In the Europe of the early middle ages, it was the merchants who liked their money hard -- so their invoices would hold their value -- and sovereigns who wanted it to bend to their needs. Fast forward to the nineteenth-century United States, and the same battle was fought between America’s bankers its farmers. Today, it is the baby-boomers across the developed world whom price stability suits, and their children and grandchildren who stand to benefit from a bit more inflation.
>The fairness and efficiency of a hard money standard waxes and wanes. Capitalist economies never stand still, so neither does the appropriate monetary standard.
In all three cases, the underlying dynamic is the same. An economy’s creditors -- those who hold financial claims on other people, when everything’s netted out -- lose when the standard monetary unit buys less stuff. Its debtors, by the same token, gain. The trouble is that -- as all these cases also show -- the distribution of creditors and debtors throughout society changes radically over time. As a result, the fairness and efficiency of a hard money standard waxes and wanes as well. Capitalist economies never stand still, so neither does the appropriate monetary standard.
That is not a statement of opinion. It is a statement of historical fact. Operating on a standard that suits only one part of the population confines money to limited circulation: even the greatest private money in history -- the écu du marc -- discovered that. To lock a monetary system to a fixed standard, and then throw away the key, is to condemn it to a marginal existence. To achieve widespread use, money must operate on a standard that suits a wide range of interests. So bitcoin’s intrinsic limit may make it very popular -- but amongst a limited constituency of users.
What Exactly Is Money For?
Then there is bitcoin’s answer to the third central monetary question: how new money is actually created.
Sovereign money was (and mostly still is) created against public debt. The sovereign incurred debt by employing officials or buying provisions, and thereby got its liabilities into circulation. The merchant-bankers’ money, on the other hand, was created against commercial debt. They issued bills to finance trade, and those bills then circulated as money. Bitcoins, by contrast, are created on a very different principle. They are issued as a reward for verifying the transaction log.
In a world in which people have lost faith in government’s judgment on public expenditure and in bankers' acumen as arbiters of sound business, there is obviously something unattractive about relying on these qualities to determine how new money is created. In contrast, a system where the process of money creation is open to all and tightly linked to the technical job of sustaining the payments system itself sounds much more sensible. Look a little harder at these three alternatives, however, and there is an awkward question lurking in the background: what exactly is money for?
>It is as if money exists not to serve any ulterior purpose at all, but simply as an end in itself.
We may not like the processes whereby sovereign money or bank money were created -- but they did have clear rationales. Sovereign money was a tool to achieve the sovereign’s aims -- public action of one sort or another. Likewise, the bankers’ money was a tool to expand trade and thereby consumption. So it made perfect sense that the issuance of new money should be tied to the financing of public or private spending.
Seen in this light, the logic of bitcoin mining is strangely circular. The issuance of new money is tied to the job of maintaining the integrity of the payments system. It is as if money exists not to serve any ulterior purpose at all, but simply as an end in itself. In that case, bitcoin may indeed be the perfect metaphor for our relentlessly transactional culture. But it is less clear that it can serve as the currency of a modern, market economy, in which the creation of money through the extension of bank loans is intentionally linked to the expansion of business investment.
Coinage: The Original Internet of Things
Bitcoin, however, is more than just its answers to the first three key questions of money.
At its core is its novel payments technology -- the distributed public ledger -- which could just as easily be used to process payments denominated in US dollars, or British pounds, or Japanese yen as in bitcoins. So how does bitcoin’s answer to the fourth question any money must answer measure up against the historical alternatives?
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