Don Boudreax Responds to #Bitcoin Desparagers

(Reposted from Cafe Hayek)

Here’s a letter to the Baltimore Sun:

Flaws aplenty infect Peter Morici’s dismissal of the value and prospects of Bitcoin (“The Bitcoin myth,” March 4).  None, however, is as uninformed as is his claim that “[d]etractors of paper money have always been fixated by the absence of gold to back it up, but they fail to recognize what really makes a currency accepted and secure – the government guarantee and the good sense of the sovereign not to abuse its franchise.”

Forget the many historical instances of the sovereign debasing the coinage and unleashing ​hyperinflation – from Nero in ancient Rome to Mugabe in modern Zimbabwe.  Look instead only at the relatively stable U.S. dollar.  During the 34 years of the classic-gold-standard era in the U.S. (1880-1914), the dollar lost only 3 percent of its value.  In contrast, during the past 34 years (since 1980) the dollar has lost 65 percent of its value.  Even more revealingly, since the 1913 creation of the Federal Reserve – an institution designed and operated by Uncle Sam allegedly to maintain the purchasing power of the dollar – the dollar has lost 96 percent of its value.

Contrary to Prof. Morici’s claim, “sovereign” control of money, unrestrained by gold convertibility or other such safeguards, has been anything but a guarantee of stable money.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

I thank George Selgin for constructive feedback on an earlier draft of this letter.

UPDATE: I calculated the dollar’s loss of value, 1880-1914, from the figure given by Michael Bordo in his essay “Gold Standard,” in the Concise Encyclopedia of Economics.  There, Bordo reports that over the years 1880-1914 the average annual rate of inflation was 0.1 percent.  In private correspondence, my colleague Larry White – using the CPI calculator at this site – reports that the dollar lost novalue between 1880 and 1914.  Indeed, if I’m reading this site correctly, the value of the dollar increased slightly over the course of those three and a half decades.

Either way, of course, the point stands: the dollar’s value has plunged while under the management of the “sovereign” in whom Peter Morici counsels us to have faith.


3 thoughts on “Don Boudreax Responds to #Bitcoin Desparagers

  1. The problem with this analysis is the assumption that inflation (“the dollar losing its value”) is the only bad thing that can happen to money. Yet the term “stable” that you use doesn’t mean “never losing value” (or “never gaining value”); rather, it means being predictable. Here’s a beautiful chart of what that means:; my point here is that although you can clearly see that the Reserve did a lousy job managing inflation, they managed to avoid deflation — which if you do the math, was the only thing that made the previous years look good to you.

    And as bad as inflation is, deflation is not better.

    But there’s one thing that’s worse than inflation or deflation: and that’s a spike in either direction. Steady inflation or deflation we can handle; a spike nobody can predict. Look at the chart.

    Bitcoin has an extremely predictable supply function, but a completely unpredictable demand that makes its value fluctuate wildly. It spikes all over the place.

    Above I disagree with you. Next I’m going to agree:

    Bitcoin doesn’t need a regulator because there’s nothing any regulator could possibly do beyond what its current regulator actually does — release bitcoins slowly and randomly up to a predetermined maximum. Bitcoin needs competition. Bitcoin is wonderful tech, but its competition will have different regulation. And they may even provide something that Bitcoin can’t, but government currencies can: a built-in base level of demand.

    Government currencies provide base levels of demand by taxation. Because the coinage provides the measure for the taxation, the government requires everyone to evaluate all transactions in those terms.– so other currencies are more expensive to work in. At the same time, they “provide” a base level of demand by demanding that we send them a certain amount of those coins.

    (I know you didn’t write that — but you’re more likely to read what I write and actually interact with it :-). )

    • I have nothing to say on your disagreements. I’m curious as to your thoughts on how an e-currency would have a built-in base level of demand.

  2. Well, I gave the example of taxes as a built-in base level of demand, but that obviously only works for government money. Another way to do things would be to have internet traffic controlled by those coins, so that’s essentially how backbone providers make their money.

    In order to use the internet, therefore, you need to have these coins — so why not do more with them?

    Admittedly it’s not as efficient as taxation (the USG _requires_ that you use dollars as your medium of accounting, even if your medium of exchange is something else), but I think we need to explore voluntary means as much as possible.

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