Against The Gold Standard

After reflecting upon the recent articles I have written where I have defended the new peer-to-peer currency called Bitcoin from attacks by gold standard advocates, I feel it is time stop taking a defensive role and make a few offensive jabs at the much vaunted gold standard.

In my articles I have spent a lot of time comparing the economics of how gold operates as a currency to how Bitcoin operates as a currency.  In the course of comparing the currencies, I was struck by a problem with the gold standard that was so obvious, yet so damning, I felt it deserved its own article.  I hope to hear a response from some well versed gold standard advocates on this issue.

The problem is not a new one, but it is a problem that I have never in all my years heard a satisfactory answer to.   The problem is quite simple, so here it is:

When gold is represented by something, what prevents arbitrary replication of that “thing”?

The law?  Who is the law?  Aren’t laws arbitrary creations by some governing body?  If that body has the authority to make arbitrary replication of money products illegal, then it stands to reason it also must have the power to make counterfeiting legal.

Throughout history, hasn’t that been the historic fault of the gold standard?  Hasn’t history been abundantly clear that as soon as paper receipts for gold are used as money, those paper receipts inevitably become monopolized by State actors, leading to their eventual arbitrary replication at the hands of the criminal class?

Don’t the bankers who issue the receipts have a massive incentive to cheat the system and issue more receipts than they actually have in gold reserves?  Doesn’t the State have a massive incentive to allow such legalized counterfeiting?  Has not history made it clear that those who have the power to issue money always and inevitably come to dominate the rest of society?

Baron Nathan Mayer Rothschild once said,

“I care not what puppet is placed on the throne of England to rule the Empire, …The man that controls Britain’s money supply controls the British Empire. And I control the money supply.”

Rothschild wasn’t talking about minting gold coins for use in barter; he was talking about paper receipts.  The incentive to issue more paper than specie is more massive than any other kind of fraud imaginable.  If one had the ability to manufacture paper that people treat in the same way they treat a gold coin, the urge to inflate would be more powerful than even an angel could bear.

I’m reminded of a statement Milton Friedman once made concerning greed as he was addressing Phil Donahue on his talk show.  Friedman said, “You know I think you are taking a lot of things for granted, just tell me where in the world you will find these angels who are going to organize society for us? I don’t even trust you to do that.”

I would argue that there is NO solution to this problem.  Changing the structure of government, eliminating the State, enforcement of fraud laws, and other such measures ultimately can not prevent a private bank from engaging in this kind of fraud.  Indeed, history has shown us that bankers routinely buy the law and were instrumental in creating the modern State.

Rothbard wrote extensively on the mischief caused by private banks engaged in the counterfeiting of their own notes prior to the inception of the Fed.  The Fed is simply a coordinator and cartelizing agent that allows for the even inflation of the money supply and acts to prevent bank runs, but its existence is not necessary for banks to engage in the counterfeiting of their own notes.  It was through this process that the bankers came to acquire enough power to take control of government in the first place.  It was through the power of the printing press that the Fed came to be enshrined in law.

I seem to recall, deep within the recesses of my mind, Hoppe making similar arguments at one point in time.

Dr. Hans-Hermann Hoppe writes:

And they [the power elite] realized that their ultimate dream of unlimited counterfeiting power would come true, if only they succeeded in creating a US dominated world central bank issuing a world paper currency such as the bancor or the phoenix; and so they helped set up and finance a multitude of organizations such as the Council on Foreign Relations, the Trilateral Commission, the Bilderberg Group, etc., that promote this goal. As well, leading industrialists recognized the tremendous profits to be made from state-granted monopolies, from state-subsidies, and from exclusive cost-plus contracts in freeing or shielding them from competition, and so they, too, have allied themselves to and “infiltrated” the state.

There are “accidents” in history, and there are carefully planned actions that bring about consequences which are unintended and unanticipated. But history is not just a sequence of accidents and surprises. Most of it is designed and intended. Not by common folks, of course, but by the power elites in control of the state apparatus. If one wants to prevent history from running its present, foreseeable course to unprecedented economic disaster, then, it is indeed imperative to arouse public indignation by exposing, relentlessly, the evil motives and machinations of these power elites, not just of those working within the state apparatus, but in particular also of those staying outside, behind the scenes and pulling the strings.

The ability to acquire enormous power through the fraud of counterfeiting is plainly evident.  Thus, the importance of ensuring that such fraud can not take place is paramount in selecting a currency system.  Bankers are very good at playing the role of benevolent benefactors.  Today, over half of our society calls out to the banker gods begging for more table scraps and handouts.  Bankers make society love them for their printing presses. It is impossible to get rid of counterfeiting if bankers can use the power of the printing press to make the public believe they are the beneficiaries of the fraud.  They only need to convince half of the population that they are benefiting from the fraud, then turn that half against the other to ensure their fraud continues unhindered.

Former Chairman of the Federal Reserve, Alan Greenspan once said,

“Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don’t, frankly, matter.”

Low interest rates, cheap loans, cheap credit, social welfare programs, public-private contracts that insulate corporations from competitive forces, etc.. etc.. etc.. – all act to fool the public into believing that their great benefactors are only looking out for their best interests.  And all of those things arise from the power of the printing press.   From this we can say that the urge to inflate is not limited to the bankers who control the printing presses, but also expands out to the public who ostensibly control “the law.”

I would argue that as long as the possibility exists that gold receipts can be counterfeited, they will be counterfeited.  And as long as those receipts are counterfeited, a State will exist to ensure that things remain that way.  It is a simple matter to bribe judges, law makers, enforcement agents, and even the public itself when one has a printing press.

The market has proven wholly inadequate at preventing the fraud of counterfeit bank notes, it can only react after the fact to punish the fraudsters.  But as we have seen, it is often too late.  Once the bankers have bought off the politicians and the public with their fraudulently acquired dollars they will be protected by the State.  The market has been trying to punish the fraud of counterfeit bank notes for the past 40 years and yet the State has held it at bay.

Thus we are back to my original question.  What system is to prevent the arbitrary replication of receipts for gold under a gold standard?  Unless we give up digital transactions and outlaw the use of paper receipts as a society, there is nothing that can prevent it.

If it hasn’t become clear by now, I hope you can see why Bitcoins (or another similar currency like it) are superior to a gold standard.  They simply can’t be inflated.  It can’t happen.  And further, since there is no bank issuing the notes, there is no one group of people who can use the power of the press to influence the public or political class with the bribery of free money.

This core problem must be addressed by gold standard advocates if they want to argue that gold is superior to encrypted digital currencies like Bitcoin.   Since gold can not be shoved down a transmission wire, unless the gold standard advocates want argue that all transactions must be made with physical specie, they have no possible way of getting around this one fatal flaw with the gold standard.

I never in a million years thought I would be saying these words, but the gold standard really is a relic of a by-gone era.  In today’s society where barter takes place across global markets using digital transactions, a gold standard currency that does not use the exact same mechanisms of Bitcoin to ensure replication of the digital representation of gold is impossible, is ultimately doomed to fail in the exact same manner it has already failed today.

Of course, the nature of Bitcoin is such that it is impossible to tie gold specie to a Bitcoin because Bitcoins can not be created in accordance with the minting of new gold.  But the nature of Bitcoin also begs the question as to why we even need to have such a currency tied to a commodity at all.

We don’t – and we shouldn’t.

It is a waste of resources to have men digging for gold, just to have it sit in a bank vault, when those same men could be making something useful for humanity instead.  Gold was only useful as a currency because it could not be arbitrarily inflated and met the requirements of scarcity, divisibility, fungibility, and recognizably better than any other physical commodity.   Today, in our new digital world, such monetary requirements are better suited to the digital realm, where the waste of resources on the production of money is not necessary.

I would like to end this article with some thoughts on money by Hoppe.

In a free society, the market would produce money, as all other goods and services. There would be no such thing as money in a world that was perfectly certain and predictable. But in a world with unpredictable contingencies people come to value goods also on account of their marketability or salability, i.e., as media of exchange. And since a more easily and widely salable good is preferable to a less easily and widely salable good as a medium of exchange, there is an inevitable tendency in the market for a single commodity to finally emerge that differs from all others in being the most easily and widely salable commodity of all. This commodity is called money. As the most easily salable good of all it provides its owner with the best humanly possible protection against uncertainty in that it can be employed for the instant satisfaction of the widest range of possible needs. Economic theory has nothing to say as to what commodity will acquire the status of money. Historically, it happened to be gold. But if the physical make-up of our world would have been different or is to become different from what it is now, some other commodity would have become or might become money. The market will decide. In any case, there is no need for government to get involved in any of this. The market has provided and will provide some money-commodity, and the production of that commodity, whatever it is, is subject to the same forces of supply and demand as the production of everything else.

Bitcoins are the first true digital commodity.

Bitcoins are free market money.

 

Related articles:

How To Use Bitcoin – The Most Important Creation In The History Of Man

Libertarian Goldbugs Hating On Bitcoin – Free Market Money

The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation

The Economics Of Bitcoin – How Bitcoins Act As Money

 

  • Jason Walls

    Let me start by saying I’m not a gold bug.  I’d call myself an “asset bug”, because, at the end of the day, I need to be able to trade whatever money I use for food or the advancement of my procreation.  Money needs to be able to be traded for real assets.  That means one and only thing: *that money needs to be trusted*.  In a free market money system without BitCoins or computers, banks would issue their own IOUs.  Banks would have assets, and the value of the IOUs would be a formula based on the the total assets the bank has and the trustworthiness of the bank.  You wouldn’t even need to make counterfeiting illegal beyond simple copyright infringement; if a bank defrauds its own bills, then the trust-risk-factor would go up, and the value of their bills (and their business) would go down.  People would stop using them.  With the ability to transmit information quickly, accurately, and with context over long distances, that asset-to-risk ratio becomes very accurate, very quickly.

    Let me reiterate that it’s assets, not gold.  The assets could be gold (back by protection from theft, i.e. vaults); ham hocks, wood, or quarry stone (also back by private or police protection); or even the promise of future labor, or loans (backed by contract enforcement).Trust is subjective.  People trust what they FEEL is safe, and there’s no way getting around that, especially since the value of money is built on that trust.  I (general I) trust that my gold is in a vault somewhere, and someone will *probably* want it someday.  I trust that the loans that are represented by my bank IOUs will be backed up by some contract enforcement mechanism.  No matter what, until we all have privatized security forces and decentralized contract brokers, the law will always be involved.That is my only issue with BitCoins.  Most of the buzz about them has been speculative – people are gambling with them just as they would the stock market.  No one has used them yet to buy a year’s worth of groceries (maybe I’m wrong about that).  I can’t trust them yet.   Maybe I will someday, when I can use them to buy a cup of coffee.

    • http://twitter.com/ibutton77 Jesse Thompson

      >
      Maybe I will someday, when I can use them to buy a cup of coffee.

      That’s one of the reasons I look forward ti BitInstant’s vaunted debit card offering. :3

      If I can hold bitcoin, in my wallet on my watch under my terms and protected from USD inflation, and then spend that through a debit card into USD accepted by any merchant in the united states with negligible delay and negligible fees, then I am in a very real sense “spending bitcoins to get coffee”.

      Granted, and others have made this point, it’s not the same as the merchant flat-out accepting the bitcoins from me. Doing that would be cheaper for everyone involved but would require the merchant to have faith in the currency, too. But acceptance is a chicken-and-egg problem, and steps like bitcoin debit card I think are great at breaking that ice.

      I do guarantee that, once that comes out and meets it’s performance promises, that will become how I buy my groceries, tyvm. :D

  • Blah

    nice, gold is not money just because, it is/was money because the marked has chosen it.

  • Idoc

    micheal,

    i’m a bitcoin advocate as well.  one question that bothers me is this:
    why do the lead devs keep suggesting that 1 BTC can be subdivided down to .00000001 btc if and when we want?  isn’t this a form of inflation?

    • http://www.libertariannews.org/ Michael Suede

      no, that would be deflation.

      Try to imagine how much a bitcoin would be worth if all goods and services in existence were represented by bitcoins.

      The entire wealth of the world would need to be divided up among 21 million coins.

      This means the currency has to be extremely divisible to account for things like gumballs and soda pop which are really really cheap to produce.

      A gumball might cost .00000001 coins if this was the case.

    • Chris

      Is that fact that you can divide a US dollar into 100 pennies a form of “inflation”?  Dividing a Bitcoin is no different.

    • http://www.cafepress.com/bitcoinshirts Erik Voorhees

      By subdividing a BTC, one is in fact creating more units and thus it is technically inflation. HOWEVER, and this is crucial, when the subdivision occurs, ALL ACCOUNTS and PRICES reflect this division equally. So while it’s inflation, it’s irrelevant, because it does not distort any prices. When Ben prints money, your bank account doesn’t rise to reflect the change. When BTC is divided like a stock split, your back account does reflect the change.

      If the btc decimal was moved to the right by 50 places, then every account would have a proportionately higher number of btc units, and it becomes an issue of notation, nothing else. 

      • Bitman

        Yes, that’s the reason why Bitcoin has been built with this facility of sub-division so that its value can be consistently maintained. Lets not kid ourselves, Bitcoins, as a system, does “print” money via mining. BUT the way that money is printed is VERY different from any Government central banks do. In BANKING and FINANCE theory, the only reasons money (in the form of Fiat Currency, Credit and other IOUs issued) was to facilitate trade and commerce and control Inflation and Deflation in the form of MONEY SUPPLY. YET, many Government of central Banks HAD Abuse that POWER for what ever reasons.

        Bitcon have taken over the POWER of “printing” and its transparent. To quote the Bitcoin wiki, ” …in the first 4 years of the Bitcoin network, 10,500,000 BTC will be created. The amount is halved each 4 years, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12 and so on. Thus the total number of coins will approach 21,000,000 BTC over time.” This controlled issuance is a controlled attempt to issue Bitcoin over time an usage take up increases. How this figure and limit is arrived at is a mystery. Whether this total is sufficient to support the used of the Bitcoin economy in the future is a BIG UNKNOWN.

        However, there is also a sub-issue mechanisim built into the system, that is the divisibility of the Bitcoin. To quote the wiki again: “Technically, a Bitcoin can be divided down to 8 decimals using existing data structures, so 0.00000001 BTC is the smallest amount currently possible. Discussions about and ideas for ways to provide for even smaller quantities of Bitcoins may be created in the future if the need for them ever arises.

        Now, I see this further issuing of Bitcoin is enpowered by the user. The user do not possess the influence or power to undermine Bitcoin values (in relation to other real world currencies in an exchange) but merly to sub-divide that values to meet his commercial transaction needs. For example, the current Bitcoin excahnge value to US$ now stands at 1 BTC to US 20. If the merchant wants to sell an item for US 1, he can request and accept 0.05 BTC. If the item he wants to sell is US 0.01, he can of course ask for 0.0005 BTC.

        I will comment about Gold standards in my next post.

  • http://www.cafepress.com/bitcoinshirts Erik Voorhees

    Excellent piece.

  • Levi Ramsey

    Bitcoin is not necessarily immune to that criticism, though.  If Bitcoin becomes a major transaction-processing and wealth-storing system, much of that wealth may well be held by e-wallet services who will effectively be issuing their own currency for internal transactions which they warrant as convertible to bitcoins for external transactions.  There’s currently a limit on the size of a block in the chain (1 MB) and thus a limit on the number of transactions that can be in a block (about 1,000).  With six blocks per hour, the Bitcoin protocol is thus currently limited to about 6,000 transactions per hour.  This is a configuration variable and is possible to change, though dramatically increasing it in turn decreases the ability of nodes to fully participate (i.e. to actually download the block chain).  In addition, the expenses of securing a wallet against theft and/or key loss (e.g. renting a safe deposit box in which a printed representation of the keys is kept) are likely to remain reasonably constant in bitcoin terms (they’ll increase dramatically in dollar terms with inflation, though) and don’t dramatically increase with the number of coins in the wallet (thus e-wallets will probably undercut DIY security on price).  Further, as transaction fees on the block chain increase (as they’re expected to), there’s more room for e-wallets to undercut the block chain as transaction processors (and network effects arising from the possibility of customers preferring to deal with entities that have accounts with a given e-wallet provider will probably also drive consolidation of e-wallet providers).

    Those e-wallet providers will essentially be banks: while they may not necessarily be lending out coins, there’s still the same incentive as a gold warehouse-receipt issuer to issue more receipts than they have gold on hand for an e-wallet to issue more bitcoin warehouse receipts than they have bitcoins on hand.  That it’s still going to be comparatively easier for someone to redeem bitcoin warehouse receipts for block chain (that is to say, “real”) bitcoins (it might mean paying 3%… the cost of transporting a substantial amount of gold from one vault to another is probably somewhat higher) and that it will probably be easier for people to create competing e-wallet services (some of which would likely use honesty as a selling-point) probably mean that there’s less room for this sort of fraud in bitcoin as there is in gold (and both offer dramatically less room for this sort of fraud than there is in central bank fiat systems)

    • http://www.libertariannews.org/ Michael Suede

      I don’t think your arguments on security costs have much merit.

      I can download truecrypt for free and store an encrypted copy of my wallet file on a USB keychain drive for a couple of bucks.  On top of that, I have a dual drive box and web storage where I could also put a backup copy. 

      But let us look at your ewallet arguments.  It is impossible to have fractional reserve lending because the stock of coins is what is used to make payouts.  They can’t issue receipts for bitcoins because they have to issue actual bitcoins to borrowers.

      There is no problem with 100% reserve banking – which is what bitcoin banks would be forced to operate under.

      • http://twitter.com/ibutton77 Jesse Thompson

        Isn’t it a bit reductionist to ignore all security costs aside from capitol? If I want a physical vault, the contractor will charge me for more than the material costs of a hundred pounds of concrete and a hundred pounds of iron. Someone is building and re-enforcing walls out of that material, and designing a vault door with a complex locking mechanism.

        If you are confident in using truecrypt and your wits to fend off malware and offline attacks http://xkcd.com/538/ alike, then you may have yourself a nice security system for your bitcoins. But saying that has a price tag of “a couple of bucks” is disingenuous unless you’re going to offer to guarantee the security of any other computer newbies with a similar approach for no more than “a couple of bucks” a pop. You skip over the implied value of your computer literacy and security acumen which you either have or convince yourself you have, right up until you’re hacked (bitfloor.jpg) or mugged.

        > It is impossible to have fractional reserve lending because the stock of coins is what is used to make payouts. They can’t issue receipts for bitcoins because they have to issue actual bitcoins to borrowers.

        https://en.bitcoin.it/wiki/MtGox#Redeemable_Code_.28Currency.29

        Allow me to introduce you to the MtGox Voucher. You hold a Mt. Gox balance, create a voucher, give to another Mt Gox user, the balance transfers to them.

        No bitcoins withdrawn, no blockchain accessed, no transactions out of the aforementioned 6000/hr limit consumed, no fees paid to miners, ad no direct proof Gox has the bitcoins to back up the digital paper money.

        Still impossible to counterfeit without Mt.Gox’ involvement. Person A gives voucher to person B. B logs into their mtgox account (or resses up a throw-away account if they wish; no overhead needed) to redeem and verify the voucher, now has BTC on file (or any other currency). B starts the process again by passing vouchers to C, D, and E.

        • http://www.libertariannews.org/ Michael Suede

          First off, I’m a software developer by trade, so I feel pretty confident about my security assessment. If you keep your wallet file encrypted with a strong password, and keep off-line backup copies, you are going to be secure against virtually any cyber attack against your system.

          As for fractional reserve banking, I commented on this here already:

          http://www.libertariannews.org/2012/03/09/fractional-reserve-banking-with-bitcoins/

    • http://phedny.net/ phedny

      At one side, you describe the one fear I have for Bitcoin: people will eventually use eWallet services, because they are easier, more secure, provide guarantees or something or just because they are cheaper due to transaction costs, either or not cause by the block size limit. And once eWallet services one a large scale allow transactions to clear outside of the blockchain, there is a very nice incentive to start lending eWallet-Bitcoins not backed by blockchain-Bitcoins.

      Having said this, there are two important points to make.

      First, historically, gold has been used to settle trade imbalances between countries. When one country has a trade deficit and another one has a trade surplus, gold is transported to settle the difference. The same could be used between eWallet services: as long as there are enough eWallet services, such that enough eWallet-Bitcoins are exchanged among those services and regular settlements through the blockchain occur, dishonest eWallet services might face trouble. But they can go on and on as long as no more blockchain-Bitcoins are withdrawn as there are present in the eWallet service.

      Second, both with gold and with Bitcoin anybody is capable of holding the “true” stuff. When you decide to hold gold, you can also decide on holding physical gold (including taking care of security) or holding a certificate or IOU. When choosing the latter option, because it’s easier or cheaper, you expose yourself to the risk of what you call counterfeiting. But if you care about your assets, you can always decide to hold physical gold. The same is true with Bitcoin. You may decide to hold Bitcoin in eWallet services for the sake of easy usage, lower transactions fees or whatever reason; with Bitcoin you’re still in the position to transfer blockchain-Bitcoins into an address for which you keep the private key in an offline and secure location.

      So, if (or some people believe when) the gold counterfeiting bubble bursts, the gold certificates may be worthless, but the impact on people holding physical gold is different. The same is true for Bitcoin. As long as the general public doesn’t know or understand this, Bitcoin isn’t the solution to the fundamental problem.

    • http://phedny.net/ phedny

      At one side, you describe the one fear I have for Bitcoin: people will eventually use eWallet services, because they are easier, more secure, provide guarantees or something or just because they are cheaper due to transaction costs, either or not cause by the block size limit. And once eWallet services one a large scale allow transactions to clear outside of the blockchain, there is a very nice incentive to start lending eWallet-Bitcoins not backed by blockchain-Bitcoins.

      Having said this, there are two important points to make.

      First, historically, gold has been used to settle trade imbalances between countries. When one country has a trade deficit and another one has a trade surplus, gold is transported to settle the difference. The same could be used between eWallet services: as long as there are enough eWallet services, such that enough eWallet-Bitcoins are exchanged among those services and regular settlements through the blockchain occur, dishonest eWallet services might face trouble. But they can go on and on as long as no more blockchain-Bitcoins are withdrawn as there are present in the eWallet service.

      Second, both with gold and with Bitcoin anybody is capable of holding the “true” stuff. When you decide to hold gold, you can also decide on holding physical gold (including taking care of security) or holding a certificate or IOU. When choosing the latter option, because it’s easier or cheaper, you expose yourself to the risk of what you call counterfeiting. But if you care about your assets, you can always decide to hold physical gold. The same is true with Bitcoin. You may decide to hold Bitcoin in eWallet services for the sake of easy usage, lower transactions fees or whatever reason; with Bitcoin you’re still in the position to transfer blockchain-Bitcoins into an address for which you keep the private key in an offline and secure location.

      So, if (or some people believe when) the gold counterfeiting bubble bursts, the gold certificates may be worthless, but the impact on people holding physical gold is different. The same is true for Bitcoin. As long as the general public doesn’t know or understand this, Bitcoin isn’t the solution to the fundamental problem.

    • http://twitter.com/ibutton77 Jesse Thompson

      While I have heard others make the fractional reserve eWallet argument before, when you talk about “honesty as a selling point” it leads me to imagine that Bitcoin *does* offer a solution to allow an eWallet provider to offer perfect transparency while protecting the blockchain from further bloat.

      Namely, eWallet service can keep it’s own transactions public just like the blockchain does. Customers can confirm their transactions are listed properly with their wallet “addresses” passing virtual money about between their accounts and others, you can see the real bitcoin entering and leaving the system via the regular blockchain and then track it’s progress within the system, as well as confirm that the “asset” balances remain solvent at all times.

      That would be impossible to audit with gold without hurting security by allowing customers to make spot inspections of the vaults. ;3

  • Pingback: Response to Michael Suede “Against the gold standard” « El Economista Prudente()

  • http://eleconomistaprudente.wordpress.com Manuelgar

    Hello,

    Nice article.  If you are interested, I´ve just wrote an especific response to this article here:

    http://eleconomistaprudente.wordpress.com/2011/06/22/response-to-michael-suede-against-the-gold-standard/

    • http://www.libertariannews.org/ Michael Suede

      I liked your article, but you are misinterpreting what I’m saying.

      When I say “counterfeiting” – I’m really saying “fractional reserve banking”

      I view them as identical crimes.

  • http://www.economicsandliberty.com Anthony Freeman

    Bravo! For similar sentiments I recommend:

    Bitcoin: A New Commodity Created To Serve Market Demand
    http://economicsandliberty.wordpress.com/2011/06/22/bitcoin-a-new-commodity-created-to-serve-market-demand/

  • Bitman

    The Gold Standard.

    What does that mean. It means the highest quality and performance any item has reached for the purpose it is used for. For example, if a measuring instrument is referred to as the Gold Standard, it means that it the best of the best in the market for that particular type of measuring tool available. Now, having said that, lets get to the issue of the Gold Standard as applied to money in economics.

    Historically, Gold has been used as money but failed to be the medium of exchange for many reasons. Gold is a precious metal commodity like silver or other metals. It has intrinsic values as well as a store of value (eg, if it is made into jewelery). One important reason among others why gold cannot be the medium of exchange is because of this intrinsic value in Gold.

    A case in point: if you mint US$100 gold coin now and use it to circulate as money. What happens if the worth (not in money terms) of this coin is US$120 a year later? Or should the value drop to US$80. Better yet, should it stay at US$100 forever? What would be the economic impact?

    To make my argument short: Fiat money is the answer. Fiat money is neutral. It makes a good medium of exchange. The erosion of the purchasing power in the Fiat currency is not because Fiat currency is evil. Don’t blame the currency. Don’t blame the tool. Blame the workman. Blame the people (politicians, economists, your parents, teachers, not forgetting to include yourself, etc) for the economic shambles.

    For example.Many have complained about inflation. Lost of purchasing power. Yes, rightly so. Is it because of Fiat currency? No, my friend. Why. Because of economic mismanagement. Prices goes up for the wrong items, meaning inflation is applied to the wrong stuff. People dont like their food prices, healthcare, etc to go up BUT they like their House Value to go up. Now home values are down, that’s deflation, yet people are complaining, and rightly so. Do the blame the Fiat currency for causing Housing deflation. No. they blame the housing bubble and the people that manage it. 

    Moral of the story: identify the real cause of the problem and attribute the blame correctly.

    • Bitman

      Just before people misunderstood me, backing Fiat Currency with gold is the same as issuing gold coins directly into the economy. If its 1:1, it makes no difference. Because of the intrinsic value of gold and changes of its value over time, there’s where the fractional reserve ideas kick in, besides the limited physical amount of gold in sustaining a blooming economy.

    • http://eleconomistaprudente.wordpress.com Manuelgar

      The prices of all goods fluctuate, including currencies.  None economic good is neutral, wether it is used as currency or not.  And fiat currency is not an exception.  Prices are subjective value from a good relative to another.  If wheat is scarce because a bad harvest, then a ton of wheat will be worth more gold coins, then gold has less value in terms of wheat.  

      It is not true that all prices fluctuate against a fixed value represented by gold or any other currency, that´s just not real.  Everything fluctuates reciprocally.Regarding issuing 1:1 gold certificates being the same as issuing gold coins is not the same if those account certificates are account entries instead of bills, becasue no physical delivery is needed and payments are optimized through clearing processes.   Besides, nominal account entries would provide more security to the depositor than bearer  physical gold coins or certificates.

  • http://profiles.google.com/fungusfitzjuggler Patrick Donnelly

    Rothschild was wrong and merely being hyperbolic. He clearly had a point! But he was never invincible. He would not be boasting, talking his book, if he had been!

    Gold and precious materials cannot be forged! They can be imitated and fraud has occurred for those who do not take precautions, but not made worthless by government! Making gold illegal is like the drugs war! The price goes up and the quality goes down!

  • http://profiles.google.com/fungusfitzjuggler Patrick Donnelly

    Rothschild was wrong and merely being hyperbolic. He clearly had a point! But he was never invincible. He would not be boasting, talking his book, if he had been!

    Gold and precious materials cannot be forged! They can be imitated and fraud has occurred for those who do not take precautions, but not made worthless by government! Making gold illegal is like the drugs war! The price goes up and the quality goes down!

  • Guest

    Well… Everything you say is true.  On the other hand, governments have compelling reasons to outlaw bitcoin.  You can’t tax sales or assets you don’t know exist – and can’t trace.  In the end, that will kill Bitcoin.  It doesn’t make any difference how good a system it is.  If the government and existing banking cartel can’t control it – they will destroy it.

    • Nospamplease

      bitcoins and the bitcoin network are indestructable.

      many companies, an entire industry and governments have tried to stop the bittorrent protocol but they can not.

      The bitcoin network is even stronger because supporters of the network can profit directly in bitcoins in supporting. It is global, meaning a co-ordinated global attack would be necessary to even attempt to disrupt it. It is currently virtually impossible that enough compatational power could be co-ordinated by even the US government to hijack the bitcoin blockchain (this would not destroy bitcoins or the network, just temporarily steal the accounting of the network allowing the attacker to double spend his own bitcoins).

      The only way to destroy the bitcoin network would be to turn the internet off (impossible) and prevent a similar netork from being created (almost as impossible).

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