Skip to content

Bitcoin-Kramer essay

link to the paper I started writing but never finished:

https://docs.google.com/document/d/1_z7kLE6_dZuNmLtdwhwvoy8pzRwJcnhg0qubeLNl9ig/pub

Again in response to David Kramer’s blog post on LRC.

________________

Finally getting around to actually publishing this post.  The draft (and paper) is from June 2011 like my other posts.

A Response to “Bogus” David Kramer

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.

Initial Frustration with austro-libertarians. The Genesis of a new blog.

When I became aware of bitcoin weeks ago I got excited about it’s prospects.  I decided I wanted to learn more about Austrian Monetary theory because from what I had already gathered a supply of money that does not inflate a ton over the years can be a great thing and money is possibly the most important part of a society.  A money that is outside of government control and remains in stable supply is just what the doctor ordered for the progress of civilization.

Then after reading a few people’s commentaries on bitcoin I found that not everyone agreed with me.  And I don’t mean the one’s who wouldn’t agree with me anyway who believe in a supply of money infinitely inflatable but rather those influenced by the Austrian school who believe in free-market money had very bad things to say about bitcoin.  I was dumb-founded!  They didn’t seem to understand the austrian take on money the same way I did.  And they knew more Austrian economics than I did!  Surely I must have been mistaken.

I needed to read an expert’s opinion on bitcoin to settle this: one of the economists from Mises.org.  But to my dismay none had written about it.

So I began to research into austrian theory on money using primary sources from the Austrian greats (Mises, Rothbard, Hayek) themselves so I could be certain what the Austrian take is (and adjust my understanding  of it accordingly).  I decided if I had a correct understanding I would have to publish the article myself drawing heavily from the Primary Sources and let the words come straight from the mouths of the Austrian-School greats.
I read Gary North’s short online book Mises on Money and gleened some knowledge that seemed to back up what i thought from North and the quotes from Mises he used.

Someone had to write an article to show these austro-libertarian gold bug bitcoin haters that they aren’t following the very experts they esteem.  And since clearly no one else was going to do it… it would have to be me.  Great.

As I was laboring in this research and procrastinating and getting distracted by other matters of life outside of hobby-academics I found an article entitled Libertarian Gold-bugs hating on Bitcoin–free market money.  “Yes!” I thought.  Now I don’t have to write this article, this guy did it for me!  That was yesterday morning.  Later that evening I read a blog post and figured out getting out of writing the paper wouldn’t be so easy…