commonaly valued standard of value" you are NOT a person typing words at random - you KNOW what you are typing is just webspinning.

    As for "Fiat money does not require this backing [i.e. the "backing" of the magic pixie dust in the fairly castle] because the value of liberty of the state backs it".

    Again you are NOT some village idiot or collection of chimps pressing keys on the computer at random - you KNOW that this stuff you have typed is meaningless "because the value of liberty of the state backs it" - meaningless drivil and you KNOW it is meaningless drivil.

    As meaningless as when the French Revolutionaries said their fiat money was "backed" by all the "land and wealth of France" or when the Continental Congress said much the same thing (in a American context) about their "not worth a Continental notes".

    You are spitting in my face and I am tired of it.

    I would not tolerate it face to face - and I am not going to tolerate it over the internet either.

    So you "win" the debate Martin - because I am not going to reply to you any more.

    Peter Surda.

    Get my point now?

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