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  • Good Money, Bad Money—And How Bitcoin Fits In

    Posted on by Azrael Comment


    bit

    Let us start with talking about bad money, by which I mean the US dollar, the euro, the Japanese yen, the Chinese renminbi, the British pound, the Swiss franc, and basically all official currencies.

    They all represent fiat money. The term fiat is derived from the Latin word fiat and means “so be it.” Fiat money is “coercive money,” or “money forced upon the people.”

    There are three major characteristics of fiat money:

    1. The state (or its agent, the central bank) has a monopoly on money production.
    2. Fiat money is produced through bank credit expansion; it is literally created out of thin air.
    3. Fiat money is intrinsically valueless. It is just brightly colored paper and intangible bits and bytes that can be produced at any time and in any amount deemed politically expedient.

    Just in passing, I would like to let you know that fiat money has not come into this world naturally. States have worked long and hard to replace commodity money in the form of gold and silver with their own fiat money.

    The final blow to commodity money came on August 15, 1971: US President Richard Nixon announced that the US dollar would no longer be convertible into gold. This very decision (which I like to call the greatest monetary expropriation in modern history) effectively put the world on a fiat money regime.

    Against this backdrop, it may not come as a surprise that fiat money suffers from economic and ethical deficiencies.

    First, fiat money is inflationary. Its buying power dwindles over time, and history has shown that this entropy is almost as irreversible as gravity.

    Second, fiat money enriches a chosen few at the expense of many others. The first receivers to get a hold of the new money benefit to the detriment of latecomers.

    Third, fiat money fosters speculative bubbles and capital misallocations that culminate in crises. This is why economies boom and bust.

    Fourth, fiat money lures states, banks, consumers, and firms into the pitfall trap of excessive debt. Sooner or later, borrowers find themselves in a deep hole with no way out.

    Fifth, fiat money feeds big government. And as the state expands and sprouts like weeds in an untended garden, this outgrowth strangles—even destroys—individual freedom and liberty.

    I have spoken enough about bad money. Let us talk about good money.

    What is good money? To answer this question, we just have to think about how a free market in money works.

    Here, people are free to decide which kind of money they would like to use, and they also have the freedom to cater to the needs of fellow people seeking good money.

    The outcome of a free market in money will be good money simply because people will demand, out of self-interest, good money—not bad money. This is actually what sound monetary theory would tell us. Money has emerged from a commodity and spontaneously from the free the market: no state or no central bank was needed in the process.

    To qualify as good money, the “thing” or good in question must have specific properties. It must be scarce, homogeneous, divisible, durable, transportable, mintable, etc. Gold and silver meet these requirements par excellence, and this is why they were chosen as the universally accepted means of payment whenever people were free to choose.

    How does Bitcoin fit in?

    I would argue that from a monetary theory point of view, Bitcoin qualifies as a good money candidate. It has emerged from the free market through the voluntary actions of all participants involved, respecting individual freedom and private property rights.

    I would also argue that Bitcoin complies with the regression theorem and thus provides the crypto unit with a necessary requirement to potentially become money. The key question, therefore, is whether Bitcoin will stand a chance in challenging and outcompeting official fiat currencies or gold money. Let us think about this in further detail.

    One exciting feature of Bitcoin is that its quantity is limited to 21 million units. This hard cap means that at some point, the quantity of Bitcoin will not grow any further. If the quantity of money is constant and the economy expands, prices for goods and services will fall.

    Would that be a problem for money users or the economy? No, it would not. Firms can still be successful if prices decline. Their profits result from the spread between revenues and costs. If goods prices fall (in nominal terms), firms just have to make sure that revenues keep exceeding costs.

    Consumers would be pleased to see the prices of goods fall. Their money becomes more valuable. They can reduce their cash balances and increase spending.

    But wait: would consumers not refrain from buying goods if and when prices can be expected to fall over time? Imagine a car costs $50,000 today and only $40,000 in a year. If I need the car right now (because my old one has broken down), I would have to buy a new one right away, I would not and could not wait.

    The general answer is this: People make their decision to buy now or later based on discounted marginal utility. The marginal utility of buying the car for $50,000 ranks lower on people’s value scale than paying only $40,000. But the car available for $40,000 is not for sale now but in a year. When it comes to decision-making, people will, therefore, discount the marginal utility of purchasing the good for $40,000 in a year using their individual time preference rate.

    They will then compare the result with the marginal utility of buying the good now for $50,000. If the discounted marginal utility of buying the car for $40,000 in a year is lower than the marginal utility of buying at $50,000 now, people buy now. If it is higher, they will postpone their purchase.

    The important point is: There is no reason to fear that the economy will come to a standstill if and when the prices of goods decline over time. Money that has a limited quantity, such as Bitcoin, would work just fine!

    Let me stress something fundamentally important here: The quantity of money in an economy does not have to grow to make increases in production and employment possible. The sole function of money is exchange, and so a rise in its quantity does not make an economy richer; it does not bring about any social benefit.

    All an increase in the quantity of money does is lower the purchasing power of one money unit compared to a situation in which the quantity of money has not been increased.

    We just heard that in a Bitcoin money regime, we would have to expect price deflation. What would that do to the credit market? As the prices of goods fall, holding money becomes more profitable.

    If, for instance, prices fall by three percent per year, the purchasing power of money increases by three percent. In this case, I would not exchange my money for a T-Bill that yields only, say, two percent per year.

    To make me part with my money, a borrower would have to offer me a return on the investment that is higher than the increase in the purchasing power of money. Borrowers would be careful taking up debt because they know that in times of stress, they will not be bailed out by an inflationary monetary policy.

    Therefore, it is likely that in an economy where there is a constant quantity of money, the credit market will remain relatively small—especially compared to the debt pyramid that comes with today’s fiat money regime.

    At the same time, firms retaining earnings and issuing equity for funding would be much more commonplace. People would invest their life savings in company stock rather than debt (be it issued by banks, governments, or corporations).

    What about the market interest rate in a world in which price deflation occurs? We know that in a free market, the nominal interest rate cannot drop below zero. This is easy to understand: if I lend $100 to you for one year at, say, minus 5 percent per annum, you would have to return $95 in one year.

    Of course, any lender (who is not out of his mind) would politely reject this kind of deal. They would be better off just holding on to cash and would not lend at a negative interest rate. I cannot go into detail here but will simply say that in a free money market, the market clearing interest rate is determined by people’s time preference. Time preference is always and everywhere positive, and so is its manifestation, the originary interest rate. In other words: the interest rate would not and cannot fall to zero, let alone into negative territory.

    So far, I have argued that the limited quantity of Bitcoin does not stand in the way of the crypto unit becoming money. However, some aspects appear to be disadvantageous for Bitcoin’s aspirations to become money.

    From the current state of technical capabilities, distributed ledger technology is unlikely to be put to widespread use in retail and large value payments. Currently, there are around 360.000 Bitcoin transactions per day, and given its current configuration, the Bitcoin network is presumably running at full capacity. This is not enough. For instance, in Germany alone there is an average of around 75 million transactions per business day!

    What is more, Bitcoin transaction costs vary widely. For instance, in July 2016, it cost around $.08 for a transaction mined on the block (data recorded in files) in the next 10 minutes. In December 2017, it cost more than $37. Currently, the price is around $4. High and volatile transaction costs might discourage the use of Bitcoin from the viewpoint of many people and institutions.

    Another aspect is finality. Financial transactions require a point in time from which they can be taken as valid. However, not all DLT (distributed ledger transaction) consensus mechanisms offer this. The “proof of work” protocol, for instance, merely provides a probabilistic finality (due to the creation of forks).

    What about safety? Progress has been made in Bitcoin safekeeping (think of, for instance, cold storage wallets). However, vulnerabilities remain, as scams and thefts at even the largest and most sophisticated crypto exchanges prove.

    A central issue in this context is where to store your private cryptographic keys. They need to be stored offline (so they cannot be hacked), and the place of storage must the secured (to prevent theft) and immune to electromagnetic fields (otherwise the stored codes could be destroyed).

    For professional investors, this is a challenge. They might need a bunker storage solution, but this could turn out to be quite inconvenient. How does one get access to private keys quickly and at low costs?

    Bitcoin was developed for peer-to-peer (P2P) exchange without any intermediation. But would people really want a monetary and financial system without any middleman? For some payments, you may not need intermediation (e.g. to buy a book).

    For others, you may wish to involve an intermediary. Imagine you mistakenly send 100 Bitcoins instead of just one. How would you get it back? Who is going to help you out in a P2P world without any intermediation? The answer is nobody, and nobody would help you if your wallet got hacked.

    What about more sophisticated financial transactions like borrowing and lending? It is hard to imagine that this can be done in an anonymous and trustless regime as envisaged by the Bitcoin protocol. Interestingly enough, many Bitcoin owners seem to keep their coins on crypto exchanges, which control the private keys of the Bitcoins. Obviously, people trust some intermediaries in the Bitcoin space, actively demanding the services supplied by these “middlemen.”

    This observation points us toward a rather important but unfortunately often neglected issue: To support economic progress and a sophisticated monetary sphere, a currency must be compatible with some form of financial intermediation. Otherwise, it will be difficult to compete effectively with existing fiat currencies, which offer money users many convenient intermediary services.

    How would an intermediation structure look in a free market of money? For the sake of illustration, let us review the workings of a digitalized gold money system.

    Let us say Mr. Miller owns one ounce of gold (31,1034 … grams). It is recorded on the asset side of his private balance sheet.

    For greater convenience, he deposits 10 grams of gold with a money warehouse, which offers security, storage, and settlement services.

    The 10 grams of gold are credited on Mr. Miller’s account with the money warehouse, and the accounting unit is gold gram.

    In return, Mr. Miller gets a digital gold gram certificate (which may be called a money certificate) documenting that he owns 10 grams of gold deposited with the money warehouse.

    The digital gold gram certificate serves as a means of payment, and it can be redeemed into gold at any time at par with the money warehouse.

    Now there is a steel company that wants to raise money by issuing a bond. Mr. Miller wishes to earn some return, so he decides to exchange his digital gold gram certificate against the bond. In Mr. Miller’s balance sheet, the digital money certificate is replaced by the bond. The steel company records the digital gold gram certificate as an asset on the left side of its balance sheet and a liability on the right side of its balance sheet. Now the steel company can spend the money on input factors, salaries, rents, etc.

    In addition to this “direct credit transaction,” a digitalized gold money also facilitates all sorts of “indirect credit transactions,” as well as all kinds of transactions in stock and bond markets, derivative and commodity markets, M&A markets, and so on.

    In fact, in a free market of money, you would not only have money warehouses (offering safekeeping and settlement services for money proper) but also institutions specialized in credit, hedging, pooling risks, insurance, etc.

    Of course, we could imagine Bitcoin, rather than gold, being “base money,” and digital Bitcoin certificates, rather than digital gold certificates, being used as a means of payment. Either way, intermediation would work just fine, and unhampered competition would effectively prevent the practice of money warehouses operating on fractional reserves.

    However, with the need for an intermediation structure, it is hard to see how the monetary system—whether Bitcoin or gold serves as “base money”—could escape the repression of the state. Under intermediation, it is no longer possible to have transfers of any kind confined to the purely virtual realm; transfers would have a point of reference in the real world where the state has become overwhelmingly powerful.

    While states might no longer be in a position to stamp out cryptocurrencies, they can and actually will do everything in their power to increase the hurdles preventing money candidates—be they cryptocurrencies or precious metals—from replacing fiat currencies.

    For instance, states impose VAT and capital gains taxes and restrictive regulations on potential money candidates, and they bestow the privilege of legal tender status on their own fiat currency. All of these are hostile to the idea of good money.

    The emergence of cryptocurrencies has given great impetus to the search for better money. As paradoxical as it sounds, it is the state that is one of the greatest allies of Bitcoin in particular or any other crypto unit in general. If there were no state (as we know it today), we would undoubtedly have a free money market. People would be free to decide what money they would choose. No one would have to hide. In a genuinely free market of money, it would be far from a done deal that Bitcoin would outcompete digitalized gold money.

    The world is as it is, however, so I would like to conclude by saying that technological progress is just one aspect of making the emergence of good money possible. The other aspect is to inform the public at large that fiat money is bad money, that good money is possible, and that it is advantageous for them, and that all it takes is a free market in money unimpeded by the state.

    Technology alone might not do the trick of putting an end to the tyranny of fiat monies—it also requires people to actively invoke their right to self-determination in monetary affairs.

    ***

    This talk was given at the Value of Bitcoin Conference in Munich, 3 June 2019.

    Deutsche Bundesbank (2017), Distributed-Ledger-Technologien im Zahlungsverkehr und in der Wertpapierabwicklung: Potenziale und Risiken, Monthly Report, September, pp. 35 – 50.

    Harwick, C. (2016), Cryptocurrency and the Problem of Intermediation, The Independent Review, v. 20, n. 4, Spring, pp. 569 – 588.

    Herbener, J. ed. (2011), The Pure Time Preference Theory of Interest. Auburn, Ala.: Ludwig von Mises Institute.

    Hülsmann, J. G. (2008), The Ethics of Money Production, Auburn, Ala.: Ludwig von Mises Institute.

    Mises, L. v. (1998), Human Action: A Treatise on Economics. The Scholar’s Edition. Auburn, Ala.: Ludwig von Mises Institute.

    Mises, L. v. (1953), Theory of Money and Credit. New Haven, Yale University Press.

    Polleit, T. (2017), Die Blockchain-Disruption: Geld, Bitcoin und Digitalisiertes Goldgeld, Ludwig von Mises Institut Deutschland, 20 December.

    Polleit, T. (2014), Geldreform: Vom schlechten Staatsgeld zum guten Marktgeld, FinanzbuchVerlag, München.

    Reik, T. (2019), Bitcoin Revisited, Sprott Insights, 29 May.

    Rothbard, M. N. (2009), Man, Economy, and State. The Scholar’s Edition. Auburn, Ala.: Ludwig von Mises Institute, Auburn, US Alabama.

    Rothbard, M. N. (2008), The Mystery of Banking, 2nd Edition, Ludwig von Mises Institute, Auburn, US Ala-bama.

    Thorsten Polleit


    Thorsten Polleit

    Thorsten Polleit, Chief Economist of Degussa, Honorary Professor at the University of Bayreuth, and Partner of Polleit & Riechert Investment Management.

    This article was originally published on FEE.org. Read the original article.


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  • How America’s Use of Economic Warfare Could Spark a Currency Crisis

    Posted on by Azrael Comment

    The Trump administration dropped 44,000 bombs in its first year, a faster bombing pace than President Obama, who bombed more than President Bush. America has intervened militarily in other countries for decades against the council of founders like George Washington, who advised that America should “observe good faith and justice towards all nations; cultivate peace and harmony with all.”

    But the U.S. doesn’t only project power across the globe through its massive military. It also weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick.

    The U.S. government showers billions of dollars in foreign aid to “friends.” On the other hand, “enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar.

    How exactly does the United States weaponize the dollar?

    It utilizes the international payment system known as SWIFT.

    SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system.

    SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries.

    The U.S. has used the system as a stick before. In 2014 and 2015, it blocked several Russian banks from SWIFT as relations between the two countries deteriorated. More recently, the U.S. threatened to lock China out of the dollar system if it failed to follow U.N. sanctions on North Korea. Treasury Secretary Steven Mnuchin threatened this economic nuclear option during a conference broadcast on CNBC:

    If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful.

    A number of countries, including China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. It comes as no surprise that countries on shaky ground with the U.S. would take such measures, but even traditional U.S. allies have grown weary of American economic bullying.

    On Sept. 24, the E.U. announced its plans to create a special payment channelto circumvent U.S. economic sanctions and facilitate trade with Iran. E.U. foreign policy chief Federica Mogherini made the announcement after a meeting with foreign ministers from Britain, France, Germany, Russia, China, and Iran. She said the new payment channel would allow companies to preserve oil and other business deals with Iran:

    In practical terms, this will mean that E.U. member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world.

    The plan comes in response to Donald Trump’s decision to withdraw from the Iran nuclear deal. The E.U., Russia, and China released a joint statement saying the “Special Purpose Vehicle” will “assist and reassure economic operators pursuing legitimate business with Iran.” The statement also said the signatories to the Iran deal “reconfirmed their commitment to its full and effective implementation in good faith and in a constructive atmosphere.”

    The Special Purpose Vehicle will serve as a clearinghouse for transactions with Iran. An Al Jazeera reporter explained it this way:

    If the Italians want to buy some Iranian oil, they will wire the money to this entity which will then handle the financial transactions from there and vice versa. There will be no involvement of commercial banks and central banks, both of whom are terrified at the prospect of US retribution if they are seen to be going against US sanctions.

    Rodger Shanahan, a research fellow at the Lowry Institute for International Policy, called the plan “a poke in the eye for the U.S.”

    America’s undeclared wars have cost trillions of dollars. Economic warfare could come at a similar price. De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam. This is yet another consequence of the U.S. government abandoning the constitutional requirement for sound money. The Federal Reserve perpetuates the system with its money printing and interventionist monetary policy.

    As James Madison said, “Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other.” War always comes at a steep cost—whether military or economic.

    Source: How America’s Use of Economic Warfare Could Spark a Currency Crisis – Foundation for Economic Education


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  • How a Bitcoin System is Like and Unlike a Gold Standard

    Posted on by Azrael Comment

    Many commentators have compared Bitcoin to gold as an investment asset. “Can Bitcoin Be Gold 2.0,” asks a portfolio analyst. “Bitcoin is increasingly set to replace gold as a hedge against uncertainty,” suggests a Cointelegraph reporter.

    Economists, by contrast, are more interested in considering how a monetary system based on Bitcoin compares to a gold-standard monetary system. In a noteworthy journal article published in 2015, George Selgin characterized Bitcoin as a “synthetic commodity money.” Monetary historian Warren Weber in 2016 released an interesting Bank of Canada working paper entitled “A Bitcoin Standard: Lessons from the Gold Standard,” which analyzes a hypothetical international Bitcoin-based monetary system on the supposition that “the Bitcoin standard would closely resemble the gold standard” of the pre-WWI era. More recently, University of Chicago economist John Cochrane in a blog post has characterized Bitcoin as “an electronic version of gold.”

    In what important respects are the Bitcoin system and a gold standard similar? In what other important respects are they different?

    Similarities and Differences

    Bitcoin is similar to a gold standard in at least two ways. (1) Both Bitcoin and gold are stateless, so either can provide an international base money that is not the creature of any national central bank or finance ministry. (2) Both provide a base money that is reliably limited in quantity (this is the grounding for Selgin’s characterization), unlike a fiat money that a central bank can create in any quantity it likes, “out of thin air.”

    Bitcoin and the gold standard are obviously different in other ways. Gold is a tangible physical commodity; bitcoin is a purely digital asset. This difference is not important for the customer’s experience in paying them out, as ownership of (or a claim to) either asset can be transferred online, or in person by phone app or card.

    The “front ends” of payments are basically the same nowadays. The “back ends” can be different. Gold payments can go peer-to-peer without third-party involvement only when a physical coin or bar is handed over. Electronic gold payments require a trusted vault-keeping intermediary. Bitcoin payments operate on a distributed ledger and can go peer-to-peer electronically without the help of a financial institution. In practice, however, many Bitcoin transactions use the services of commercial storage and exchange providers like Coinbase.

    The most important difference between Bitcoin and gold lies in their contrasting supply and demand mechanisms, which give them very different degrees of purchasing power stability. The stock of gold above ground is slowly augmented each year by gold mines around the world, at a rate that responds to, and stabilizes, the purchasing power of gold. Commodity (non-monetary) demands also respond to the price of gold and dampen movements in its value. The rate of Bitcoin creation, by contrast, is entirely programmed. It does not respond to its purchasing power, and there are no commodity demands.

    Difference in Supply Mechanisms

    Let’s consider supply in more detail. Secularly, annual production of gold has been a small percentage (typically 1% to 4%) of the existing stock, but not zero. Because the absorption of gold by non-monetary uses from which it is not recoverable (like tooth fillings that will go into graves and stay there, but unlike jewelry) is small, the total stock of gold grows over time. Historically this has produced a near-zero secular rate of inflation in gold standard countries.

    The number of BTC in circulation was programmed to expand at 4.0 percent in 2017, but the expansion rate is programmed to fall progressively in the future and to reach zero in 2140. At that point, assuming that real demand to hold BTC grows merely at the same rate as real GDP, Bitcoin would exhibit mild secular growth in its purchasing power, or equivalently we would see mild deflation in BTC-denominated prices of goods and services. (Warren Weber’s paper similarly derives this result.) This kind of growth-driven deflation is benign, but the difference is small in real economic welfare consequences between a money stock that steadily grows 3% per year and one that grows 0%.

    The key difference in the supply mechanisms is in the induced variation in the rate of production of monetary gold in response to its purchasing power, by contrast to the non-variation in BTC. A rise in the purchasing power of BTC does not provoke any change in the quantity of BTC in the short run or in the long run. In Econ 101 language, the supply curve for BTC is always vertical. (The supply curve is, however, programmed to shift to the right over time, ever more slowly, until it stops at 21 million units).

    By contrast, a non-transitory rise in the purchasing power of gold brings about some small increase in the quantity of monetary gold in the short run by incentivizing owners of non-monetary gold items (jewelry and candlesticks) to melt some of them down and monetize them (assuming open mints) in response to the rising opportunity cost of holding them and to the owners’ increased wealth. The short-run supply curve is not vertical. Still more importantly, this rise will bring about a much larger increase in the longer run by incentivizing owners of gold mines to increase their output. The “long-run stock supply curve” for monetary gold is fairly flat. (I walk through the stock-flow supply dynamics in greater detail in chapter 2 of my monetary theory text.) The purchasing power of gold is mean-reverting over the long run, a pattern seen clearly in the historical record.

    Because its quantity is pre-programmed, the stock of BTC is free from supply shocks, unlike that of monetary gold. Supply shocks from gold discoveries under the gold standard were historically small, however. The largest on record was the joint impact of the Californian and Australian gold rushes, which (according to Hugh Rockoff) together created only 6.39 percent annual growth in the world stock of gold during the decade 1849-59, resulting in less than 1.5 percent annual inflation in gold-standard countries over that decade. For reference, the average of decade-averaged annual growth rates over 1839-1919 was about 2.9 percent.

    Predicting Supply

    As a result of the long-run price-elasticity of gold supply combined with the smallness and infrequency of supply shocks, the purchasing power of gold under the classical gold standard was more predictable, especially over 10+ year horizons, than the purchasing power of the post-WWII fiat dollar has been under the Federal Reserve.

    As I have written previously: “Under a gold standard, the price level can be trusted not to wander far over the next 30 years because it is constrained by impersonal market forces. Any sizable price level increase (fall in the purchasing power of gold) caused by a reduced demand to hold gold would reduce the quantity of gold mined, thereby reversing the price level movement. Conversely, any sizable price level decrease (rise in the purchasing power of gold) caused by an increased demand to hold gold would increase the quantity mined, thereby reversing that price level movement.”

    Bitcoin lacks any such supply response. There is no mean-reversion to be expected in the purchasing power of BTC, and thus its purchasing power is much harder to predict at any horizon.

    Describing gold supply, Warren Weber writes: “Changes in the world stock of gold were determined by gold discoveries and the invention of new techniques for extracting gold from gold-bearing ores.” This is not well put. Changes in the world stock of monetary gold come about every year from normal mining. Gold strikes and technical improvements in extraction brought about changes in the growth rate (not the level) of the stock.

    Historically, the changes in the growth rate were not dramatic by comparison to changes in the postwar growth rates of fiat monies. As often as not, the changes in gold stock growth rates were equilibrating, speeding the return of the purchasing power of gold to trend from above trend. As Rockoff noted, some important gold strikes (like the Klondike in the 1890s) and some important technical breakthroughs (like the cyanide process of 1887) were induced by the high purchasing power of gold at the time, which gave added incentive for prospecting and research.

    The phrase from John Cochrane quoted above is part of a sentence that reads in its entirety: “It’s an electronic version of gold, and the price variation should be a warning to economists who long for a return to gold.” From the consideration of the mean reverting character of the purchasing power of gold, by contrast to Bitcoin’s lack of such a character, we can see that the second half of Cochrane’s statement is incorrect.

    The inelastic supply mechanism that produces price variation in Bitcoin should give pause to those who predict that Bitcoin will become a commonly accepted medium of exchange. It says nothing about the purchasing power of gold under a gold standard.

    Reprinted from Alt-M.


    Larry White

    Lawrence H. White is a senior fellow at the Cato Institute, and professor of economics at George Mason University since 2009. An expert on banking and monetary policy, he is the author of The Clash of Economic Ideas (Cambridge University Press, 2012), The Theory of Monetary Institutions (Basil Blackwell, 1999), Free Banking in Britain (2nd ed., Institute of Economic Affairs, 1995), and Competition and Currency (NYU Press, 1989).

    This article was originally published on FEE.org. Read the original article.




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