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Bitcoin

by George Selgin April 22nd, 2013 11:01 pm

The University of Georgia having, in its infinite wisdom, decided long ago to make its faculty do without sabbaticals, yours truly, sensing impending burnout, determined to do the next best thing, by taking leave for several months from all extra-curricular economics, including participation in economics discussions in this forum, in the blogosphere generally, and (so far as he could manage it) in the larger world.

Having thus refreshed myself, I now feel fit not only to return to the monetary-economics fray, but to plunge straight into the bitcoin melee, by means of a declaration calculated to make every true-blue bitcoiner take aim for my jugular.

The declaration? Simply, that no matter how often bitcoin enthusiasts state otherwise, bitcoins aren't currency. Nor are they money of any other sort. They aren't--to employ economists' standard technical definition--a "generally accepted medium of exchange." Perhaps some day they will be. But not yet--not even by a (very) long chalk.

But that bitcoins aren't money doesn't mean that monetary economists shouldn't be interested in them. On the contrary: they ought to find them very interesting indeed, both because of the puzzle their presence poses, and because of the possibilities that presence points to.

What's puzzling about bitcoin is that it has gained a foothold at all. Thousands of retailers (some are listed here) now accept bitcoin in payment for everything from restaurant tabs to dating site dues, not to mention marijuana and other black-market stuff. And the number keeps growing daily. That growth itself isn't puzzling, for once a payments-network bandwagon gets going it becomes more and more tempting for merchants to hop on. But how did it get going in the first place? It is said that the first person to eat an oyster had to have been exceedingly brave or exceedingly crazy or some of each. But that primordial mollusc eater had nothing on the first, equally anonymous person to receive bitcoins in exchange for valuable merchandise, in the hope of somehow fobbing them off in turn on others. The earlier pioneer might, after all, have simply taken his cue from a seagull or oyster-catcher.

Unlike the rise of bitcoin's network, that of various past money commodities like tobacco, cowries, and salt poses no puzzle: whoever first toyed with accepting such commodities for goods could count on the existence of persons who desired the commodities in question for their own sake, even if no one else was prepared to hazard their employment as exchange media. By adding their own willingness to try a commodity as an exchange medium to the preexisting non-monetary demand for it, such experimenters enhanced the likelihood of success on the part of others who made the same gambit, and so on. Such, in essence, is the basis for Menger's famous (if controversial) conjecture regarding the spontaneous evolution of early (commodity) monies. The first person to accept bitcoins in exchange, in contrast, couldn't hope to smoke them, make them into a nice bracelet, or sprinkle them on his food, in case he couldn't trade them away: he (or she) could only hope that someone else would attempt a similar leap of faith, or face the consequences of trading some useful goods or service for so many units of digital dross.

It's owing to the leap (or leaps) of faith required to turn otherwise useless stuff into exchange media that it has generally been supposed that fiat money could never become such except by means of government coercion, meaning not simply that the government must stamp "this is legal tender" on otherwise worthless pieces of paper, but that it can only get such pieces of paper to circulate in the first place by first making them convertible claims to either a commodity money or some established fiat money (which must itself have once been convertible into either a commodity or some other fiat money, and so on). Once it has managed to get its convertible paper into orbit, a government can then (suddenly) withdraw the convertibility launching pad without having its paper spiral back to earth, thanks to the now established demand for it as a pure exchange medium. Such, at any rate, has been the standard view of those (including the present writer) endeavoring to bridge the chasm separating Menger's theory of commodity money from the modern reality in which irredeemable fiat monies rule the roost.

Such bridge building has had as its counterpart several studies casting doubt on the possibility of a "private" (which is to say voluntarily adopted) fiat money of the sort that Benjamin Klein and (despite his Austrian heritage) Friedrich Hayek have thought possible. According to such critical studies, such a money, being potentially infinitely expandable, would tempt its suppliers to reap high short-run profits by hyperinflating, rather than settle for the more modest periodic gains they might have by preserving their currencies' purchasing power. Knowing this to be so, rationale persons will steer clear of such would-be exchange media, making them non-starters.

So much for received wisdom. Bitcoins challenge this wisdom, not quite by flatly contradicting it--to do that bitcoins would have to be money, which (as I've said) they aren't--but by having managed to get off the ground at all, despite lacking any sort of convertibility "launching pad" and despite being "intrinsically" useless. Just as a toddler's first steps don't qualify it for the Olympics, the first barely above-ground flight of bitcoin is far from guaranteeing that it will stay aloft, let alone keep gaining altitude. Still it does seem to show that otherwise useless stuff can become an exchange medium without resort to trickery, and indeed without any sort of government encouragement. And that's neither a mean nor an uninteresting accomplishment.

Just how did bitcoin manage to overcome what (for want of a better name) I'll call the "oyster" problem? My partial answer is that, at least for some time after they first became available in 2009, bitcoins possessed three qualities such as no other actual or potential exchange medium had yet managed to combine. First, the open-source software providing for them to be "mined" by persons commanding sufficient computer-power allows only for a strictly limited annual output, with steadily diminishing returns such as will make unit mining costs approach infinity as total output approaches 21 million coins (as it is scheduled to do in 2040). In short, with just over 11 million bitcoins outstanding so far, no amount of computer power or time will ever expand the quantity by more than another 10 million. No one, in other words, is able to make a bundle by striking bitcoins at libidum. The problem of securing trust that might confront a prospective issuer of private "fiat" money is thus averted. In this respect bitcoin is more like a commodity than a fiat money, which is why I prefer to label it a "synthetic" commodity.

The other features that made bitcoin unique are (1) the untraceable nature of transactions conducted using it and (2) the fact that, being a "digital" money, it can circulate electronically. Bitcoin, in short, was the first medium to allow for perfectly anonymous transactions, avoiding both a paper trail and face-to-face contact, and to do so with the same convenience as any other sort of "digital" payment. Bitcoin's inventors were thus able to take advantage of an unfilled niche. But filling it guaranteed nothing: the water was there for the horses to drink, but whether any would risk a first sip remained to be seen.

Risk it, of course, some did; and now, after some dramatic gyrations, with more undoubtedly to come, bitcoin, having already merited at least a footnote in the history of exchange media, might well manage to do considerably better than that. It is, after all, the nature of network goods to go from strength to strength, with every uptick in network size enhancing the prospects for further growth. That, so far as bitcoin enthusiasts are concerned, is the good news. The bad news is, first of all, that bitcoin remains a bit player relative to established moneys, which for all their shortcomings command vast networks that are correspondingly self-reinforcing. Second, bitcoin's relatively tiny network goes hand-in-hand with a high degree of market volatility, and a correspondingly reduced attractiveness to retailers, with large orders placed by one or two "big players" sufficing to generate huge price swings. Finally, the very success of bitcoin is bound to inspire imitations combining the original product's desirable features with others such as might cause it to suffer the same fate as Betamax and BlackBerries. Consider, for example, a private cybercurrency based on a "mining" protocol aimed at dampening short-run swings in its exchange value. Or consider MintChip, a cypercurrency now under development at the Royal Canadian Mint, which is supposed to be as anonymous as bitcoin, but with the very considerable advantage of being fully compatible and integrated with the already established Canadian dollar exchange network.

Paradoxically, the very innovations that may eventually doom bitcoin also explain why it deserves to be regarded as one of the most promising developments in the history of money since the invention of ordinary coins. For, as I explain in my paper on "Synthetic Commodity Money," its otherwise modest achievement proves that, with the help of the right software, one might design an "ideal" money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes--be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it's only a possibility. But what a possibility!

Addendum (April 23): Over at Bitcoin Forum a commentator observes, regarding my post: "I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010. It's like they don't want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty." While I can't pretend to be chaffing at the bit to converse with ideologically-driven libertarians, whether anarcho- or anacrho- or both, I will say that I don't see what the emergence of BTC/USD markets has to do with the "oyster" problem I pose. Sure, once bitcoins became desirable enough people wanted to be able to get hold of them without mining for them themselves, e.g., by purchasing them with dollars. Nothing puzzling about that. But the fact that entrepreneurs were quick to respond to that desire hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them. Should anyone at Bitcoin Forum wish to enlighten me and others on the matter, as I'm sure many can, I should be very grateful to him or her.

65 Responses to “Bitcoin”

  1. avatar John S says:

    Welcome back, George! This is like Jordan saying, "I'm back."

    Re: cryptocurrencies--have you seen JP Koning's post on Ripple? In terms of Free Banking, it seems to have more interesting possibilities than Bitcoin.

    "Its mission is to provide a non-banking payments alternative by decentralizing the process of creating and circulating highly liquid IOUs. Put differently, Ripple offers an environment in which individuals can be their own credit-issuing and credit-accepting banks."

    http://jpkoning.blogspot.kr/2013/02/ripple-or-bills-of-exchange-20.html

    • avatar George Selgin says:

      Thanks for the comment, John. I will certainly look into Ripple. On its face, though, it doesn't look like it involves some alternative, new standard.

  2. avatar Rick says:

    According to the ECB report posted by Bradley Jensen yesterday: "Virtual currency schemes differ from electronic money schemes insofar as the currency being used as the unit of account has no physical counterpart with legal tender status."

    Maybe we should have a discussion about what legal tender laws really mean and how they're supposed to work, i.e., a seller must accept the money being "tendered" or the debt is discharged and the buyer gets the item for free, with the government exerting whatever force is necessary to make that kind of outcome happen.

    Right now, in the U.S., only current U.S. coin and Federal Reserve notes are legal tender, so in a perfect world where everyone understood legal tender laws, if one were to tender payment for any public or private good or service in current U.S. coin, and it was refused, the debt would be discharged, i.e., the rent paid, the tax satisfied, the item paid for, etc.

    If I'm not mistaken, legal tender laws became necessary in the U.S. Civil War era to assure that former slaveholding states would recognize and use only U.S. coin and U.S. Note (Greenbacks), and discontinue using Confederate money.

    • avatar George Selgin says:

      Rick, you are indeed mistaken in your understanding of legal tender laws, and especially in claiming that buyers whose offers of legal tender are refused may then have goods for free. According to the U.S. Treasury, "[t]here is...no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy."

      Nor could Greenbacks have been made legal tender for the purpose of forcing former rebels to stop using Confederate notes, since they were awarded that status in 1862, when there was no question of having the South comply with it. Upon the North's victory, on the other hand, it was hardly necessary for it to take steps to demonetize Confederate notes, as that victory itself rendered those notes worthless.

      • avatar Rick says:

        George, I agree that under legal tender laws there needs to be a degree of good faith and reasonableness on the part of both the person tendering or offering payment, and the receiver (merchant, tax collector, landlord, etc.), but your answer suggests that legal tender laws have no effect, or should have no effect.

        For example, if a post-1862 merchant in the Civil War era, whether from the North or the South, advertised items for sale in U.S. dollars, but absolutely refused to accept Greenbacks in payment, courts would have no choice to either compel the merchant to accept the Greenbacks or give the tenderer the items sought to be purchased for free.

        Using another more modern example, if a merchant subject to U.S. law is offering something for sale in U.S. dollars, but will only accept Bitcoin in payment, in order to give effect to legal tender laws courts would necessarily need to force the merchant to accept Federal Reserve Notes or current U.S. coin under 31 U.S.C. 5103:

        The Coinage Act of 1965 states (in part):
        "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts." —31 U.S.C. § 5103 http://en.wikipedia.org/wiki/Legal_Tender

        • avatar leviramsey says:

          Legal tender laws have no effect when there's no debt.

          In the case of the merchant offering something for sale in US dollars, but only accepting bitcoin in payment, that fact in and of itself is not a debt owed by the purchaser to the merchant. If a merchant delivered items to a purchaser and then demanded bitcoin, the purchaser could discharge the debt simply by paying in USD. However, if the merchant refused to deliver items until receiving bitcoin, no such debt exists, although if the merchant fails to deliver, the merchant could discharge the debt by offering USD.

          • avatar Rick says:

            "If a merchant delivered items to a purchaser and then demanded bitcoin, the purchaser could discharge the debt simply by paying in USD."
            Yes, but only because of our legal tender law, 31 USC 5103, right? In the absence of a legal tender law, the person tendering payment is at the mercy of the merchant's whim, no?

            "However, if the merchant refused to deliver items until receiving bitcoin, no such debt exists, . . . "
            If the merchant offers to sell items for U.S. dollars, and the Bitcoin-less buyer accepts the offer, then tenders current U.S. coin or Federal Reserve Notes under 31 USC 5103, are you saying the merchant would have the right to refuse to deliver?

            " . . . although if the merchant fails to deliver, the merchant could discharge the debt by offering USD."
            Yes, but that's because the merchant breached the contract, not because of the legal tender laws, which are mainly designed to preserve the debt-discharging rights of the person tendering payment, and not necessarily the rights of the person or merchant receiving payment.

          • avatar Rick says:

            On item #4 in this article by Rob Gray, he corrects Ron Paul on how legal tender laws work: http://www.opencurrency.com/5-things-i-learned-from-d-c/

            A lot seems to depend on if and when a debt is incurred, and what kind of terms the merchant made apparent before the debt was incurred.

  3. avatar JP Koning says:

    I've read your 1994 paper Ensuring the Acceptability of a New Fiat Money a bunch of times. Would it be fair to say that if you were to rewrite your 1994 paper, you'd be more sympathetic to Don Patinkin's theory of fiat money?

    Just to summarize, Patinkin thought that individuals could compute the amounts of a virgin fiat money that they'd demand at each price level, then submit these demands to a Walrasian auctioneer who would process everyone's demand curves and calculate the equilibrium price for that new fiat currency. You wrote that a corner no-trust non-monetary option was probable and that independent fiat currencies were likely to fail.

    Bitcoin and a legion of alternative cryptocurrencies would seem to imply that Patinkin is somewhat justified and floating a new fiat currency is relatively simple.

    • avatar George Selgin says:

      Despite bitcoin I'm not really any more inclined than before to favor Patinkin's theory, JP. For Patinkin, while pretending to explain how fiat money can have value in equilibrium, simply confuses a theory of what that value will be if the money comes to be accepted with an account of how it might become accepted. Mises et al., in contrast, took the second matter seriously, and addressed it in a manner than at least conforms with the experience of all actual fiat monies. Bitcoin doesn't fit that pattern, true enough; but neither can it be said to affirm Patinkin's alternative view, for the simple reason that his "alternative," like the creationists' alternative to the theory of evolution, is in reality no alternative at all. Instead it merely begs the question.

  4. avatar matonis says:

    George, regarding your postulated solution to the "oyster" problem, I have proposed that bitcoin represents a 'survivability' corollary to the regression theorem in that its decentralization lends resiliency to the overall Bitcoin network which is what accounts in large part for its preference. Fabricated scarcity (i.e., Wei Dai's b-Money, Nick Szabo's BitGold) and digital anonymity (i.e. David Chaum) were possible prior to the emergence of bitcoin. Part of the rationale for why those variants did not achieve early 'medium of exchange' status was because under a centralized point of failure, no holders or transactors could have any belief that the system would survive attacks from monetary competitors and State actors. Hence, with monetary survivability, that somewhat risky "first sip" becomes less risky.

    • avatar zelig says:

      I think decentralisation guaranteed by design is indeed one crucial feature. Ironically it is that makes the non-trust solution trustable, resilient to confiscation, control, regulation, taxation, data corruption or infrastructural failure. The fact that it is theoretically much more stable (not in its price level but as an accounting system) than any known fiat or commodity kind of solves the oyster-problem since this competitive advantage could offer a prospect for profit.
      The bravery of the first sips seems less radical though when you picture a group of nerds on a linux command line launching their bit-mining operations. I know the feeling is surely worth a few dollars of hardware expenses.
      As other commenters say, the psychology of earliest adopters is accessible to empirical inquiry.
      Thank you all for the great discussion.

    • avatar George Selgin says:

      Thanks for these remarks, Jon. Your angle is interesting, and reinforces the niche argument. But there's still the matter of why some didn't mind being the first and therefore, at least potentially, the only.

  5. avatar Peter Šurda says:

    Dear professor Selgin,

    maybe you can kindly read my master's thesis about Bitcoin from the Austrian perspective (or the updated book version I'm working on now). I deal with the questions you do, I also reference some of your work. You can find it by googling or on my blog.

    Also, and I think I wrote this to you earlier as well, you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured.

    • avatar George Selgin says:

      Indeed, Peter, I had better read your thesis, which I will look up upon returning from DC, where I am headed for the next day.

      I also want to discuss with you the question concerning whether you can have a "hashing parameter," or something analogous to it, that varies in response to factors other than time alone. Certainly it is worth contemplating whether some alternative technology exists that could achieve the desired outcome. I have, in fact, heard from developers of an alternative cryptocurrency who claimed they were working on somethiong along these lines.

      • avatar derka says:

        Yes you can certainly base altcoin production (supply inflation) on any parameter (nominal or real GDP, employment, etc.), the tricky part is doing it without centralizing trust. For the sake of demonstration, call the parameter of interest X.

        Option 1) Centralize authority. Give the WSJ authority (via public/private key encryption) to report the value of X to the altcoin network. The altcoin network responds algorithmically to this news. Perhaps if X is NGDP and is down, increase production!

        Option 2) Give the authority to the miners. Every miner could record the current value of X in the blocks they produce. Problematically, the miners will collude and devalue the currency to reap the hyperinflated rewards.

        Perhaps there are more options I haven't considered well enough?

        Or you could do what bitcoin does and what Milton Friedman recommends[1]: "I would freeze [currency plus bank reserves] and hold it constant and have it as sort of a natural constant like gravity or something."

        I'd love to hear people's thoughts. Cheers.

        [1]http://www.econlib.org/library/Columns/y2006/Friedmantranscript.html

        • avatar George Selgin says:

          Derka, yours (and Peter's) are precisely the sort of reflections I'd like to see many more of, and i too am anxious to hear other's thoughts. Let me pose the desire as an alternative to the RCM's MintChip "challenge": a special prize to anyone who comes up with an anonymous macroeconomically bullet-proof decentralized cyber (or "synthetic") money commodity. The prize? I will publicly announce the winner and certify that person as a genius.

          True, kudos from me aren't worth a thing, yet. But hey, give them a chance: you never know what some libertarian cyber geeks might covet!

          • avatar alanx says:

            The difficulty of any sort of crypto-currency implemented like dollars is that crypto-currencies are transparent.

            Everyone *knows* how many are being "printed". If you build a crypto-currency that gives a central bank all of the "printed coins" (as we do with the dollar), then everyone obviously sees that their coins have been debased. And they WORKED for their coins, while the central bank simply "prints" theirs, people are not going to like that.

            And Crypto-currencies are easily moved around the world. I bought my BTC from several different sources, but most from MtGox in Japan. I pooled all of them into a secure wallet. Then moved 20 to BTC-e in Russia. There I traded back and forth with Litecoin, and ended up with ~50 BTC. I transfered all but a few to my wallet. A little more trading in Russia, and I am thinking about transferring everything to my wallet, and just locking it all down.

            If you have a scheme for your crypto-currency that insures inflation, and people can move it and trade it as easily as BTC, then nobody is going to say with your crypto-currency. They will keep the currency that rises in value the most.

            The wild swings in crypto-currencies will dampen with bigger markets and more professional traders. That isn't me! But people see trends, and they are going to seek to hold value.

            This is all assuming a world where crypto-currencies are allowed to compete, and no seriously horrible government force moves against them. That moves the discussion from what people will do, to one where it is what government can make people do.

          • avatar Peter Šurda says:

            I agree with Derka, but it's not the full issue. The full issue has two aspects:
            - there needs to be a definition of the variable that is easy to verify against empirical data
            - there needs to be a consensus mechanism for resolving conflicts

            So the system would need to be able to both create and verify values derived from macroeconomic variables. I'm very skeptical that this can be designed (not even talking about coding it), but I always complain about other people substituting their lack of imagination for an argument so maybe I'm wrong.

            By the way, I now left my job to do Bitcoin research full time so if anyone has suggestions or things to discuss I'm available.

    • avatar Koen says:

      Peter wrote: "Also, and I think I wrote this to you earlier as well, you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured."

      Interesting, but would it not be possible for the network to respond to patterns that occur in the network but that are reliably associated with (e.g. being the effect of or having the same cause as) certain (macro-)economic phenomena? I mean, for example, contractions in the money supply seem to have both a (macro-)economic reality outside of the network and specific effects within the network. Or am I misunderstanding what you mean here?

      • avatar Peter Šurda says:

        In theory you are right, the devil is in the details. You'd need to be able to decentrally measure and verify it very accurately. Based on what I know, the measurement of macroeconomic variables is done centrally, is approximate and influenced by various biases and even arbitrariness. And I'm not even talking being prone to manipulation (i.e. intentional, as opposed to just unintentional, influence). Compared to that, it's extraordinarily difficult to manipulate what the current time is or the number of blocks (and that's all that's need to control the money supply of Bitcoin and most other similar systems). You'd literally have to convince tens of thousands of computers that it's a Monday even though it's a Sunday, or the year 2016 even though it's 2013.

        The level of precision and elasticity of macroeconomic aggregates is just so far away that I don't see this as a realistic endeavor (but I could be just lacking imagination and be wrong of course).

        That being said, some aspects are easier to implement than others. The concept of velocity that I used in my empirical research (based on CBDD) is endogenous to the blockchain and thus can be implemented as a guiding factor relatively easily. However that still leaves open the question of being prone to manipulation, and furthermore as I argue in my thesis, it is debatable to what extent it accurately reflects real macroeconomic concepts.

    • avatar Peter Šurda says:

      Minor update: I'm now not entirely sure it's impossible to design a synthetic commodity which has a value pegged to another good. Mainly the conversations I had with Adam Back and Ron Gross persuaded me that my conclusion might have been premature. I am now wiling to admit that if the referenced goods are liquid (e.g. fiat money), it could be done in a decentralised way. I still don't think it's possible if they are illiquid (e.g. a commodity basket, here I still agree with Rothbard's critique of Hayek in "The case for a genuine gold dollar"), but I am more receptive to the argument.

  6. avatar Eitan says:

    "...hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them." Seems like that's exactly what the commenter was saying a little effort might reveal. You can actually talk to those people and since it was only 4 years ago, it's not as though this was lost in the sands of time. Some reasons may be: geek chic-ness, ideological resonance, early adopter status. Also, it's not quite accurate that Bitcoin allows "for perfectly anonymous transactions, avoiding ... a paper trail". Since all transactions are documented in the distributed ledger, there is a complete paper trail. Bitcoins are pseudonymous, but anonymity requires care and effort to maintain.

    • avatar George Selgin says:

      No need to be snide, Eitan: you may insist that that the commentator addressed the crucial point at issue, but if so I cannot see it anywhere in the passage I quote. What's more I made perfectly clear my willingness to hear from anyone who could speak directly to the matter. The reasons you give point to possibilities that I neglected to mention, not because I haven't come across them, but because they raise as many questions as they answer (just try proposing them in the econ department cafeteria and you'll see what I mean). But I'm not saying they aren't part of the story. In fact, I have long entertained the view that bitcoin mining took off just because solving the "challenge" was fun. The novelty demand could then kick in to create a secondary bitcoin market, aided by geek factors you mention.

      My point has in any case been that the "oyster" problem was in fact solved in bitcoin's case, and that whatever the solution was, the usual monetary theories don't account for it.

      • avatar Eitan says:

        Apologies. Did not intend to sound snide. The commenter didn't directly address your question, but he gave good directions for finding the answers. The first bitcoin transaction occurred on January 12, 2009. I'm guessing that was only a test transaction. It appears that the first goods people traded for bitcoins were dollars. The names mentioned by the commenter "NewLibertyStandard" and "Theymos" were involved in these early transactions. The first non-money good traded for bitcoins was a couple pizzas which were famously sold for 10000 BTC in May 2010. All the history of bitcoin is documented on the forums and in the blockchain.

        https://en.bitcoin.it/wiki/Bitcoin_Firsts
        https://en.bitcoin.it/wiki/History
        https://bitcointalk.org/index.php?topic=137.0
        https://blockchain.info

        P.S. There's nothing really fun about solving the mining challenge. Sometimes it's characterized as "solving a difficult math problem" but it's nothing like the kind of fun math puzzles people enjoy. It's really a boring problem of incrementing a counter until the algorithm says you win.

      • avatar tdbtdb says:

        To me it seems obvious that the developers and some of their buddies and some others who've been mad about crypto currency since David Chaum wrote about it (in the seventies?) would be eager to download the bitcoin mining software and give it a spin. For instance, security podcaster Steve Gibson downloaded the software and set it up as preparation for a show where he planned to discuss the design. He mined 50 bitcoin using an ordinary PC.

        Less clear why someone was willing to trade a pizza for some bitcoin (by recent exchange rates, probably the most expensive pizza in history). But why did Satoshi Nakamura bother to design the system? He (possibly them, since this is a pseudonym) obviously did not intend to profit or even gain fame from his technical exploit. Political ideology might be a motivation. Or just an irresistible opportunity to write software that might change the world.

  7. avatar Justin Rietz says:

    "Certainly it is worth contemplating whether some alternative technology exists that could achieve the desired outcome. I have, in fact, heard from developers of an alternative cryptocurrency who claimed they were working on somethiong along these lines."

    Off the cuff, it might be possible to use the Federal Reserve's FRED API to automatically pull data on a chosen economic aggregate. Of course there are all sort of issues: timeliness of Fed data, data updates, security of the the FRED API, how to reduce the virtual currency in circulation, etc.

    • avatar tdbtdb says:

      Perhaps this is what you mean when you mention the security of FRED, but clearly having such a system depend on FRED would put it under the control of whoever controls FRED, nagating the whole point. So there are 2 risks, one that unauthorized hackers could compromise FRED, the other that the people feeding data to FRED might feel tempted to lie.

  8. avatar alanx says:

    Theories aside (after all, economists are pretty poor at predicting economic outcomes)...

    Bitcoin is just a sparsely populated public ledger of accounts that insures a payment from one account (requires a signature of its associated private key-- that is not public) can be made to another account. The first is decremented appropriately, and the latter incremented. No modifications are al. wed, and all transactions are digitally locked down against tampering.

    Bitcoin has intrinsic attributes driving adomption: Security, low transaction costs, no fees for accounts at all, and most of the primary banking services (direct deposit, securing of wealth, wire transfers, multiple/special use accounts, sending payments, receiving payments, international transfers...) All for just very low transfer fees, to anyone in the world.

    Dollars by comparison seem useless...

    • avatar alanx says:

      I should never use a phone to try and type a comment... Sorry for all the fat thumbs!

    • avatar George Selgin says:

      If dollars are useless by comparison, presumably you have sold yours off by now--deposits included. But I bet you still have some. Come on, be honest!

      • avatar alanx says:

        If I could easily move dollars to Bitcoin, and back again (since while the adoption of Bitcoin is moving fast, it is still VERY minimal...) I would only convert to dollars as required to make payments.

        Obviously Bitcoin allows much more freedom of payment and is far less expensive for the services it provides, and is a better store of value (or really at this point, investment).

        But I do find it odd... I have you a list of strong fiscal, price, and feature advantages of Bitcoin, and all you could respond to is the (obvious) fact that I hold dollars?

        Really? I most assuredly do not bank at one of the "Too Big to Fail" Banks in the USA (WF) because I *want* to support them out of the goodness of my heart, or because I feel their services are a value for the fees, lack of interest, and charges that I pay.

        I bank with WF in dollars because I am forced to do so with some bank. Inertia of banking with them for 20 years leaves me there. No other reason.

      • avatar alanx says:

        And oh by the way... Who do you bank with, and why do you enjoy paying fees, being provided no reasonable option to offset inflation, and being charged pretty hefty amounts for transactions that (with Bitcoin) would be absolutely free and require no party to have a contract and account with anyone?

        I wonder how much money per year is spent on counterfeiting prevention and prosecution with dollars? And when a few billion dollars went missing in aid to Iraq? Wouldn't that be nice to be able to track? The huge Bitcoin theft in 2011 is talked about all the time, but the community is still watching that address. They will not be able to spend it without notice, and they have not as of yet.

  9. avatar Michael Hardy says:

    Might it be that a few who could afford to do so invested in it because they thought it had potential? Before I ever saw an encyclopedia created and edited by whoever came along, I'd have thought that that would obviously be just a bunch of graffiti. It converted me to the view that many functions of business, government, and academia would get taken over by nerds at home in their pajamas, in ways we cannot yet understand. This looked like a step in that direction, so of course it's attractive.

  10. avatar n8rwJeTt8TrrLKPa55e says:

    Hello George. I'm the person who wrote that post on bitcointalk, someone suggested I follow up over here.

    I myself arrived at Bitcoin after it was already over $1 and MtGox was established, so cannot give you a firsthand account of its early days or value bootstrapping. However the beauty of Bitcoin, as another commenter pointed out, is that we are lucky to be observing the birth of a new kind of money within the immediate past. We don't need to try to figure out what the Lydians or Ionians were thinking 2500 years ago. In this case, we actually have written records on social media and, most importantly, most of the people involved since the get-go are still alive and many are still active in the Bitcoin community. You and other researchers can go to the forum, register (anonymously if you wish), and directly ask those people about events in 2009, their own motivations, and the motivations of their peers.

    More precisely, some very interesting people that you should talk to who should be able to give insight on the "oyster" question:
    *Hal Finney: One of the first (or possibly even the first) users/miners after Satoshi, recipient of the first Bitcoin transaction. He currently has a rapidly-advancing degenerative, disabling disease but still manages to post occasionally.
    *NewLibertyStandard: First person to make a BTC/USD market and publish exchange rates. Ask him how he bootstrapped his valuation methodology given that no prior prices or transactions existed, and what reasons people gave for buying or selling coins from him.
    *Theymos: Designated admin by Satoshi on bitcointalk, early user/miner, sold 15,000 BTC on Bitcoin Market for ~0.003 USD: the all-time low on any market. How did he arrive at "overvalued"?

    Aside from direct interviews, reading the oldest threads on the forum also provides good information regarding the mindset of participants in 2009 and 2010.

    Feel free to PM me on the forum if you need further assistance. BTW there is nothing to fear over there, most people (especially the three above) are polite and friendly, but if you don't want to deal with the occasional troll or mental patient you can just send private personal messages to any user instead of posting publicly.

    PS: I very much enjoyed your research and talk on private coinage, and you do have a special distinction as the first economist I remember who took Bitcoin seriously.

    • avatar George Selgin says:

      Kindly pardon this late acknowledgement of your comment: I have been distracted by end-of-semester obligations.

      Your observations are quite helpful; I certainly will plan to take a closer look at the BC forum. Indeed, I had intended to reply to your comment there, but refrained owing to the rules requiring that one serve what seemed like a sort of apprenticeship period before being able to do so.

      I also am about to make another post here concerning Bitcoin, which I hope may elicit further comment from you and other BF contributors.

  11. avatar Francisco Borja says:

    Here is my take on the oyster question. See, to me (it is important to point out that this is a personal view for the means/ends value scale is relative to the individual) bitcoins ARE commodity money. Why? Well to use professor Selgin’s definition commodity money is “some useful article of trade, that is, something that has a use other than that of being a medium of exchange”. Bitcoins fit into this category in my particular value scale because when I first bought a bitcoin I wasn’t only interested in its value as a medium of exchange but at the possibility that I was buying into an effort to “stick it to the fed”. Thus, even if no one else accepted my bitcoins as medium of exchange, I could still “consume” it, that is fulfill one of my needs, one of the ends in my life. That is to say, bitcoins are “intrinsically useful” to me. To my personal value scale $30 dollars (which is what I paid for my first bitcoin) was well worth the satisfaction of doing my part to “stick it to the fed”, which, I believe is akin to smoking a commodity or building a nice bracelet from a commodity no one accepted as a medium of exchange. Bitcoins are a currency built around an ideology, which I think is what provided it with its commodity-ness at its inception.

    • avatar tdbtdb says:

      Bitcoin is a payment system and medium of exchange, but is it money? I can write checks against my stock mutual fund, does that mean that stocks listed on the NYSE are money? Does the money supply increase every time the Dow goes up?

  12. avatar smintleflop says:

    Having read some of the original whitepaper and newsgroup correspondence from Satoshi, it is clear that bitcoin began as an idealogical endeavour. The Genesis Block itself lends credence to this, having been stamped by Satoshi with the words "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks", clearly underscoring the disillusionment Satoshi felt with fractional-reserve banking.

    Looking at the early developer activity I am reminded of some of the things I have seen at Google. In much the same way that Google decided to fund R&D - without a clear business strategy - for a car that could drive itself, sometimes enterprising humans get together and just do things 'because it can be done'. The idea itself can be all the intoxication a person or group needs to try that first oyster. The rest of the endeavour can often be fuelled by nothing but the giddy excitement and sense of satisfaction one gets from knowing she is building something important from scratch.

    As for how the actual value of bitcoin progressed from there and gained a whole army of followers crazy enough to indulge in this oyster eating frenzy? Well, they arrived in earnest after the launch of Bitcoin's first 'Killer App' - the Silk Road. For the first time ever, traders of illicit substances had been given a tool to market their products directly to consumers without the fear of leaving a paper trail (digital or otherwise). Consumers got to buy in confidence, knowing that the products they were purchasing were backed by a similar rating system to that of Ebay, thus ensuring they were safe from being diluted and/or contaminated by low-level street dealers. It is from here that we begin to see bitcoin gaining a real foothold and, with it, a corresponding real world monetary value.

    What happens next really depends on how quickly the adult industry decide on their 'cyrpto format' of choice.

    • avatar Martin Brock says:

      Anonymous payment doesn't enable the seller of an illicit substance to find buyers anonymously. Silk Road is more like Tor's killer app, and Tor is largely funded by the U.S. Navy which also claims patent rights over onion routing. The Tor story is at least as interesting as Bitcoin.

  13. avatar Vlada Krupa says:

    Form my interview with Marek Palatinus (one of the first users of Bitcoin and owner of the third largest minig pool) i think i can offer one possible soulution to this riddle. There is possibility (that was there from the begining) that bitcoins and bitcoin network could have non-monetary uses. It is like a robust key waiting for somebody to made a locks. For example if you connect ownership of some real thing (like a car) with ownership of some bitcoin unit. Viz. https://en.bitcoin.it/wiki/Smart_Property
    And very fist traders could be aware of this future possible uses of bitcoins.

  14. avatar Remarkl says:

    The money supply that matters is created by bankers monetizing creditworthiness. The only good constraint on the money supply should be the demand from creditworthy borrowers. Any arbitrary supply, whether it is gold in the ground or hashing operations in cyberspace, cannot work as well as underwriters with skin in the game judging credit applications.

    Government spending may or may not create value. To the extent that government spending creates value (not an easy judgment to make, but that's why we have politics), it can probably safely create money, too. But to the extent that it does not create value, it should be offset by money removed from circulation, either temporarily via borrowing or permanently via taxation.

    But as regards free banking, I don't see how the game is advanced by a medium which a banker of good repute cannot create out of thin air in exchange for debt instruments of others.

    • avatar alanx says:

      "The money supply that matters is created by bankers monetizing creditworthiness. The only good constraint on the money supply should be the demand from creditworthy borrowers."

      Stupid, dumb, and impossible to validate and verify. What makes bankers a good judge of creditworthiness? The 2008 crisis? The dot com bust? The interest rate fixing in the Libor scandal? (fixing rates on 800 Trillion dollars of assets) or the new rate fixing scandal on the additional 379 Trillion dollars of Interest Default Swaps?

      And exactly why should Bankers earn Interest on pretty much the entire money supply?

      The MARKET is where the money supply should grow! And it should grow by the MARKET becoming more productive! And then as the value of currency rises (to be able to denominate transactions in a larger economy), everyone holding currency just magically has MORE buying power! Allowing people to buy more goods, and companies (who are sitting on plenty of money) to hire more people to meet the demand of people whose wages are worth more, and whose savings are worth more.

      "But as regards free banking, I don't see how the game is advanced by a medium which a banker of good repute cannot create out of thin air in exchange for debt instruments of others."

      Bitcoin provides the best opportunity for showing you.

      • avatar Remarkl says:

        "What makes bankers a good judge of creditworthiness? The 2008 crisis?
        The 2008 crisis? The dot com bust? The interest rate fixing in the Libor scandal? (fixing rates on 800 Trillion dollars of assets) or the new rate fixing scandal on the additional 379 Trillion dollars of Interest Default Swaps?

        No, those things show what happens when bankers do not do their jobs properly. But their job is still their job, money is still liquid credit, and any credit that a bank cannot monetize is an opportunity lost for production, employment, and growth.

        I won't litigate the question of whether a currency should appreciate, depreciate, or stay flat over time. I believe, with the Fed, and, specifically, with Janet Yellen, who, according to Alan Greenspan, has the data to VALIDATE AND VERIFY her claims, that slow, predictable inflation best tips the economy in the direction of spending and investment, permits price discovery of downward sticky commodities (especially labor) and, thereby, maximizes growth.

        • avatar alanx says:

          "...permits price discovery of downward sticky commodities (especially labor) and, thereby, maximizes growth."

          Great theory, but stinks for most people. This is a fancy phrase that really means "reduces the values of wages to maximize corporate profits"

          The problem in our economy is that the value of wages is too low. People cannot afford to buy products! But at the same time, the process of maximizing corporate profits (flowing largely to the richest of the population) is working as designed. The result is high unemployment, an inability of the population to afford for labor intensive products and services (health care and education), and record corporate profits!!!

          If this is the situation that you feel is desirable, then I guess the "banker supplied money system" is working great! If you don't happen to be part of the richest of the rich, then it isn't working so well for you.

          • avatar Remarkl says:

            "Great theory, but stinks for most people."

            Either we believe in markets or we do not. If you think that labor's price should be subsidized by the government, then you should say so, and propose a direct subsidy rather than back-door support via monetary policy.

            Thus, I favor lower payroll taxes, higher and earlier Social Security, and other ways of dealing with the falling bargaining power of labor (including the loss of aggregate demand resulting from it). But I'm not going to deny that labor's bargaining power is falling nor do I believe that monetary policy is the way to deal with the problem.

            Whether or not subsidies are given, however, workers and owners must NEGOTIATE for wages. That's how markets work. Inflation forces that negotiation to occur, overcoming psychological resistance to nominal pay cuts. (If you were around in the 1970's, workers were getting COLA's routinely, and savers were getting hurt, because workers had bargaining power. Now, they don't. That's the market.)

            The monetary system did not put workers behind the eight ball. Globalization and automation did that. A stable currency would mask the weakened state of labor (because wages are downward sticky), just as the housing bubble masked the loss of manufacturing jobs. But the mask eventually melts, and then there is hell to pay.

          • avatar George Selgin says:

            Remarkl says: "I believe, with the Fed, and, specifically, with Janet Yellen, who, according to Alan Greenspan, has the data to VALIDATE AND VERIFY her claims, that slow, predictable inflation best tips the economy in the direction of spending and investment, permits price discovery of downward sticky commodities (especially labor) and, thereby, maximizes growth."

            Alanx replies: "Great theory, but stinks for most people. This is a fancy phrase that really means 'reduces the values of wages to maximize corporate profits'"

            This is a perplexing exchange, for the basis for Yellen's claim is precisely that a little inflation helps to reduce unemployment. Usually it is the inflation hawks who are regarded as being indifferent to the well-being of "most people" (e.g., wage earners). Here Alanx flips the usual rhetoric on its head.

            In any event, Yellen's argument is the one elaborated by her husband, George Akerlof, Dickens, and Perry in a Brookings paper some years back. Far from being original it is an old claim--tracing back to Hume and toyed with by Marshall, among other English-language writers. I don't find it compelling either in its earlier or its Brookings telling, for reasons I give in Less Than Zero. On the contrary I'm inclined to agree, with Alanx, that "a little inflation" is more likely to do damage to than to help those who can least afford it.

            Having said that, though, there is a vast difference between an expansionary monetary policy aimed at perpetuating inflation and one aimed merely at restoring aggregate demand from some low, recessionary level (or growth rate).

            None of this has in any case much to do with the merits of a money supply that is "banker determined" in the sense of depending on the demand for loans. Concerning that idea, the related real-bills doctrine, and confusion of demand for money with demand for credit more generally, I'm afraid I have nothing kind to say, but will settle for recommending the antidotes, including generous doses of Wicksell, Laidler, and Yeager.

          • avatar Remarkl says:

            Prof Selgin -

            I guess being a professor has its occupational hazards, like treating everyone as if they were paying to have you tell them what to read. If you cannot or will not succinctly debunk Yellen or me here in your blog, then that's your readers' loss.

            According to the NYT (whose credibility I concede may not be impeccable), Dr. Greenspan wanted to shoot for zero inflation, but Dr. Yellen persuaded him that 2% was a better target. Are you just harder to fool than he?

            Dr. Yellen's claim may be that inflation helps to reduce unemployment, but that says nothing about real wages, which may fall in the process. Her prescription may help the unemployed at the expense of the employed.

            In general, setting monetary policy so as not to help or hurt some interest group strikes me as a fool's errand. I would much prefer that monetary policy favor production, leaving to politics the proper distribution of the largest possible pie.

          • avatar alanx says:

            "Either we believe in markets or we do not. If you think that labor's price should be subsidized by the government, then you should say so, and propose a direct subsidy rather than back-door support via monetary policy."

            If you believe in markets, then you don't need inflation to force anything. But Inflation puts savers and wage earners behind the eight ball from the start.

            It would be different if the current system WORKED. But the current system DOES NOT WORK to equalize wages, or to protect savings.

            "The monetary system did not put workers behind the eight ball. Globalization and automation did that. A stable currency would mask the weakened state of labor (because wages are downward sticky), just as the housing bubble masked the loss of manufacturing jobs. But the mask eventually melts, and then there is hell to pay."

            Not true at all. Globalization and automation increased productivity. But monetary policy is based on CPI which explicitly ignores productivity gains. Thus inflation is HIGHER than CPI estimates! The greatest rates of productivity gains have been completely masked by using a rubber ruler for measuring value.

            As you say, there is hell to pay when all is unmasked. And the Income gap, loss of jobs

          • avatar alanx says:

            I appreciate the kind words, George.

            I am no economist. I am an Engineer, and as such I have been spending the last few years digging through the data. Born in the 1960's, for most of my life I considered the concentration of wealth with a few to be a "non-problem". Basically, the very rich become funders (mostly) of business through investment. So the very rich get a nice life style, but technological progress pretty much offset the benefits of their wealth.

            The examples abound. In 1900 hardly anyone had a refrigerator, or electricity, or a telephone, or a car. Or even indoor toilets! Nobody had decent tennis shoes, much less calculators, or video cameras, or computers. Today, these things are nearly universal.

            As long as you concentrate on goods and services, this theory holds up pretty well. But then digging through the data, over the last few years I began to doubt my earlier position. I began to see that most people could afford mass produced goods and services, but Healthcare and Education were increasingly a problem.

            It turns out that all of this could have been anticipated had economists factored in production improvements within their estimates of inflation. In the 1960's William J. Baumol and William G. Bowen did exactly that. Baumol's Cost Disease predicts rapidly falling prices for goods and services, slower cost reductions for medicine, and not so many cost reductions for education. However, his research was ignored.

            CPI takes a basket of goods and services (which by all rights should have dropped significantly in price over time) and defines their cost as a base.

            Now suddenly, instead of falling prices of goods, somewhat falling prices of Medicine, and slightly falling costs of education, we have stabilized prices of goods, rapid rises in costs of Medicine (and thus health care insurance), and unbounded rises in the cost of education!!!

            All of this is due to an underestimated rate of inflation.

            Lastly, when you have a population with significant stores of wealth in savings and buying power in wages, a little inflation can be used to boost economic growth. This is because your population has resources you can use inflation to leverage. But we are at the end game here. My wife and I as engineers late in our careers make significantly more money that most. And we struggle to pay medical and education costs! Inflation has decimated the buying power of our wages, even as productivity gains have lowered the prices of consumer goods.

            If I could treat health care issues with rubber ducks made in China, all would be cool. Or if I could educate my kids with a few items purchased at Walmart, all would be well. But Medicine and Education resist mass production! So at some point, we have to reinflate the wealth held by the population, and quit concentrating wealth in the hands of a few.

            The accounts of the people are nearing empty now. Cheap monetary tricks are not going to fix these problems.

          • avatar alanx says:

            "In general, setting monetary policy so as not to help or hurt some interest group strikes me as a fool's errand. I would much prefer that monetary policy favor production, leaving to politics the proper distribution of the largest possible pie."

            I don't disagree, BTW. But I do disagree that more inflation will increase production. The ability of people to buy goods and services is rapidly being lost. Wages have fallen too low, but once unemployment is high, labor hasn't any leverage to raise wages. So corporations take the tact of managing production and employment to increase profits. And that is (ultimately) lower production, if there is no market that can afford more of their goods.

            Again, inflation is a cheap trick. It only works while the market has savings and wages that can take the hit and still buy goods. Use the trick too much, and you get our current economic pickle.

          • avatar Remarkl says:

            "But monetary policy is based on CPI which explicitly ignores productivity gains."

            As the wag said about string theory, that's not even wrong. It makes no sense whatever. Yet you are so sure of it.

            Monetary policy is based on whatever metrics the monetary authorities care about - unemployment, risk-free interest rates, NGDP, inflation measured by whatever measure they deem appropriate, etc. CPI? Maybe, somewhere sometime. But not as a definitional matter.

            "Globalization and automation increased productivity" by substituting foreign and mechanical labor for American human labor. How you can disconnect those dots is beyond me. Some such displacement gives rise to more and better opportunities (the ICE turned teamsters into Teamsters), but that's not a law of nature, just how the cookie crumbled during THAT industrial revolution. The one we're in now isn't crumbling as nicely for labor. The relationship between the CPI and other measures of inflation is wholly irrelevant. What matters in a market economy is bargaining power, and American labor has lost much in that regard. Everything else is just fall-out.

            "If you believe in markets, then you don't need inflation to force anything."

            And a foolish consistency is the hobgoblin of small minds. Markets often confront multiplayer prisoners dilemmas, and government exists to coordinate play to produce a plus-sum result and avoid a tragedy of the commons. Such coordination is essentialy government's raison d'etre.

            Meanwhile, ALL monetary policy "interferes" with the market as you define it. There is nothing special about zero inflation as a target that renders the outcome neutral any more or less market-driven than a 2% inflation target. Meanwhile, you advocate a currency that will appreciate. That currency DENIES creditworthy borrowers access to credit. What could be a bigger interference in "the market" than that?

          • avatar George Selgin says:

            Remarkl, regarding your jab about "occupational hazards," I can only say that the real "hazard" is the moral one to which certain blog readers become subject when, having been encouraged by a blog author's already generous enough willingness to address their comments at all, they imagine themselves entitled to lengthy essays aimed at sparing them the need to have read anything else.

            This isn't to criticize you for not wishing to take the time to read works to which I refer; I understand that you may not have time to do so. It is merely to wonder why you imagine that I suffer under no similar time constraint.

          • avatar alanx says:

            Remarkl, you said:

            "Meanwhile, you advocate a currency that will appreciate. That currency DENIES creditworthy borrowers access to credit. What could be a bigger interference in "the market" than that?"

            Yes perhaps in some sense I "advocate" a currency that will appreciate. In another sense, if you let the market choose a currency, the market will always choose a currency that appreciates, that cuts transaction costs, that eliminates risk of counterfeiting, that can be totally secured, that provides accounts to anyone in the world, that eliminates fees and charges.

            And if such a technology also vastly reduces the need to borrow capital (more effectively distributing capital across the population), well, there you go.

            Central Banks have never succeeded in a free market place without government force eliminating hard currencies. If you believe in a free market, just let things go, and we will see which approach is preferred by the market. Interference in a market can be understood as an action that forces people to make decisions that are not in their best interest, and that they didn't wish to choose for themselves anyway.

            There is no proof of "Interference in the Market" just because some people win and some people lose as the market shifts to adopt new technologies. Even if these people are "credit worthy" as you call them.

          • avatar Remarkl says:

            "if you let the market choose a currency, the market will always choose a currency that appreciates..."

            No, it will hoard that one as a store of value. It will USE the one that depreciates, the one that can be borrowed without the collateral losing value over time, the one that works...

            I am not a free-market absolutist, so you can ding me if you like for saying "either you believe in markets or you don't." I do, however, believe that prices should be set by the market UNLESS the result is a tragedy of the commons. As I said earlier, I have no problem with subsidies. I believe that wages should be negotiated, but I also believe in a minimum wage, mandatory overtime, and other coordinated limits on how badly people with jobs have to live. My problem is with the failure to recognize a subsidy (like a zero-inflation target vis a vis downward-sticky commodities)when one sees one.

            The argument for 2% inflation is that it increases production. That means a bigger pie. One can argue that it does not produce a bigger pie, but that is different from the objection that it hurts workers or "interferes with the market," whatever that means. The hurt to workers can be remedied with a subsidy, and the whole purpose of the inflation is to stimulate the market by discouraging the hoarding of credit and the resultant paradox of thrift.

            " Even if these people are "credit worthy" as you call them.

            I don't call PEOPLE credit worthy. I call borrowers creditworthy, by which I mean that they are capable of repaying the loan they are requesting. That's not some sort of merit badge. It's a professional banker's judgement about a fact - the borrower's ability to repay. Any loan that can be repaid summons forth the outputs it is intended to buy. That is a good thing for all concerned. If a good credit cannot be funded, then THE ECONOMY loses. A good or a service never happens, and SOMEONE has to do without it. Why on earth would you would want to be snarky about that?"

          • avatar alanx says:

            "No, it will hoard that one as a store of value. It will USE the one that depreciates, the one that can be borrowed without the collateral losing value over time, the one that works..."

            Actually, people will want to be paid in the better currency. Merchants, and workers alike. The depreciating currency will depreciate even more. At some point people just won't want it. Maybe bankers will continue to lend it, but people will immediately divest themselves of a losing currency in favor of one holding value.

            This is simple Thier's Law.

            If Depreciation is on the order of the growing economy (a few percent or so) loans are still possible. But bubbles are very difficult to develop because, as you say, the currency becomes valuable and limits rapid (unhealthy) growth.

            Certainly an appreciating currency is bad for bankers and banks. Well, just like your attitude towards workers when unemployment is high (so they can't reasonably negotiate their wages) I say the same thing: "TOO BAD!"

            Bankers have have a free flowing supply of cheap money printed for them to lend to the rest of us for interest we actually have to work for to pay. As far as I am concerned, if technology can put bankers out of a job, then all the better. They should have to actually work for a living producing a actual product too, just like everyone else. But of course, they would rather leverage this, set interest rate that, and just rake in the money!

            The moral hazards of printing money has always doomed currencies. The Federal Reserve has not been immune. It was just lucky enough to ride an unprecedented rise in technology that has largely covered over their excesses. Now they have abused our trust far beyond even technology to cover! This isn't going to end pretty.

          • avatar Remarkl says:

            "Well, just like your attitude towards workers when unemployment is high (so they can't reasonably negotiate their wages) I say the same thing: 'TOO BAD!'"

            What part of "I favor lower payroll taxes, higher and earlier Social Security, and other ways of dealing with the falling bargaining power of labor (including the loss of aggregate demand resulting from it)" did you not understand?

            You have now added illiteracy to your incivility ("Stupid, dumb...") and ignorance of economics. Strike three. I'm out of here.

          • avatar alanx says:

            "I don't call PEOPLE credit worthy. I call borrowers creditworthy, by which I mean that they are capable of repaying the loan they are requesting."

            And if we are impoverishing most people by destroying the value of their wages and savings? That isn't a problem, even by your rather banker centric moral system?

            "That's not some sort of merit badge. It's a professional banker's judgement about a fact - the borrower's ability to repay."

            What proof do we have that bankers actually are good at judging these things? Ever look at how badly they did in 2008? Or how badly they judge risk when the borrower is black or an immigrant?

            "Any loan that can be repaid summons forth the outputs it is intended to buy. That is a good thing for all concerned. If a good credit cannot be funded, then THE ECONOMY loses. A good or a service never happens, and SOMEONE has to do without it. Why on earth would you would want to be snarky about that?""

            Likewise, why are you snarky about the fact that people increasingly cannot afford goods and services? And when they can't afford them, they do borrow. Why is that better? Eventually, they cannot afford to borrow? What now about those goods and services?

            There is a very legitimate concern about the fact that our market increasingly cannot afford our products and services. The economy cannot run forever on just the demands of the most very wealthy among us.

            Show me a solution to the income gap that doesn't involve debasing wages and savings, and I will be on board. Frankly, none is being offered today. This is the only reason Bitcoin happens to have a chance.

            And no about of folks like you saying "People really don't want wages that hold value" is going to make it true.

        • avatar alanx says:

          "Monetary policy is based on whatever metrics the monetary authorities care about - unemployment, risk-free interest rates, NGDP, inflation measured by whatever measure they deem appropriate, etc. CPI? Maybe, somewhere sometime. But not as a definitional matter."

          When the Federal Reserve sets an inflation target, that definition is using Inflation to set Monetary policy. If they defined inflation by the rising costs of Education, then you would get significantly different monetary policies than if you defined inflation by the falling costs of computer technology.

          • avatar Remarkl says:

            "When the Federal Reserve sets an inflation target, that definition is using Inflation to set Monetary policy."

            Yes, but not all central banks always target inflation, and many pundits urge the use of other targets, e.g., NGDP. "Monetary policy" as a concept, is not wedded to inflation, even if, in any particular time, OUR central bank is. And, BTW, the Fed uses personal consumption expenditures to guage inflation, not the CPI.
            http://www.forbes.com/sites/afontevecchia/2013/04/29/the-feds-favorite-measure-of-inflation-continues-to-fall-qe-is-here-to-stay/

            But the Fed also uses unemployment as a metric. QE4ever is supposed to end at 6.5% unemployment or 2% inflation, whichever comes first. Your whinge about the CPI just doesn't fit.

            And what any of this has to do with wages remains opaque. Wages are negotiated. People get no less than they can command. Inflation just forces them to command it at reasonable time intervals. Sometimes they win, sometimes they lose, but the inflation is just the starter's pistol, not part of the race course.

          • avatar alanx says:

            "But the Fed also uses unemployment as a metric. QE4ever is supposed to end at 6.5% unemployment or 2% inflation, whichever comes first. Your whinge about the CPI just doesn't fit."

            Yeah, as long as you can make statements about monetary policy without using the word 'inflation'.

            "And what any of this has to do with wages remains opaque. Wages are negotiated."

            Yet you have a huge body of research that shows wages to be "sticky". They don't go up over fast enough over the population to account for inflation. And they don't go down fast enough over the population to account for deflation. You can talk about "negotiation" all day about wages, but the fact is if a business does nothing at all, inflation insures a wage cut.

            The worker then is clearly at a disadvantage here. And by worker, I mean ANYONE depending on a wage. Or a return on an investment. Or the value of their savings or pension, or Social Security benefit. Really most things priced in dollars.

            "People get no less than they can command. Inflation just forces them to command it at reasonable time intervals. Sometimes they win, sometimes they lose, but the inflation is just the starter's pistol, not part of the race course."

            Inflation insures that the wage earner is going to run the race uphill. That is because when that pistol goes off, they are already behind. And because inflation is tied to CPI (and doesn't ACTUALLY reflect the change in value of money), they are behind more than they think.

            How else can you explain why the most productive workforce in the history of mankind cannot distribute the goods and services it produces across the population as well as it could 40 years ago when it was whales less productive?

      • avatar Remarkl says:

        "It is merely to wonder why you imagine that I suffer under no similar time constraint."

        It makes no more sense for you to say "You're wrong, read some books," than it would have for me to post that same sentence as a comment. If you are too busy to make YOUR blog a place where YOU exchange ideas, then you should probably not expect people to offer any here.

        I was hoping for more than an outpost of the Cafe Hayek. Oh, well...

        • avatar George Selgin says:

          Remarkl, I have no patience at all with persons who abuse quotation marks, and especially when they compound the wrong by referring to the "same sentence," as if to reinforce the suggestion that the quoted words are genuine.

          For the record, what I actually wrote is:

          "Yellen's argument is the one elaborated by her husband, George Akerlof, Dickens, and Perry in a Brookings paper some years back. Far from being original it is an old claim--tracing back to Hume and toyed with by Marshall, among other English-language writers. I don't find it compelling either in its earlier or its Brookings telling, for reasons I give in Less Than Zero. On the contrary I'm inclined to agree, with Alanx, that "a little inflation" is more likely to do damage to than to help those who can least afford it."

          Again, you wrongly assume that a response to a blog comment is a place for the detailed elaboration of arcane matters of theory such as those addressed in the works mentioned. It isn't, here or in any other blog I know of. Not even at MoneyIllusion, though Scott Sumner does his damnedest to respond to every comment. (Many bloggers don't even allow comments, in case you haven't noticed.)

          Your larger problem is that, although you admit not being very widely read in macroeconomics (fine), and not having time to read much (OK), still, upon having apparently encountered some (presumably recent) reference to Yellen's views, and finding those congenial to your own priors, you go forth boldly brandishing them as if they were incontrovertible, when that's quite far from being the case.

          You also labor under the misapprehension that, since Alan Greenspan supposedly allowed himself to be persuaded by the views in question, the rest of us mere mortals ought surely to follow along. Besides its more obvious flaws, starting with a crude appeal to authority, this perspective neglects the ease with which most sitting central bankers allow themselves to be persuaded to add a little more booze to the punch bowl rather than take it away.

          Finally, Freebanking isn't "my" blog: it was created by others, who then invited me to contribute, which I do, now and then, out of the goodness of my puny and shriveled little heart, and for no form of compensation whatsoever. In other words, every word I write here is a free lunch, or would be were there such a thing. Perhaps there isn't. Ingratitude, truculence, and guile, alas, are all too evidently real.

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