Posts Tagged ‘Central banks’

By Richard Martin

An acquaintance asked me how money backed by gold or any other commodity can be more stable than fiat currency. Here is part 1 my answer.

Money started as commodities that were used in exchange to resolve the coincidence of wants problem. If I have apples and you have oranges and someone else has bananas, but the quantities, qualities, and timings don’t match, we can use a neutral commodity as a medium of exchange. That commodity then becomes independently valued for its saleability and marketability and eventually is considered a monetary good.

Commodities that have served as money include seashells, quipu (Peru), wampum, beads, tools, jewelry, iron, bronze, glass, copper, silver, and of course, gold. And also livestock, which is reckoned as heads — caput in Latin — whence the words cattle, chattels and capital. In other words, commodity moneys are nothing but  liquid wealth.

In the early modern period in Europe, banks developed as money warehouses. People deposited their holdings of precious metals for safekeeping and convenience. Banks would issue certificates of deposit, letters of credit, and banknotes, all of which could be used as money substitutes or fiduciary media. Depositors could also draw funds by writing checks. 

But that was too enticing to bankers, who started issuing banknotes and various certificates on credit under the assumption that they would not all be exchanged for physical money on deposit. They were then commandeered by governments, primarily in Great Britain, or set up various private rackets and cliques to issue loans to friends and family without full backing.

Through a series of factors including influence peddling, bribery, fraud, jurisprudence, and legal chicanery, over 400 or so years we have gotten to the current monetary system where all official currencies in the world are entirely fiat and we have a full fractional-reserve banking system. This leads to credit bubbles and the cycle of boom and bust.

More to follow.

By Richard Martin

What follows is a summary of my current understanding of the “crypto” space, including Bitcoin. I am interested in this because I think it’s a fascinating topic and very important. I think there will be an overreaction (what else is new) with all kinds of regulations that will end up having unintended consequences. We keep reliving Bastiat’s “broken window fallacy.” See also the writings of Thomas Sowell.

1. “Crypto” is either a scam, a means to perpetrate a scam, or a bad idea that leads to unintended consequences, most of which are bad.

2. You don’t need crypto to scam people, although it helps if it’s dressed up as magic internet money. Madoff didn’t need crypto to scam people, nor did Ponzi (of eponymous fame), John Law, and many others throughout history too numerous to name or remember.

3. Setting aside the shady aspects of crypto, we can say that the whole “industry” comes from attempts to improve on Bitcoin through various means. The Bitcoin source code was published in late 2008 by an anonymous developer (or group) under the pseudonym “Satoshi Nakamoto.” “Nakamoto” disappeared into the ether at the end of 2010 and hasn’t been heard from since.

4. Anyone can download the code as it is freely available and try to tinker with it. But there is only one widely used and accepted implementation, Bitcoin Core, which is used to run most of the Bitcoin network.

5. So far, no one has come up with an objectively better version of the original Bitcoin concept, although there have been minor adjustments that have been adopted through the consensus of node operators, miners, and holders.

6. There have been attempts to take over the Bitcoin network, but they have all failed, and the network has only become more robust and resilient over time. In essence, you either: 1) need a massive amount of energy to take over Bitcoin, or 2) must convince the great majority of stakeholders to accept proposed changes. The former is coercive while the latter requires the changes to be advantageous for all stakeholders, both in perception and in reality.

7. Probably the best way to characterize BTC is as a form of digital gold. Like gold, it can’t be conjured out of thin air, like the USD and all other government enforced currencies. Like gold, it is intended to have saleability through time (i.e., preserve its value), but contrary to gold, it also has saleability through space (see The Bitcoin Standard by Saifedean Ammous). You can move BTC anywhere in the world at the speed of the internet at minimal cost. Gold requires massive storage and security, with enormous transportation costs to move safely and securely. As an example, France sent an aircraft carrier in the 1960s to New York to recover its gold that was still being held by the US Treasury because of WW2.

8. Given all this, BTC is intended to replace the USD as a global base money. Whether that happens or not is open to conjecture. We can think of any number of scenarios of how the US and other states react over time, some bordering on the conspiratorial.

9. In my opinion, the most likely path forward is that the Fed, SEC, CFTC, etc., plus central banks and securities/monetary regulators around the world will try to limit or even coopt crypto and BTC to maintain the current government-controlled fiat monetary system. Whether and how that happens is not predictable at present.

10. One crypto-like idea being discussed extensively is CBDCs, or Central Bank Digital Currencies. From what I gather, the idea is to create and launch fully programmable – and thus controllable – digital money. The Fed seems hesitant, but the Chinese Communist Party thinks it’s a great idea! How could it possibly go wrong?

11. As for blockchain technology, my understanding is that it is a method of storing data and information in a decentralized ledger. The Bitcoin network uses a blockchain to ensure its ledger is public, distributed, decentralized, and fully auditable. Every transaction is recorded in the blockchain and maintained by the network, which includes both the verification nodes and the work nodes (miners). Whether or not blockchains are useful in other areas remains an open question. From what I’ve read and heard, it is inefficient as a means of managing data, and centralized databases remain the gold standard (pun intended) in information management.

© Richard Martin