The nature of money and the glory of Bitcoin

Despite what some may say, Bitcoin is destined to be money. We need a new currency for a new era. Photo: Wikimedia Commons

MADISON, Wis., July 31, 2013 — Bitcoin is a new money for a new era. Decentralized, open source, peer-to-peer, and cryptographic, it can be mined, purchased, sold, and traded by individuals without a conventional financial institution. A computer or smart phone is the only requisite.

Bitcoin is “mined” by specially designed computers that solve increasingly difficult mathematical equations over time. By design, all mining will be complete by 2140, resulting in a fixed quantity of Bitcoin. Thus, despite the fact that they are intangible, Bitcoin is nevertheless finite and scarce. Unlike government fiat currency, there is a limit to the amount of money that can be “created.”


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Bitcoin trades in universal units (“Bitcoins” and smaller units, such as “millicoins”) the same way that gold trades in ounces and grams, and that it traded as currency before governments gained control and created superfluous, misleading terms such as “dollar.”

Bitcoin is extremely useful in facilitating online commerce. Bitcoin enables the idea of smart property. Bitcoin is promising as an investment. In fact, the Winkelvoss twins have invested a large sum into Bitcoin, putting their “money and faith in a mathematical framework that is free of politics and human error.”

But all that pales in comparison to Bitcoin’s fundamental capability as a medium of exchange: It is destined to become money — or at the very least, one of many similar competing currencies.

Unlike government fiat currency monopolized by legal tender laws, Bitcoin is not and cannot be forced upon a population. Moreover, while all transactions are anonymous and free of state intervention, the openness of the transactional records (the “ledger”) ensures that no one can cheat the system.


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Despite overwhelming potential, economists from Paul Krugman to hard-money Austrians have treated Bitcoin with scorn. Can it really be money? Yes, indeed.

In the latter half of the nineteenth century, the purchasing power of the dollar steadily increased. Several factors bequeathed prosperity upon the American people, including technological innovation and a business-friendly political climate. What generally receives the lion’s share of credit, however, is gold. During the Gilded Age, the United States operated under a gold standard without a central bank. It was accompanied by an era of currency stability accompanied by a diminishing consumer price index.

Notwithstanding its historical success, the gold standard is neither necessary nor sufficient for monetary stability. Money must be easily divisible, durable, fungible, and have a broad demand. Because of these characteristics, money is, by definition, the most marketable good in society.

Drawing on the work of the nineteenth century economist Carl Menger, Murray Rothbard wrote, “If one good is more marketable than another — if everyone is confident that it will be more readily sold — then it will come into greater demand because it will be used as a medium of exchange.”

Over the long course of human history, gold and silver emerged as the most prominent monies. In the past, other commodities such as shells, tobacco, and copper functioned as media of exchange.

Gold and silver became money because they were universally accepted media of exchange, and from their acceptance in trade emanated their function and value. But why were they accepted as a medium of exchange in the first place?

Once again, Rothbard: “The cumulative development of a medium of exchange on the free market … is the only way money can become established. Money cannot originate in any other way, neither by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper ‘money.’ It is not a useless token only good for exchanging.”

It can be argued that Rothbard’s account of money is misleading and partially incorrect. The historical process he describes — namely, the emergence of money over time due to its characteristics as a marketable commodity — invites no doubt, yet the overall account focuses on proximate causes and neglects a fundamental insight.

No good — not gold, milk, or even water — possesses “intrinsic” value. There is no such thing. Milk is valuable on the market only because there is demand for it, and individuals demand it because they expect that it will satisfy their intrapersonal subjective desires.

Rothbard’s charge that money cannot be created out of “useless material” is hollow. In his use of the undeniably subjective word “useless,” Rothbard imputes a value judgment into his theory of money. Indeed, what is “useless” to one may be “useful” to another.

It does not matter if Bitcoin is “useless” or “useful.” All that matters is that individuals are willing to voluntarily accept it in trade.

For individuals, a Bitcoin “wallet” can be set up most easily through online and mobile Bitcoin exchanges such as Coinbase and Blockchain, where mining and transaction records can also be viewed.

Without any substantial risk or cost, merchants — both online and in physical locations — can accept Bitcoin. Bitpay is the leading online payment system, allowing its users to implement a Bitcoin payment system on their website with ease.

Want to immerse yourself in the Bitcoin world? Organized by Bitcoin juggernaut Jeffrey Tucker, the 2013 Crypto Currency Conference will take place in Atlanta on October 5. Featuring an eclectic mix of money experts, libertarian theorists, and entrepreneurs, the conference aims to be a “compelling conversation, whether you are new to the Bitcoin world or a savvy code monkey who has been mining for years.”

 

Joseph S. Diedrich also writes for the MacIver Institute and The College Fix. Find him on FacebookGoogle+, LinkedIn and Twitter @JSDiedrich.


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Joseph S. Diedrich

Joseph S. Diedrich has been a columnist at The Washington Times Communities since early 2013. He covers non-electoral politics from a libertarian perspective. His work has also been featured at the MacIver InstituteThe College Fix, and elsewhere.

Joseph is also a classically-trained composer and somewhat of a gastronomy enthusiast. Find him on Facebook, LinkedInGoogle+, and Twitter @JSDiedrich.

 

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