Gold, Paper and Bits

Column by Jim Davies.

Exclusive to STR

Carl Menger's great discovery was that all economic activity consists of everyone's individual, subjective choices. His successors in the Austrian school – Bawerk, von Mises, Rothbard, et al – have amplified that and refined it, but that's the fundamental truth. That is how prices are determined and why products are produced. The choices are far too often constricted and distorted by government interference, but to the extent feasible, they are individual (not group, industry or class) and they are subjective (not fixed or objective, as Karl Marx so irrationally insisted, especially with regard to labor.) We each value things differently.

Even more: Menger realized that this applies to money, as much as to any other commodity, good or service. The fact that the “market” (the aggregate of all individuals economically active) have chosen gold and silver for that purpose for all of recorded history doesn't mean there is anything intrinsically special about gold (as, alas, I've written myself on occasion) but that, acting rationally, individuals have chosen it as money for the good reasons that it is rare, durable and hard to counterfeit and so can be expected to keep its value. And it has.

Thus: gold and silver have no intrinsic value. Their value is imputed, by scores of millions of individual choices in the market. Nothing has an intrinsic value. Value is always subjective.

It's impressive that this market preference for precious metals as money was acknowledged, however reluctantly, by governments; for prior to 100 years ago this year, they used gold for their currencies even while stamping on each coin some image to convey the impression that the particular king or state had played some part in making it valuable as money. Most of them did try to cheat; the Roman Empire destroyed itself by alloying silver with base metals, and many a State has clipped the coinage, or drilled a hole in its middle, or otherwise tried to deceive those it was pretending to protect. But until 1913, it was a hard, slow business. Gold worked pretty well, despite the best efforts of governments to defy individual choices.

Then one century ago, the evil genius of the US Government worked out how to give itself the power to bypass the restrictions of gold. One step at a time, it introduced paper currency – not as a certificate redeemable for gold, as illustrated here from 1882, but as “fiat” money; it was money only because they said so, regardless of what individuals in the market might choose. Thereafter, it was merely a matter of how fast to run the presses – or, more recently, how frequently to tap the keyboard. Currently, they are creating $85 billion new “dollars” every month, or about a trillion a year, equal to all that the IRS collects as “income tax” and to about 7% of the whole US money stock. That rate will halve its value every ten years. As is becoming quite well known, it has lost 98.5% of its value in the last century, or about half every 20 years. So the rate of value destruction is accelerating.

So much for gold and paper, and many readers will be familiar with the foregoing. Now let's consider something new under the sun: Bitcoins.

I'll assume that the inventors' promises are trustworthy. In that case, Bitcoins are perfectly private electronic cash, whose supply will gradually increase from the present 11 million to a fixed maximum of 21 million.

Recently Gary North, who often writes perceptive pieces, came out strongly against Bitcoins as a form of money. He said they are a Ponzi scheme, that true money arises only slowly, that Bitcoin is not money, and even that “dollars are money.” I disagree on all four counts.

Not Ponzi-like: as shown here, Carlo Ponzi marketed a perfectly viable import plan to his neighbors, and never cheated anyone before the government put him out of business. If we impute to him fraudulent intentions, then he deliberately paid benefits out of new capital inflows instead of from business profits--that's what characterizes later “Ponzi schemes.” Bitcoin bears no resemblance to that. No benefits are promised except that it is, or will become, a good form of money. As we'll see, it's likely that its value will steeply rise (deflate), but the rate depends on how fast it's adopted relative to the rate of “mining.” Once all 21 million coins are mined, its value will rise at the same rate as productivity rises, presuming it has then completely displaced other forms of money. There is no similarity to Ponzi's plan.

Not too fast: Dr North asserts that true money “arises out of an unplanned, decentralized process. This takes time. It takes a lot of time” in contrast to Bitcoin, which appeared recently and on a planned basis. This mis-states how money arises. Quite true, the market's choice of gold and silver took centuries to develop; but the distinguishing factor is not the time it took but the fact that it was freely chosen by the market – as Austrian theory requires. Nothing says that choice must be slow or fast, and since at present all such choice is prohibited by law, Gary North does not know what the market would choose in the absence of that law; nor will anyone ever know, until the prohibition is repealed or nullified.

It's money, or rather is a candidate for choice as money, as soon as that choice can be made. North denies that Bitcoin is money because its dollar exchange rate has fluctuated wildly since launch, rising this year alone from $2 to $1,000 each. Quite true. For that reason, I'd not be quick to use it as money today – better to store it until its value, compared to useful stuff, settles down to something more predictable. I'll show some reasons below why, when it's settled down, the market may well choose Bitcoin as its dominant form of money.

Dollars aren't money, despite Dr North's opinion. The market did not choose them and that's why not; they fail the Austrian test. Stuff becomes true money if the market so chooses, and not if it doesn't so choose. They (that is, fiat or paper dollars as in common use today) were cunningly foisted on what remains of the market by government counterfeiters. They are ersatz money, used only because government compels it: “this note is legal tender.” Thus, at present there is no money at all in general circulation, for “money” is only what the market chooses, and the market is forbidden to choose. We live in a moneyless society!

Now let's try to compare the qualities of three possible forms of money, so that (if government were unable to prevent you) you could choose which you prefer: gold, fiat dollars, or Bitcoin. There are several criteria suggested. For brevity I'll omit silver, though it compares well with gold for everyday use. I'll assume for each alternative that it becomes the dominant form of money, as the fiat dollar pretends to be today.

Criterion Gold Fiat Dollar Bitcoin




Value stability [1] Almost perfect Falls, on gov't whim Rises, w/productivity
Counterfeiting Impossible Quite easy Impossible
Ease of carriage Cumbersome Convenient Very simple
Worldwide transfer Difficult [2] Bank wires expensive Very easy
Privacy Good None [3] Perfect
Foreign exchange N/A Necessary and pricey N/A
Need of 3rd Party No [2] Yes (except paper) Never
Vulnerable to theft Yes Always, esp. by gov't Slight
Accidental loss? Hole in pocket Unlikely Must backup


[1] For gold, stability depends on the rate at which gold is mined and minted, compared with the rate of productivity rise. In the 1800s, the difference was about 0.5% a year, meaning prices fell that much – a very mild deflation. For Bitcoin, after 21 million are “mined,” no more will appear, so prices will fall at the rate that productivity rises.

[2] Electronic gold (e.g., E-Gold) is, of course, easy to transfer. But that's not private, nor 100% secure because a third party needs to be trusted. It's not cash-in-wallet.

[3] Privacy can be preserved by living on a strictly cash (paper) basis, but that's not feasible for most people. Otherwise, government spies on every transaction.

No news to many readers, but the table first demonstrates that the fiat dollar would not be chosen by any rational person. It's interesting, though, to compare gold and Bitcoin. Each has merit, but to my mind Bitcoin comes out ahead. An additional advantage is that although the discovery of a mountain of gold in wildest Alaska is highly improbable, it's not impossible and would swiftly destroy the value of gold; Bitcoin, meanwhile, has a fixed 21M supply limit.

For the table above, I assumed that the market could choose the dominant form of money – but that will only happen if government vanishes. A question arises: Is the Bitcoin idea so powerful as to to bring about on its own that very desirable result? The possibility marks a tantalizing end to this dreadful Century of Paper.

The thought is that Bitcoins are a very private form of value exchange, and a fraction of the market for money can adopt it right now, regardless of government law; and if that fraction grows well, its privacy attribute would cripple the government's ability to collect taxes – and hence to survive, since nobody is dumb enough to fund it voluntarily.

I suppose there are people in government smart enough to notice that. If so, I predict they will work night and day to prevent Bitcoin gaining traction. How they will do so is less easy to predict; but they have been quite effective so far in preventing the use of gold for that purpose, so we'd be unwise to assume they cannot find a way. What might they do?

One way would be to criminalize the acceptance of Bitcoins and, in emulation of Iron Felix's General Tuchachevsky, set the penalty for noncompliance as the execution of the firstborn son. Why not? Their survival as a government would be at stake, and Lenin's precedent is already in place. Or perhaps they would haul the store owner outside and shoot him on the sidewalk, pour encourager les autres. Worse was done by agents of the government of Germany, a country at least as well civilized as ours, during WWII. It doesn't seem credible to me that a desperate FedGov would be inhibited by a certain “goddamn piece of paper.”

Then they would likewise pursue all the customers of traders who ever advertised their willingness to accept Bitcoins, using delivery addresses – extracted, if need be, with the aid of waterboards, thumbscrews, electrodes and truth drugs. Again, they would stop at nothing and would hardly feel bound by G.W. Bush's infamous “America doesn't do torture.”

It seems very obvious to me that for as long as it can employ enforcers, any government will use them to prolong its grip on power by any means necessary; and a growing preference for Bitcoin (however desirable) would do nothing, that I can see, to reduce the number of its enforcement personnel. I hope those who disagree with that will take the chance to explain, in comments below, precisely why they think it would.

Otherwise, we're stuck with government until its employees quit. Accordingly, the only solution is to educate and motivate the entire population not to work for government. That's already happening and requires very little effort from each who is serious about liberation.

Anyone not yet taking part might visualize his children and grandchildren being tortured.


Your rating: None Average: 7.5 (2 votes)
Jim Davies's picture
Columns on STR: 243

Jim Davies is a retired businessman in New Hampshire who led the development of an on-line school of liberty in 2006, and who wrote A Vision of Liberty" , "Transition to Liberty" and, in 2010, "Denial of Liberty" and "To FREEDOM from Fascism, America!" He started The Zero Government Blog in the same year.
In 2012 Jim launched , to help lead government workers to an honest life.
In 2013 he wrote his fifth book, a concise and rational introduction to the Christian religion called "Which Church (if any)?" and in 2016, an unraveling of the great paradox of "income tax law" with "How Government Silenced Irwin Schiff."


GregL's picture

Nice, thoughtful article. Without taking anything away from your meaning or main points, I have a couple of nitpicks with your paragraph starting with "It's money". Although the bitcoin price rise has been breathtaking, it's lowest point during the past year was $12.74 on Dec 17, 2012. It hasn't been $2 since Nov 20, 2011. Also, companies like Bitpay, have largely eliminated the risk of market fluctuation and volatility, by automatically converting merchant prices from dollars to bitcoins and providing a convenient way for consumers to make purchases denominated in bitcoin without having to first sell their bitcoins and risk that the exchange rate has changed by the time they complete the purchase.

- Greg

Emmett Harris's picture

Nice article, Jim.  While I'm not a Bitcoin enthusiast, I think it has a lot of potential.  And it makes government nervous -- another benefit.  

Thunderbolt's picture

Beautiful article, Jim. Like you, I see advantages over even gold and silver, especially in the transportation and privacy departments. Governments have good reason to be nervous. Bitcoins might slay the income tax/robbery at gunpoint.
Does anyone have the clout to get this posted on LewRockwelldotcom? It would be a nice addition to the North-Rosenberg debate.

Glock27's picture

Thunderbolt, Whiskey I believe will be the future bitcoin. Those who can operate a still and create a great mash with proper distillation to make a fine tasting whiskey will never ever lack for customers. Same for weed, but a still is compact and easier to hide than a field of weed.

Jim Davies's picture

Thank you, Greg, Emmett and Thunderbolt!
Greg, thanks for the correction about BTC prices, and the info about Bitpay.
T-bolt, LewRockwelldotcom has a wide readership and a fine stable of well-known authors, but I'd say that their excellence is not quite as consistent as those here on STR. So possibly the horse shoe belongs on the other hoof?

John deLaubenfels's picture

I agree that Gary North is wrong, for the reasons Mr. Davies states.  I do have a few quibbles:


   . It's "Bitcoin", not "Bitcoins".  Is this really so difficult to get right?  It would appear so, as Mr. Davies isn't the only one making this bonehead mistake.


   . Davies asserts that the "value stability" of Bitcoin "rises with productivity".  Bitcoin may stabilize over time, but surely Mr. Davies is aware that its price against other currencies has been extremely volatile to date.  Any future stability is entirely speculative.


   . Davies states that counterfeiting is "impossible".  I would encourage him to be more careful in his use of words.  That's like saying that cracking PGP, which would require factoring the product of two large primes, is "impossible".  This is false.  Using today's computational power, cracking PGP would (apparently) take longer than the life of the universe, so it's "impractical", but the distinction is non-trivial and should not be ignored.  Also, there is always a possibility that new algorithms may be developed which could immediately crack either PGP or Bitcoin.


   . Davies states that privacy of Bitcoin is "perfect".  This is false.  Every transaction is entered in a public record, because it's necessary to do so to prevent the same coin from being spent more than once.  Transaction records may or may not be traceable back to the individuals who spent, depending on whether special anonymizing steps are taken, but even if they are, anonymity is not guaranteed, and anyone who is seduced into believing otherwise may be in for a rude shock when government thugs come knocking on the door.  Davies should educate himself better before making nonsense statements such as this.


I'm not against Bitcoin, though I would take care to purchase coins, then spend them, in a short period of time to avoid the ongoing price volatility.  It pains me, however, to see misinformation spread by people who ought to know better.


Glock27's picture

John: I guess I am a skeptic on this issue. When the SHTF, bitcoin, dollars, yen's and yan's will be useless. We will be in a barter system and a whiskey maker will have a boon on his or her hands if they can produce a respectable mash and distill it just right. Wine making may even be a better skill since fruit of all kinds abound and wine making is not all that difficult. If we look at history, bartering seems to be the first economic enterprise explored. Just a observation and not a judgment. I have no idea what a bitcoin is and would not invest in it.

Jim Davies's picture

Thanks John for the corrections.
About your second one, Bitcoin stability, I must have failed to make clear that I was thinking of its stability after the market has made its choice of a predominant form of money, and after all 21M Bitcoins have been mined.
At that point the dollar will be history, and any other fiat currencies in the world will look sick; but how will the purchasing power of Bitcoin look? - I was suggesting that it will rise, presuming only that productivity rises, as it surely will in a free society. Rather fast. Hence, I think, deflation.
Yesterday I posted a Blog about that question. It will be unfamiliar.