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A Response to “Bogus” David Kramer

June 13, 2011

Yesterday a blog post appeared on lewrockwell.com entitled: Bitcoin: Just another Bogus Medium of Exchange  (and you’ll have to visit the original for his links as I haven’t made sure they work in this post)

Here is my response I e-mailed to the Author, David Kramer:

I will indeed take you up on the challenge of reading Rothbard.  After hearing about bitcoin I did begin to dabble a little into Mises’ monetary theory and found Gary North’s small online book (found on LRC) helpful in explaining some of his main points in Theory of Money and Credit [link].  I also intend to read Hayek’s Denationalization of Money.

I want to make sure you denounce bitcoin in a way that is consistent with Austrian roots.  Sound arguments must be be founded from consistent theories or they are not reliable. (much like the supply of money must be consistent.)  Else I’m afraid your blog post is pure FUD.  And how is that different from how the Establishment tries to marginalize?  Let’s not be them; not stoop to their level.  I don’t know much about you off hand.  If you write for LRC I’m sure I’ve read and enjoyed many of your posts and articles.  [I’ll] learn more about you after I write this as I don’t want to be distracted or tempted to ad hominem arguments.

I want to point you to this article.  When I first started reading up on bitcoin I was astonished at all the silly arguments being tossed around.  And then I was really thrown by how so many people were trashing bitcoin because it wasn’t gold.  Clearly these libertarian and Austrian-School inspired individuals knew something different about money that I did not.  As I understood money I saw (and see) huge potential for Bitcoin and thought (also think) it has great advantages over gold.  I would argue there is a place for bitcoin in a free-market.  Isn’t that what we are after?  A free market? Voluntary action.  I thought at this point that someone has to do the research and find out if bitcoin can be good “money” as the austrians would define it.  And as I’m sure you’ve experienced, when “someone” needs to do something you often find that that “someone” is yourself (because no one is around to do it BUT you).  I started half-heartedly doing some research into monetary theory but got delayed and distracted.  Luckily, today I read this.  Now I don’t have to write the article (thank god) someone did do it for me

I’d like to engage in some discourse with you.  I’d like you to lay out why Bitcoin is no good.

The fact that it’s called “virtual currency” gives you an idea about its actual value as a real medium of exchange.

Wrong.  Money like anything else has subjective value.  I can only sell my car for however much someone will pay for it.  Monetary Value is subjective as well, it is only worth what someone will exchange for it.  I’m sure you know this.  A good’s worthiness to be a medium of exchange is determined according to money-attributes.

Question 1:  What makes good money?

Ok, benefit of the doubt.  By “actual” value you meant “non-monetary” value right?  Only that’s not what comes across is it?  FUD
Given:  Bitcoin has no non-monetary value.  +1 for David Kramer
Question 2:  What non-monetary value does gold have?  (specifically what value did it have in the ancient world)

While many people who are touting it on Facebook are enamored with the fact that it was voluntarily created by the marketplace (i.e., is not forced down our throats by a private central bank), I’m afraid that those people are losing sight of how a real medium of exchange arises in a free market. A medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange, i.e., it was also a good being  bartered for other goods and services. Over the centuries, the commodities gold and silver won out as the two most preferred mediums of exchange—with gold holding the number one position due to its being more scarce than silver.

Question 3: How does a money come about in a post Gresham’s Law world/environment where money already exists and barter is no longer used?  Does anyone know? Yes, the first money [was] able to come about because it had some non-monetary value. (see Question 2)  The evolution of money came out of barter and certain goods were better than others for holding as an intermediary.  Eventually gold was found to be the best (“won out as most preferred”) and became the money of every voluntary system it was introduced into.  Why?  (see Question 1)  +1 David Kramer
(draw parallels between evolution ([gold]) and creation/Intelligent Design (bitcoin) here (see Question 3)

Gold > Silver because it’s more scarce.  Bitcoin more scarce than Gold.  Bitcoin > Gold?
-1 David Kramer?

What was Bitcoin’s prior material use/value? Zero.

right.  it was invented as a good to only be used as money.  (see Question 3)

It is just bits in a computer. And what’s with the “fixed” amount of Bitcoins? Who/what determined the “proper” amount of 21 million for Bitcoins to top out at? A computer program? (Next we’ll find out what the proper minimum wage should be.)

 As I’m sure you’ve been made aware the fixed amount of bitcoins was not determined by any computer model or program.

Only the free market can voluntarily determine how much of a real medium of exchange is needed in the marketplace over time. While the idea of  attempting to get rid of the Bankster monopoly on creating money out of thin air is commendable, Bitcoin is also money created out of thin air. Bitcoin is just substituting one bogus medium of exchange for another.

Question 4: How does the market determine the supply of money?
There’s that word again. “real”… what is meant here?  FUD
Hmmm, this is where you wander a little from Mises (as far as I can tell–and I can’t find the quotes North used right now [somewhere in here])…
Mises said the amount of money in the marketplace produces no net good.  It could be little, it could be big.  The other goods will just price accordingly.  In fact introduction of new money causes problems I’m sure you’re well aware of.  In the case of the production of gold the miners who are able to spend the new money first get their gain from the loss of the last ones to spend the money.  No net good.  The amount of money doesn’t matter.
Going back to 21 million.  It doesn’t matter.  It’s an arbitrary number.  (I trust you also know or have been made aware it can be divisible down to 8 decimal places).  21 million was determined by the founder of Bitcoin as an arbitrary number(maybe 21 is his favorite number.  maybe it was his age, who cares?) and is agreed upon by the community (read marketplace) maintaining the code.  Were that to change the voluntary market would adopt something else (as I imagine the market might adopt something other than gold if all of a sudden it started raining in Gold–see your argument for scarcity).  In order for it TO change (21mil) the bitcoin project would have to be “forked” and a new currency made whose supply is able to “inflate” or perhaps “be determined voluntarily” (read “inflate” and see “no net good”)

As I’m sure you’ve also been made aware bitcoin is not exactly created out of thin air.  It must be mined.  There is proof of work involved in the production of new coin.  This work is also inherent in the system to control the network that verifies and facilitates the currency not only does mining create new coin it keeps all coins in existence.

UPDATE: I’ve been getting a lot of reader response trying to “explain” to me the economic virtues of Bitcoin. Some responders have even mistakenly used Austrian economics to rationalize their views. I would suggest that before you write to me about the Austrian economics view of a medium of exchange, you should read the two books by one of the two giants of Austrian economics, Murray Rothbard, on what a medium of exchange is. Here is the pdf for Rothbard’s What Has Government Done to Our Money and here is the pdf for Rothbard’s The Case Against the Fed. For those of you who have not yet read any Austrian economics, please do not waste your time writing to me trying to explain the “scientific” breakthrough of the bogus Bitcoin computer program. (There already was a REAL digital currency, e-gold, that was backed by a real commodity until the Federalistas shut it down. Eventually, Bitcoin will be shut down too because of its anonymity capabilities.)

am I to take offense at “explain”  … is that what I’ve attempted to do: “explain”?  ah “mistakenly” … I trust you will point out any mistakes I’ve made …
Question 5:  Judging by the book titles of Rothbard’s [why] should I read about a government money when a government money doesn’t apply to bitcoin.Judging from this blog post alone you lead me to believe you are a Gold Bug above being an austro-libertarian.  You would rather have a “gold standard” than free market money.
__________________________________________
Fingers crossed, I get a response.
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From → Responses

5 Comments
  1. What is Kramer’s email? I need it now.

  2. Matt Tanous permalink

    “What non-monetary value does gold have? (specifically what value did it have in the ancient world)”

    Guilding and other decorative work. Gold, due to its rarity, held value as a general symbol of wealth – kind of like, say, a Ferrari nowadays (as compared to a normal car).

  3. exactly. gold was (and is) pretty. (another trait that’s highly subjective). But if you think about it, it’s non-monetary value is related to it’s uselessness. it says “I’m so well off that I can waste my time and energy on adorning things with this hard-to-find substance that really has no other use than it looks nice”. and the same goes for a Ferrari nowadays. A normal car will likely get decent gas mileage while getting the job done, it’s the right tool for the job. A Ferrari… says something else.

    Actually I think a Ferrari nowadays is technically more useful than gold was millenia ago. A Ferrari is still a car and can get you from point A to point B (very fast). Sure, gold is still a metal but what actual use did it have back then other than looking pretty? Even now the only industrial use I can think of for gold is as a conductor, but back then they didn’t have much need for that.

    Owning a Ferrari says a lot more than “hey, check out this silly rock-thing I found. Look at the yellow stuff in it”. I mean, Pyrite is far more lustrous. If someone had never seen or heard of either of the two substances before I’d think most would find the Pyrite more pretty.

    side-note: the Washington Monument has a cap of pure aluminum on it’s top.

  4. Question: Isn’t “Competing Currencies” one of the Austrians’ views? Doesn’t that mean that any individual can create a currency and as long as it is believed to be good for its purpose (e.g. responsibly produced and distributed with a clear long-term expansion, etc….) as long as it is believed to be good and thus “demanded” is good money? From this viewpoint, isn’t just the “best” currencies (in terms of tradability, even if no other intrinsic value as non-money) the ones who will survive. And isn’t this competition what will push down the chances of “Ponzi scheme” as today’s Central Banks? From this viewpoint, wouldn’t Austrian agree fully to the Bitcoin and Citcoin and Ditcoin and etc… as long as there is truly free competition and non of these currencies engage in cronyst activities? Am I right to believe that Mises, Hayek, Rothbard would agree to Bitcoin as long as they have no influence in Government and as long as other similar currencies also compete with Bitcoin??? Thank you

    • stevoblevo permalink

      Hi Remberto, I think you’re spot on. Although I’m no expert on what Mises, Hayek, Rothbard and the like argue, from my understanding it’s the market that decides. I believe outside of fiat (and it must be enforce-able fiat) Greshem’s Law reverses itself and good money drives out and replaces bad money. It, like everything else, is the action of the market that drives.

      This is why I’ve been so surprised by the current day rothbardians and misians and Austrians who poo-poo on bitcoin. It seems they are so hung up on Gold being THE money that they remain blind to the possibility of anything else out-competing it in terms of marketability and seem to forget why Gold has been THE money and how/why it got there.

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