11 Mar 2014

A Question for the Hard-Money Bitcoin Skeptics

Bitcoin 118 Comments

“Guest” in the comments of my last Bitcoin post perfectly summed up the hard-money angst over Bitcoin. He (?) wrote:

This misses the point. There is a distinction to be made between inherent value (nothing has inherent value) and arbitrary value, where people make claims about the utility of some thing even if that thing cannot provide said utility in the real world. Yes, it is possible to make arbitrary trades, but the function of MONEY is to enable a double-coincidence of wants for goods from which people derive real utility.

What logically follows from your argument is that ANYTHING can be money merely because people BELIEVE it is worth X.

So here’s the setup to my question: Suppose governments around the world see the light, and totally get out of money and banking, treating them as lightly as the pizza industry. In such a world, I predict that gold and silver would quickly become the world’s monies once again, with competing, private-sector mints issuing coins, and competing, private-sector commercial banks issuing notes and electronic claims against their gold and silver reserves (let’s not argue about whether those claims would be backed 100%). People would walk around with actual gold and silver coins in their pockets, and merchants might even start pricing goods and services directly in weights of metal, rather than national currencies.

Now for my question: Suppose in this world, people over time found better items that replaced the actual industrial and consumption uses for gold and silver. Thus over time, an ever rising fraction of the demand to hold gold and silver is purely for monetary purposes. So at some point in this process, would all of the hard money people declare, “Shucks, at this point gold and silver are like Bitcoin was during that fad from 2009 – 2015. People are now only accepting gold today in trade because they think others will accept it tomorrow, not because they know there is a backstop where they can trade the gold and silver coins to dentists. We need to find a new money commodity, that is currently being used in production” ?

(If it matters, I am almost positive that I have read one of the Austrian giants say that it’s not necessary for a commodity money to remain a commodity, merely that there is the historical link to satisfy the regression theorem. But unfortunately I can’t find such a quote, so maybe I’m hallucinating.)

118 Responses to “A Question for the Hard-Money Bitcoin Skeptics”

  1. Matt M (Dude Where's My Freedom) says:

    “If it matters, I am almost positive that I have read one of the Austrian giants say that it’s not necessary for a commodity money to remain a commodity, merely that there is the historical link to satisfy the regression theorem.”

    This sounds really familiar to me, too. But I also can’t remember exactly where it’s from. I’d guess Rothbard but not entirely sure.

    • Smiling Dave says:

      Here is the key blunder in this article, as explained by Mises in Money and Credit:

      “Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function.” [Thus, bitcoin fails spectacularly].

      “But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange.” [Thus Bob's thought experiment has no relevance to bitcoin.]

      Another blunder is that although it may remain valuable based on its function as a common medium of exchange, that will not last long absent govt coercion. Because the moment a money loses its commodity value, it will be dropped like a hot potato, as Mises stated and proved and showed by many historical examples in Money and Credit. See my humble blog:

      http://smilingdavesblog.wordpress.com/2013/10/16/the-kickstart-fallacy/

  2. Matt Powers says:

    Good question… except David Graeber has proven, anthropologically, that the regression theorem is false.

    http://www.amazon.com/Debt-The-First-000-Years/dp/1612191290

    • Joseph Fetz says:

      Have you even read the book? If you had, you would have been laughing every few paragraphs at how horribly reasoned his thesis really is. In fact, much of the book was horribly reasoned and contradictory …

      On raffia-palm cloth:
      “This cloth was what the area was really known for. It was not only used for every sort of clothing, but also exported: the Lele considered themselves the clothiers of the region, and it was traded with surrounding people to acquire luxuries. Internally, it functioned as a sort of currency. Still, it was not used in markets (there were no markets), and, as Mary Douglas discovered to her great inconvenience, within the village, one couldn’t use it to acquire food, tools, tableware, or really much of anything. It was the quintessential social currency.”

      And then on page 138:
      “If raffia cloth was the small change of social life, camwood–a rare imported wood use for the manufacture of cosmetics–was the high-denomination currency. A hundred raffia cloths were equivalent to three to five bars. Few individuals owned much in the way of camwood, usually just little bits to grind up for their own use. Most was kept in each village’s collective treasury.”

      Here’s another one:
      “… Economists will often admit this, if you ask them in the right way. Markets aren’t real. They are mathematical models, created by imagining a self-contained world where everyone has exactly the same motivation and the same knowledge and is engaged in the same self-interested calculating exchange.”

      And here’s yet another:
      “The Tiv at that time used bundles of brass rods as their most prestigious currency. Brass rods were only held by men, and never used to buy things in markets (markets were dominated by women); instead they were exchanged only for things that men considered of higher importance: cattle, horses, ivory, ritual titles, medical treatment, magical charms.”

      There was also this absurdity from an earlier chapter (the first, if memory serves):
      “Economists like Karl Menger and Stanley Jevon’s later improved on the details of the story, most of all by adding various mathematical equations to demonstrate that a random assortment of people with random desires could, in theory, produce not only a single commodity to use as money but a uniform price system.”

      So no, it is not true that “… David Graeber has proven, anthropologically, that the regression theorem is false”. If anything he’s proven that he’s an absolute moron who has no business in academia, which is probably why Yale kicked him to the curb.

    • Joseph Fetz says:

      Oh, and let’s not forget that he essentially admits his ideological bias right in the beginning of the book.

    • Joseph Fetz says:

      Probably the only thing as embarrassing as David Graeber writing about economics and money is Gary North writing about Bitcoin.

      • Major_Freedom says:

        No no no no no

        Joe…buddy…didn’t you know that the worst scientists in the world always beat the best economists? No matter what. No matter what.

  3. Andrew' says:

    The “no inherent value” thing bumps me every time. Water’s inherent value is at least that it isn’t diamonds.

    • Neil says:

      I’ll trade you a gallon of water for a small diamond any day.

      • Andrew' says:

        Do I get to set where and when we meet?

        • Yancey Ward says:

          +1

        • Tel says:

          Haven’t you just admitted that the value of water is subjective, and therefore cannot simultaneously be inherent?

          Or at least, whatever inherent value that water does have depends on circumstance, so it isn’t a constant, making it a poor choice of reference. It’s also bulky making it difficult for transactions.

  4. Neil says:

    It’s possible, Bob, but unlikely. Maybe they replace gold with platinum, or silver with palladium, or something along those lines, but historically, gold and silver are the most marketable commodities. What else is there that’s practical enough and scarce enough to be used as money?

  5. Neil says:

    There is an esoteric argument that God created copper, silver, and gold as natural money, and this is borne out chemically in their atomic structures. If you look at the periodic table, they are stacked on top of each other in the same family. They are, in fact, the only naturally occurring elements that have a single electron in the outermost quantum level and 18 electrons in the next quantum level closer to the nucleus.

    Jesus, in Matthew 10:9, told the disciples to not take these three metals in their money belts.

    Go figure.

    • Harold says:

      Mercury, cadmium and zinc are the only elements with 2 electrons in the outer level and 18 in the one below. I don’t see why this makes copper, silver and gold natural money; am I missing some theological point?

      • Neil says:

        Yes. The reference to cu, ag, and au as money by Jesus Christ in Matthew 10:9. Also the historical use of cu, ag, and au in coins (money). US pennies used to be made of copper until 1982. US Dimes and Quarters used to be made of silver until 1964. I don’t think any of the metals you listed have a broad history of being used as monetary metals, while all of the ones I listed do have such a history. Jesus did not refer to the ones you listed as money either. He did refer to the ones I listed as money.

        • Harold says:

          I was wondering specifically about the electron orbital bit – I wondered if 18: 1 was significant in some way that say 18:2 for mercury was not.

          • Neil says:

            I don’t know of any particular significance of the numbers 18 or 1. I just think it’s interesting that those three metals are mentioned by Christ as money, were historically used as money in coinage, and are also the only natural elements to have that orbital structure. Coincidence or divine monetary design?

  6. RPLong says:

    Prior to the advent of Bitcoin, I wondered if perhaps certain stocks and bonds could function as money substitutes. Before we all lose our proverbial marbles over this, my conjecture was based on an evolution in the way we treat stocks/bonds, not an assumption that if money disappeared, stocks/bonds would fill the void.

    But now that Bitcoin exists, I believe the future will be something like it. We don’t really “need” hard money anymore, IMHO. I think Bitcoin is “IT” but I do think it represents the next evolutionary step.

  7. Neil says:

    Don’t forget, Bob, Bitcoin is not a commodity, and therefore doesn’t fit the Austrian definition of money. Just because bitcoin can theoretically be kept scare doesn’t mean it is money, because it has absolutely no other use. Gold and silver, on the other hand, have industrial uses even if they aren’t used as a medium of exchange by the masses.

    • Matthew Gilliland says:

      The Austrian definition of money is “the most saleable [liquid] good.” That’s it. Various Austrians have referred to this as a “commodity” by the traditional definition, yes, and it has been referred to as “sachgeld” (thing-money) by Mises/Menger, which is translated and used in English as “commodity money,” but it doesn’t necessarily carry that connotation originally. Furthermore, there’s no reason in Austrian theory why something non-tangible can’t be a money; to say that it can’t because it isn’t a commodity is to beg the question.

    • Bob Murphy says:

      Neil are you saying right now, US dollars aren’t money? I’m not asking if they’re “legitimate” money or “good” money, but you’re saying they’re not money?

      • Andrew' says:

        Too soon to tell…

      • Neil says:

        I think US dollars are money. But they don’t meet the Austrian definition of money and therefore they are capable of losing 100% of their value. This is because, like bitcoin, they are not a commodity, not even physical or material most of the time anymore, and nothing more than a figment of the collective imagination.

      • guest says:

        That’s actually my position: that Federal Reserve Notes aren’t actually money.

        They USED to be IOUs *FOR* money, but now they are “I owe you some promises”, or “IOU Nothings”.

        As an aside: IOUs are supposed to become void when redeemed; What happens to bitcoins when they are redeemed for actual goods? – They don’t become void, and that makes them more of a fraud.

        Why do Bitcoin adherents need to protect it from the government, anyway, since all they’re doing is arbitrarily assigning values to things, not with a view toward determining profit and loss in terms of the goods that their “money” will buy? There are a practically endless number of things on the earth that one may choose to arbitrarily assign values to.

        Just pick up some dirt and tell people it’s worth a house; What is the government going to do, confiscate dirt?

        Since the function of money is to enable people to determine profits and losses in terms of the goods and services they can buy with it, the money must have a connection to real, albeit subjective, utility.

        And the only way a money CAN have a connection to utility is if the money, itself, has utility.

        • Tel says:

          The inherent value of US Federal Reserve Notes is that you can pay your taxes with them. That is to say, you pay for protection from violence (both foreign and domestic).

          • guest says:

            I’ve come to understand that our taxes are actually being used to misrepresent Americans to other countries by sending the troops to meddle in other people’s business:

            Is Ron Paul serious? Blowback in 1979 from a 1953 coup?
            http://www.youtube.com/watch?v=ldgbOxDX6DE

            Ron Paul – Israel Created Hamas, Just Like We Create Al Qaeda – January 9, 2008
            http://www.youtube.com/watch?v=mgSYeBu_KdE

            And the fact that Congress hasn’t tried Obama for treason means that the representatives have no intention of following the Constitution.

            We’re actually being robbed to pay people to instigate hostilities abroad and to pay for central planning programs that not only don’t work, but were never intended to work (unless by “it’s working” one means “fulfilling the agenda of the politician” as opposed to conforming to the consent of the governed).

            Not to mention that the Income Tax is unconstitutional:

            Irwin Schiff vs. IRS on Fox TV News
            http://www.youtube.com/watch?v=s0yqy06ZEzE

    • George Stiglitz III says:

      Don’t forget, Bob, Bitcoin is not a commodity, and therefore doesn’t fit the Austrian definition of money. Just because bitcoin can theoretically be kept scar[c]e doesn’t mean it [will be].

      FIxed that for ya

  8. Carlos Novais says:

    1. Bitcoiners says that the blockchain potential will provide many more uses

    2. The best currency appears to be one with stable quantity so that means no quantity deflation nor inflation, only possible if not an investment nor a consumption product = no use (or almost) besides being a medium of exchange. “use” in the meaning of being consumed (quantity deflation).

    3. Bitcoin started as being purchased as barter (Pizza by scarce bitcoins) and then… regression theorems sets in mixed with speculation about potential as “money”.

    • Tel says:

      On point (1) you supposedly can use Bitcoin to seal a contract with neutral 3rd party escrow. Or in other words create a transaction with N-way entanglement rather than our traditional A pays B style of transaction.

      Disclaimer, I’ve never seen this working, nor met anyone who got it working… this is entirely just a neat idea at this stage.

    • George Stiglitz III says:

      2. The best currency appears to be one with stable quantity so that means no quantity deflation nor inflation,

      No, no, no. Please, a free market in the production and supply of money is the ‘best’, as it does not egress on others rights, and profit/loss calculations nicely moderate supply to growth — which is not flat, as the BTC ‘setup’ avers

  9. Major_Freedom says:

    “So at some point in this process, would all of the hard money people declare, “Shucks, at this point gold and silver are like Bitcoin was during that fad from 2009 – 2015. People are now only accepting gold today in trade because they think others will accept it tomorrow, not because they know there is a backstop where they can trade the gold and silver coins to dentists. We need to find a new money commodity, that is currently being used in production”

    Can’t say, but if I understand what you’re saying, then it might make sense to say that if gold and silver are what Bitcoins are now: goods traded against dollars which are still the medium of exchange.

    People say Bitcoins go into a bubble or not by way of how many Bitcoins are being exchanged against dollars, not by how many real goods a given Bitcoin buys. But if the scenario is a world where gold and silver are money, then it would not make much sense to say that gold and silver are in a bubble or not based on how many real goods a given Bitcpin buys.

    People are still reasoning from the dollar and tacitly holding the dollar as money when they say things like “Bitcoins are in a bubble.” To say Bitcoins are in a bubble because of how many dollars are being exchanged against them, is assuming dollars, not Bitcoins, are money.

    How many people, well, other than me, say “Dollars are in a bubble”? If the dollar prices of real goods declines significantly, who would think “Gee, look at how expense dollars are! They gotta be in a bubble.”?

    Saying something, anything, is in a “bubble”, presupposes a valuation relative to some other, “more important” standard.

    Thus, IF Bitcoins are one day to be money, then bubble talk will likely take the form of things exchanged against Bitcoins, not Bitcoins, being in a bubble. Maybe gold and silver, who knows.

    But if gold and silver are the money, then the things in a bubble would be those things exchanged against gold silver, like maybe Bitcoins. And closer to home, if dollars and not Bitcoins are the money, the we would likely see talk of Bitcoins, not dollars, to be in a bubble.

  10. Major_Freedom says:

    I don’t understand why all those gold haters and those who are quick to accuse others of paranoia and conspiracy theories, seem to have so much difficulty truly welcoming and encouraging free market competition in money, to see exactly what individuals protected of their property rights would choose on their own.

    Shouldn’t they be the first in line to support true legalization of gold and silver? Wouldn’t it be a great opportunity for them to shine the goldbugs on, after nobody chooses the barbarous relic, and instead choose the ancient Chinese writing surface technology with pictures of past mafia dons? I mean, wouldn’t that just make them feel so good to have been proven right?

    • Bob Roddis says:

      Exactly! Since those horrible metals are nothing but relics, no sane person would ever own or use them.

      Hide your eyes, MF. I’m making an MMTer reference. Matt Franko of the Mike Norman site is constantly saying that war and pillage are caused by love of “metals”. BTW, the MMTers believe in the state theory of money.

      Jethro Bodine comes to mind.

      • Bob Roddis says:

        That sounds like “doublethink”. To coin a phrase.

    • Keshav Srinivasan says:

      But is the claim made by the “gold haters” that people would never use gold, or that it would be better if people didn’t use gold? You might believe that there is no valid standard of what’s good for someone other than that which they themselves choose to do, but the vast majority of the “gold haters” you speak of don’t share that belief.

      • Major_Freedom says:

        In answer to your question: both.

  11. b. says:

    i would argue that if you came today into a mom and pop store or even a local walmart with some gold coins, they would accept it as payment.they could open you a credit account chained to market prices or set the price right away.i can’t really imagine talking them into accepting bc.
    also mr. murphy, or anyone smarter than me, could you please explain to me how bitcoins are scarce?there are tons of these virtual currencies, some have even better control and security mechanisms and still they cost a fraction of what bc cost.i mean, gold dug up in china is as good to the local store as gold from south america.but i somehow suspect this isn’t the case with bitcoin/

    • George Stiglitz III says:

      “also mr. murphy, or anyone smarter than me, could you please explain to me how bitcoins are scarce?there are tons of these virtual currencies, some have even better control and security mechanisms and still they cost a fraction of what bc cost.”

      “i mean, gold dug up in china is as good to the local store as gold from south america.but i somehow suspect this isn’t the case with bitcoin”

  12. steveZ says:

    Bitcoin could go to zero. Gold and silver cannot. People would only stop using it in production if it was worth more as money. But, unlike bitcoin, there would be an arbitrage opportunity if the price became low enough to profitably produce things with gold again.

    • Dan (DD5) says:

      I’ve heard better pro-hard-money arguments against Bitcoins then the one you have set up in your post. Like that hard money is technologically independent. Bitcoins heavily relies on technology. Gold or silver do not. If just one part of the technology is unavailable, and it could be something as basic as power, then you basically have no money.

      • Dan (DD5) says:

        Not a response to steveZ, but a general comment to the post.

      • Bob Murphy says:

        Dan (DD5) wrote:

        I’ve heard better pro-hard-money arguments against Bitcoins then the one you have set up in your post.

        But Dan, shouldn’t I start with the easier arguments? And it’s not as if everybody is saying, “Right Bob, everybody knows that…” No, I’m still getting pushback on what are (to me) obvious points.

  13. Matthew Gilliland says:

    That moment when Smiling Dave’s post (as “guest”) gets used to make a pro-Bitcoin point.

    • Smiling Dave says:

      It wasn’t me, Sherlock.

      • Matthew Gilliland says:

        My mistake. It seemed like your smug style, and it was mostly wrong, so I made the natural assumption.

  14. skylien says:

    Bob, IF Gold and Silver would totally lose all uses that they have (Really all!) so that they would practically be like BTC. Yes, but the finding of the new money would be done automatically by the market, and wouldn’t necessarily start at the moment Gold and Silver lost all their use value (apart from the monetary value), and this could practically take ages.

    Some months ago I have sent you an E-Mail in which I theorized how competition among different moneys would work out. In it I explained why I think what I have just said above.

    • Matthew Gilliland says:

      This assumes that Bitcoin has no alternative uses, which is incorrect, and presupposes (contra Rothbard) that the market would find a new money if all uses were lost. This ignores the reason for the valuation by the user of the medium of exchange. The user doesn’t care if anyone uses it in a factory; that’s merely what made it liquid early on. Once it is accepted broadly in exchange, the early reasons for liquidity aren’t important.

      • skylien says:

        I don’t care if something that I think is contra Rothbard.

        I don’t think that the market would settle for one good as money if left to its own devices. Why I think that is a bit complicated.

      • guest says:


        The user doesn’t care if anyone uses it in a factory; that’s merely what made it liquid early on. Once it is accepted broadly in exchange, the early reasons for liquidity aren’t important.

        By that logic, no one should care that paper money causes the business cycle.

        And it does so by misrepresenting the relationship of the money to the goods it buys. It has this effect even though most of us are completely oblivious to that knowledge.

        Believing hard enough doesn’t make something money. The purpose of money is to guage profits and losses in terms of non-money goods. So, if there is no connection between the money and the utility derived from the goods bought with it, then it isn’t money.

        • Matthew Gilliland says:

          Do you still use paper money? If so, then no, you don’t care as far as your day-to-day use of the money goes.

          “The purpose of money is to guage profits and losses in terms of non-money goods.”

          No, the purpose of money is to exchange things indirectly. It just so happens that, with the most liquid good in a given time and place, things tend to be denominated in terms of that good. Bitcoin isn’t money now, but if it were the most liquid good, its prices would be stable enough for it to function as a stable unit of account.

          • guest says:


            No, the purpose of money is to exchange things indirectly.

            WHY do you want to exchange things indirectly? It’s because it will be easier to exchange for what you want INdirectly than directly.

            The goal is to acquire a particular good, not to merely exchange things just so you can say you traded with someone.

            You trade because there is a real, albeit subjective, preference that you are seeking to fulfill.


            Bitcoin isn’t money now, but if it were the most liquid good …

            It can never become money because it isn’t a good. It’s a pattern; A concept.

            The materials used to preserve the pattern – computers, drives, etc. – are goods, and can potentially be money; but the patterns, themselves aren’t things.

            • Matthew Gilliland says:

              It is scarce and usable, therefore for our purposes, it is a good. You can’t handwave away something because it doesn’t precisely fit in your conception of a box.

              • George Stiglitz III says:

                Matthew, it isn’t scarce. The 51% threshold is easy to break, is natural to the algo, and so becomes even easier to do over time (says the Fed’s white paper). Then, as it’s made ‘wrong’ anyways, with a fixed rather than free market supply ‘time bomb’ built in, it excuses away its eventual revaluation (which is functionally as simple as a software update down on the farm)

        • Tel says:

          By that logic, no one should care that paper money causes the business cycle.

          A very large number of people don’t care, and out of those who do, most of them look for ways to turn it to their own advantage.

          • guest says:

            Yes, but the only way to turn paper money to one’s own advantage is to rip someone else off – even if you don’t know you’re doing it.

            We’re giving people paper for stuff, for crying out loud. :D

  15. Brian says:

    My prediction of the most common medium of exchange in a modern money free-market: Wal-Bucks and Amazon Points. Easily tradable (physical or digital), backed by “commodities” (i.e., real goods and services). The key would be that the giant retailer would need to have full transparency about units in circulation and actual inventory (probably production capacity as well).

    • guest says:

      Assuming Wal-Bucks weren’t denominated in Federal Reserve Notes (where the value of the Wal-Buck is determined by the purchasing power of the FRN rather than of the Walmart goods that supposedly back the Wal-Buck), “full transparency” would have the effect of making Wal-Bucks a near 100% reserve note (the goods would be the actual money).

      And since Walmart has competitors, Wal-Bucks, if competitors would accept them as payment, would have different values for the same item. Likely, though, Wal-Bucks would be used only at Walmart since competitors can make their own Store-Bucks.

      If the Wal-Bucks are backed by the goods they sell, then the Walmart would be engaged in warehouse banking and would have to be lending out their goods at interest in order to make money.

      Walmart being the creator of Wal-Bucks, how would people acquire them? It would have to be by purchasing them with some other form of money. So the Wal-Buck would actually be getting its value from the other form of money rather than from the goods Walmart sells.

  16. Ben Kennedy says:

    I would argue that counterfeiting is the primary concern of money, closely followed by transaction convenience. Historically, money would be a hard commodity like gold solely because it supported those goals – it’s hard to counterfeit and it’s portable. The intrinsic value of gold as jewelry made it good to use as money as that meant that it was already widespread. I don’t think the value of gold as a commodity is directly connected to it’s value as currency.

    In today’s world, Bitcoin address the problem of counterfeiting and transactions. The main reason I’m ambivalent to it as a money I would use is the original mining process – it strikes me as grossly unfair that a handful of early adopters have such a big piece of the pie

  17. Seth MacLeod says:

    Don’t forget that money is an institution. Institutions are signposts that people use to orient their plans and expectations of others’ plans. In other words, there are no guarantees that any given person will accept the dollar, gold, bitcoin, etc., tomorrow in a trade, but money as an institution signals to us that we can expect with great confidence that any given person will accept a particular thing (money) in an exchange — hence the phrase ‘generally accepted medium of exchange’.

    That’s why the distinction between subjective value and arbitrary value is so important. Of course value is subjective, but that doesn’t mean that people arbitrarily assign value to things. If you want a turkey for Thanksgiving, that turkey has to fulfill certain desires in order for it to be useful, e.g. big enough to feed all of your guests. So when you are looking for a turkey, car, watch, or whatever, you don’t just arbitrarily rate the value of these things; they need to be suitable to your ends.

    People can form reasonable expectations with great confidence about how people will value commodity money and even fiat money. (As we all know, fiat money derives its value from government fiat; look at the Somali shilling to see what happens when fiat money loses this “backing”.) Picture a zombie apocalypse. In stories about a zombie apocalypse, it is typical for canned food and ammunition to emerge as money. It is not hard for us to find this believable, because we can imagine that in such a scenario that people could expect with great confidence that any given person will desire and trade for canned food and ammunition.

    But what about bitcoin? The thing with bitcoin is that *any* unit of bitcoin is sufficient to mark a transaction on the block chain. We can’t really form an expectation in our mind as to what the appropriate amount of bitcoin would be to suit our end, i.e. to use in a transaction, because *any* amount can be used to mark a transaction on the block chain. In the case of beaver skins, we know that people who want to use them for clothing need a certain amount in order to create their desired clothing. In the case of tobacco, we know that people need a certain amount in order to actually smoke it. In the case of gold, we know that people need a certain amount in order to use it in wiring or jewelry. All of these historical commodity monies had some kind of baseline use that people could use to form expectations about how other people will value them. But with bitcoin, we cannot form in our minds an expectation based on any kind of use in a plan. Whatever a person’s valuation of bitcoin is, it is ultimately arbitrary.

    Does anyone remember the 10,000 BTC pizza purchase? 10,000 BTC or .01 BTC, it is ultimately arbitrary. Either unit is sufficient to mark that a transaction occurred. Neither person in that trade can know what amount of bitcoin would be suitable for a trade. So what the bitcoin advocates say is, “As people continue to trade bitcoin, there will eventually be some kind of general agreement as to what its value is, and the price will stabilize.” This is essentially an unbacked assertion. Based on what? Prices are always in a constant state of fluctuation. People constantly ‘overvalue’ and ‘undervalue’ goods and services. Even eliminating the Fed would not change this fact — the Fed may fuel certain bubbles, but not all bubbles can be explained by the ABCT; only certain bubbles — so what happens when bitcoin begins to be either ‘undervalued’ or ‘overvalued’? Like any other good or service, the market will ‘correct’ these valuations. But, without some sort of baseline understanding with which people can form accurate expectations of others’ valuations, there is no way for the market to settle on some ‘correct’ valuation (which is naturally not static in nature anyway).

    So let’s go back to money as an institution. The institution of money serves the role of a good that people can form expectations of great confidence that any given person will accept it in a trade *and* what this person’s valuation of the specific money is. The defense of bitcoin actually rests on a world with static conditions and values, but in a world with ever-changing conditions and values, bitcoin ultimately cannot have this ‘stable’ value that people generally agree on. And since people cannot form accurate expectations of how others value bitcoin, it cannot serve a role as money.

  18. Transformer says:

    I suspect that gold without non-monetary uses would not work as money since the demand and supply dynamic that once made it useful as money would break.

    At the moment there is a big industrial and consumer demand for gold which means (I assume) that quite a large part of the gold that is mined annually is used up by industrial processes or bought by consumers to replace or add to their jewelery holdings. If these uses for gold fell to zero then existing stocks of gold would be converted to money and in addition people would probably continue to mine it just because it has monetary value. This would cause inflation which would undermine its usefulness as money.

    Perhaps there would be an equilibrium value where all existing gold was used as money and the price was too low to make it worth mining. But I can envisage that reaching this equilibrium would be so inflationary that people would abandon gold as money along the way.

    Currency issuers could quite easily avoid this problem by backing their currencies against a bundle of commodities that do have non-monetary value (or just use a different commodity as money).

    • guest says:


      If these uses for gold fell to zero then existing stocks of gold would be converted to money and in addition people would probably continue to mine it just because it has monetary value. This would cause inflation which would undermine its usefulness as money.

      Mining gold will never be more inflationary than printing paper money.

      And if the use-value for gold and silver disappears, people will just use the next most widely traded commodity as the money; Or maybe, for awhile, different regions will have their own most widely traded commodities that would be exchanged for another region’s commodity-money when purchasing from another region.

      Eventually, this exchange between regional commodity-money would reveal that some commodities stored value better over more regions than others, and then more regions would adopt THAT commodity as their commodity-money.

      There wouldn’t be economic chaos if people needed to switch from one commodity-money to another; It would be seemless.

      But there will definitely be chaos as the FRN loses its purchasing power, since the only reason it has purchasing power is because of the use of force to supress people’s preferences for ACTUAL stores of value (such as, but not limited to, gold and silver).

  19. Edward says:

    I wonder what happens when 3-d printing and star trek replicator technology advances far enough to the point in real life that gold can be “beamed” into existence from air molecules or water particles

    • khodge says:

      You mean like Latinum? Star Trek had to invent a currency to expand its story lines. They had not yet conceived of Bitcoins.

    • khodge says:

      I think that if governments got out of the business of making money someone would come up with a system that would use 2″ x 3″ plastic cards with a black magnetic strip on the back as money.

  20. Transformer says:

    Consider a barter economy.

    You work for a baker and you’ve just got paid in bread-rolls. You don’t want to swap all your bread rolls on other goods , you just want to store the value for later. Bread goes stale so you need to swap them for something more durable and that will be easy to find transaction partners for later. You need to find something that is “money-like”.

    There are 2 option available to you both of which are equally durable, divisible and all the other things that make for good money except for one thing One of them (X) has no value outside of its “moneyness” value. The other (Y) has huge industrial uses as well as its “moneyness” value.

    Before deciding which to swap your bread-rolls for you read “free-advice” and start to worry about your choice losing its value if its “moneyness” dis-appears . If you choose X you could lose the whole value. if you choose Y then if the “moneyness” goes you can still obtain the remaining industrial-use value.

    The rational choice is X other things equal.

    For this reason I think a commodity with non-money uses will always trump one without and therefore gold valued purely for its “moneyness” and nothing else is unlikely to retain its value.

    • Transformer says:

      Correction: The rational choice is Y other things equal.

      I could make this even simpler:

      Imagine its not a barter economy but an economy with 2 currencies. . Rational people will always choose the money with non-money uses over the one without (which will likely soon perish).

      • Matthew Gilliland says:

        No, rational people will always choose the money that is more liquid. I see no evidence that “rational people” are making any decisions about their money commodities based on what a purely theoretical price floor would be if the item were to lose its value in exchange.

        • Transformer says:

          I am assuming other things equal between the 2 currencies

        • Tel says:

          What’s your definition of “liquid” in precise terms?

          • Matthew Gilliland says:

            Most widely accepted. Menger said “saleable,” Mises said “marketable,” and modernly we say “liquid.”

            • Tel says:

              Houses are very widely accepted.

              • Ben B says:

                Houses are more widely accepted than money?

              • Matthew Gilliland says:

                Houses are actually a great example of a good that *isn’t* very liquid.

              • Tel says:

                Matt, your definition was “widely accepted”, if you offer someone a house, they are very likely to accept it.

                Now you need a new definition, rather than going back to “liquid” which was the thing you were trying to define in the first place.

            • Transformer says:

              Menger defines marketability (which we can take to be a synonym for “liquidity” as:

              “facility with which [a good] can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same”

              If people fear a good will lose its value because its non-money use is in decline I think it is reasonable to say its liquidity will decline too.

              • Ben B says:

                “If people fear a good will lose its value because its non-money use is in decline I think it is reasonable to say its liquidity will decline too.”

                This depends on the liquidity of other potential monies. If there is a large liquidity-use gap between that money which is declining in its non-monetary value and those other goods that may function as a medium of exchange, then I don’t see why anyone would shift from this more liquid good to these less liquid goods. If the point of holding money is to put yourself in the best possible position to buy yet unknown goods you may demand in the future, then why would you want to exchange this more liquid good for a less liquid good for the purpose of gaining liquidity?

                In other words, if the next most liquid goods are houses, will gold’s value decline as a money because its non-monetary value is declining? What else you going to use? Houses?

            • George Stiglitz III says:

              tight spread between buy/sell

  21. Transformer says:

    I was assuming other things equal between the 2 currencies.

    Why would liquidity trump everything else ? Isn’t one of the attributes of liquidity the expectations that an asset will maintain its value ?

  22. Tel says:

    People would walk around with actual gold and silver coins in their pockets, and merchants might even start pricing goods and services directly in weights of metal, rather than national currencies.

    If you are buying something online, you can’t pay with gold and silver coins. They just don’t install coin slots on smartphones.

    By the way, with any online web shopper, the technology to change prices from one currency to another is trivial so the issue of what people choose as their standard price reference is completely irrelevant.

    • Matt M (Dude Where's My Freedom) says:

      Well, you could use receipt money in the form of a debit card that is issued by a bank that engages in 100% reserve banking.

      Doesn’t Peter Schiff offer something like this through his bank, but it’s illegal for use in the US?

      • Tel says:

        Then you would be trusting the issuing bank, and the person on the other side of that transaction would also be trusting the issuing bank.

        If you insist that the government should audit that bank, then you are back to trusting the government, which is pretty much where we started at.

  23. guest says:


    If it matters, I am almost positive that I have read one of the Austrian giants say that it’s not necessary for a commodity money to remain a commodity …

    I think you’re right about the quote, though I would still disagree.

    It was likely Rothbard of whom you’re thinking. Consider that he at least held that position, implicitly, during the following exchange between he and someone who, like me, viewed FRNs as IOUs rather than money; Rothbard taking the position that since he was using FRNs to acquire goods, he therefore considered them to be money:

    The Founding of the Federal Reserve | Murray N. Rothbard
    http://www.youtube.com/watch?v=Ta7q1amDAN4#t=1h0m44s

    Brain fart on the part of Rothbard, of course. Heh.

    It seems that the gentleman in the video believed that money couldn’t have credit associated with it, so maybe he was a Greenbacker, which I am not.

  24. Nick Rowe says:

    You are right, Bob. Here is my own very similar thought-experiment:

    Suppose pretty shells are valuable because people like wearing them as jewelry.

    Then they start using the shells as money, which increases the demand for shells, and makes them even more valuable.

    Then suppose fashions change, and people stop wearing the shells around their necks, and keep them in their pockets instead. The monetary demand can remain, and shells can remain valuable (though not as valuable as before).

    There are two equilibria:
    One in which shells are valuable, so are demanded as money, and so are valuable.
    A second in which shells are not valuable, so are not demanded as money, so are not valuable.

    With hindsight, I (re)interpret Mises as saying that history determines which of the two equilibria we find ourselves in. Brits drive on the left today because they drove on the left yesterday. Brits speak English today because they spoke English yesterday. We use QWERTY today because we used QWERTY yesterday.

    • Nick Rowe says:

      And wasn’t Menger always going on about the importance of custom? He was right. Some things are processes; we don’t start from scratch.

      • Transformer says:

        I agree that tradition may be enough to keep something that has no non-monetary value in use a money.

        However you say “The monetary demand can remain, and shells can remain valuable (though not as valuable as before).” makes me wonder if

        1. The fact that people see the non-monetary value declining will cause people to question if the shells will be a good store of value and if there are alternatives available they may start to switch.

        2. Once people realize that the shells they hold have no intrinsic value they may get vertigo and dump the shells for a different money commodity that is guaranteed to at least hold part of its value should it lose its money-status.

        • skylien says:

          “1. The fact that people see the non-monetary value declining will cause people to question if the shells will be a good store of value and if there are alternatives available they may start to switch.”

          Right, that is what I think. There is absolutely no reason people have to stick with shells. Losing its appeal already means a loss in total value, which also might already kick start a process to go for another medium of exchange which not only has a prospect of at best stable value like shells, but even one of increasing its value.

          • skylien says:

            “There is absolutely no reason people have to stick with shells” I might add *as store of value.*

            The funtion medium of exchange comes after store of value.

    • guest says:

      If no one values the shells for their use-value, then it’s ability to reflect the relative use-values of the goods and services that are bought and sold with them is gone, and the values being assigned to the shells become arbitrary.

      It’s BECAUSE the effects of debasing money is so well hidden that governments want control over the supply of it, and banks want governments to give them monopoly power over the supply of it.

      Austrians, please consider this, to which Smiling Dave alluded: Once you say that real money can have arbitrary values assigned to it, you’ve conceded that the Regression Theorem is irrelevent.

      Because, the argument will then be, “We’re assigning arbitrary values to shells (or FRNs) now, and people accept them, so why can’t we just assign arbitrary values to other things and call that money, too?

      The Austrian School will destroy its credibility by acknowledging bitcoins to be money.

      I’d also like to point out that the REASON Tom Woods’ “Useless Stones” argument, in his video “Smashing Myths and Restoring Sound Money”, makes sense, is precisely because the stones are USELESS; There’s no REASON to value the stones as representing the relative values between the goods that I sell for money and the goods that I buy with money. They have no use-value:

      Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
      http://www.youtube.com/watch?v=HAzExlEsIKk#t=5m40s

      • Matthew Gilliland says:

        So you reject subjective value theory? Because that’s really what you’re saying — you can’t imagine the reason for the valuation (despite the fact that Bitcoin is useful even outside of exchange), therefore you dismiss Bitcoin.

        • guest says:

          No, I acknowledge subjective value theory; I reject arbitrary value theory (I’m obviously made that name up).

          There is a distinction to be made between inherent/intrinsic value – which nothing has – and arbitrary value, where simply because you believe hard enough that a piece of paper is worth a house, then at that moment it becomes money.

          If all you had to do is arbitrarily assign values to things to create money, then you should have no problem accepting a handful of dirt from me in exchange for your house.

          You will say, “But I don’t value your dirt more than my house”. To which I will respond, “Well, as soon as you merely decide to do so, you WILL value my dirt more than your house – problem solved”, according to your position on bitcoins.

          The question bitcoin adherents have to answer is WHY should I accept bitcoins but not accept a handful of dirt? The dirt is far more available to me, and I doubt the government would go through the trouble of confiscating it.

          I wouldn’t even need to get a computer. It’s right there on the ground.

          Bitcoins get their value from arbitrary guesses, whereas sound money gets its value from someone’s real, albeit subjective, goals.

          • George Stiglitz III says:

            You also wouldn’t be tracked by GPS / IP / BTC combo, as everything, especially BTC is essentially a public ledger, so long as you still believe govt is ‘ours’, the people’s.

            “Bitcoins get their value from arbitrary guesses, whereas sound money gets its value from someone’s real, albeit subjective, goals.”

            Ehh, BTC get’s value on two sides, both subject to human action. Firstly, Gilliands subjective (albeit diminishing) valuation for BTC on the bid side, as do precious metals. So they differ on the supply side. What’s important is the history of silver and gold, to a lesser extent, as money, with a limited, but free market ‘malleable’ supply. The 2% over long hundreds of years, give or take, was only supplanted by regional political pressures, whereas with BTC and it’s brethren, supply is in the eye of the majority owners of the farms, which also ‘approve’ transactions. At present, the supply is constrained, at once causing a different dynamic to the future of supply. Will people get ‘turned off’, any more than dollar accounts are frozen today, or revalued anymore than fiats Latin, Belarusian, or American? What of that supply uncertainty, immediate loss of account value (supply to you). I’d say we are more acquainted with the history of gold mined, and prospects for their future production, than the BTC promise of non-free market supply controls and tracking.

            • guest says:


              What of that supply uncertainty, immediate loss of account value (supply to you).

              Carried to its logical conclusion, the argument for bitcoins rejects the importance of any inflation, deflation, or steady prices, since bitcoins are arbitrarily valued.

              Not enough bitcoins? Just tell the seller to simply believe that you have enough. And through the magic of arbitrary valuation, you should be able to acquire what you want in the same way people do now with bitcoins.

              If the money has no connection to someone’s utility, then the supply doesn’t HAVE to be limited.

        • Smiling Dave says:

          Riddle me this. Here is our man Mises in Money and Credit speaking:

          “This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless…”

          Matthew Gilliland: So you reject subjective value theory, Ludwig? Because that’s really what you’re saying.

          Sadly, he is in the grave and cannot hear you. But perhaps someone else here knows the answer.

          And for those curious enough and humble enough to know the answer, they can mosey on down to my humble blog and read the articles listed in Bitcoin All In One Place, number 8.

          • guest says:

            Not to distract, but would you agree with me that Mises was wrong to treat use-value and exchange value as separate sources of valuation? [I'm assuming that you're right that Mises held this position; I haven't actually read that for myself, yet.]

            The reason I believe so is because if you grant that something can have value merely because other people are exchanging it [thereby enticing others to acquire it for the purpose of trade], then this would make the Regression Theorem unnecessary.

            Because all that would have to be done is to trick enough people into using things that have no use-value as money, at which point the so-called “exchange value” would create the demand necessary to establish it as money.

            My position is that if a commodity ever lost its use-value, it would become fraudulent to use it as money.

            • Smiling Dave says:

              Deep q, Guest.

              What you propose is like someone saying that all he needs to do is strengthen his arm muscles enough for him to be able to throw a baseball so fast it reaches escape velocity, and he can then throw it to the moon. But we know the human arm can never reach that strength.

              Same thing here. People don’t get, [except Gary North seems to have understood this in his article about bitcoin], how wide the demand has to be for something to become a medium of exchange or money.

              It has to become, as Mises wrote in HA, “the most marketable good”, meaning something which has greater demand than anything else in the economy. You will always find someone willing to trade anything at all in return for it, so coveted is that most marketable good.

              You can’t trick enough people for that to happen. Yes, the bitcoiners are trying. And yes, Bob thinks bitcoins have reached escape velocity long ago, when only one guy bought one pizza three years ago. But they err.

              I do, however, agree with you that if a money ever loses all use value, [and ever so much more so bitcoin, which never had any in the first place] then it has a much deeper problem than the reg. thm to deal with.

              I don’t know if it becomes fraud, but it will be dropped like a hot potato the moment people get a chance.

              My humble articles “The Kickstart Fallacy” and “Deep Stuff About Fiat Money” elaborate, complete with quotes from Mises in Money and Credit.

              Links, cause I’m such a nice guy:

              http://smilingdavesblog.wordpress.com/2014/03/15/deep-stuff-about-fiat-money/

              and

              http://smilingdavesblog.wordpress.com/2013/10/16/the-kickstart-fallacy/

    • Bob Murphy says:

      That’s going to be a long post with that title.

      • guest says:

        Bring it.
        :P

      • Smiling Dave says:

        Come Bob, enlighten us. Show us even one.

        As for Pete, his argument seems to be that “most marketable” and “having extremely limited demand” are concepts that do not contradict each other. He supports this, he thinks, with a quote from Menger. I find that laughable, pace Peter.

        He didn’t catch any contradictions, nor did he bother about Mises’s arguments in HA, where he insists that a medium of exchange must have a wide demand qua commodity way before it is ever used even once as a medium of exchange.
        I quoted and elaborated on what Mises said in my humble blog. Do a search for “wide demand”.

        So your turn, Bob. Show us one contradiction, or any other flaw, in my humble writings. I’ve pointed out some in yours.

        • Peter Šurda says:

          Smiling Dave,

          “most marketable” does not pop up in any of the quoted references, so your objection is a non-sequitur. Furthermore, “most marketable” is, according to Mises for example, closer to the definition of “money” rather than a “medium of exchange”. And with respect to “wide demand”, I explain your error in the actual post.

          As usually, you’re trying to wiggle out of our contradictions by a diversion tactic.

      • Peter Šurda says:

        The full title is actually “The contradictions of Smiling Dave continue” and the post is relatively short. I wrote about other his contradictions in the past. He just introduced a new one.

    • guest says:


      However, Menger was very clear both in his definition of marketability:

      “A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices.”

      This part has a footnote which says:


      The price of a commodity may be denoted as uneconomic on two grounds: (1) in consequence of error, ignorance, caprice, and so forth; (2) in consequence of the circumstance that only a part of the supply is available to the demand, the rest for some reason or other being withheld, and the price in consequence not commensurate with the actually existing economic situation.

      Question for the bitcoin adherents: How would someone using bitcoins know whether or not they made an uneconomic purchase in consequence of error? What does an error look like when a money is arbitrarily valued?

      What’s stopping both sides from simply deciding to agree that the price is right?

      And what now of Cantillon Effects? Are people REALLY being ripped off by newer users of printed money, or could they just simply believe hard enough that they are better off than they are?

      If the money has no connection to someone’s utility, then giving someone that “money” in exchange for something is fraud. Which is why it’s important to point out that bitcoins have no use-value.

      The reason I know that an egg can be traded to get a frisbee from an egg-hater is BECAUSE I can get a hat for the egg and then trade the hat for the frisbee. The medium of exchange in this scenario – the hat – has a use-value to someone, which is WHY it can be used as a medium of exchange.

      Whether something can be widely traded, and accepted as money, that has no use-value is not an issue, here; Of course this can happen, but it’s fraud.

      • Peter Šurda says:

        Noone knows to what extent the price of a good is based on error of others’ judgements. This is not specific to Bitcoin.

        Cantillion Effect does not imply that people are being ripped off, only that there is a transfer of wealth. This does not necessarily imply a violation of property rights.

        Media of exchange do not necessarily have a high value, rather they have high liquidity. Furthermore, they can have utlity due to a decrease of transaction costs.

    • guest says:


      The level of liquidity necessary for money may still lie very high and be unattainable for Bitcoin for all we know.

      I’m going to go out on a little bit of a limb here and say that this statement here reveals that an unspoken motive for the creation of bitcoin is the “not enough money” argument offered by the Greenbackers, and which the Austrian School rejects.

      Keep your ears open for more of this.

      • Major_Freedom says:

        You mean we can add as many zeros as we want to the left hand side of the decimal, but for some reason we can’t add any zeros to the right hand side?

        Egads!

        • Tel says:

          Actually there’s a limit to how finely divisible a Bitcoin is.

          However, there’s no limit to people inventing new digital currencies with decimals wherever you like. Although the “not enough money” argument MAY apply to Bitcoin, it certainly does not apply to the general concept of crypto currencies.

          • guest says:

            The Austrian position is that there is always enough money – the supply doesn’t matter.

            Whereas the quote from Peter Surda, above, seems to show that he is concerned about whether or not there is enough bitcoins for all the purchases that people want to make.

            [I know I technically misspelled his name; But I'm not trying to be rude.]

            This belief that there can be “not enough money” leads people to believe that we need to be able to create/print more money.

            If something IS a money (unlike bitcoins), then the supply doesn’t matter – the higher price in terms of a commodity money reveals an important piece of information about that good, and to artificially increase the supply of money to give some people an artificial ability to purchase such goods is to destroy that information, and to enable newer users of IOUs to rip off later users (this is the Cantillon Effect).

            The proper response to not having enough money is to produce something – not to fool people with phony money.

            • Tel says:

              If your chosen currency does not divide down to make everyday transactions, then it can’t be used for those transactions. Thus, it does not operate as a mechanism of exchange.

              • guest says:

                But that’s when you use another widely traded good, with less value than the previous one, as your medium of exchange. And you can do that along side of the other, more expensive currency.

                As long as a large number of people are seeking to fulfill their preferences (which is forever), and are willing to NOT violate their competitors’ rights to sell, there will be a good that can be used as a medium of exchange.

                The problem is when the government artificially restricts competition through tariffs or anti-trust legislation:

                Defending the Undefendable (Chapter 23: The Importer) by Walter Block
                http://www.youtube.com/watch?v=PTT_WHyzZ54

                Anti-Trust and Monopoly (with Ron Paul)
                http://www.youtube.com/watch?v=8C4gRRk2i-M

            • Peter Šurda says:

              “Whereas the quote from Peter Surda, above, seems to show that he is concerned about whether or not there is enough bitcoins for all the purchases that people want to make.”

              This is absurd. I never made such statement. Indeed I have been, apparently in vain, trying to explain the difference between liquidity and other variables for years. Liquidity is not divisibility, and it is not the money supply.

              With respect to the Cantillon effect, even the mining of gold triggers it, however it is to a large extent mitigated due to the costs necessary to produce the gold. Any increase in the supply of any medium of exchange triggers the Cantillon effect. A relative change in liquidity premia of two media of exchange also triggers a transfer of wealth (but of a different type than the Cantillon effect). This does not imply that there is a violation of property rights, or even an issue from Austrian point of view.

              • guest says:

                A violation of property rights happens when the increase in the supply of the medium of exchange is fraudulent.

                But not so when the increase is of an actual good, such as gold and silver.

                The redistribution under sound money happens BECAUSE the real marginal value of that good has, in actual fact, gone down.

                Whereas, with the printing of paper notes, since the notes are claimed to represent a good – not being those goods, themselves – the increase is a fraud.

              • Peter Šurda says:

                Even if I agree with your assumption, it still has no relevance for Bitcoin, because Bitcoin is not a claim. I have written about this extensively.

      • Peter Šurda says:

        This connection makes no sense to me whatsover. In fact both in my masters’ thesis as well as in the paper I sent to Bob I explain why this is not take case.

Leave a Reply