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Below is a letter to the editor of the New York Times that I wrote to try to explain why BITCOIN can NOT be a money or currency in our economic system.  Apparently the Editor did no like the message for he did not publish the letter.  Perhaps people on this blog would like to comment on Bitcoins!


March 1, 2014

To: Letters to the Editor Department

New York Times


In his article “The Bitcoin Blasphemy” [N.Y. Times, Match 1, 2014], Joe Nocera implicitly raises the issue of why Bitcoin is thought of as a virtual currency when credit cards are recognized as merely a way of making payment in some form of government money.

What those who are promoting the notion that Bitcoin is some real, if virtual, money fail to comprehend is that all market transactions involving production and sales in any developed nation are organized through the use of that nation’s money denominated legal contracts.

Money (or currency), whether fiat or backed by gold or silver, is therefore defined as that thing that by delivery discharges all legal contractual obligations. Only the government, as the enforcer of contractual obligations, can determine that thing that is legally MONEY, i.e., what thing(s) will discharge contracts under that nation’s civil law of contracts. As Keynes once noted, in a money using, market economy, only the government can write the dictionary as to what is money. Government money has value as long as all residents are law abiding.

Credit cards can facilitate payments but are not money. They can be used for transactions where the buyer promises to pay in terms of government defined money to the credit card company while simultaneously the credit card company pays government defined money to the seller.

Unless the government asserts that the tending of Bitcoins will discharge all legal obligations, Bitcoins cannot be money. Bitcoins are merely something that someone created and has claimed to be “as good as cash” by implying that a well organized and orderly market exists where every Bitcoin can be sold for the currency of a nation in which the holder of the Bitcoin wants to buy something via a legal contract. We require dollars and not Bitcoins to settle legal contracts in the USA. Financial assets such as General Motors stocks are also valued in terms of dollars every day on the Stock Market – but GM stock cannot be directly used to settle a legal contract. Instead GM stock must be sold for dollars when the holder of the GM stock wants to legally pay for the purchase of a good or service. [Stamp collectors also deal in stamps that can be bought and sold on an organized market – but the stamps themselves are not money. These collector stamps have value only because community of users [collectors] have decided to give them value.]

 People should have learned a lesson from the crash of the so called “derivatives” financial assets that were sold to the public by investment bankers as being as “good as cash” . These derivatives were never virtual money, though they were created by the investment bankers. When the market for selling these derivatives collapsed in 2007-8, these derivatives became worthless pieces of paper, as even financial writers of the media recognized. The result was a financial panic globally as holders of these virtually assets suddenly realized they were not as good as MONEY.

With the collapse of the Mt. Gox market for buying and selling Bitcoins, when will editorial page writers warn their readers that Bitcoins cannot be money?

  1. William Turnier
    March 22, 2014 at 5:18 pm

    The NYT limits letters to a tight word count (250 I believe) and that would automatically bar your letter. They will make exceptions for very famous personages (e.g. Former Attorney General).

  2. Mrs Tiggywinkle
    March 22, 2014 at 5:24 pm

    This argument is circular. It states that bitcoin cannot be money because the government has not defined it as money.

    However, US Federal Judge Amos Mazzant has ruled in court –

    “It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

    And the German Finance Ministry has declared it a “Unit of Account”, which stops short of declaring it a full currency, but makes it subject to financial law and tax powers.

    In short, even even if we accept your circular argument for the definition of money, your argument still falls down completely.

    • Cristi C
      March 23, 2014 at 7:52 pm

      You did not understand that case. The judge sided with SEC that BTC is a form of securities, like stocks, commodities, not money. The judge wording should not be taken as is because a judge is not a Central Bank.

    • paul davidson
      March 24, 2014 at 8:07 pm

      The judge is just fortifying my argument when he says anyone who wants to accept bitcoins in discharge of an obligation is free to do so —- and also says bitcoins “can be exchanged for conventional currencies” — since I pointed out so can collectors’ stamps, GM equity securities, etc. As long as someone is willing to set up a well organized and orderly market for buying and selling anything, that thing is a LIQUID ASSET (but not money per se –as my example of derivatives in my first post argued. For ORDERLINESS in a well organized market requires a market maker who will guarantee that price changes of the thing vis-a-vis “conventional currencies” move in an orderly manner. If Bitcoins was money per se why would anyone need to exchange it into a “conventional currency”?/

  3. Cristi C
    March 22, 2014 at 5:36 pm

    Good work. I’m not sure why the editors rejected it. In fact, it would simply means they are rejecting verdicts given by many Central Banks about BTC. Most of them treat BTC as commodity, not money nor currency.


  4. March 22, 2014 at 5:44 pm

    My views on bitcoin (written during the boom before the Mt.Gox crash:

    Cryptocurrencies ought to be outlawed or outcompeted

    Bitcoin is very hot these days in the media, and transaction and speculation activity is on the increase. Seen from my left-wing and anti-capitalist position, I hope that bitcoin will recede because of inherent weaknesses, or because of rivalry from competing cryptocurrencies (which will hopefully also not suceed much). I am aware that this is a provocative stance for some of my otherwise political and ideological allies.

    My position is that

    1) cryptocurrencies should be outlawed just like forged money, and that …

    2) there are probably methods to enforce such legislation, …

    3) but there is a need for an attractive alternative since cryptocurrencies cannot be eradicated.

    Why make them illegal?

    First and luckily, this is not an acute problem. One therefore has time to carefully argue for this – I suspect – controversial position. One should be aware that bitcoin is sooo geek-cool, cutting edge, international (a “break with petty nationalism”) – and by many progressives (sigh) considered to be a tool to fight “the banksters”. One must therefore proceed in the public discussion about this in a way that does not alienate young and IT-savvy progressives too much. That said, it is necessary to argue for the position that any means of exchange that makes it much more difficult for a government to levy taxes, and to curb criminal (black) economic activities, must be considered harmful and should be outlawed. A modern welfare society must (as argued by f.inst. William Baumol based on considerations about effects of automation and technological progress and the impact on manufacturing but not on services to the same degree) use an increasing share of GDP for public expenses: most important are health, education, caring, infrastructure. So an increasing share of GDP – at least according to what is seen as the succesful “Nordic model” – must be collected via taxation and paid for by the government. We are talking 40% or more and increasing, in advanced welfare states.

    If cryptocurrencies gain much traction however, this will imply large-scale tax evasion and simply be damaging for the welfare state. Note that right-wing libertarians are very aware of this: they gleefully rub their hands together over this fantastic new tool to fight “government”. IT-savvy progressives that have fallen for the “anti-bankster” hype about bitcoin, become useful idiots for right-wing libertarians.

    Methods of enforcement?

    This is very difficult (and that explains the euphoria among right-wing libertarians). But one way to go about it is possibly for government agencies to routinely open bitcoin accounts (exploiting the much-touted anonymity of such) and offer sale of a good, or offer to buy bitcoin for regular currency, and then prosecute any national that responds with an identity and address (which they have to if they wish to do the offered transaction). Just the knowledge of the existence of such undercover activity from the authorities with associated stiff penalties should imply a credible threat, at least against traders within a given country. Concerning cross-border trades, one probably has to get agreements with other nations about enforcement.

    An alternative should be offered

    Peer-to-peer cryptocurriencies are probably here to stay. The good thing about this technology is that international payments can be made very cheaply, circumventing profiteering banks and credit card companies. And to not be, or appear, private-bank friendly, “outdated” and “luddite” in these discussions, one should actively promote a high-tech and similarly convenient and cheap alternative: Central Bank-based mobile (electronic) money (and also local and regional currencies hosted by the CB, but this is not the topic here). Every citizen should get a free deposit account at the CB*, and the CB should also offer international payment services at near-zero prices. With such an alternative, cryptocurrencies will remain a fringe phenomenon.

    I am aware that this discussion has hardly started, and would like to hear what others say.
    * This CB ought to be an instrument of the government, following Modern Monetary Theory – not “independent”. But this is another discussion.

  5. March 22, 2014 at 5:57 pm

    Paul: A more uiseful way to think about bitcoins is to recognize that much of what we use to complete transactions today are processes/things that are not legal tender. You are defining money as legal tender. It is absolutely true that you do not have to accept a check that I write against a bank account in payment of an obligation so that check is not legal tender. However, and oddly enough, neithers are Federal Reserve Notes, which are legal tender in the U.S., required to be accepted in all transactions even though they say they are legal tender on their face. When you file your tax forms each year you can pay by check or credit card but not by sending cash (Federal Reserve notes). The instructions are quite explicit: do not send cash. There are many other cases where cash is not accepted.

    Our discussions of money and of the role of central banks would be much clearer and more sensible if we, as economists, recognized what much of the population knows. Credit cards and debit cards and checks are as useful or more useful for completing transactions than is “cash.” There are different kinds of settlements that have to be made for each form. My bank account has to be replenished periodically with an electronic entry from my employer or pension fund: I have to transfer funds (again electronically) to the issuer of my credit cards. And so on. But there is no magic “stuff” that gets used in making these settlements.

    It is true that the unit of account in a world of nation states, contracts and transactions of all sorts are completed using instruments denominated in a unit of account that coincides with the territory of each nation state. ( Even here, however, there have been exceptions–dollars have long been used in the border region of the U.S. and Mexico– and there are other cases) but that is not the issue in talking about bitcoins. Bitcoins are simply another way of making settlements that are denominated in dollars but handled among non-governmental groups/individuals. In spite of what the bitcoin advocates (I am tempted to write nuts) may think, there is nothing novel about this. What does make bitcoins a bit different is that secrecy and the pretense that the courts of a nation have no control, makes them riskier. And, I assume they would be hard to use in most places though I confess that I have not explored the options as I regard them as yet another manifestation of a failure to understand our generalized payment systems.

    One reason for this failure is that economists and policy makers continue to talk as though there is a “supply of money” that central banks provide. Central banks can influence the exchange rates of various kinds of highly liquid assets, but the reality is that most of the money/credit that we use to settle the bazillions of transactions that we carry out in a modern economy are settled electronically among private parties who operate under a variety of contractual rights and obligations. The requirement to use legal tender is not primary among those rights and obligations.

    • originalsandwichman
      March 22, 2014 at 6:12 pm

      “In spite of what the bitcoin advocates (I am tempted to write nuts) may think, there is nothing novel about this.”

      Nuts, you say?

      “Again, if he would give his nuts for a piece of metal, pleased with its colour; or exchange his sheep for shells, or wool for a sparkling pebble or a diamond, and keep those by him all his life he invaded not the right of others, he might heap up as much of these durable things as he pleased; the exceeding of the bounds of his just property not lying in the largeness of his possession, but the perishing of anything uselessly in it.” — John Locke

    • paul davidson
      March 22, 2014 at 10:35 pm

      Sorry Anne to disagree. All market transactions are organized via the use of legal money denominated contracts. Why LEGAL — because if one party or the other does not live up to its contractual obligation, the other party can go to the courts (the State) and if the courtfinds there is a legal contract, then the court can require the party that did not live up to its contractual obligation to pay the other party damages interms of the legal defined money.

      One can use checks instead of legal tender currency to make payments– only because checks are a “tap” issue– i.e., the check can be immediately converted into legal tender by the bank that the check has been drawn against if the check recipient prefers that rather than the value of the check being added to the recipients checking account [ which can be converted into legal tender at the demand of the holder of the account].. That is as long as the check issuer has sufficient funds in his bank checking account.
      If the seller on a legal contract fails to deliver the goods or services that were specified in the contract, the court can require the seller to pay damages suffered by the buyer in terms of legal tender.

      an example I always used when teaching a class at the University of Tennessee was suppose I received a call in the middle of a term from Harvard saying that th professor who was teaching Macroeconomics had died and Harvard would hire me to replce the professor if I could immediate come to Harvard to take over the prof’s courses.

      since teaching at Harvard was more prestigious than at Uof T, I would accept and immediately tell the Dean that I was leaving IMMEDIATELY!. The Dean might argue that we had an employment contract and that I had to stay until a least the end of the term to teach my courses there.

      My response would then be “Dear Dean, Lincoln freed the slaves and therefore you can not force me to teach for the rest of the term if I do not want to. Of course you can go to court and sue me for the damages of hiring someone else to teach [if you had to pay him/her more than my pay for the rest of the term and incurred any other costs in hiring a replacement. But I can always discharge any legal contractual obligation by tendering money in the form of legal tender or a “tap” bank issue that is guaranteed to be converted into legal tender.

      As I already indicated, that was why Keynes stated that the State and only the State had the right to write the dictionary on what is MONEY.

      And no one else can! As log as people are law obedient and accept the civil law of contracts.

      Now it is true that two individuals who know each other can agree to swap things in exchange — but market transactions are typically between agents who do not need to know each other and therefore use legal contracts to arrange such swaps.

      • March 23, 2014 at 11:12 am

        At best you argue that the state can force settlement in money. But commerce works in the majority by voluntary exchange, not arbitration, and it’s very common for contracts to be barters between two commodities. Share swaps are an example.

  6. March 22, 2014 at 6:28 pm
  7. March 22, 2014 at 7:22 pm

    From classic economic theory of value bitcoins have value of exchange. They cost work to make (specialized computers and mainly electricity). Thou, I think they are not money as they are not accepted by governments to pay taxes.
    But then, money is only valid, in this strict sense for paying taxes in one or, in the case of US dollar in a few countries (Panama, Ecuador for example).
    Outside of these places dollars should not be considered money but just one means of exchange.
    The problem for bitcoins is competence by a growing number of cryptocurrencies with different characteristics.

    • paul davidson
      March 22, 2014 at 10:39 pm

      Perhaps that is why the classic economic theory is so wrong! If I write an article on economics it costs me some work — but I can not pay my electricity bill by sending the article to the electricity company

      • March 23, 2014 at 1:20 pm

        Any means of exchange that does not allow oversight and taxation is detrimental to a modern welfare state. And this is why right-wing libertarians love cryptocurrencies. The good thing is that new parallel cryptocurrencies emerge all the time. This undermines confidence in each of them, makes them volatile and useless as a store of value. Excellent.

        The comparison with gold and palladium is misleading. Gold and palladium cannot be created, if you don’t believe in alchemy.

  8. March 22, 2014 at 8:39 pm

    What Anne Mayhew says. Also:

    Bitcoins are virtual gold, or maybe palladium. The have low use value, high scarcity, can’t be forged, and aren’t controlled by any government. They’re clearly designed to facilitate payments and store value. People aren’t obliged to accept them, but they do so voluntarily. Very few real-world vendors accept Bitcoins, making their use value low and uncertain, but the speculation is that acceptance will grow making them valuable. Currently they’re like an obscure precious metal, say palladium. Proponents hope they’ll become mainstream like gold, silver, money.

    So are they money? They’re clearly an attempt at commodity money, like gold. Let’s assume the proponents/speculators are correct and they achieve broader acceptance. What are the implications?

    Like gold and houses, Bitcoins are in fixed supply and thus deflationary. If you hoard an amount of Bitcoins it’ll rise in value with GDP. Arguably this is unfair and promotes inequality. It also rewards idle saving instead of consumption, trade, or real-world investing and depresses the economy. Investments whose real risk-adjusted return is below GDP growth aren’t made, which of course lowers GDP. If Bitcoins became pervasive as money they’d bring the same deflationary problems as the gold standard. If they became pervasive as investment instruments they’d resemble housing bubbles.

    The introduction of Bitcoins itself expands the money supply in the short term. Vendors of low marginal cost products such as information goods will increase supply in order to gain Bitcoins, and that is good. However this is a temporary and bounded effect. The total amount of Bitcoins is fixed, and eventually the much stronger deflationary effects will prevail.

    To prevent these problems, modern states exercise monetary policy, which comes down to two things:

    – Inflate money at a low positive rate to force surplus to be invested and generate growth.
    – Directly recycle surplus though a combination of taxation and inflationary spending.

    The first use of inflation is monetary, like interest rates. The second is fiscal, using inflation to catch what nominal taxation can’t. Bitcoin evades both taxation and inflation, making monetary policy impossible (if it succeeds in a big way). This is of course what libertarian supporters want.

    The libertarian supporters are either extremely selfish or deluded. The world of their dreams would be characterised by extreme and increasing concentration of wealth and income as well as declining yields for every kind of investment. When surplus isn’t recycled in nominal terms and the money supply isn’t increasing, investments necessarily will yield diminishing returns. The price/earnings ratio of all assets will keep climbing, while total output and consumption will be well below capacity and keep falling.

    Bitcoins are good for individuals, but very detrimental to the common good.

    • paul davidson
      March 23, 2014 at 3:31 pm

      there are s many things incorrect in this comment, that I hardly know where to start. Fr example, can any commodity be money? Apparently you think so. Then why not have peanuts be money — or have money grow on trees? Then whenever there was some unemployment, entrepreneurs can hire the unemployed to harvest more money off of the money trees!

      Why don’t we use wheat as money? It is a commodity that is traded for MONEY on an exchange — as supposedly Bitcoins are.

      Ultimately in a later comment on here you indicate that buyer and seller can agree to swap anything! Yes they can agree and that does not require money — but if one party defaults on its contractual “agreement” obligation, how does the other party force the defaulting party to “pay up”? If they have a legal money contract under the civil law of contracts, the party can get the government to force contractual obligation or at least monetary payment for all damages caused by the default.

      • March 23, 2014 at 7:01 pm

        What makes a commodity money is the breadth of other commodities that people will readily exchange for it, as well as the depth. Breadth is intuitively clear: we have a sense whether Dollars, Bitcoins, gold Sovereigns, Rubles, or jars of peanut butter will be acceptable means of payment in a particular economy. You firmly argue that breadth is determined by fiat. MMT people argue it comes from taxes. I’m not convinced by either. The most obvious basis is trade acceptance. As vendors are willing to trade their commodities for a currency, it becomes money. The state can force it by forbidding trade in other currencies or by making state enterprises accept it, but it’s the acceptance and practical usefulness that makes it money, not decree. It’s also the breakdown of any worthwhile acceptance that destroys it.

        Depth is less obvious. We assume that fiat money can make a claim on the entire economy or the whole of extant wealth, so its monetary function doesn’t dry up at some point. Printed cash certainly wouldn’t suffice for that. Gold would be questionable and severely deflationary. Peanut butter, cigarettes, or Brixton Pounds (a local community currency) clearly would not scale beyond petty consumption. I’ve heard the argument that Bitcoin is intended to be shallow in that sense. It’s supposed to be a means of payment that doesn’t scale to claim any significant portion of the economy or of wealth, so its deflationary effects should be negligible. It’s an intriguing argument (via Tomasz Węgrzanowski on Google+).

  9. Bruce E. Woych
    March 23, 2014 at 1:48 am

    A fiat bitcoin, it seems, is as good as a fiat dollar at any given time while its independent ‘auction’ rate appears to generate volatility to its rate of exchange separate from other currencies. Nevertheless, since it is exchanged for currencies it remains only as valuable as the petro-pegged exchange system circulates global speculation flow while the carry trade allocates specific values for that float. It’s all a pyramid schema in the final analysis, and that is why the derivatives bubble blew out the economy, and that is why the bitcoin could never be a currency against currencies backed by securities and government sanction. Oddly enough, however, the Bitcoin may well be the prototype for a future electronic currency we are reluctant to admit.

    • Bruce E. Woych
      March 23, 2014 at 3:21 am

      “Electronic money is a new expression the meaning of which is not stable. It can refer to different realities depending on the context (legal or not, historical or actual, monetary theory…).

      However, the underlying principle of electronic money involves the use of computer networks, the Internet and digital stored value systems. Examples of electronic money are bank deposits, electronic funds transfer (EFT), direct deposit, payment processors, and digital currencies such as Bitcoin.”

    • paul davidson
      March 23, 2014 at 3:45 pm

      The bitcoin can become money only if the government includes bitcoin payment as a legally accepted way of meeting all legal contractual obligations.

      Of course, the community can refuse to trust the government — and therefore refuse to enter into legal contracts for all market transactions b ut then the market system is likely to collapse into a barter system — and we all know the tremendous costs of finding a partyon the other side who has exactly what we want to swap and is willing to agree to the swap!!

      I can tell stories of when companies issuing script for purchase at company stores or US military script [good only at the Post Exchange] being used by citizens of occupied territories rather than the legal money of the government — but these all boil down to some agreed upon swap set of arrangements — and as economists we shoul recognize such barter tupe swaps are exceedingly costly.

  10. March 23, 2014 at 2:01 pm

    Paul: It seems to me that your reply to my post supports my argument rather than yours. You are absolutely correct in saying that if one party to a market transaction fails to deliver as promised, the aggrieved party can turn to the courts. That is what I meant when I wrote that we operate under a variety of contractual rights and obligations. These rights and obligations are supported by our legal systems. But, I also said that the requirement to use “legal tender” is not primary among those rights and obligations. If you had indeed had the imagined confrontation with a dean over your rights as a free person to leave one employment for another, the core of the argument would not have been about what form of payment you, or Harvard, or the University of Tennessee would have used to settle the obligations.

    I also question your assertion that you can use checks “instead of legal tender” to make payments because checks can be immediately converted into legal tender. That almost never happens and is not the concern of the recipient of the check. The party accepting the check most often wants to be assured that an electronic transfer will occur without delay. There is no “tapping” of legal tender. And, indeed, what “legal tender” is in the modern U.S. is an interesting question. The Coinage Act of 1965 apparently does not require private firms or individuals to settle obligations with the use of coins or Federal Reserve Notes. And, as I said in my earlier post, the Internal Revenue Service, in its instructions to tax payers specifically says “Do Not Send Cash.” They will accept credit cards or checks. I understand the role that the concept of “legal tender” played in our history, when bank holdings of precious metals were more likely to be “tapped” by those who had received payment in the form of bank notes or checks, but in our modern economies where electronic transmission settles most transactions, it is not clear to me how the courts view the concept. Perhaps someone more learned in current law can tell us.

    In any event, I do suspect that I could force the IRS or Amazon or . . . to accept “legal money” in payment but the cost to me in my time and legal fees would make the exchange rate between the plastic that I most often use for payment of obligations and the Federal Reserve Notes that carry the words “legal tender” quite unfavorable. My argument is simply that economists should accept that reality and give up pretending that we live in an earlier time.

  11. paul davidson
    March 23, 2014 at 3:17 pm

    WE accept checks in payment not because we are going to immediately change the amount into legal tender — but only because we know we can anytime we want.

    Market economies require a civil law f contracts to decide what settles a legal contractual obligation. Now it is true that the seller can say to the buyer (before a meeting of the minds) that he/she will sell you three hours of baby sitting time if in turn you provide two hours of helping the seller’s child with his homework. If you both do as agreed upon, there is no
    problem and no legal tender, checks or any other form of financial payment need to occur. The problem comes if after the seller provides three hours of baby sitting time, you refuse to provide the two hours of to help with homework. The legal system cannot enforce your ned of the agreement === only thr Mafia “god father” can!

    In other words the seller can always indicate what he wants to get paid in– and if the other party agrees and does it there is no problem..

    After all on each dollar bill there is the statement that “This Note id legal tender for all debts, public and private” means that no matter what your contractual obligation –as far as the law of the land is concerned, tendering a sufficient number of Federal Reserve [liability] notes will discharge your contractual obligation .

    THus stamp collectors must pay “money: when they want to buy particular stamps for their collection –even though they have other stamps that are worth money. Only if they can convince the other party to accept one of their collection of stamps in “payment” for the stamp the collector wants — and then a “swap” can occur — but not an enforceable money contract legal transaction.

    No matter what the Dean wanted me to pay –other than “money” to leave my teaching position in the middle of the term, I do not have to pay that thing — unless the court decides that I must pay “damages” for not fulfilling my employment contractual obligation!
    If the Dean says, for example, he will not go to court to enforce my contractual obligation if provide valet services for him during the summer months –I donot have to accept that servant role and there is no legal way the Dean can force me to accept his offer.

  12. March 23, 2014 at 4:26 pm

    Paul: Your logic is good. But, I remain convinced that in the real world in which we live, following electronic completion of transactions is the best way to understand how we settle transactions. If we want to use the word money to describe the mechanism by which such settlements are generally made, then we should use that word to describe electronic transmissions. Other hypothetical methods of settlement, as for example provision of valet services, are of little interest in trying to understand the real world. One of the problems with bitcoins and the hype they have enjoyed is that they have been created and bought into by some gullible folks who live more in a hypothetical rather than a real world. My advice (not original) is to follow the money=electronic transmissions.

    This advice is important not simply for understanding and avoiding the fad of bitcoins but more importantly for understanding the limited role that monetary policy can play in solving the very real problem of unemployment and stagnant wages. Inadequate though logical definitions of money contribute to our ongoing failure to address these issues in too many economies. But, that is a topic that goes beyond this thread and for another day.

    • paul davidson
      March 24, 2014 at 4:30 pm

      Well Anne it is better to be logical in one’s development of theory and economic concepts than illogical.

      As I must insist, any two individuals can settle an agreement between themselves any way they like-fro example I may agree with my wife that if she cooks dinner, I will set the table and take out the garbage -but after dinner how can she enforce me to take out the garbage if I do not want to> Not cook dinner tomorrow? Threaten a legal divorce? — but most states do not recognize refusal to take out the garbage as grounds for divorce.>

      – but if this agreement to cook in return for taking out the garbage is to be seen as a LEGAL contractual agreement, then it means there is only the thing that the STATE say can discharge any and all legal contractual commitments — namely my paying my wife enough money to compensate her for whatever costs necessary for her to hire someone to take out the garbage!

      • March 24, 2014 at 5:47 pm

        Paul: Will make this brief as I think we have carried on our disagreement too long.

        #1: I do not propose illogical argumentation as the alternative but rather investigation of real world economic activity.

        # I agree that the State can order monetary compensation but argue, from observation, that payment of obligations, state-ordered or otherwise, is most likely to be made by check or credit card. And, I continue to disagree with you that these forms of payment are money simply because they can be converted to Federal Reserve notes. Checks and credit and debit cards are money because they are widely accepted in payment.


  13. March 23, 2014 at 4:31 pm

    We already have electronic money, which is safe and non-volatile: Goverment-backed fiat currency in checking accounts, for many years used in purchases with debit cards, increasingly via computer, and even mobile phone. The most well-known example of the latter is M-Pesa in Kenya, launched in 2007. A huge success.

    Cryptocurriencies being electronic is therefore nothing new. The “novelty” is that they are inherently volatile, unsafe and a vehicle for criminal activity and tax evasion. The hype about cryptocurrencies being “electronic, cutting-edge” etc,. should be taken with a spoon of salt.

    Also the “no more than 21 million units can ever be created”. That obviously appeals to the goldbugs, but should not to progressive economics camps.

  14. Bruce E. Woych
    March 23, 2014 at 5:49 pm

    Solution? Bitcoins made in GOLD…back to basics!

  15. Bruce E. Woych
    March 23, 2014 at 6:12 pm

    Paul: I applaud your topic and your reasoning in challenging the Times status quo interests and authority, but in the interest of clarity there may be a confusion between “money” and what is officially and formally termed “legal tender” in your classification.
    Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled “Legal tender,”

    “Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation.[1] Paper currency and coins are common forms of legal tender in many countries. The origin of the term “legal tender” is from Middle English tendren, French tendre (verb form), meaning to offer. The Latin root is tendere (to stretch out), and the sense of tender as an offer is related to the etymology of the English word extend (to hold outward).[2] The noun form of a tender as an offering is a back-formation of the noun from the verb.[citation needed]
    Legal tender is variously defined in different jurisdictions. Formally, it is anything which when offered in payment extinguishes the debt.
    Thus, personal cheques, credit cards, debit cards, and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt obligation until payment is tendered. Coins and banknotes are usually defined as legal tender. Some jurisdictions may forbid or restrict payment made other than by legal tender. For example, such a law might outlaw the use of foreign coins and bank notes or require a license to perform financial transactions in a foreign currency (http://en.wikipedia.org/wiki/Legal_tender)”

    There is a good deal more to evaluate in considering the distinctions, but obviously space is far too limited here to delineate the definitive characteristics that determine the “state” and the status of formal vs substantive legal tender and/or “money” in real transactions.

    • Bruce E. Woych
      March 23, 2014 at 6:33 pm

      To clarify the point based upon the data provided, if you are paid in Bitcoins…it seems very theoretically possible that you could be sued in court for an unsatisfied “debt” as recognized by the State. This is a very tricky equivocation. The determining criteria in the passage provided is:
      “Legal tender is variously defined in different jurisdictions. Formally, it is anything which when offered in payment extinguishes the debt.”
      To make matters even more confusing, the law permits some rejection of even legal tender (as refusing to accept pennies or large denominations) in establishing a transaction:
      “In some jurisdictions legal tender can be refused as payment if no debt exists prior to the time of payment (http://en.wikipedia.org/wiki/Legal_tender), so that the cancellation of an obligation itself is the only determination of what constitutes true legal tender. Keep in mind that even when debt exists, foreign currencies (obviously money) might also be rejected in selected jurisdictions. If Bitcoins fall into the same designation, the distinction must be that they can be considered “money” but clearly not government enforced “legal tender.”

  16. March 23, 2014 at 6:12 pm

    Any means of exchange that does not allow oversight and taxation is detrimental to a modern welfare state. And this is why right-wing libertarians love cryptocurrencies. The good thing is that new parallel cryptocurrencies emerge all the time. This undermines confidence in each of them, makes them volatile and useless as a store of value””

    ———comment: the ‘modern welfare state’ has mixed value. sure, i went to public schools, was supported by government employment when growing up, now get government subsidized healthcare, etc. But, the modern state is often more ‘aptly’ termed a warfare -welfare state.. Taxes may pay for ‘goods’ and also ‘bads’ depending on your view (eg wars like iraq, huge contracts to the military and spy/tech industries, subsidies for corporations etc.). Some refuse to pay taxes, or some fraction thereof, or basically choose to live very simply and hence earn so little you are exempt from federal taxes.

    (One can also mention some don’t like paying taxes to support academics (including economic professors, NSF buerocrats, corrupt health researchers—eg who shill for drug companies who pay them under the table (eg at Harvard, Brown, Emory…) and even alot of artist types, since they appear to be second rate state supported cults too often). .

    Paul Davidson’ idea that ‘money’ as defined by him (something the state creates—-just like ‘life’ (eg 3rd trimester, or to Peter Singer maybe 3 years) and ‘rights’ such as to marry, drink, and drive) permits you to go to the court, may depend partly on whether you can afford a lawyer. (Or support someone at ICC in the Hague living large, while you are sitting in prison).

    This is one reason why alternative currencies, as well as things like barter, underground economices, etc. exist. People develop their own schools, public goods, etc..

    It seems you are living in some utopian fantasy world, if you have never heard of ‘ithaca hours;’ or other currencies. Also, if you have some faith underlying faith that ‘citizens’ will be ‘law obiding’ and government will always do the right thing, as deined by Clarence Thomas and the other reactionaries on the supreme court . (who were carefully selected by places like Yale, Harvard, and Chicago law schiools.)

    Sure, you can sell GM or othert stock and get dollars backed by the state. But your stock value may go to zero easily.

    Ergodicity makes the world go round its Poincare cycle, for an eternal return, or permanent working vacation.

    If bitcoins are not money, then maybe money is unnecesary except as a term (like penny, euro, ducket, etc.)—as it is in general equilibrium theory (where money is a commodity, as is the state) Maybe states are too. “You can take your money—cuz money don’t buy me love’.
    I would say you can take your bitcoins too. (The only thing innovative about that is they are on computers, and have somme slightly innovative method for creating them (via sweat equity)).

    • paul davidson
      March 24, 2014 at 4:17 pm

      Barter, underground economies, Ithaca hours, etc may well exist –but things like Ithaca hours are a basis of keeping bookkeeping records on barter swaps among a small group of like minded individuals who trust each other. Try paying the chain store grocery or pharmacy or electric company with “Ithaca hours” and see what happens. But you have no problem paying these folks with credit cards, legal tender currency or even checks — because thse fors of payment all ultimate rest on a transfer of claims to legal tender currency between buyer and seller — sometimes going through an intermediary such as the credit card company of the banks of buyer and seller.

    • paul davidson
      March 24, 2014 at 4:21 pm

      You say money does not buy love …. well maybe not but there are all sorts of love transactions at brothels — and marriages for money which certainly provide something that looks like it can provide love —).

  17. Bruce E. Woych
    March 23, 2014 at 6:51 pm

    (http://en.wikipedia.org/wiki/De_facto) De facto (English pronunciation: /diː ˈfæktoʊ/, /deɪ/,[1] Latin pronunciation: [deː ˈfaktoː]) is a Latin expression that means “concerning fact”. In law, it often means “in practice but not necessarily ordained by law” or “in practice or actuality, but not officially established”. It is commonly used in contrast to de jure (which means “concerning the law”) when referring to matters of law, governance, or technique (such as standards) that are found in the common experience as created or developed without or contrary to a regulation.”
    (http://en.wikipedia.org/wiki/De_jure) De jure (in Classical Latin de iure) is an expression that means “concerning law”, as contrasted with de facto, which means “concerning fact”. The terms de jure and de facto are used instead of “in law” and “in practice”, respectively, when one is describing political or legal situations.

    In a legal context, de jure is also translated as “concerning law”. A practice may exist de facto, where, for example, the people obey a contract as though there were a law enforcing it, yet there is no such law. A process known as “desuetude” may allow de facto practices to replace obsolete de jure laws. On the other hand, practices may exist de jure and not be obeyed or observed by the people.”
    Interesting stuff: The two terms were recently used by Putin in his speech on reconciliation
    (or NOT: http://praguepost.com/eu-news/37854-full-text-of-putin-s-speech-on-crimea):

    • paul davidson
      March 24, 2014 at 4:11 pm

      peo9ple who engage in transactions may, if they know each other as buyer and seller, settle in any way they desire — but such agreements will not be enforceable in the court of law

      What makes money so acceptable is that in almost all market transactions the buyer an seller do not know each other on a personal level — but do know they can trust the government to eforce the contractual obligations on both sides — although most of us enter into such contracts without even thinking we will have to go to court to settle a contractual dispute.

  18. RS
    March 24, 2014 at 1:19 pm

    Current volume in bitcoin trade is 1 million USD a day. There is no real reason why a news paper should waste time on explaining the dangerous of bitcoin when the application is marginal. The current bitcoin volume is roughly equivalent to a single T-72 russian tank, not exactly the volume needed to equip an army to fight a war. The volume needs to increase by 1,000 times to allow bitcoin equiping a third world army with old russian army equipment. Bitcoin simply isn’t big to be a viable currency.

  19. Julius
    March 24, 2014 at 5:50 pm

    “Only the government, as the enforcer of contractual obligations, can determine that thing that is legally MONEY, i.e., what thing(s) will discharge contracts under that nation’s civil law of contracts.”

    Oh dearie me. I do wish economists would be a bit more careful before going off-piste into areas they are not familiar with.

    The parties to a contract are free to agree what currency will discharge their contractual obligations. There are countless contracts subject to English law that provide for payment in currencies other than sterling. For example, shipping contracts almost invariably provide for payment in dollars, but the last time I checked, dollars were not legal tender in the UK. Nevertheless such contracts are fully enforced by English Courts / Arbitrators who will issue a judgement or award in (e.g.) dollars. I would be very surprised if the position were any different in the U.S. in relation to contract which provide for payment in Euros or sterling.

    Although the point has not been tested in relation to bitcoins, there is no reason in principle why a judgement or award could not be issued in bitcoins if that is the currency agreed by the parties.

    • paul davidson
      March 26, 2014 at 7:09 pm

      Julius: Well the IRS has come out with my position — Bitcoins is not money — it is just a property –like anything else we might own –from Equity share in a large corporation, or a valuable stamp collection; or even the clothing on our backs. You may want to give a poor person the shirt off your back — but that person can not take this shirt property and use it to buy a meal even at McDonalds.

  20. March 25, 2014 at 9:42 pm

    Try the Comment is Free crowd at The Guardian, Paul.


  21. Bruce E. Woych
    March 26, 2014 at 12:06 am

    Here’s an interesting take on the intrinsic identity of bitcoins: (full details @ link)

    IRS: Bitcoin Isn’t a Currency….it’s PROPERTY
    By Rob Wile
    The IRS has ruled bitcoin should be treated as property,
    not as currency, for tax purposes.

    So just as the Post Office determined that Santa was real in Hollywood, the IRS seems
    to have the last word on bitcoins…NOT currency.

    ………………………………………………And NO ONE dare argue with the IRS !

  22. rob julian
    March 26, 2014 at 11:23 am

    In currency questions, as in economics in general, scarcity is everything. The fundamental scarcity problem with the bitcoin project remains this: If the project is successful, one could expect that success would be judged to be in terms of more and more people wishing to use bitcoins as currency. The pattern for success, like nearly all patterns of success, would look like a geometric rise in demand. Any project which starts small but has great scope, would be expected to exhibit geometric growth patterns, and especially with the internet and social media factors playing key roles in this case. But the complex pattern of creation and release deliberately designed into bitcoin, reveals not only a linear pattern of creation, but a worse than linear pattern, in that extra supply is being tapered in steps down to zero!

    This scarcity mismatch problem is one which one of the first famous economists Robert Malthus would easily recognise: the conflict between a geometric rise in demand, pushing against a linear rise in supply. Whichever way you look at it, it seems bitcoin is a recipe for disequilibrium. If bitcoin is successful, the demand and take up should have the geometric growth character of a contagion, sweeping across our connected culture. This pushes against the steady drip mechanism of release encrypted in bitcoin’s DNA. On the other hand, if bitcoin remains niche and is pretty much unsuccessful, even this steady drip of new coins promised, will be enough to flood the thin market and make bitcoins worthless.

    To be successful as a means of exchange (and not a vehicle for speculation) it is necessary that bitcoin’s value remains reasonably steady, and this, as every economist knows, means a rough balance between supply and demand throughout the period in question. If bitcoins rise in value too strongly, people will hoard and not spend. On the other hand, if they risk seriously dropping in value, people will be frightened to hold them and therefore be unwilling to accept them as a means of payment. Buyers or sellers will exercise their veto in either case, exactly where their self interest suggests, and bitcoin will never fulfil the role of a trusted widely used means of exchange.

    The only theoretical route to bitcoin’s success as a proper alternative currency, requires that its demand or popularity must grow at a very unique and particular rate, which near enough matches the diminishing rate of its arbitrary supply or creation pattern. So therefore its popularity would have to be growing strongly now and then gently taper off to match the reduction in supply to come. And then finally in 2040, its usage and popularity must float in a perfect stasis indefinitely, with no more or no less demand for the currency tipping it up or down in value. What a precarious and impossibly unlikely path to success! Growth in supply is arbitrarily fixed at a descending rate, there are no helpful macro levers to assist, and the single factor of demand is left free and alone to supposedly achieve stable prices? Is it possible to think of an example of another market where supply is fixed and demand left alone manages to achieve a stable price? In other markets, price stability is often desirable but usually not fundamentally necessary. But a currency is a different matter: stability of value is part of the remit.

    A key problem of the Gold Standard era was the limited rate of expansion of gold in world circulation, which held back economic growth. Total world economic growth was in effect banded by gold, making one country’s growth require another country’s deflation. But a saving grace of gold was and is that at least gold mining output was adding to the worlds stocks and therefore allowing at least some expansion. And the higher the price, the greater the amount of marginally profitable mining came into production. 90 per cent of the worlds gold has been mined since the Californian gold rush in 1849, and today mining adds approximately 2 per cent to world gold stocks every year. Bitcoin on the other hand has mined half its coins already, even though as a currency it is still a tiny infant project, and the mines are to be slowed down and closed quite soon. Gold also has the advantage that 70 per cent of existing gold and 60 per cent of newly mined gold goes into jewellery, giving gold a deep reservoir of alternative market, which may release gold when prices are high, or hoover it up when prices are low. Bitcoin in contrast appears quite a thin, small and volatile market, with bitcoin’s value free as a bird to be blown up or down by speculative animal spirits.

    It is missing the point to note that the rising value of bitcoins could be offset by introducing ‘granularity’ through bitcoin subunits (like pence or cents). If pounds were rocketing in value, would you be willing to spend pence any more than you would be willing to spend pounds? No, it is the opportunity cost of spending part of a rising asset which would encourage you to hoard / veto any possible transactions, not the lack of ‘granularity’.

    Supporters would have us believe that all the factors which control and dictate the path of bitcoin are already embedded and encrypted within the benign objective disinterested computer program, beyond human interference. But like the final discovery of the Wizard in the Wizard of Oz, certain events have shown that there is one or more human beings with quite influential subjective input into the project.

    Louis Woodhill (on Forbes website 4th Nov 2013) makes a point which seems apt with which to end this comment. In the first paragraph he reproduces part of bitcoin’s own wikipedia entry, then draws quite a fundamental conclusion from it:

    “On 15 August, the major vulnerability was exploited. Over 184 billion bit coins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the bitcoin protocol.” Wikipedia (at the time, although this is a very “active” and contested page on Wikipedia).

    “Obviously, the same people who erased the 184 billion phony bitcoins could erase the 8 million “real” ones. Money always involves trust, and in the case of bitcoins, you don’t even know whom you are trusting.”

  23. paul davidson
    March 26, 2014 at 4:02 pm

    In today’s New York Times there is an article indicating that the US Internal Revenue Service agrees with me — namely that Bitcoins can not be treated as money. At best Bitcoins are property , according to the IRS, similar, as I already pointed out to shares of stock in the General Motor corporation!!

    I guess I win my case as to what legal money is .

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