With my last post, I indicated that I was setting up to make a related follow-on post. I am, but this is not that article. At the request of one of our fellow dudes, and on a different, but related topic, I want to take a minute to talk about the new “digital currency”- Bitcoin. Now, I’m no expert on Bitcoin in particular, but all of the same economic laws apply to it as to any other money ever used by mankind.
Previously, I had shown that “money” is, on one level, an intermediate good. That is to say, it doesn’t necessarily represent what you want, but it represents something everybody wants. In this role, it facilitates trade by being widely accepted. Money also needs to be durable and divisible. This also distinguishes money from barter items. Say I have some fresh tomatoes out of the garden to trade- well, I have about 5 days to find a transaction to make. Or I want to trade my car, but you don’t have anything of equal value. I can’t trade you half a car- we have problems.
When America was first starting out, we used what is referred to as “commodity money.” The actual $20 worth of gold was put into a single blob and “Twenty Dollars” and “United States of America” was stamped on it. It was fairly easy to tell if someone was giving you the real thing. Some coins could be broken apart to provide divisibility- that’s where the phrase “two bits” comes from. Different size coins were available for different values, and different metals such as silver and copper extended the range.
As a quick aside- just to make the point- even though we are no longer on commodity money, the US copper alloy Quarter and Dime still hold the tradition of denomination by weight. If you have an accurate scale, you can see that a quarter weighs exactly 2.5 times what a dime weighs! “Silver money” used to actually be counted by weight, with no regard for the denomination. Silver dollars, halves, quarters and dimes had the value of their weight of silver alloy.
When we changed to paper dollars, it was what is known as “representative money.” That is the gold standard that most of us think of. You don’t hold the actual commodity, but the note you hold represents an actual physical commodity on deposit. Problem with this is, it is open to devaluation as FDR did in the ’30s. By the stroke of a pen, it cost $28 to buy an ounce of gold instead of $20. That is to say, the cash in your pocket wouldn’t buy as much.
The next advance, if looting the populace is progress, is “fiat money.” Money, because we say it is. It is MINO, to use our parlance. Money In Name Only. It is money because we recognize it as such. Part of its power comes from its “Legal Tender” status- the government pretty much says you have to denominate all prices in US Dollars, and accept them as payment in trade. As far as what it actually represents, it represents “the full faith and credit of the US of A.” Which is something, after all. If you decide to start competing with the government’s monopoly on printing cash, they will hunt you down, take all your stuff, lock your ass up, etc.
Which finally brings me to Bitcoin. No commodity backs it, so it is a pure fiat currency. The fiat that backs it is not a government, ours or anyone else’s, so it represents the full faith and credit of some dude with a computer. No one is required to accept them, or set prices in terms of them, so value (and hence exchange rates) are pretty much just a matter of opinion. They claim to be worldwide. I guess the internet reaches there, wherever “worldwide” is, so I’ll give them that. But I bet with an hour’s drive to the international airport I could swap US Dollars for pretty much whatever I wanted. Probably get me some Dutch Guilders if I fancied to. The bank handles exchange if I write a check and send it overseas. So no clear advantage there.
Cash money works when the power is out. Bitcoin may run on your smartphone or whatever, but my stack of Washingtons doesn’t need batteries. Bitcoin claims to be able to make transactions anonymous, but I have my doubts. Let’s ask the NSA how hard it is to follow people’s online activities. Electronic surveillence? Hell, our flea market here doesn’t even have electricity. And I guar-an-damn-tee you can find anything you want there, if you have the cha-ching a jinglin’ for it!
Where does it come from? Is there a “Bitcoin mine?” Or does it come from a well? Actually, they call the process “mining.” On a real non-technical level, their server creates a new number and if you are the first to guess the number, you get the newly-minted Bitcoin! How does that create wealth?
Finally, can it be debased? I see two possibilities for it. Remember MySpace? Not so much since Facebook, huh. What’s the “next Bitcoin?” And it is “digital.” That means “numbers.” How many numbers can they print until they run out?!? If I’m going to get ****ed for a number, my number is 68.
Now, no one can debase Kate or counterfeit Cindy- enjoy!