Bitcoin Forum

Have you ever wondered why gold have been and ceased to be money so many times in history? Many talk about returning to gold, but if gold was that much better than fiat money, then why has fiat money recurrently replaced it? The supporters of Bitcoin would say centralization is to blame, since it allows the manipulation of the monetary system in favor of the wealthy. However, since most gold monetary systems were also centralized, how could centralization explain fiat monetary systems, especially debt-based ones? Clearly, centralization is not enough to explain our current monetary system.

Here I will present an alternative explanation that, despite recognizing the role of centralization, does not rely on it as a primary source of understanding.

Let us begin with money itself.

If a commodity has the same value of whatever has the same price, then these two values are neither of those objects for being the same, just like two numbers three are the same. And because this value common to both commodities is neither of them, it cannot have any of their utilities or material qualities, which derive from their material beings: their common value is the social abstraction of their utilities or material qualities for the sake of their common monetary value. This is money itself: an actual equivalent of all possible equivalents.

But commodity money--like gold--is also a merchandise, with its own economic value. This is clearly seen just by choosing another commodity to represent money, making money as concrete as gold, with all its utilities or material qualities.

Therefore, money has two dimensions: an abstract one, which is money itself, and a concrete one, which is its representation.

A representation can itself be represented: we already have replaced gold by many representations of it, like paper notes. However, most of these representations have one thing in common: just like gold, they make no inherent distinction between money itself and its representation--hence the following problem.

Lately, monetary representations have become ever cheaper to produce. Our last such representation is the cheapest so far: magnetic records readable by computers. Yet still, any confusion between money itself and its representation requires its value--the actual equivalence to all possible equivalents--to be the same as that of its representation, then decreasing with it. So preserving that value--hence money--requires delaying its most valuable representation, while keeping it also present as debt.

This is the origin of debt money: the confusion between money itself and its representation, which continuously depreciates money, forcing its original (more valuable) representation into the future as debt.

And here is the originality of Bitcoin: it is a form of money that, for the first time in history, inherently distinguishes between money itself (a private key) and its representation (the corresponding public key), eliminating the root of debt money.

Which is also why Bitcoin is incompatible with fractional reserve banking: in order to loan a fraction of any deposit, banks must confuse the identity of deposit money with its different representations in different bank accounts. This is what money creation in a debt monetary system actually means: cloning money identity by mistaking its different representations for it.

So, despite inspired by gold, Bitcoin is a fundamental departure from it: this cryptocurrency not only restores a valuable representation of money, but further enforces a permanent distinction between that representation and money itself--which neither gold nor bank accounts can do.

The reason people like gold and liken it to Bitcoin is that there is only so much gold. People can't make more of it. They can mine more of it, but all of the easily mined gold has been mined already. The supply limits itself as time goes on. I think that's why people say Bitcoin is similar. However, I enjoyed your description of the differences in the technical transactions.

Excellent post.  Though I wouldn't say bitcoin is incompatible with fractional reserve banking.  I would instead say that people will view a bitcoin deposit more as a debt obligation rather than as a perfect substitute for actual bitcoins.  For that reason, we may never see fractional reserve banking applied to bitcoin in any kind of broad sense (people might instead hold some of their savings in shares of a loan business).

Have you seen this? http://mndrix.blogspot.com/2011/11/bitcoin-gold-of-future.html (http://mndrix.blogspot.com/2011/11/bitcoin-gold-of-future.html) 

How about bitgold?

Use the blockchain mechanism to distribute IOU signings over a WOT mechanism and use 256bit values to represent a number of gold atoms. Remove mining at use the web of thrust mechanism to validate gold holdings.
Instead of mining use the mechanism of Guarding: Guards provide hashing power which is distributed to the network as certain number of gold atoms per plank time unit.

Using units which have the maximum possible amount of precision would seem overkill, but only so in guaranteed that the system is compatible with future implementations.

The post is not correct because people have already tried to create bitcoin representatives already. You are seeing people trying to create bitcoin banks to solve bitcoin's problems in the wrong way. Bitcoin doesn't need any banks from what I've learned but it needs improvements in the software to solve particular problems.

And gold can be used a trustworthy physical currency. I do believe bitcoin can be used to facilitate a new digital financial system.

It is conceivable that in the future bitcoin could also become a method for trading digital contracts as well but that would be back to the derivatives. The bitcoin system or a similar one could be used to trade contracts that relate to something such as gold but I don't know how digitally signed contracts could work exactly and how current legal systems would deal with them.

A "bitgold" would have problems and advantages I suppose.

Bitcoin certainly takes much less technical proficiency to secure and assay than gold even at this early stage in development. I'd say that is a strength as far as properties that create value go.

Having a bitgold would make the market much more stable as it is linked to the more stable (But not very) gold markets. Obviously bitcoin is super volatile.

But bitcoin is just having growing pains.

I'm certain that it will be around, and eventually grow up. But as for using it as a store of value that's a different story.

But Gold and Bitcoin also share a common issue: Pump & Dump by the big guys, but that's been the case with every commodity in history.

Gold wasn't lost as money because of "centralization."  It was lost as money because governments desire the ability to debase the national currency for deficit spending.

Upon a gold standard, the ability of governments to spend beyond their taxable means is limited. Upon a fiat standard, the ability of governments to spend beyond their taxable means is far less limited, for they can merely print some portion of the deficit (and the public, taught in government schools their whole lives, never learns about the insidious inflation tax they endure).

Put simply - the gold standard tends to be abandoned by governments because it restricts their ability to spend. It limits their power, so they find ways and excuses to get rid of it.

One of the beauties of Bitcoin is that it is not an obligation of any party. With an IOU, or "backing" of gold, there must be a person, group, or company that fulfills the obligation. Bitcoin eliminates counter-party risk, and tying such a system to an IOU structure removes that benefit.

Bitcoin isn't gold but it does seem to have more similarities with it than with fiat, especially concerning distribution. Fiat is always loaned into existence at interest, is distributed only through tightly controlled "approved" centralized channels and therefore contains the seeds of its own eventual destruction. Bitcoin, like gold must be mined by someone who has the capital, technical know how, etc to compete and discover some from a finite and ever diminishing quantity. These fundamental changes in distribution are important when considering how it may affect the greater economy in terms of savings, investment and freedom of access to the distributed commodity.

+1

Where gold and bitcoin differ is transactions.  Bitcoin can be sent around the world for little or no fee in a very short amount of time.  Gold involves customs, shipping insurance, and risk of theft.

Yes, that and very high divisibility to allow for precision plus easy quantitative assessment make bitcoin vastly superior to gold as a unit of transaction.

Gold and Bitcoin have in common a limited supply, and of course this is a key feature of both. However, because gold confuses money itself with its representation and requires proxy representations to cope with society needs, it leads to increasingly cheaper representations that are taken for money identities, which leads to debt money. So if Bitcoin had only a limited supply, without fundamentally distinguishing between money itself (a private key) and its representation (the corresponding public key), it would sooner or later lead to debt-money, just like gold did.

The reason why Bitcoin is incompatible with fractional reserve banking is because fractional deposit loaning of a bitcoin deposit would require having the same bitcoins in different bank accounts, which in turn would require creating another identity for them--instead of a private key--one that allowed its own confusion with whatever its representation were--since fractional reserve banking requires confusing the identity of deposit money with its different representations in different bank accounts (the miracle of money multiplication). Unfortunately, this would no longer be a Bitcoin monetary system, but another monetary system built on top of deposits denominated in bitcoins that could just as well be denominated in dollars.

I have a link to that article in my blog :)

I would have to dig into bitgold to understand it better. My point here is that whatever our future money is (and so far I believe it is Bitcoin), its fundamental feature will be this distinction between money itself and its representation, which in Bitcoin is implemented as a distinction between a private key and its corresponding public key. That distinction is what allows Bitcoin to actively control the money supply without violating privacy, thus replicating the natural scarcity of gold.

There is no problem in creating representations of Bitcoin, provided that such representations are complete (physical coins with an embedded private key are a good example of a complete bitcoin representation). By complete representations I mean representations that replicate the dual nature of Bitcoin as both a private key and its public representation, thus preserving the fundamental distinction between them.

Of course the motivation for debt money includes the "ability to spend," although this only hides a deeper motivation: the massive transfer of wealth resulting from a continuous creation of new money always born in the hands of the same few people.

Although it may seem that governments have an inherent desire for deficit spending, the gold standard was abandoned mostly during war periods, and those wars were motivated by private interests rather than by public ones.

The key point is that gold was the historical basis for fractional reserve banking, which in turn was the historical basis for central banking: gold makes no distinction between money itself (the actual equivalent of all possible equivalents) and its representation (the commodity, gold), so it not only allows but naturally favors and even requires fractional reserve banking (just remember how fractional reserve banking evolved from gold keeping).

Bitcoin, on the contrary, has the distinction between money as an abstraction (a private key) and its representation (the corresponding public key) as an essential, defining feature, which is as much an essential difference from gold as one can be.

After two weeks of extremely lengthy debate, this page was created.

https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin

Scared? Don't use bitcoin banks. Use the software and merchants can only except real bitcoins.

Fractional reserve banking becomes a scam when its incentivized by a cetral bank acting as a lender of last resort.
 
The scam is further condoned by the system when its imposed on you because you have no choice but to deal with a bank that is allowed to do fractional reserve banking.


With bitcoin, fractional reserve banking is not made impossible but it becomes a "do it at your own risk" endeavour.

Fractional reserve banking consists in creating new money from loans, and Bitcoin does not allow anyone to create new Bitcoins at will. Therefore, implementing fractional-reserve banking with Bitcois would involve creating another monetary system in which Bitcoin would be just a monetary unit, and no longer a monetary system. Finally, although the two monetary systems could eventually coexist, they would remain distinct: there is no such thing as fractional-reserve banking within the Bitcoin monetary system.

First, what do you mean that 'mos gold monetary systems were also centralized' ? Are you talking about gold and silver certificates which were then later not redeemable in gold and silver? Centralization was a necessary step to wean the public off of gold and silver money and move to a more centralized system of purely fiat money.

(It's also not just a matter of centralization, it's how much power over the money supply the centralized authority has.)

It was an extremely gradual process from the gold standard of the 1800s, to the increasing use of gold certificates, to the introduction of Federal Reserve Notes, to the confiscation of privately held gold in 1933 (but dollars were still redeemable in gold by foreign governments), to the removal of silver from the coinage in 1965, to the point where dollars were no longer redeemable for gold in any way in 1971. Each step gave more power to the Fed to create money at will.


Basically, I'm not sure what your question is. Centralization was necessary for the government/Fed to get more power to create money - why do you think this says anything about the merits of a gold standard?

Fractional reserve is an enormously popular topic in circles of jerks everywhere. The web page you link to is probably helpful for someone although one might conclude from it that the differences in the two viewpoints are mostly semantics around the definition of money supply. IMO, the Keynesian model seems much more in contact with behavioral reality, it's based on observations of what people have actually done for thousands of years, practices predating Keynesian ideas like actively managing the money supply through lending. The Austrian school strikes me as one of these prescriptive ideologies like Soviet-style Marxism that establishes a "rational" model ( by some definition ) and then tells us it should be how the world is made to work because of the internal "correctness" of the model.

In any case, bank lending is not the only way that leverage can be used to create money. For example, margin lending can have the same effect. Such lending does exist in the Bitcoin world at the exchange site Bitcoinica. The hedging that inevitably is done by keepers of large concentrations of money ( e.g. Mt. Gox ) almost certainly involves the use of leverage. One way or the other, all lending can create more money in circulation, not just the evil deeds of fiendish central banks   :)

Such a system you describe already exists: Mt.Gox payments can be made from one person to another without ever being processed through the Bitcoin blockchain. There is no evidence that Mt.Gox is anything but honest about having enough Bitcoins to cover the deposits of each user, but the only thing stopping them from cheating is their own honesty and business reputation.

The only reason Bitcoin would be less likely to fall to fractional-reserve problems is that the Bitcoin software reduces the need for 2 out of the 3 reasons for having a bank:

1. To protect one's money from theft. (Bitcoin can be encrypted and backed up on your own)
2. To act as a clearinghouse for transactions, bill payment, etc (Bitcoin software handles this well, it's not instant, but that doesn't matter for most transactions)
3. To act as a middleman between people who want to lend their money out for interest, and people who wish to borrow money at interest (Bitcoin does not address this)

What Atheros presents as Keyensian viewpoint is not Keynesian viewpoint. However, I have promised not to edit the Keynesian section. I contacted two keynesian economists to clarify their position by email, but got no reply.

Any debt instrument can theoretically create money, if it is used as a medium of exchange instead of the object of the debt. This occurred historicaly because these instruments (e.g. banknotes, cheques, EFT) decrease transaction costs. With Bitcoin, this advantage is absent: Bitcoin denominated debt instruments do not generally decrease transaction costs apart from special uses (e.g. the aforementioned exchanges), therefore they are not used as media of exchange instead of Bitcoin and do not affect money supply, so an overissue does not create macroeconomic questions.

Bitcoinica offers loans (margin) at interest (5% spread of variable duration) with fractional reserve (1:10 leverage).

Mt. Gox offers reserve notes (redeemable codes) which like fiat to gold may be more convenient than bitcoin. For all we know, there may (soon) be more of these reserve notes in circulation than bitcoin.

(emphasis added) In order for them to be in circulation, they need to be generally accepted as a medium of exchange instead of Bitcoin. However, this is not the case. They are only usable for limited specific purposes and are technologically incompatible with Bitcoin. Because they do not, in general, reduce transaction costs, they will probably never circulate as if they were Bitcoins. Practicing such overissue probably still falls under the definition of Fractional Reserve Banking, however it does not increase money supply. I provided several quotes which explain this in the other thread. Here's the basic one from wikipedia (http://en.wikipedia.org/wiki/Fractional_reserve_banking):

Overissue is an insufficient condition for an increase of money supply. Acceptance of these new instruments as if they were money proper is also necessary. Whether they are depends on the transaction costs.

More likely contenders for increasing the money supply are projects which issue debt instruments that are specifically designed to decrease transaction costs, for example Ripple (and, maybe, OpenTransactions, I'm still not 100% sure about this one).

How do you define transaction cost? Does it include risk, literal fees, confirmation time, convenience?

Mt. Gox codes present a default risk, but there are no fees, transactions are nearly instantaneous, and at least where accepted, they are convenient. They are essentially one-time use and could not replace bitcoin because of the redemption race condition.

But I don't see that it follows, as you seem to imply, that such instruments do not inflate the money supply even if only minusculely. During the short life time of a redeemable code, before it is redeemed, doesn't it carry the same transactional value of a static bitcoin that might otherwise have been used? Is it any different if the US Fed doubles the paper dollar supply in the morning and destroys the excess in the evening, versus some other doubled credit instrument with a twelve hour lifespan? I understand the stickiness of prices (wages probably won't budge nor will prices double), but when a street market vendor notices that his fresh fruit are selling especially quickly, might he not consider raising prices or pulling the discounts?

I could believe that digital money increases velocity by design, providing an extra inflation for which gold is not similarly susceptible.

Funny, I think of the lack of exchange depth and corresponding illiquidity for a high volumes of USD-BTC makes the exchanges essentially fractional reserve USD banks.  Bitcoins may be worth $3 each, but if everyone tries to cash out at once, they'll be in for a rude surprise as this is essentially a bank run (exchange run?) that causes liquidity problems, just like a real bank run, except that the last person to try to cash out only gets $0.30 on the dollar (or whatever).  As much as we might all like for bitcoins to be a standalone currency, I think it will always be the child compared to USD, at least for the forseeable future (which is 3-5 years, in my book).

Lack of market liquidity is not good, but it is completely unrelated to anything like fractional reserve banking and bank runs. It's an inherent risk in owning anything that you might not be able to sell it for what you paid.

Bank runs occur when people have been told they own dollars but those dollars have already been used by someone else. Owners of Bitcoin are, or should be, under no false impressions that their investments will be redeemable for a set number of dollars.

You describe the difference between inflationary and default risk. A bank run is a default risk (you get nothing) while this 'exchange run' is inflationary risk (what you get is worth less) just as much as a deflationary risk (what you get is worth more). That potentially no one wants bitcoin is no different than every asset in existence sans pure energy.

Except with mining, you cannot "create more money" with Bitcoin, period.

To leverage your position in Bitcoins, Bitcoinica has to already have those additional Bitcoins: it cannot create them, like commercial banks do by loaning deposit money.

What I am saying is that commodity money in general (and gold money in particular) leads to fractional reserve banking, which leads to central banking, no matter how gradually. As I am also saying that Bitcoin is essentially different.

Bankers will, if the law and the market allow them, move toward fractional reserve banking under fiat or commodity money. They will do it regardless of the fact that there was a gold standard, not because of the fact.

Saying that commodity money leads to fractional reserve banking is like saying that private property leads to trespassing. Yes, people trespass on private property, but they do it in spite of the fact that it's private property, not because it's private property. And the right response is to uphold and enforce the private property, not to embrace the trespassing.

As any populist will tell you: YES YOU CAN!

I suggest you google BASE, MB, M0 versus M1, M2, M3 (http://en.wikipedia.org/wiki/Money_supply). A bank can not print paper dollars, euros, yuan, but they can create M2 credit (aka money) just as I can create M2 bitcoins. A fractional reserve bitcoin bank can get into just as much trouble as a traditional bank. The only difference is that no one lender of last resort can bail out a bitcoin bank through monetization (printing).

I can take bitcoin deposits from all of you and lend virtual bitcoins. As long as I keep up a confident smile and not all of you simultaneously run to withdraw, I can keep the ponzi scheme fractional reserve system in perpetuity.

All of the above and more.

Mt. Gox codes, however, are not in general accepted instead of Bitcoins as a method of exchange.

The reason why such instruments do not increase the money supply is the same that deciding to buy an apple instead of an (originally desired) orange does not increase the supply of oranges: for people other than those involved in the transaction, they do not, in general, act as substitutes.

What you describe is a reduction of the size of the Bitcoin economy and an increase of the size of the "Mt.Gox Bitcoin code" economy, rather than an increase of the money supply (of Bitcoins).

Paper money and demand deposits (or another credit instrument) in fiat act as substitutes (of each other). A necessary condition for this is that demand deposits (via cheques, ATMs, EFT) often reduce transaction costs compared to paper money. Mt. Gox codes denominated in Bitcoin do not (and, possibly, never will) reduce transaction costs, and are not, in general, accepted in Bitcoin-denominated transactions.

Money velocity and money supply are two different variables.

And I suggest you read more in-depth books about money supply, it does not matter whether you choose Keynesian, monetarist or Austrian, since they all support my position.

The definition of M2 as quasi-money (http://en.wikipedia.org/wiki/Near_money) includes that a redemption of instruments belonging to M2 increases M1. For redemption of fractional reserve M2 instruments to increase M1 this requires that there exist fractional reserve M1 instruments. With Bitcoin, they do not (even though they are hypothetically thinkable, if there was a M1 instrument that decreased transaction costs, such as Ripple).

Let me repeat that: the existence of fractional reserve M1 instrument is a necessary condition for Bitcoin-denominated debt instruments to affect the money supply of Bitcoins.

But unless someone else than the loan taker accepts these virtual bitcoins as if they were real Bitcoins, this would not affect the money supply. Conversely, unless people in general accepted these virtual bitcoins in the first place, the loan taker would not accept them either, and your business model would not work.

And the reason why this would be a pyramid scheme is that there would be no other use for these virtual bitcoins than to get people to give you real bitcoins.

Many in North Korea talk about returning to food, but if food was that much better than tree bark, then why has tree bark replaced food in the North Korean economy?







Answer: Government force.

Thanks Lonelyminer, I've had more than too little of the Christmas Gløgg to fully appreciate your post. But I suspect you put me in my place. Thanks for the education.

Your explanation is right to the point.

Peter Schiff has a beautiful analogy regarding the difference between a PM-backed currency and fiat money:

If you had a dime in 1935, you would be pleased to know that it had 90% silver content. And in 1935 a dime could buy you a gallon of gas

Today, that same 1935 dime with its current silver value, can STILL buy you a gallon of gas. Yes, that 1935 dime is worth $3, because once upon a time we actually backed the value of coins and dollars. That 1935 dime retained its value against inflation for 75 years. Many thanks to FDR and the U.S. Mint for knowing back in the day what money was suppose to be.

On the other hand, a 2011 dime which is based on fiat currency might buy you 5 drops of gas.

Since 1965, all our coinage has had it's silver content removed, and our dollar currency has the promissory backing of gold removed since 1971. The worth of our money today is quickly declining as we print more and more paper money to bail out failing banks and failing nations.

I find bitcoins a refreshing alternative with a lot of potential, and physical silver a good investment hedge.

The part about the 1935 dime versus a dime today, is more less paraphrased from a video clip on Schiffs web site, EuroPac.