Researchers split up roughly 300 participating undergraduate students into two groups. The first group was asked to perform activities that were associated with money-related words and images, and the second group participated in activities that were unrelated to money altogether.
Afterward, the participants were asked to make a series of illicit business decisions: to act dishonestly but earn more money, for example, or to hire a candidate who would share confidential information. The students who first participated in the money-related activities were more likely to engage in unethical behavior, the researchers found.
I am curious, though, what the justification is for referring to Bitcoin as a “commodity” currency. Consider this from Izabella Kaminska at the FT Alphaville blog:
For those who insist that the term “fiat” refers exclusively to government-issued fiat currency, it’s perhaps better to interpret our use in the evolutionary sense.
Meaning that Bitcoin (and other virtual currencies) represent not commodity money, not managed money, nor even old fashioned government-issued fiat money, but a whole new type of super fiat that is rendered valuable by the issuing crowd (made up of independent entities) rather than the state.
The idea is that Bitcoin isn’t “declared” to be valuable by the state, but that it is “declared” to be valuable by common consent of the community of Bitcoin users. Consider this a kind of communal rather than governmental fiat.
This is why I wondered earlier about Bitcoin as “merely fiat money without the pretensions.”
But then again, isn’t this kind of communal agreement or declaration of value what money has always really been? Isn’t that, as Joe relates, what we learn from the example of the rai of Yap? (Their real innovation seems to be that they anticipated something like the “virtualization” of money exchange.)
Here again I’ll invoke the insight of Richard Whately: “It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.” People are mining Bitcoins because they fetch a high price…at least for now.
The Disadvantages of Bitcoin
For people who are not obsessed with anonymity and are not waiting for the U.S. to return to the gold standard, the reasons for avoiding entering the Bitcoin market are numerous:
1. Convertibility – Whereas other currencies are convertible into other financial instruments (dollars to checks to certificates of deposit, etc.) and through numerous third-party services (e.g., Visa, PayPal, Citibank), commodity currencies like Bitcoin can only be exchanged for fiat currencies—and then only through an online exchange. Indeed, unless your computer is working overtime on Bitcoin mining, the only way to acquire the currency is to buy it from one of the 30 online exchanges.
These exchanges are completely unregulated and are subject to problems that do not affect other financial markets. For instance, in 2011 the largest Bitcoin exchange, MTGox, had a security breach that resulted in the theft of nearly $9 million worth of Bitcoins. The theft caused the value of Bitcoins to crash from $17.50 to one cent before the market was able to recover.
2. Instability – The MTGox breach—and the subsequent market crash—taught Bitcoin owners a harsh lesson about commodity currencies: they can be wildly unstable. Over the 8 month span from October 1 2010 to June 9 2011, the market value of Bitcoins skyrocketed 9667-fold from a value of $0.06 to $29.
The rate had dropped in 2012 and at the end of last year a Bitcoin was worth only $13.51. Last week, though, Bitcoins were trading as high as $266 before plummeting to less than $100. Anyone who had bought $1,000 worth of currency in October 2010 would theoretically have $4.4 million worth of Bitcoins. However, the convertibility problem would make it nearly impossible to extract that money without crashing the market and devaluing the entire currency. A gradual sell-off over an extended period of time would be necessary to take advantage of increase in valuation.
Still, being the seller of the overvalued currency is preferable to being the buyer. The Winklevoss twins, millionaires famous for their legal battle with Facebook, claim to own around one percent of all Bitcoins currently in existence (around 108,000). They began buying the currency in 2012, making some early Bitcoin holders very rich.
We’ve had some intriguing discussion about Bitcoin at the Acton Institute offices today. It is certainly a phenomenon worth greater attention, and something of significant cultural, social and economic import. But I’m not buying Bitcoin, at least not yet.
My initial skepticism is in part due to my lack of familiarity with the details of the currency and its formation. I certainly need to learn more.
But also in large part my skepticism is due to my doubt about the productiveness of the effort that generates the currency. Is it merely fiat money without the pretensions? Is it the logic of subjective value-theory brought to the final conclusion? I worry that the computing power expended to mine BitCoins is vacuous and parasitic at its core. It does not represent a good or service that has been provided for or contributed to anyone.
A Bitcoin has value simply because people have decided it has value. People “mine” Bitcoins because, as Whately would note, “they fetch a high price.”
But what does a Bitcoin block represent in terms of actual human utility? I worry too that this is a system that relies parasitically on real-world resources, e.g. coal which provides a large part of the electricity, which is used to run computers so that they can then in turn “mine” something entirely virtual.
What is Bitcoin teaching us, really?
If you’ve had experience with Bitcoin or thoughts about the phenomenon, please share them in the comments below.
In today’s Wall Street Journal, Jon Hilsenrath and Kristina Peterson report, “The Federal Reserve is heading toward launching a new round of stimulus to buck up the weak economy, but stopped short of doing so right away.” The predicted means of stimulating the economy is another round of the unconventional policy of quantitative easing (QE), i.e. when a central bank purchases financial assets from the private sector with newly created money in effort to spark economic growth. Thus, the quantity of US dollars would be increased, debasing their value and causing inflation.
The authors note that this strategy has received significant criticism:
Critics say there is little more the Fed can do to help, having already pushed short-term interest rates to near zero. They contend its unconventional actions could do more damage by sparking inflation, and that in the meantime the Fed is punishing savers who are getting little return on their bond investments. (more…)
Join us as we welcome Mr. Jeffrey Tucker for the AU Online presentation of his popular lecture, The Nature and Function of Money. The online session is scheduled for Monday April 16 at 6:30pm ET. In this lecture, Mr. Tucker explores the centrality of money to market economics, its origins, the history of its development, and its functions in modern economic life. Visit auonline.acton.org for more information or to register.
Acton’s director of research Samuel Gregg is up at Public Discourse, with a piece titled “Monetary Possibilities for a Post-Euro Europe.” With his usual mix of sophisticated economic analysis and reference to deep principles, Gregg considers European countries’ options should the eurozone fail. If that happens, he says, “European governments will have a once-in-a-lifetime opportunity to rethink the type of monetary order they wish to embrace.”
One such scenario is a three-way monetary division within the EU that reflects the differing political commitments and economic priorities of different nations. Germany and the more fiscally responsible eurozone members such as Austria, Finland, and the Netherlands could, for instance, decide to reconcile themselves to being the only ones with the necessary fiscal and monetary discipline to maintain a common currency.
Alongside this bloc would be two other groups. One would consist of those EU countries such as Britain, Sweden, and Denmark that have maintained their own monetary systems because of reservations about the euro’s implications for national sovereignty. Another group would include EU nations such as Greece, Portugal, and Italy that are simply unable or unwilling to embrace the disciplined monetary and fiscal policies required by a common currency; these nations would consequently find themselves outside the eurozone and reverting to their national currencies.
A more radical monetary opportunity for a post-euro EU would be currency competition. This was once proposed by Britain’s Margaret Thatcher as an alternative to the present common currency. Contemporary proposals for currency competition, such as that advanced by Philip Booth and Alberto Mingardi, involve the monetary authorities of different countries authorizing the use of currencies alongside the euro in domestic settings other than their own. Consumer choice rather than state sovereignty would thus ultimately determine which currencies were used.
Yet another option would be the embrace of what might be called a European gold standard. In the 1950s and 1960s, the German economist Wilhelm Röpke argued that European monetary integration could occur via a nucleus of countries agreeing to adhere to a gold standard, much as had happened somewhat spontaneously in the nineteenth century through a process of unilateral decision-making by individual countries. Once this had occurred, adherents of such a gold standard would have to insist upon all members maintaining monetary discipline as well as freedom and stability in foreign exchange markets.
The stability of the European currency would be assured not by EU bureaucrats, but by the gold standard itself, and by allowance for the expulsion of countries that abuse their big-boy privileges.
Britain just rejected an EU treaty because the Conservative Party decided Brussels was trying to capitalize on the Mediterranean crisis by grabbing more power. The three proposed currency models, Gregg argues, would maintain countries’ freedom by yanking monetary power from central bureaucrats who exercise political power. He reflects further on the composition and history of the eurozone, on the countries’ political and economic freedom, and on what Röpke would have to say in the rest of the piece.
In a recent article in the Washington Post, Juan Forero and Michael Birnbaum recommend that in the face of the looming specter of Greek debt default, Europe may learn a few lessons from South America. In particular, they point to the good example of Uruguay and the bad example of Argentina.
According to the authors,
In a story that may provide a lesson for Europe, one country, Uruguay, that was on the edge of financial oblivion organized a fast, orderly and negotiated response that revived the economy and ended a run on banks. Another, Argentina, spiraled into a chaotic default and remains a pariah in world financial markets.
The article lists a variety of reasons, such as tax evasion, political stagnation, and civil unrest, with regards to why Greece is in danger of becoming the next Argentina. There is one aspect, in particular, though, that sheds some interesting light on current monetary practice. According to the article,
Greece is hamstrung by its ties to the euro, which it cannot devalue to make its exports cheaper, and leaving the currency zone might prove even more painful.
Though currency debasement has been possible since time immemorial, it has become easier ever since the “Nixon Shock” of 1971, when the United States ended its tie to the gold standard, affecting every other nation which had tied its own currency to the U.S. dollar for the sake of stability. However, from that point on, most countries have been operating with purely fiat-based currency; a government’s central bank can print as much or as little money as they desire, since its value has no stable grounding. (Grounding the dollar’s value to a specific amount of gold prevented the U.S. from printing more money than gold that it could be exchanged for.)
In a recent article in the Journal of Markets & Morality, James Alvey highlights the analysis of James Buchanan on the ethics of public debt and default. With regards to default, Buchanan identified two common means: open default or concealed default through inflation. By inflating its currency, a country can, in effect, cheat its bondholders out of the amount promised to them by repaying its debts with debased money. To do so is effectively concealed default. Notably, Alvey writes, “Buchanan says that the U.S. government did ‘default on a large scale through inflation’ during the 1970s,” the very decade in which we left the gold standard.
What is fascinating about the current crisis with Greece is that its central bank does not have sole control of the euro. Despite being a fiat currency, its decentralized nature gives it a certain stability. Concealed default is not an option for Greece, forcing it to make the hard decisions necessary to avert defaulting on its debt or to do so openly.
For more on the history and moral implications of currency debasement, see Juan de Mariana, Treatise on the Alteration of Money, recently translated and published by Christian’s Library Press.
I was listening to news radio and heard an update in which the senate majority leader Harry Reid gave his interpretation of events on the debt ceiling negotiation. The part that really got my attention was where he insisted that further committee work would go after those “millionaires and billionaires.”
I wondered, “What is he really saying?” Let’s begin with millionaires and billionaires. Is Reid charging them with having committed some evil? If a person had made a lot of money by force or fraud, then I would agree that disapproval and punishment might be merited. Can we confidently say that rich people, as a class, have committed evils which make them suitable subjects of a public official’s desire to punish?
Why is he so angry? Why does he make these people sound like bad people? Is it the fact that they have quite a bit of money? I suspect he does, too. Indeed, it has been noted that Reid has become a somewhat wealthy man while holding office. Does he impute ill motives or actions to himself by virtue of his possession of resources well above the average?
What if we do think that having a lot of wealth is a sign of moral weakness? Perhaps we believe that having much more money than is needed to live (even live comfortably) represents a bad choice. Even if we think that, does that mean we invest the government with the moral right to appropriate that wealth as needed so as to operate without hard debates about limits on spending? Maybe our only right is the right to have our own opinion of how wealthy people should spend their money.
I think Harry Reid needs to think more about why he’s so morally exercised. Follow the conclusions of that anger and maybe we’ll get down to basic principles. Once we get there we can have a legitimate discussion.
Camarin M. Porter of the Department of History at University of Wisconsin-Madison reviews a text edited by Stephen J. Grabill, Sourcebook in Late-Scholastic Monetary Theory: The Contributions of Martin de Azpilcueta, Luis de Molina, and Juan de Mariana (Lexington, 2007). The review appears courtesy of H-Net, a unique and indispensable set of list-servs hosted by Michigan State University.
The Sourcebook includes translations into English of selected texts from the significant figures listed in the book’s subtitle, as well as a general introduction by Grabill and specialized introductions for each text: Azpilcueta’s Commentary on the Resolution of Money (1556), Molina’s Treatise on Money (1597), and Mariana’s Treatise on the Alteration of Money (1609).
In this extensive review, Porter writes, “For each of the three texts, the Sourcebook efficiently accomplishes its goal of setting each authors’ specific concerns in areas of moral theology and economics within full social and intellectual contexts.”