The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.Bitcoin and the dangerous fantasy of ‘apolitical’ money
Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.
The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.
To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.
The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.
I tend to agree. And this is also why I'm skeptical of the whole "community currencies" movement, however well-meaning it may be. As long as the main money supply, the one we have to pay our taxes in, is under control of the same people, I don't see how community currencies, which I may remind you are backed by nothing, can really make much of a difference besides making us feel better. It's incapable of funding the sorts of large, capital-intensive projects we so desperately need (like alternatives to carbon). Can anyone point out a single building built anywhere with "community currencies?" How about trains or solar panels? Anyone? Maybe I'm all wet on this one, but it seems to me like community currencies are the real distraction here.
And this leads me to an observation. Yes, it's hard to trust the U.S. government in its present form, with it's smug, incestuous circle of elite bureau/technocrats, it's armies of lobbyists, it's corrupt politicians trading money and favors with the one percent, its military/industrial/security/media complex, and its complete disconnect from the everyday realities of ordinary, non-wealthy, non-connected Americans (i.e. Versailles on the Potomac).
But this effort to discover who really created Bitcoin is telling. For all of its faults, the U.S. government is a known institution. It' won't vanish overnight, and will always exist in some form. There is some sort of democratic control and oversight (whether we choose to exercise it or not). There is some transparency (although not nearly enough). Dollars are an established, accepted medium of exchange (I'm betting you used some today. If you don't trust them, please send them all to me). It has established institutions, public and private, that have developed around it for a long time to manage it, like banking insurance and bonds.
So how does it follow that people who don't trust the current monetary systems are pinning their hopes on a shadowy, obscure individual or cabal who is totally anonymous (until last week, and he vigorously denies it), a protocol so complex that only highly-trained mathematicians and computer scientists can understand it, and a group of individual, unaccountable prospectors and privateers leaping in with no central oversight or management with the expectation of profit? A monetary system that has literally no precedent? This is somehow more trustworthy than the government? Er...what? Color me confused. If you want to reform the monetary system, how about, well, actually reforming the U.S. monetary system?
Here's James Kwak making a similar point:
Part of the underlying problem is an unwritten law of software competition: Security, performance, and reliability all cost money, but features are cheap and popular. So in the short term, it's a rational strategy to race ahead with feature development, skimp on security, and hope that you don't get caught with your pants down. This is why it's hard to expect high quality software when you're in the middle of a technological land grab, which is exactly what's going on with Bitcoin. This is especially true when the customers you're trying to attract are unsophisticated individuals sucked into the excitement of a speculative bubble. All the other Bitcoin exchanges may be safe as Ft. Knox—but that would be a surprise, given the incentives involved. Instead, we should expect shoddy development to be the norm.Bitcoin and the Myth of Tech Utopia (The Atlantic) The belief that every human problem can be solved with software forgets the human element inside all software.
More generally, there is no such thing as a technological utopia. No matter how perfect a technological concept is, when it enters the world of human beings, it becomes imperfect. Bitcoin is no exception. In addition to everything else, apparently Mt. Gox's problems are due in part to a Bitcoin vulnerability that has been around since 2011—but that humans didn't get around to fixing.
This is why we have laws, and regulators, and insurance, all of which would make Bitcoin more like ordinary money. Bitcoin may yet become a lasting part of our financial infrastructure, in part because it offers the promise of lower transaction costs. (As far as anonymity goes—well, look what the U.S. government is doing to Swiss banks.) But it will not usher in some kind of libertarian paradise.
I don't think creating some kind of "perfect" monetary system is possible. I also think it's a distraction from the underlying economic system that they money is used in. The way money is created and distributed is intimately tied up with the economic system we live in; you cannot separate them. Bitcoin operating under capitalism still has all the underlying problems of capitalism. But we're not supposed to think about those.
The point is, institutions still matter.
I'm no particular fan of Bitcoin, but I do see a use for community scrip-type currencies. During the Great Depression, the dollar was so deflated that it was hard to get enough of them back into the economy (what we might call "stimulus" nowadays). As a result, there were farmers with crops that they couldn't afford to have people harvest, and people with no money for food. In the absence of dollars, a community currency can step in and facilitate a transaction, so (for example) farmers can get harvesters and people can get food. After all, scrip is basically backed by the same thing that backs dollars - whatever you think someone will give you for it. (I have some sushi-backed dollars in my wallet right now.)ReplyDelete
A currency doesn't have to fund huge infrastructure projects or securities to be useful in the most base need for an economy, especially when dollars temporarily don't fit the bill. It's also arguable whether or not the ability to use dollars to induce large-scale environmental destruction (mining, dumping, fracking, etc.) is a good thing in the long run. Just my two cents.
During the Great Depression, the lack of dollars was caused by the gold standard (aka 'sound money'), which is no longer in force. This led some communities, most famously in Austria but there were others - to issue local currencies as mediums of exchange. They did *not* however, function as stores of value by design - hence the demurrage currency idea. Currently, the threat to the dollar is inflation, not deflation.Delete
Community currencies are certainly more reliable than Bitcoin, certainly - at least you know where they come from. But dollars are backed by more than trust, they are backed by the "full faith and credit of the U.S. government," that is, the institutions supposedly created by "we the People." I know these days it's easy to roll your eyes at that. But that's the heart of the problem. Some of a currency's power comes from what debts in can allow you to discharge. If you owe a debt to me, or vice versa, we can choose how those debts are to be paid (I'll gladly accept sushi). But debts to the government (tax liabilities) or foreign creditors can only be discharged via U.S. dollars.
Now there is no shortage of dollars; they are just going to the wrong people - to professional gamblers rather than people who actually create value. That's because the people who create value have to pay interest, whereas the gamblers get to receive the interest. The current way of getting more money into the economy is to supply the banks with more cash and hope they lend it out. Of course, they get the cash at a lower interest rate than they lend it out. they get richer, we get poorer.
The other way is for the government to spend the money into the economy directly, for example doing projects that are desperately needed like fixing the bridges that are falling down. The concern here is that the distribution will be hijacked by special interests. But that once again puts the blame where it belongs - the corruption and loss of faith in our institutions. Another way is for the government to lend the money directly, and use the interest to fund itself rather than taxing us at disproportionately higher rates than the rich. That's the public banking idea.
I'm interested in knowing why you believe the risk of inflation is greater than that of deflation at this time. Since 2008, I've heard crazy people on the Right screaming about "hyperinflation any day now!" chicken-little style, and all the while inflation has been (at best) incredibly modest, say 1%. It seems that the Fed is far more worried about its mandate to keep inflation in check, over its mandate to stimulate employment.ReplyDelete
I agree that what dollars there are out there, are concentrating in the hands of the proverbial 1-percenters. However, that would seem to create a lack-of-cash situation (with all the symptoms of deflation) for the very lowest folks, I'm sure: folks who are more worried about eating than maintaining a cash reserve as a store of value. Of course they need real legal tender dollars to discharge many debts, but lacking them (or needing to spend the ones they do get on things like taxes), community currency at least keeps things flowing about as well as barter. Money, special as it is, is a commodity.
When I say "community currency," I am talking about scrip such as Ithaca Hours (http://www.ithacahours.org/) or the Ypsilanti time bank (http://hourexchangeypsi.org/).
"It seems that the Fed is far more worried about its mandate to keep inflation in check, over its mandate to stimulate employment." - Bingo! And the shouts of hyperinflation have a distinct political agenda behind them.Delete
Inflation is generally considered to be caused by "printing money," meaning that if you increase the money supply faster than the stuff you can buy with the money, you will get inflation. If very single person right now got an extra million dollars in their bank account, none of us would be any richer; things would just cost more.
Deflation is when things get cheaper. So since a lot of money and wealth "vanished" in the housing bubble, economists got concerned about all that vanishing money (since it was never real to begin with), and took measures to prevent deflation, Why?
If you expect deflation, you hold on to money because it will be worth more in the future. This leads to hoarding. It also means you're paying back loans with money that's worth moere than when you took out the loan. If you are expecting inflation, you spend now, because things will get more expensive in the future. You're also more likely to take out a loan, since you will be paying the amount back, but the amount will be worth relatively less in the future. From an economist's standpoint, everything is predicated on usury, and fiddling the dials to make sure there is enough of it. So deflation bad - inflation good.
So there are pressures both ways. People are getting poorer, yes, but goods are geting more expensive due to scarcity. It's complex.
Some of the time banking things you mention I would not put under community currencies at all. They are just tools to enable more effective barter. That's something else. They help hook up people who needstuff some with people who can do it. There are a lot of these in Greece right now, and I expect them to continue. But they are no substitute for a healthy economy. The problem with the Euro in greece is that the Greeks have no control over it.
It *is* complex, perhaps more complex than your explanation above. Some of that seems to come from the von Mises (Austrian) type school, which has a different definition of "inflation" and "deflation" than common people use. They say that increasing the money supply, itself, is inflation, whether or not it causes the rise in prices that most people mean when they say "inflation." The two do not necessarily go hand-in-hand, though, because (for example) if the money supply is increased, and the supply of goods/services to chase grows *faster* than the money supply, deflation should occur, even though the supply of money technically increased. Your explanation above seems to conflate the two definitions of "inflation," or at least seems to reason that increased prices naturally follow an increased money supply. This was "common sense" back in the early 19th century when economics was mostly theoretical, but the understanding has changed in the interim. (There are also other concepts that matter here, such as the velocity of money, and money as a commodity for which the demand waxes and wanes for reasons other than the size of the money supply.)ReplyDelete
If the time bank/community scrip does not fall under what you are calling "community currency," I'm not sure what you mean by community currency. The only other examples I can think of, are generally pre-Civil war currencies issued by banks and individual states.
I do agree about the Greeks, who might do better leaving the Eurozone and re-adopting the drachma. That way, they can manipulate their own currency for their own needs, rather than being the victim of Germany's need to manipulate the euro (or what my husband jokingly calls the "greater deutschmark") to the benefit of German fiscal goals more than Greek needs to have an economy that works for them.
I think of those things as time banking rather than community currencies, although I probably don't understand them all that well. We have a time banking system here in Milwaukee, but no community currency that I'm aware of.Delete
So, if I need a faucet repaired and you need a haircut, we can hook up and get what we need. Or I can do something for you and then you owe me something at a later date, and we can keep track of it and "transfer" our work to other people. Some similar tasks, but not a true currency that I can walk into a store and pay for stuff.
But think of say, constructing a building. You need to coordinate hundreds of people, dozens of businesses and agencies, pay workers, requisition materials, pay outside vendors, procure bonds, etc. That can only be done with some kind of true currency. That's why I asked whether a building has been built with such things. After all, people need shelter. If it can't do things like that (or run a bus system, or feed hungry people, or repair the sewer or pick up trash, or fill potholes, or...) than it's of limited use. Maybe we'll get there, but without the backing of some sort of government, I don't see how. Part of the problem is centralized businesses (Wal Mart, Home Depot, etc.) make all the economic activity in communities fly out of the community to the centralized ownership pools. Hence, communites go broke and fall apart. That's a major problem. Plus, since banks can create unlimited sums of money, they can put it to speculation driving up the price of everything while communities go broke. They use their money creation power for wealth extraction rather than wealth creation.
There's a teriffic interview on the latest Extraenvironmentalist with Ben Dyson which covers a lot of these things:
Thanks, I'll take a look at the interview.Delete