Bad Ideas About Money and Bitcoin

How We Got Used to Fiat Money

Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market valued silver a bit lower than that.

Gold-Silver Price Ratio, 1800-1914

The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). - Click to enlarge

Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio.It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit.

Eight Spanish silver reales, or “pieces of eight” which consisted of 387 grains of pure silver (the coin on the upper right is a Mexican piece of eight, with Chinese chop marks). - Click to enlarge

These coins were minted by the Spanish Empire since 1598 and were of the same size and weight as the German Thaler, which in turn was standardized across all German territories since the 15th century. These coins were legal tender in the US until 1857 and for a long time were the by far most widely used coin.The Coinage Act of 1792 established that the new US dollar was to be equal in value to Spain’s pieces of eight, but people soon found out that the US Mint used a slightly different standard of fineness (0.9 instead of 0.8924), which meant that about 1% more silver was needed to mint a dollar. This made them reluctant to bring silver to the mint, hence the Spanish coins continued to dominate in daily life. Spanish reales were actually the first world currency, and it worked splendidly for almost 300 years (incidentally, over the time of its existence, this was the least debased coin in the Western world, which explains its popularity). People would cut the coin into 8 pieces (“bits”) of equal size for smaller transactions and to make change – prices on US stock exchanges were quoted in fractions based on these 8 bits for a very long time. The United States Assay Commission which kept an eye on the quality of the production of the US Mint was one of the few bureaucracies to ever be disbanded – in 1980. This is actually testament to the stickiness of bureaucracies – gold coins had been out of circulation since 1933 and silver coins since 1965 (a rudely debased half dollar existed until 1970)

The Coinage Act standardized the unit, but it did not change the rights of depositors or the obligations of banks. However, today, many people think that the government can, post hoc, change the definition of a unit and thereby change the value of everyone’s debt obligations and bank balances (and presumably cause a repricing of every extant asset).

We see this in many discussions of China’s future monetary policy. Many gold bugs have said that China will announce a gold-backed yuan. No one can know what a government may do in the future, but we can say in principle that it is impossible to fix the price of gold in yuan (or dollars or anything else). We can say that it won’t work if they try to change the value of the yuan by simple changes of law.

Another bad idea today traces itself back centuries. People use the paper bank note (and now electronic credit) as the equivalent of money for most situations, such as making a payment. Back in 1792, everyone understood that the paper note was redeemable for money. If you went to a bank, and pushed a twenty dollar bill over the counter, you would get just over 1 ounce in gold coins.

A $5,000 and a $50 gold certificate issued by the US treasury in 1882 and 1928. - Click to enlarge

These bearer certificates were in use from 1882 to 1933 and were freely convertible into gold coins at a fixed rate of $20.67 per troy ounce. The treasury began to issue gold certificates in 1865 already, but before 1882 the depositor was identified on the certificate by name. The background to this is that US greenbacks, a fiat money used to finance the civil war, only came back into line with the gold value of the dollar at around 1879. Once the treasury started to redeem these so-called United States Notes in gold again, gold certificates were introduced for general circulation as well.

Private bank notes issued in the 1850s an 1830s. - Click to enlarge

It is stated on them that the bearer will be paid the sum on the note in dollars on demand. In other words, it was crystal clear that the notes themselves were not money, but merely money substitutes.

At the same time, every creditor was made poorer and every debtor was made richer. That is what, in fact, decreeing a change in value does. As economist John Maynard Keynes wrote (citing Vladimir Lenin):

“…the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

The bad guys 100 years ago understood something that most good guys today do not. Distort, pervert, undermine, and destroy the relationship between creditor and debtor at your peril. Whether you realize it, or not, the stakes are nothing less than capitalism. Lenin knew it, and hoped to use it to usher in his utopia where he could get away with mass murder on an unprecedented scale.

Bitcoin  – The Next Step?

This point relates to our ongoing theme of bitcoin. Bitcoin’s value is, to say the least, fluctuating. Lenin aptly described it: “the process of wealth-getting degenerates into a gamble and a lottery.” With such value fluctuation, bitcoin is manifestly unsuitable for lending and borrowing. When instability comes to the legal tender paper currency, people are surprised and may not have an alternative. But with bitcoin, they can see it in advance. Checking back at Bitbond, we now see two bitcoin loan requests. Both are bitcoin miners, and the total between both loans is ฿9.3.

And note the final and most important connection between the bad idea that bitcoin is money and ideas that recur in history. In 1933, the US government forced all citizens to treat irredeemable paper as if it were money. There was still some gold in the monetary system, though no longer moving, no longer deposited and redeemed. But in 1971, the government finished off gold. The dollar was declared to be purely irredeemable, and this rippled through to all other paper currencies.

Daily Bitcoin in USD

Bitcoin, daily – after running to a high of nearly $4,500, bitcoin has corrected again. - Click to enlarge

From a technical perspective the uptrend remains intact so far. An aside: we do not agree completely with Keith’s arguments regarding Bitcoin; we hope to soon get around to posting our 2 cents as well, or rather our 2 satoshis.

Crypto Compare Index

Bitcoin Cash (BCH), which recently split off from BTC – as it became known that several large mining pools are dedicating a part of their hashpower to BCH, the spin-off currency rallied, while BTC corrected concurrently. - Click to enlarge

Meanwhile, Segwit 2x and Core supporters continue to bicker.

The philosophy of postmodernism seeks to “deconstruct” truth. A fitting money of postmodernisn, would be “deconstructed” too. Like bitcoin.

Absolute hashrate in exahashes per second

The effective hash-rates dedicated to BTC and BCH mining. - Click to enlarge

At nearly 3 exahash it commands about 31% of the combined BTC & BCH blockchain hashrate. Since it is still more than 700 blocks behind the BTC chain. Miners are likely to switch back and forth between producing the two versions of the currency, depending on the prevailing combination of price and difficulty which determines the profitability of mining crypto-currencies.