exploring Bitcoin

JDH services jaydeeaich at gmail.com
Sun Mar 13 21:35:29 EDT 2011


On Sun, Mar 13, 2011 at 10:04 PM, Sebastien Bourdeauducq
<sebastien.bourdeauducq at lekernel.net> wrote:
> On Sun, 2011-03-13 at 14:49 -0700, Ron K. Jeffries wrote:
>
>> My mind is open, but it's not clear to me Bitcoin
>> will prove to be a practical method of making payments.
>
> Why not?
Basic Monetary Economics, They give out bitcoins for free. money
functions as a medium of exchange, store of value, and unit of
account. Bitcoin terrible for all 3 of those fuction
http://en.wikipedia.org/wiki/Monetary_economics.

OH and BTW bitcoin is illegel in the US. It runs afoul of
anti-gambling laws.  It's just a big cryptographically secure and
distributed lottery.


It's not a  fiat currency, because no government accepts it as legal
tender.(you an can't pay your taxes in Bitcoins)
It's not a  representative money,as there is no /bank/ that is
socially obligated to redeem it in fixed amount of some resource.
It's not a neo-commodity-money Collectible Currency Stock. like
L$(which value is what ever you can get for it on the Lindex exchange)
and USD(which value is what ever it is going for on the Forex)


It's the same reason Lindin Labs have to stop giving L$ to free accounts.

WE had an alternate E-currency once.  If you had a Palm III back in
the late 90's you probably heard of it.
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1025
Confinity was founded in December 1998 by Max Levchin, Peter Thiel,
Luke Nosek, and Ken Howery, initially as a Palm Pilot payments and
cryptography company.
But we all know what happened to that
http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1031

+++++

The Monetary Economics of Thurston Howell III

Gilligan's Island is now out on DVD, reawakening the unanswered
questions of childhood: why does the Skipper let Gilligan help with
anything when he knows he'll just screw it up? Why did the movie star
take a day cruise in an evening gown? Why did two of the richest
people in the world board a dinky boat with the hoi polloi instead of
leasing a private yacht?  And why do any of the other stranded
castaways treat the millionaire's government money as valuable while
stuck on an island where no such government can enforce its value?

Because it's just a dumb TV show.

But that last question stuck with me. Would fiat dollars be treated as
valuable without the government around to enforce its fiat? My
impression in childhood was that money belonged to the government, was
inextricably bound to the government, and we, the citizens of the
government, were just using the money "on loan" so to speak. This
impression came not only from the look of the money itself, but from
American history, as children's cartoons had communicated it to me.
(One Scooby Doo episode ends with the hidden "treasure" turning out to
be a case full of hoarded and now worthless Confederate dollars.)

A Brief Monetary History of Gilligan's Island

In early episodes, we see Mr. Howell hiring various services from
other castaways. We eventually learn he's been writing checks on a
mainland (and therefore inaccessible) bank. This works while the group
consider their condition temporary, but the checks are quickly
devalued and eliminated when the castaways begin to prepare for the
possibility of an indefinite stay on the island.

In Episode 9,  "The Big Gold Strike," Gilligan and Mr. Howell find a
gold mine on the island, which Howell convinces Gilligan to keep
secret from the others. By the time everyone learns about the mine,
Howell has already taken the lion's share of the most easily
accessible gold. He'd like to hoard it for himself, but the other
castaways begin charging him for their goods and services. Soon
everyone has a small fortune in gold, which they all try to smuggle
aboard a tiny escape raft. Their collected wealth, of course, ends up
at the bottom of the lagoon.

In later episodes, monetary exchange takes place in US paper currency.
Was it impossible to recover the gold from the lagoon? Perhaps the
writers found it more convenient to deal in the money the television
viewers themselves were most familiar with. We might dismiss this as
economic naivete on the part of the writers, but recent history
provides evidence that fiat paper can, in fact, outlive its
government. Not only that, but post-fiat money -- dead government
currency -- can out-compete American greenbacks!

Undead Money

After the invasion of Iraq, there was no more central bank printing
dinars and no more Iraqi government to put the fiat behind its fiat
currency. The American military started handing out US$20 bills and
expected the Dinar to fade from existence. Instead, to the chagrin of
the occupation force, the Dinar's value doubled against the Dollar in
two weeks. Statues of Saddam Hussein were being toppled, but his face
was still on the preferred currency, and gaining in popularity. Some
saw this as patriotism: a silent protest by the occupied population
against the invading force. But we need only look further north, to
the Kurd-controlled areas, to find a more economic explanation.

After the first Gulf War, Iraq changed its currency from the so-called
Swiss Dinar to the more recent Saddam Dinar. When a government changes
its fiat currency, it announces a transition period during which the
old bills can be brought in and exchanged for the new. After the
window closes, the old notes are declared worthless.

To no one's surprise, the rebel Kurds did not visit the Iraqi
government to make such an exchange. They just kept using the old
money. It was familiar, hard to counterfeit, and in its post-fiat
status, it was no longer inflationary: that is to say, the relatively
fixed supply of notes made the currency a better store of value than
the new Saddam dinars being printed (and printed and printed) further
south.

The Swiss Dinar may have been the first successful post-fiat money.

For a brief period after the invasion -- the time it took the
Occupation Authority to reestablish an Iraqi central bank and start
printing new dinars -- the old Saddam dinars joined the older Swiss
dinars in their post-fiat status. And lo and behold, Saddam's dead
dinars rose in value compared to the inflationary dollars of the
occupation force.

But how can this be? A money backed only by the force of the State is
backed by literally nothing in the absence of that state. And yet the
dinars continued to change hands.

By the end of the year, however, the occupation government was
printing new dinars, at first with Saddam still on them (for
familiarity), then transitioning into something that resembled the
Swiss Dinar (to promote confidence). The brief, unplanned experiment
in post-fiat monetary theory was over, but the results were
unambiguous: a stable money, even a completely unbacked currency,
beats out inflationary government paper in both value and
marketability.

While it may seem that Gilligan's fellow castaways would reject
Howell's dollars as worthless, the case of the Saddam Dinar (and the
Swiss Dinar before it) offers evidence in favor of "worthless paper."

For an understanding of the afterlife of government currency, we need
briefly to review the history and theory of money itself.

Direct & Indirect Exchange

Money arises naturally out of barter. This isn't just a historical
fact but was theoretically proven by Ludwig von Mises in his Theory of
Money and Credit: money can only have developed from barter.

Imagine Gilligan's Island without the Howells and their paper dollars.
Without money, commodities exchange directly: coconuts for fish, fish
for bamboo, etc. But even with barter, some commodities are more
"marketable" than others. Perhaps one of the castaways might
eventually buy one of the Professor's books, but they will more often
purchase Mary Ann's coconut cream pies -- or the coconuts themselves.
Coconuts are more marketable than books.

Over time, the commodity that is most marketable becomes popular for
indirect exchange: the Skipper trades his fish for Ginger's decorative
shells, not because he wants shells, but because he knows he can trade
them for Gilligan's coconuts. The price of a commodity is its exchange
ratio for the most marketable good, e.g., 12 shells per coconut. The
value of the shell money is based on the goods it traded for yesterday
-- since we can't know what prices will be today. Right now, the
Skipper is willing to trade one of his fish for two coconuts, and he
knows that Gilligan was recently willing to trade his coconuts for a
dozen shells each, therefore the Skipper wants to price his fish at
two-dozen shells each: enough to buy two coconuts. Prices can change
from day to day, but today's new prices will be based on the prices of
other things yesterday.

Government Paper

Exchanges that started in barter evolve toward a common money currency
-- decorative shells, in this example (and also in the more historical
examples of trade among coastal Africans and North American Indians).
Now suppose the Professor found the use of shells to be primitive and
irrational -- "a barbarous relic!"

The Professor, having successfully invented many new tools, decides to
invent a more rational money. He finds a way to preserve palm leaves
and mark them with denominations. The denominations do not represent a
claim for a certain number of shells. The numbers refer only to each
other and to nothing else, no other commodity. If they have value, it
is only because the Professor says they have value.

Would anyone use the Professor's new money?

Any new commodity can come onto the market, but its price will be
newly negotiable and its marketability (how many people will trade
their goods for it) will be as-yet undetermined. This would be the
status of the Professor's new "currency." Its marketability, and
therefore its value (as money), would be unknown. Money is, by
definition, the most marketable good: that thing which people will
most readily accept in trade will also be that thing that fosters
indirect exchange. Even if the others wanted to acquire preserved palm
leaves, the leaves could not possibly become the most marketable
commodity overnight and could therefore not start out as money. If the
Professor's leaves become money, it will be through the same
barter-based process that made the decorative shells into money.
(Notice, however, that if this were to happen, the unit of value would
be the physical leaf and not the arbitrary denomination marked on the
leaf. There's no reason a bartered leaf marked "1,000" should trade
for ten times as much as a bartered leaf marked "100.")

Does this make fiat money impossible? Obviously not, or we wouldn't be
using it now, but it does mean that it has to evolve slowly and in
discrete stages. Murray Rothbard recounts the process in his book,
What Has Government Done to Our Money? At each stage in the
transition, from barter to pure commodity money to monopoly coinage to
demand deposits to fractionally-backed bank notes to completely
unbacked government fiat, the earliest value of the new incarnation is
based on the latest value of the older form of money. Today's new
money requires yesterday's prices.

Over centuries, governments have taken over money from the market, and
in the 20th century, most currencies became unbacked by anything other
than the force of the State. But, as we see in the case of post-war
Iraq, the fiat history of a currency can serve as the starting point
for its post-fiat valuations. The Saddam Dinar doubled its value
(measured against the Dollar) in only two weeks, but it couldn't have
gotten started without its previous, albeit inflationary and unstable,
exchange value. At that point, astonishing as it may seem, no
government was necessary to maintain the value of the money. The
market can reclaim money from government.

Why did the unbacked paper do better than the US Dollar? Because the
quantity of dinars was relatively fixed, while the supply of dollars
grew. The law of supply and demand tells us that, all else being
equal, a rise in the supply of a thing will lower the price of that
thing. The thing, in this case, is the Dollar itself; its "price" is
its buying power, which the Iraqis watched erode drastically within
days.

This is why the castaways value Thurston Howell's paper dollars:
because whatever absurd amount he may have brought with him for "a
three-hour tour," that amount is now fixed. Dollars are the most
stable currency available on Gilligan's Island, and the government has
nothing to do with it. Or rather: the absence of government has
everything to do with it. If people are allowed to pick their own
preferred money, they will pick whatever holds its value most
reliably.

What About Gold?

It would be tempting to see the post-fiat currencies as second-best
options, valuable only in the absence of true commodity money, such as
gold. But we have to avoid the fallacy of inherent value: gold became
the universal money not just through its inherent "money-like virtues"
but because, over the centuries, its supply became fairly stable.
Platinum, for instance, has all the apparent virtues of gold (and may
well exceed gold in at least one virtue: the transportable
value-per-unit-weight) but because it is being actively and
productively mined, its supply (and therefore its exchange value) is
unstable -- for now. Someday, however, if the platinum supply levels
off, we gold bugs might jump ship for the higher-valued metal.

So would hard money -- "real money" -- be better for the island
economy than the paper dollars Thurston Howell brought with him?
Should the castaways have recovered the gold from the lagoon and used
it instead of Howell's paper?

Actually, there is reason to believe that the post-fiat dollars of
Thurston Howell III would make better money than island gold.

Remember that Howell has already extracted the easiest gold before the
other castaways learn of the mine. So what do the others do? They
begin charging Howell higher prices for their goods and services. He's
free to decline such exchanges, of course, but the pampered
millionaire can't live comfortably without help from those around him
-- and their help is now very expensive.

Yes, it's just a dumb TV show, but in this case we see the laws of
economics accurately portrayed: once the castaways realize they're
marooned indefinitely, their economic thinking focuses on the limited
resources of the island. As Mises claimed, any fixed amount of money
is the correct amount of money for a given economy. Prices will
adjust. If the supply of gold money is high, and the available goods
and services are few, then prices will be very high in terms of gold.
And in this context, the gold money supply isn't fixed: the mine is
still there, with who knows how much more gold yet to be extracted.
Under an island gold standard, the supply of money might increase at
any time, and anticipation of that fact will drive current prices
still higher. The money ends up heavier than the goods it trades for.

The government paper in Howell's suitcases, on the other hand, is easy
to transport, hard to counterfeit, lighter than gold, and whatever
amount of it the millionaire managed to bring with him is the amount
there's going to be for a while.

On this isolated island, and in this isolated context, paper beats gold.

Conclusion

None of this is to suggest economic sophistication on the part of the
show's creators or writing staff. But Gilligan's Island Economics can
provide useful thought experiments for the same reasons Robinson
Crusoe Economics has served as a staple of classical and Austrian
School economics texts.

One thing Gilligan has, which Crusoe doesn't, is a shared culture with
the others on the island. If Robinson Crusoe had been shipwrecked with
a chest full of British banknotes, they wouldn't have done him any
good. Friday would be more likely to trade for shells or gold than he
would for the strange paper.

But on Gilligan's Island (and in the Kurdish rebel territories, and
briefly in Baghdad), people who are already used to making their
exchanges in slips of unbacked paper can continue to do so profitably
without the hand of government. The invisible hand of the market
serves them better -- even when dealing in government paper.

------

B.K. Marcus is a freelance writer in Charlottesville, Virginia. His
website is www.bkmarcus.com.

+++++

Sincerely,
Panthera Tigris Altaica




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