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Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as

Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as the reasons it will fail. They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource.

tatsuke95 15y ago
The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.
- teodesian 15y ago
  You must remember, however that money != wealth. The money supply of a nation in no way represents the wealth generation going on in an economy. Printing an extra dollar does not mean the users of dollars became wealthier, it simply redistributes the existing wealth. Barter is also another factor that creates wealth, yet does not have anything to do with the monetary system. Our growing wealth in many ways is in spite of our money and governments. It is worth noting that ever since the USD lost it's scarcity (with the closing of the gold window in the 70's) real wages and quality of life has gone down, not up.
  - btilly 15y ago
    Here is a basic economic fact for you. In periods of mild inflation, people have an incentive to invest money, which leads to growth. In periods of deflation (like the Great Depression) people have an incentive to put money under the bed and wait for it to appreciate. Therefore deflation is horrible for economic growth. Thus money supply does not represent wealth generation, but controlling it does affect wealth generation in a pretty significant way. As for your comment about the 70s, the wealth of this country has gone up dramatically. However there has also been a sharp increase in inequality. Thus causing a small number of people to see wealth rise a whole lot. Whether or not the middle class has wound up better or worse is a subject of debate among economists. (The subject is not nearly as simple as you might think. We think of "inflation" as an absolute number but it is not. The inflation that you experience is relative to the goods that you purchase, and middle class or poor people purchase a different bundle of goods than rich people do.) In any case the result is that it is clear that wealth generation has been humming along very nicely. My personal belief is that the underlying cause of the increase in wealth disparity is the continual drop in the top income tax rate, the reduction of the number of tax brackets, and the increase in the tax rate on the average person. (The effective tax rate on the richest people is now below the median tax rate!) This has limited how much tax policy redistributes money between socio-economic groups. Whether this is a good or bad thing is a political debate for another time. But it is a real thing.
    - rubashov 15y ago
      > In periods of mild inflation, people have an incentive to invest money ... In periods of deflation ... people have an incentive to put money under the bed This sounds very plausible but simply does not line up with historical reality. Most of the 19th century saw persistent mild deflation alongside massive investment and growth. Inflationary periods have usually seen unproductive speculation and weak capital investment. The deflation of the great depression was simply the inevitable consequence of a fiat money credit bubble and preceding massive malinvestment. The great depression deflation cannot be characterized as a deflationary tendency of the monetary policy at the time. It inevitably followed the inflationary boom of the 20s.
      - william42 15y ago
        Are you really linking the Great Depression to fiat money when the Great Depression occured while the dollar was still on the gold standard? And there was no «persistent mild deflation» in the 19th century; there were massive swings in value: http://upload.wikimedia.org/wikipedia/commons/2/20/US_Historical_Inflation_Ancient.svg http://upload.wikimedia.org/wikipedia/commons/2/20/US_Histor...
        rubashov 15y ago
        I'm linking it to the federal reserve act and massive credit growth. Your chart shows persistent deflation in the 19th century with inflationary spikes for wars, notably the civil war.
- jswinghammer 15y ago
  The question is are they good reasons. It's probably a mistake to assume that our current knowledge and understanding of economics represents progress from where we were before. Having just finished a detailed account of the history of economic thought I can assure you that there were times when economists far better understood the nature of prices that came well before Adam Smith and Ricardo-both of whom didn't really understand prices at all. Schools of thought tend to continue until they reach a dead-end that's impossible to ignore. A new school picks up the pieces and continues on again. We have seen that with the fall and rise of Keynesian economics.
kd0amg 15y ago
Maybe we've been seeing different criticisms, but the ones I've seen don't just complain that it's not backed by fiat -- they complain that it's not backed by anything.
- kruhft 15y ago
  I think it's getting backed by all the people that are putting money into it.
  - tptacek 15y ago
    That's the same kind of backing tulips had.
jerf 15y ago
"Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency." Then you're being willfully blind. Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. That has nothing to do with its fiat-ness, it is simply a characteristic of deflating currencies of any kind. You may not agree, or you may think BitCoin has some clever solution to the problem, but there are numerous criticisms that are much more sophisticated than "it's not a fiat currency". (Another one being the "it has no backing", which is not a claim that only a government can back a currency, it is observing that it has no backing at all. I'd be perfectly fine with a credible non-governmental third party that provided a credible backing (and both "credibles" are important there, I did not just repeat myself), but there isn't one, and again, that has nothing to do with it "not being fiat".) In fact I think most criticisms of BitCoin are not that it simply isn't a fiat currency. (On a general note, if you are planning on being a BitCoin activist, it is important to learn and understand the arguments your opponents are making. You can not counter an argument you do not deeply understand. Sticking fingers in ears and chanting "la la la!" is psychologically appealing, but you're sacrificing all ability to persuade when you do it. There are good arguments against BitCoin. For that matter you can't engineer solutions to problems you don't deeply understand.)
- vrotaru 15y ago
  Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. Yes, the armchair deflationary spiral theory. With the exception of labor theory of value, I do not know of any other economic theory whose premises are a) so thoroughly laughable b) lacking any kind empirical evidence. In an attempt to reduce the noise/signal ratio (usually high) in such debates... Yes, I know the usual arguments in favor of Deflation Scare and I devoted a fair amount of time thinking and debating these matters. Done my homework, so to speak. But feel free to surprise me, with an argument I missed.
  - jerf 15y ago
    That's your persuasive counterargument? "That theory sucks"? I don't deny the standard case is controversial (which is also, BTW, not the same as "lacking in any evidence"; there's plenty of evidence, it's just that what it means is still debated), when discussing deflation spirals of a relatively small size, but when you're talking about a currency that will deflate by orders of magnitude, and that necessarily must do so if it going to be any sort of successful, I think you need more than "Ha ha ha! I laugh in the face of your argument!" I do not know of a real world parallel of such a thing, and when it comes to systems this complicated the presumption by any sane systems engineer is that your new proposal won't work. I for one am not going to take it as axiomatic that BitCoin is inevitably going to work and the burden of proof is on those who think it won't work (another psychologically tempting position). Quite the opposite. You claim to have done your homework... have you considered actually sharing it with us? Or are derisive italics all you really have?
rmc 15y ago
You mean when 19 out of every 20 people had to work to grow food, and there wasn't enough money for social welfare? How much of the last 200 years (industrial revolution, mass transport (trains/roads/cars/planes), etc.) have been due to having a fiat currency and modern banking system?
- jcborro 15y ago
  Um, the U.S. dollar was fully convertible to gold until 1971. Since gold has risen from $35 to $1500 per ounce.
nhaehnle 15y ago
"They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource." Please check your facts. For the majority of human history, money was not backed by a scarce resource, but by government power. For example, there was no guarantee in the Roman empire of exchanging coins to a certain amount of gold or silver, and the value of the coins in the Roman empire was largely unrelated to their material value. To make that more precise, the reason that precious metals were used in coins was to prevent forgeries. If C is the cost to produce a coin or piece of paper money, then its value will (with very few degeneracies) always be in the range between C and f*C, where f > 1 is a factor that depends on the level of anti-forgery technology, and on the efficiency of law enforcement for tracking down forgers. After all, no government in their right mind would produce coins whose value is lower than or equal to the cost to produce them - that would just be a nonsensical work. Therefore, the value is larger than C. However, the higher the ratio between value and cost of production, the more attractive the coin or paper money becomes as a target for forgers. So raising the cost C of production makes it less attractive to forgers. Interesting side note: If you actually look at the (unfortunately scarce) data concerning inflation in the Roman empire, you will see that as inflation pushes the real value of coins down, and the nominal cost of production of the coins up, the government eventually reacted by minting new coins with adjusted production costs (by reducing the amount of precious metals in the coins, or by creating new coins with the same amount of precious metals, but higher nominal value). It is quite unfortunate that folklore has the causality between minting coins and inflation exactly the wrong way around.

tatsuke95 15y ago

The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.

teodesian 15y ago
You must remember, however that money != wealth. The money supply of a nation in no way represents the wealth generation going on in an economy. Printing an extra dollar does not mean the users of dollars became wealthier, it simply redistributes the existing wealth. Barter is also another factor that creates wealth, yet does not have anything to do with the monetary system. Our growing wealth in many ways is in spite of our money and governments. It is worth noting that ever since the USD lost it's scarcity (with the closing of the gold window in the 70's) real wages and quality of life has gone down, not up.
- btilly 15y ago
  Here is a basic economic fact for you. In periods of mild inflation, people have an incentive to invest money, which leads to growth. In periods of deflation (like the Great Depression) people have an incentive to put money under the bed and wait for it to appreciate. Therefore deflation is horrible for economic growth. Thus money supply does not represent wealth generation, but controlling it does affect wealth generation in a pretty significant way. As for your comment about the 70s, the wealth of this country has gone up dramatically. However there has also been a sharp increase in inequality. Thus causing a small number of people to see wealth rise a whole lot. Whether or not the middle class has wound up better or worse is a subject of debate among economists. (The subject is not nearly as simple as you might think. We think of "inflation" as an absolute number but it is not. The inflation that you experience is relative to the goods that you purchase, and middle class or poor people purchase a different bundle of goods than rich people do.) In any case the result is that it is clear that wealth generation has been humming along very nicely. My personal belief is that the underlying cause of the increase in wealth disparity is the continual drop in the top income tax rate, the reduction of the number of tax brackets, and the increase in the tax rate on the average person. (The effective tax rate on the richest people is now below the median tax rate!) This has limited how much tax policy redistributes money between socio-economic groups. Whether this is a good or bad thing is a political debate for another time. But it is a real thing.
  - rubashov 15y ago
    > In periods of mild inflation, people have an incentive to invest money ... In periods of deflation ... people have an incentive to put money under the bed This sounds very plausible but simply does not line up with historical reality. Most of the 19th century saw persistent mild deflation alongside massive investment and growth. Inflationary periods have usually seen unproductive speculation and weak capital investment. The deflation of the great depression was simply the inevitable consequence of a fiat money credit bubble and preceding massive malinvestment. The great depression deflation cannot be characterized as a deflationary tendency of the monetary policy at the time. It inevitably followed the inflationary boom of the 20s.
    - william42 15y ago
      Are you really linking the Great Depression to fiat money when the Great Depression occured while the dollar was still on the gold standard? And there was no «persistent mild deflation» in the 19th century; there were massive swings in value: http://upload.wikimedia.org/wikipedia/commons/2/20/US_Historical_Inflation_Ancient.svg http://upload.wikimedia.org/wikipedia/commons/2/20/US_Histor...
      - rubashov 15y ago
        I'm linking it to the federal reserve act and massive credit growth. Your chart shows persistent deflation in the 19th century with inflationary spikes for wars, notably the civil war.
jswinghammer 15y ago
The question is are they good reasons. It's probably a mistake to assume that our current knowledge and understanding of economics represents progress from where we were before. Having just finished a detailed account of the history of economic thought I can assure you that there were times when economists far better understood the nature of prices that came well before Adam Smith and Ricardo-both of whom didn't really understand prices at all. Schools of thought tend to continue until they reach a dead-end that's impossible to ignore. A new school picks up the pieces and continues on again. We have seen that with the fall and rise of Keynesian economics.

kd0amg 15y ago

Maybe we've been seeing different criticisms, but the ones I've seen don't just complain that it's not backed by fiat -- they complain that it's not backed by anything.

kruhft 15y ago
I think it's getting backed by all the people that are putting money into it.
- tptacek 15y ago
  That's the same kind of backing tulips had.

jerf 15y ago

"Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency." Then you're being willfully blind. Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. That has nothing to do with its fiat-ness, it is simply a characteristic of deflating currencies of any kind. You may not agree, or you may think BitCoin has some clever solution to the problem, but there are numerous criticisms that are much more sophisticated than "it's not a fiat currency". (Another one being the "it has no backing", which is not a claim that only a government can back a currency, it is observing that it has no backing at all. I'd be perfectly fine with a credible non-governmental third party that provided a credible backing (and both "credibles" are important there, I did not just repeat myself), but there isn't one, and again, that has nothing to do with it "not being fiat".) In fact I think most criticisms of BitCoin are not that it simply isn't a fiat currency. (On a general note, if you are planning on being a BitCoin activist, it is important to learn and understand the arguments your opponents are making. You can not counter an argument you do not deeply understand. Sticking fingers in ears and chanting "la la la!" is psychologically appealing, but you're sacrificing all ability to persuade when you do it. There are good arguments against BitCoin. For that matter you can't engineer solutions to problems you don't deeply understand.)

vrotaru 15y ago
Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. Yes, the armchair deflationary spiral theory. With the exception of labor theory of value, I do not know of any other economic theory whose premises are a) so thoroughly laughable b) lacking any kind empirical evidence. In an attempt to reduce the noise/signal ratio (usually high) in such debates... Yes, I know the usual arguments in favor of Deflation Scare and I devoted a fair amount of time thinking and debating these matters. Done my homework, so to speak. But feel free to surprise me, with an argument I missed.
- jerf 15y ago
  That's your persuasive counterargument? "That theory sucks"? I don't deny the standard case is controversial (which is also, BTW, not the same as "lacking in any evidence"; there's plenty of evidence, it's just that what it means is still debated), when discussing deflation spirals of a relatively small size, but when you're talking about a currency that will deflate by orders of magnitude, and that necessarily must do so if it going to be any sort of successful, I think you need more than "Ha ha ha! I laugh in the face of your argument!" I do not know of a real world parallel of such a thing, and when it comes to systems this complicated the presumption by any sane systems engineer is that your new proposal won't work. I for one am not going to take it as axiomatic that BitCoin is inevitably going to work and the burden of proof is on those who think it won't work (another psychologically tempting position). Quite the opposite. You claim to have done your homework... have you considered actually sharing it with us? Or are derisive italics all you really have?

rmc 15y ago

You mean when 19 out of every 20 people had to work to grow food, and there wasn't enough money for social welfare? How much of the last 200 years (industrial revolution, mass transport (trains/roads/cars/planes), etc.) have been due to having a fiat currency and modern banking system?

jcborro 15y ago
Um, the U.S. dollar was fully convertible to gold until 1971. Since gold has risen from $35 to $1500 per ounce.

nhaehnle 15y ago

"They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource." Please check your facts. For the majority of human history, money was not backed by a scarce resource, but by government power. For example, there was no guarantee in the Roman empire of exchanging coins to a certain amount of gold or silver, and the value of the coins in the Roman empire was largely unrelated to their material value. To make that more precise, the reason that precious metals were used in coins was to prevent forgeries. If C is the cost to produce a coin or piece of paper money, then its value will (with very few degeneracies) always be in the range between C and f*C, where f > 1 is a factor that depends on the level of anti-forgery technology, and on the efficiency of law enforcement for tracking down forgers. After all, no government in their right mind would produce coins whose value is lower than or equal to the cost to produce them - that would just be a nonsensical work. Therefore, the value is larger than C. However, the higher the ratio between value and cost of production, the more attractive the coin or paper money becomes as a target for forgers. So raising the cost C of production makes it less attractive to forgers. Interesting side note: If you actually look at the (unfortunately scarce) data concerning inflation in the Roman empire, you will see that as inflation pushes the real value of coins down, and the nominal cost of production of the coins up, the government eventually reacted by minting new coins with adjusted production costs (by reducing the amount of precious metals in the coins, or by creating new coins with the same amount of precious metals, but higher nominal value). It is quite unfortunate that folklore has the causality between minting coins and inflation exactly the wrong way around.