Piking the Sacred Cow: Responses to Objections
My previous article stirred up a lot of controversy. Most of the objections came from an apparent lack of understanding of the definitions of money and money substitutes. There are several objections not related to this that should be addressed as well. A small correction has to be made regarding money substitutes. Finally, the analogy developed to fiat currencies is further elaborated on as the ability to create more cryptocurrency is brought up.
Money is defined by Menger in Principles of Economics as a commodity that has been customarily accepted, as in accepted by everyone in trade, and thus is capable of being given in exchange for any other commodity. To know what he means by commodity, we must go back to his definition of a commodity. A commodity is a product that salesmen or middlemen hold in readiness for sale. This product is a good and there are two types of goods: consumption and production goods. It is quite clear then, to see that money must start off as a good in the economy in order to be customarily accepted as money. Since Bitcoin was never a good, then it cannot naturally become a money.
A money substitute is a substitute that is used in place of the money it is substituting. A gold receipt would be an example of this. The gold receipt allows the holder to go to a bank and withdraw the gold at any time. Because of the size and weight of gold compared to the gold receipt, it can be preferable to use the bank to store the gold and only carry around the gold receipt. The gold receipt is not itself a money, but it is a substitute that is 'as good as the gold ' it substitutes for.
The first argument from a detractor I would like to address is that because a thing is subjectively valued and can be exchanged for in Dollars, that makes it a money. Since everything derives its value subjectively, this would mean that everything is a money. If everything is a money, then money loses any special designation and we should really stop using the term. For example, there is an exchange rate between bread and Dollars, but that does not make bread money.
Then there is this article from econlib.org.
The following is their response to the origin of money as explained by Menger and Mises:
"Some critics rely on the work of Ludwig von Mises and his “regression theorem” to argue that the world will never embrace Bitcoin as a true money. According to this argument, Mises demonstrated that all money—even today’s fiat money—must have been, at some point in the past, linked to a commodity that was useful in the days of barter. Since Bitcoin has no such history, the critics argue, we have the authority of Mises himself to show that Bitcoin will never be more than a fad. This article won’t address the question of whether this is a valid interpretation of Mises’ writings. Instead, I will make the modest point that if Mises is used to rule out Bitcoin’s acceptance as money, then it seems that Mises has already lost. If this logic is correct, then Bitcoin should never have been adopted as even a medium of exchange because it served no useful role as a regular commodity. (Recall that money is simply a medium of exchange that is accepted by everyone in the community.) But Bitcoin has already surpassed that hurdle, as there are websites on which people from all over the world exchange their Bitcoins directly for goods and services."
Fiat currency also is used as a medium of exchange despite never being a commodity. Cryptocurrency is much like fiat currency, except cryptocurrency isn't backed by the state and has no fiat. I would classify this as an unnatural money. The instability seen by crypto like Bitcoin demonstrates what happens when you use what is unnaturally currency. In fact, Bitcoin has stopped being used as currency the longer it has gotten in the tooth. Many stores in Cali have stopped using it after it had a huge dip in prices, and even the Bitcoin conference has stopped accepting Bitcoin as payment. This is just a functional example of why you do not use what is unnatural. To use an example, let’s consider food in a communist country. Imagine a communist country wherein the government decided to start using dirt as food. The defenders of this communist country would surely say the fact it can be imbibed means that dirt is a true food source. Everyone else will see that dirt isn’t truly food and all the negative consequences of eating dirt would be the consequence of eating a fake food source in the absence of a real food source In this example, it would be the failure of communist policy that would bring the country to eating dirt as an alternative. In the case of cryptocurrency, it is the ideological convictions of mainly agorists and other “lolberts” that is why they must defend cryptocurrency as the savior that they obviously do. Mises is being proven right as the use of Bitcoin as currency is being done away with and it is only being used to speculate, much like mystery boxes in a game show or other gambling endeavors. This is why I said it will never naturally become money.
Agorists have numerous objections, and now, I will address them. The first is that currency is not decided amongst goods in the market, but is chosen based on the currency’s collectability or difficulty to manufacture. Currency doesn't have to be hard to manufacture. Dollars are just printed pieces of paper. Gold receipts that Rothbard talked about in The Case Against the Fed are also easy to create. This objection is just plain wrong.
The next argument is that Bitcoin is “self-backed” like gold because it is rare. This argument seems to imply that things have objective value. Nothing is self-backed because nothing has intrinsic value. Everything derives its value from subjective value. The language of "being backed" by something comes from money substitutes, such as the original U.S. dollars being backed by gold - that is being demand notes. It is improper to talk about money as if it were money substitutes. Gold isn't "self-backed". It has a stable price given its use in jewelry and electronics. Bitcoin isn't backed by anything and the wild fluctuations in its price are evidence of this.
JGreenriver has numerous objections to my article so let’s start with the first. Firstly, he failed to come up with anything disproving what I had said as he quotes Dr. French. A professor of economics, Dr. French, defined money as a kind of good. This is the main thrust of my one-page article, so I am not sure if he missed that or just didn’t read what Dr. French was saying here. Either way, we now know that this theory of a good being selected as a money is not some crackpot theory of Menger and Mises that is no longer accepted, but it is accepted by Austrian economists today.
Next, he says that he is sitting in front of The Origins of Money by Menger wherein Menger calls any kind of currency a type of money. Menger, if he said this, would be saying that fiat currency is in fact real money as considered by Menger. This would in fact prove that cryptocurrency could be considered as money by the Austrian school of economics by citing Menger, as cryptocurrency is generally a type of fiat currency that isn’t currently backed by the state. This argument is counter to the quote that JG brought out at first that anything the government decides to use as a currency is actually money.
Menger mentions currency in the following excerpts:
And in fact the majority of theorists on this subject do not stop at the explanation of money as stated above. The peculiar adaptability of the precious metals for purposes of currency and coining was noticed by Aristotle, Xenophon, and Pliny, and to a far greater extent by John Law, Adam Smith and his disciples, who all seek a further explanation of the choice made of them as media of exchange, in their special qualifications. Nevertheless it is clear that the choice of the precious metals by law and convention, even if made in consequence of their peculiar adaptability for monetary purposes, presupposes the pragmatic origin of money, and selection of those metals, and that presupposition is unhistorical. Nor do even the theorists above mentioned honestly face the problem that is to be solved, to wit, the explaining how it has come to pass that certain commodities (the precious metals at certain stages of culture) should be promoted...
... and which nevertheless, in contradiction to the rest of experience, pass from one hand to another in exchange for the most useful commodities, nay, for which everyone is so eagerly bent on surrendering his wares? Is money an organic member in the world of commodities, or is it an economic anomaly? Are we to refer its commercial currency and its value in trade to the same causes conditioning those of other goods, or are they the distinct product of convention and authority?
In his testimony for Currency Commission in 1892, Menger urged a return to sound money and provided specific recommendations to achieve that goal, but Menger was, in the words of Hans F. Sennholz, "always skeptical about the knowledge and wisdom of the political authorities that were conducting the reform. But he had an abiding faith in the principles and laws of the market that spring from the subjective choices of men." When in the same year that he testified before the Currency Commission in Austria-Hungary, Carl Menger explains that it is not government edicts that create money but instead the marketplace. Individuals decide what the most marketable good is for use as a medium of exchange. "Man himself is the beginning and the end of every economy," Menger wrote, and so it is with deciding what is to be traded as money.
Menger only refers to currency as money once in The Origins of Money and that is in reference to precious metals being made into currency.
I shouldn't have to tell JG that these metals are goods in their own right. This reference to money is important as if you were going to quote Menger as saying that any currency is truly money, then you would expect him to actually do that at some point. He only refers to property of money one other time calling it “commercial money.” All money is commercial in nature of being a commodity, so we can safely ignore this as some new revelation. The idea that any currency that comes into existence is a money would also directly contradict his quote in Dr. French’s foreword, that governments can’t just create money from edicts. If any currency is a money, then the government simply printing paper pieces as currency would mean it is a money.
Thirdly, to elaborate on my article for the sake of this person. We can look to pages 260-261 of Principles of Economics wherein Menger asserts that money is a commodity. Referring back to the definition of commodity I referenced on page 238, we can clearly see that a commodity is in fact a good. Need I go back further and explain what a good is? If so, we find that there are two types of goods: consumption and production goods. Cryptocurrency is neither.
As Mises points out on page 33 of The Theory of Credit and Money, it must be a good before it becomes a money. there are two types of non-money goods - consumption and production goods. Money is itself a type of good, but a good must become a money before it can become a money good. This revelation is not coming from me but from Mises and Menger. I am simply applying these principles to cryptocurrency.
This is why the fact that money is a type of good doesn’t save the idea that Bitcoin is a money. Surely something must be a money before it can be considered a money good. I will concede one point that my article got wrong. Cryptocurrencies can be like the original U.S. Dollars in that some cryptocurrencies are being used as money substitutes. There are several cryptocurrencies that act as money substitutes.
Now, to address some of my more intelligent detractors, Mises in The Theory of Credit and Money states that money itself is a type of good. The reason this does not refute Mises from a few chapters earlier is that the discussion on the origin of money and classifying money as a type of good are separate. Something cannot go from not being a money to being a money without becoming a money at some intermediary step, as money is not an eternal object like God is. There must be some transition from not money to money for a good before it can be considered money and thus a money good. To argue otherwise is to violate causality. To show how this happens, let’s break down the argument. The argument here is that something can go from not X to X without having had to become X. In plain English, one can go from not being a Christian to being a Christian without ever having become a Christian. This breaks the laws of causality and as such is not even a possibility.
This classification of money as a good is not meant to give a new definition of what constitutes money, either. It is there to clear up the understanding of how money works in the economy. Before Mises brought this up, money was considered to be a production good simply to classify it in one of two of the classical categories. Classifying money as a third type of good allows the study of money to flow more coherently rather than classifying it as a production good that isn’t used in the production of any industry.
I would like to conclude by posing the question of just how hard of money crypto would be if it were a money. Defenders of crypto would tell you that crypto is as hard as gold in that there is only so much crypto to be mined just like there is only so much gold to be mined. Is this so?
Curiously, the note about its similarity to fiat currency seems far more analogous when you learn about forks and how they get decided on. A fork can increase the money supply at any time and a fork can be accepted by a simple majority of node holders. Who owns these nodes? A vast majority of nodes are held by miners. 6 mining pools, institutions built by miners to decrease risk and stabilize income, control 86% of the mining power. This centralization of mining power means that it wouldn’t take too many mining pools to agree to increase the crypto supply before that happens. Typically, this would be disadvantageous for crypto holders as each crypto unit loses value; however, miners create the units of which we speak and the first holder of an inflated currency is the one that benefits the most from the lost value. The holders of these units will lose their value but the new units would still have value and would be shared amongst the miners that create it. In the gold analogy often used, this would be as if the miners of gold, through consensus, got to determine how much gold was in the mines of all gold miners.
The incentive for crypto miners is obvious. Given that mining pools are not paying miners a wage but by pure profit-sharing, the profits of the mining pool are the profits of the individual miners. Given that the interest of each mining pool to create profit would be to increase the supply of Bitcoin, then it would similarly be the interest of each individual miner to increase the supply of crypto, as an increase in the supply would mean a decrease in difficulty of mining for a time. This decrease in difficulty would also happen in the protocol change that allowed for the increased money supply. Decreases in difficulty have already been shown to affect the price of Bitcoin, as lowering the difficulty in March corresponded to a stabilizing of Bitcoin’s price from its free fall at the beginning of the year. The risk of inflation by miners working in their own self-interest is a risk that cryptocurrency has that monies such as gold or silver never had. It has been a trend over the last several years for these mining pools to become more and more centralized, which means that the risks associated with it become greater. Surely, such a risk would be far greater if this were ever to be more widely accepted.
Thankfully, due to the very nature of most cryptocurrencies, it's not really a concern that they will ever replace monies like gold. This is a concern for cryptocurrencies that are a money substitute, as the historical analogue would be dollars, which were inflated even while being backed by gold.
