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Why a Free Society Needs a Free Money

55 points by cdvonstinkpot 13y ago

ddebernardy 13y ago
"Why a plutocracy needs state-issued money" FTFY. :-)
pathy 13y ago
>One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade. Except he also ordered hits on his enemies, or at least tried to. Feels violent to me. >That’s what’s threatened by taxation, regulation and intimidation. If bitcoin will have any chance of becoming a legitimate currency it will have to be regulated and most importantly taxed. Bitcoin doesn't somehow make you exempt from paying taxes just because it is a digital currency. On the flip side, I agree that bitcoin can serve as a useful tool to conduct experiments that may be hard to conduct with other currencies and that opens up very interesting possibilities.
- netcan 13y ago
  OTOH, there's something about the need for an economy to be highly taxable which is anti-progress. 1950-2000 Copyright laws were a natural fit for the technologies of the day. It made sense to sell music on discs or tapes. It was easy and possible to create and enforce laws which regulated this. This happened to result in an enormous industry where big profits were made. Then technology changed in a way that made copyright laws a bad fit. The power accumulated in that industry allows them to fight to try and force the world to behave as it had previously, to keep their business model alive. Over the last decades technology and the general structure of advanced economies (especially in Europe) have allowed a relatively (relative to other times & places) high levels of taxation government services. Governments learned how tax while avoiding destructive reactions in the economy. In a lot of cases this was trial and error (eg, >60% marginal tax rates for high earners). Subsequently a lot of European countries are now at a point where public spending is ~43% of the total. If technology starts to threaten these models, I think we'll find it very hard to adjust. Governments will have the choice between adapting (unlikely), raising taxes in less disciplined and potentially more disruptive ways, or trying to keep the world as it was by preventing the new technology from being adopted. I don't think bitcoin is the only such threat. Income inequality might be such a pressure. Mobile freelancers are another. Anyway, if bitcoin gets to the point where it genuinely threatens a government's ability to collect taxes, we're in for trouble.
  - eli_gottlieb 13y ago
    You're confusing taxation with rent-seeking.
sfjailbird 13y ago
I love that the free market has come up with a working currency, not originated or controlled by a single, or a few, players, and I love that the internet has made this possible.
swombat 13y ago
Author should actually read about the history of money before making grand statements about what money is and isn't for, and what makes it good or bad. Statements about how inflation is "erosion of wealth" indicate a gross misunderstanding of the historical purpose of money and the effects of deflation. Money is a medium of exchange. Historically, it's been mostly very, very unreliable, and over the last 100 years or so has actually been remarkably solid even as a way to store wealth. But if you want to store wealth for a long period, currency is not your best bet by any stretch.
- p4bl0 13y ago
  Argh I'm sorry I downvoted you because I ripped on my trackpad, I wanted to upvote you :-/.
- digitalengineer 13y ago
  Might I suggest: "When Money Dies" ? The classic history of what happens when a nation’s currency depreciates beyond recovery. http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941 http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinfla...
- curiouslurker 13y ago
  Since you mention studying the history of money, Niall Ferguson's Ascent of Money documentary is excellent: http://www.youtube.com/watch?v=4Xx_5PuLIzc http://www.youtube.com/watch?v=4Xx_5PuLIzc
  - lmm 13y ago
    I found him quite dry; Debt: The First 5000 Years was much more readable.
    - evgen 13y ago
      Unfortunately, Debt is better labelled as fiction regardless of how readable it might be.
conformal 13y ago
unfortunately, the US, its various security services and most of the elected officials are less-than-excited about the idea of a _truly_ free society. currently, the 1st world state has an enormous amount of control over the day-to-day lives of its citizens, moreso than at any other point in history, imo. some things are particularly hard for the state to do vs historically, e.g. institute mandatory military service of some sort, but others have become much easier, e.g. wage economic warfare on opposing states, drone strike small groups. bitcoin definitely goes a ways towards fixing some of these problems and i think the author is right to cite it as an epic experiment.
tedsanders 13y ago
I hate to be a cynic, but I disagree with many of the points put forth in this article, points that are critical to supporting its thesis. I list some disagreements below. >Then you have what we’re seeing in America, which is the long, slow erosion of wealth and savings through a steady stream of monetary inflation. Inflation does not reduce wealth. Inflation reduces the value of money. All real goods and services are worth what they're worth, regardless of the stick used to measure them. Inflation only changes the nominal measure of wealth, not wealth itself! Furthermore, economists generally regard a small amount of inflation as better than a small amount of deflation. First, inflation helps keep prices and salaries less sticky, by constantly devaluing them. Second, inflation helps keep the banking system working (I believe). If nominal interest rates ever go negative, people will withdraw deposits from banks and just hold cash (which always has a nominal interest rate of 0%). >Not only does inflation slowly eat away at individual wealth, but it also disincentivizes savings. How does inflation disincentivize savings? Assuming that nominal interest rates are constant, then yes, inflation leads to lower savings. But when inflation is high, nominal rates are high, and when inflation is low, nominal rates are low. The relationship is not clear. Also, remember that S=I, savings=investment. A common misconception is that savings is putting cash aside for the future, whereas investment is spending cash on the future. However, they are actually the same thing. Read more about why savings=investment here: http://www.themoneyillusion.com/?p=12617 http://www.themoneyillusion.com/?p=12617 >One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade. This user also allegedly hired a hitman to murder someone. >Governments try to control currencies. With all that power, shouldn’t they seek to learn as much about them as possible? Why would anyone attempt to kneecap thousands of unpaid, volunteer experimenters, who are constantly sharing with the world what we’re learning about how money works? It’s very odd. I think the US Government is concerned with people breaking its laws. In this case, illegally buying drugs and illegally not paying taxes. It sounds like a reasonable concern to me, though I admit I'm not well informed and I welcome additional comments. --- One big downside of a "free" currency is that there are no restorative forces to keep its value constant. A huge advantage of having the US government behind the dollar is that the US can control the value of the dollar. Most of the value here comes, paradoxically, not from controlling the dollar but in markets believing that the US can control the dollar. Those market expectations then themselves keep the value of the dollar mostly constant. Having a currency with a predictable and constant value is hugely important for trade. For this reason, I can't imagine Bitcoin ever succeeding on a large scale for a long time.
Mikeb85 13y ago
The entire concept of money cannot be separated from government. The reason why money has any value in the first place is because a government guarantees that value. Without that guarantee money is merely a piece of paper, or a few bytes on a hard drive...
- sneak 13y ago
  My krugerrands disagree mightily.
- maxerickson 13y ago
  Money has value when another party will exchange it for items of value. Banks issued money not all that long ago, people fool with private currencies in the present day, etc. Government backing can certainly be a valuable feature of a currency.
tehabe 13y ago
I wonder to which experiment in the Weimar Republic, Cathy Reisenwitz is referring to. The reasons for the high inflation until 1923 are very well understood. And IIRC the German government knew that inflation would be caused by their policies, maybe they were surprised by the extent but certainly not by the inflation itself. Much more interesting was the sudden end of the hyper inflation through the introduction of the Rentenmark. Which wasn't an official currency.
pjc50 13y ago
So I read this until I came to the first badly misleading reference: "When it comes down to it, the leaders of the Weinmar Republic were just running an experiment." This makes it sound like the hyperinflation was the consequence of some recklessness, or an experiment carried out in a vacuum. The reality was very different (via WP): "The "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.[6]" The Weimar government had no choice but to keep shovelling hard currency across the border to France while simultaneously being limited in its ability to earn more. This looks, economically, like a huge trade imbalance which drove down the value of the Mark, and the printing started as an attempt to keep up with the rapidly collapsing exchange rate. It was not so much an experiment as an act of desparation by a government that was being looted at gunpoint. Just as famine in the modern world is a political problem rather than primarily an agricultural one, hyperinflation is driven by political or economic collapse rather than some vaguely defined irresponsibility. Also, anyone in the US or UK who is scared of hyperinflation at the moment must not be aware of how close to zero and well-managed inflation actually is.
- digitalengineer 13y ago
  >hyperinflation is driven by political or economic collapse rather than some vaguely defined irresponsibility. All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency. Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history every economy involved was decimated as and when it occurred. Examples: http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype... Is it well-managed? Bernake himself said we're in uncharted terretory: http://www.businessinsider.com/bernankes-2010-qe-2012-8 http://www.businessinsider.com/bernankes-2010-qe-2012-8
  - chii 13y ago
    Is it loss of confidence in the currency that causes hyper-inflation? or that (high) inflation causes the loss of confidence, leading to a downward spiral?
nathan_long 13y ago
>> everyone who plays with Bitcoin is a scientist Bitcoin is neat, but this is not correct. "Try something and see how it goes", while worthwhile, is not science. Science requires controls and repeatable experiments. The reason that macroeconomics is at least 50% palm reading is that there is no way to, say, take 2,000 identical universes, bail out the banks in half of them, and compare. (Science is not the only way to determine truth; for example, you can't do repeatable experiments to identify a murderer.)
kennethh 13y ago
Some good links about inflation, fractional reserve money. Short version, the people with first access to money (banks, hedge funds) are able to get the new money and use it before the increase in the money supply is reflected in the asset prices. http://globaleconomicanalysis.blogspot.no/2013/02/reader-asks-me-to-prove-inflation.html http://globaleconomicanalysis.blogspot.no/2013/02/reader-ask... http://globaleconomicanalysis.blogspot.no/2013/03/inflation-targeting-revisited-three.html http://globaleconomicanalysis.blogspot.no/2013/03/inflation-...
deleted 13y ago
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55 points by cdvonstinkpot 13y ago

"Why a plutocracy needs state-issued money" FTFY. :-)

pathy 13y ago

>One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade. Except he also ordered hits on his enemies, or at least tried to. Feels violent to me. >That’s what’s threatened by taxation, regulation and intimidation. If bitcoin will have any chance of becoming a legitimate currency it will have to be regulated and most importantly taxed. Bitcoin doesn't somehow make you exempt from paying taxes just because it is a digital currency. On the flip side, I agree that bitcoin can serve as a useful tool to conduct experiments that may be hard to conduct with other currencies and that opens up very interesting possibilities.

netcan 13y ago
OTOH, there's something about the need for an economy to be highly taxable which is anti-progress. 1950-2000 Copyright laws were a natural fit for the technologies of the day. It made sense to sell music on discs or tapes. It was easy and possible to create and enforce laws which regulated this. This happened to result in an enormous industry where big profits were made. Then technology changed in a way that made copyright laws a bad fit. The power accumulated in that industry allows them to fight to try and force the world to behave as it had previously, to keep their business model alive. Over the last decades technology and the general structure of advanced economies (especially in Europe) have allowed a relatively (relative to other times & places) high levels of taxation government services. Governments learned how tax while avoiding destructive reactions in the economy. In a lot of cases this was trial and error (eg, >60% marginal tax rates for high earners). Subsequently a lot of European countries are now at a point where public spending is ~43% of the total. If technology starts to threaten these models, I think we'll find it very hard to adjust. Governments will have the choice between adapting (unlikely), raising taxes in less disciplined and potentially more disruptive ways, or trying to keep the world as it was by preventing the new technology from being adopted. I don't think bitcoin is the only such threat. Income inequality might be such a pressure. Mobile freelancers are another. Anyway, if bitcoin gets to the point where it genuinely threatens a government's ability to collect taxes, we're in for trouble.
- eli_gottlieb 13y ago
  You're confusing taxation with rent-seeking.

sfjailbird 13y ago

I love that the free market has come up with a working currency, not originated or controlled by a single, or a few, players, and I love that the internet has made this possible.

swombat 13y ago

Author should actually read about the history of money before making grand statements about what money is and isn't for, and what makes it good or bad. Statements about how inflation is "erosion of wealth" indicate a gross misunderstanding of the historical purpose of money and the effects of deflation. Money is a medium of exchange. Historically, it's been mostly very, very unreliable, and over the last 100 years or so has actually been remarkably solid even as a way to store wealth. But if you want to store wealth for a long period, currency is not your best bet by any stretch.

p4bl0 13y ago
Argh I'm sorry I downvoted you because I ripped on my trackpad, I wanted to upvote you :-/.
digitalengineer 13y ago
Might I suggest: "When Money Dies" ? The classic history of what happens when a nation’s currency depreciates beyond recovery. http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941 http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinfla...
curiouslurker 13y ago
Since you mention studying the history of money, Niall Ferguson's Ascent of Money documentary is excellent: http://www.youtube.com/watch?v=4Xx_5PuLIzc http://www.youtube.com/watch?v=4Xx_5PuLIzc
- lmm 13y ago
  I found him quite dry; Debt: The First 5000 Years was much more readable.
  - evgen 13y ago
    Unfortunately, Debt is better labelled as fiction regardless of how readable it might be.

conformal 13y ago

unfortunately, the US, its various security services and most of the elected officials are less-than-excited about the idea of a _truly_ free society. currently, the 1st world state has an enormous amount of control over the day-to-day lives of its citizens, moreso than at any other point in history, imo. some things are particularly hard for the state to do vs historically, e.g. institute mandatory military service of some sort, but others have become much easier, e.g. wage economic warfare on opposing states, drone strike small groups. bitcoin definitely goes a ways towards fixing some of these problems and i think the author is right to cite it as an epic experiment.

tedsanders 13y ago

I hate to be a cynic, but I disagree with many of the points put forth in this article, points that are critical to supporting its thesis. I list some disagreements below. >Then you have what we’re seeing in America, which is the long, slow erosion of wealth and savings through a steady stream of monetary inflation. Inflation does not reduce wealth. Inflation reduces the value of money. All real goods and services are worth what they're worth, regardless of the stick used to measure them. Inflation only changes the nominal measure of wealth, not wealth itself! Furthermore, economists generally regard a small amount of inflation as better than a small amount of deflation. First, inflation helps keep prices and salaries less sticky, by constantly devaluing them. Second, inflation helps keep the banking system working (I believe). If nominal interest rates ever go negative, people will withdraw deposits from banks and just hold cash (which always has a nominal interest rate of 0%). >Not only does inflation slowly eat away at individual wealth, but it also disincentivizes savings. How does inflation disincentivize savings? Assuming that nominal interest rates are constant, then yes, inflation leads to lower savings. But when inflation is high, nominal rates are high, and when inflation is low, nominal rates are low. The relationship is not clear. Also, remember that S=I, savings=investment. A common misconception is that savings is putting cash aside for the future, whereas investment is spending cash on the future. However, they are actually the same thing. Read more about why savings=investment here: http://www.themoneyillusion.com/?p=12617 http://www.themoneyillusion.com/?p=12617 >One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade. This user also allegedly hired a hitman to murder someone. >Governments try to control currencies. With all that power, shouldn’t they seek to learn as much about them as possible? Why would anyone attempt to kneecap thousands of unpaid, volunteer experimenters, who are constantly sharing with the world what we’re learning about how money works? It’s very odd. I think the US Government is concerned with people breaking its laws. In this case, illegally buying drugs and illegally not paying taxes. It sounds like a reasonable concern to me, though I admit I'm not well informed and I welcome additional comments. --- One big downside of a "free" currency is that there are no restorative forces to keep its value constant. A huge advantage of having the US government behind the dollar is that the US can control the value of the dollar. Most of the value here comes, paradoxically, not from controlling the dollar but in markets believing that the US can control the dollar. Those market expectations then themselves keep the value of the dollar mostly constant. Having a currency with a predictable and constant value is hugely important for trade. For this reason, I can't imagine Bitcoin ever succeeding on a large scale for a long time.

Mikeb85 13y ago

The entire concept of money cannot be separated from government. The reason why money has any value in the first place is because a government guarantees that value. Without that guarantee money is merely a piece of paper, or a few bytes on a hard drive...

sneak 13y ago
My krugerrands disagree mightily.
maxerickson 13y ago
Money has value when another party will exchange it for items of value. Banks issued money not all that long ago, people fool with private currencies in the present day, etc. Government backing can certainly be a valuable feature of a currency.

tehabe 13y ago

I wonder to which experiment in the Weimar Republic, Cathy Reisenwitz is referring to. The reasons for the high inflation until 1923 are very well understood. And IIRC the German government knew that inflation would be caused by their policies, maybe they were surprised by the extent but certainly not by the inflation itself. Much more interesting was the sudden end of the hyper inflation through the introduction of the Rentenmark. Which wasn't an official currency.

pjc50 13y ago

So I read this until I came to the first badly misleading reference: "When it comes down to it, the leaders of the Weinmar Republic were just running an experiment." This makes it sound like the hyperinflation was the consequence of some recklessness, or an experiment carried out in a vacuum. The reality was very different (via WP): "The "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.[6]" The Weimar government had no choice but to keep shovelling hard currency across the border to France while simultaneously being limited in its ability to earn more. This looks, economically, like a huge trade imbalance which drove down the value of the Mark, and the printing started as an attempt to keep up with the rapidly collapsing exchange rate. It was not so much an experiment as an act of desparation by a government that was being looted at gunpoint. Just as famine in the modern world is a political problem rather than primarily an agricultural one, hyperinflation is driven by political or economic collapse rather than some vaguely defined irresponsibility. Also, anyone in the US or UK who is scared of hyperinflation at the moment must not be aware of how close to zero and well-managed inflation actually is.

digitalengineer 13y ago
>hyperinflation is driven by political or economic collapse rather than some vaguely defined irresponsibility. All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency. Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history every economy involved was decimated as and when it occurred. Examples: http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype... Is it well-managed? Bernake himself said we're in uncharted terretory: http://www.businessinsider.com/bernankes-2010-qe-2012-8 http://www.businessinsider.com/bernankes-2010-qe-2012-8
- chii 13y ago
  Is it loss of confidence in the currency that causes hyper-inflation? or that (high) inflation causes the loss of confidence, leading to a downward spiral?

nathan_long 13y ago

>> everyone who plays with Bitcoin is a scientist Bitcoin is neat, but this is not correct. "Try something and see how it goes", while worthwhile, is not science. Science requires controls and repeatable experiments. The reason that macroeconomics is at least 50% palm reading is that there is no way to, say, take 2,000 identical universes, bail out the banks in half of them, and compare. (Science is not the only way to determine truth; for example, you can't do repeatable experiments to identify a murderer.)

kennethh 13y ago

Some good links about inflation, fractional reserve money. Short version, the people with first access to money (banks, hedge funds) are able to get the new money and use it before the increase in the money supply is reflected in the asset prices. http://globaleconomicanalysis.blogspot.no/2013/02/reader-asks-me-to-prove-inflation.html http://globaleconomicanalysis.blogspot.no/2013/02/reader-ask... http://globaleconomicanalysis.blogspot.no/2013/03/inflation-targeting-revisited-three.html http://globaleconomicanalysis.blogspot.no/2013/03/inflation-...

deleted 13y ago

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