
Why a Free Society Needs a Free Money - cdvonstinkpot
http://bitcoinmagazine.com/7437/cathy-reisenwitz-why-a-free-society-needs-a-free-money/
======
swombat
Author should actually read about the history of money before making grand
statements about what money is and isn't for, and what makes it good or bad.
Statements about how inflation is "erosion of wealth" indicate a gross
misunderstanding of the historical purpose of money and the effects of
deflation.

Money is a medium of exchange. Historically, it's been mostly very, very
unreliable, and over the last 100 years or so has actually been remarkably
solid even as a way to store wealth. But if you want to store wealth for a
long period, currency is not your best bet by any stretch.

~~~
sien
Here is a list of incidents of hyperinflation. How many are in C20 and beyond?
How many prior to that?

[http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...](http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation)

Inflation that is rapid and is not covered by interest is most definitely an
erosion of wealth.

Specie backed currency was a much better store of money than fiat currency.

For example, gold was $35 dollars an ounce when the US went off the gold
standard at the end of the Bretton Woods agreement in the early 1970s. The USD
has now lost 95% of it's purchasing power against gold since then. It took the
Romans 200 years to do the same with a currency backed by gold.

However, this is not to say that Specie backed currency is a good idea. The
expansion of the money supply is, overall, a good thing when well managed.
Indeed, a great problem with bitcoin is that it doesn't expand as the economy
does.

There is an excellent book by a former FT journalist who now works at The
Economist on the history of money called 'Paper Promises' that should be on
anyone's reading list if they want to understand money, and indeed the
economy, better.

~~~
swombat
Specie backed currency was not a better store of money, because the levels of
redeemability of the paper notes were highly variable. Banks went bust all the
time in those days, taking all your savings and all the currency and loans
issued by them with them. Deflationary periods were even more disastrous than
hyper-inflationary periods. Once the banks started popping, they shrunk the
money supply along with their numbers, caused further deflation, and further
ruined everyone.

Specie backed currency issued by a strong, ethical central bank with a solid
management team in a stable country might be a better store of wealth - but
how rare are those? Historically, very.

In the long run, we are all dead and there is no good store of wealth. In the
short run, however, diversified investments in stable countries are a decent
store of wealth - certainly better than any currency holding. Which is why you
don't see rich people hoarding vast sums of cash. They typically keep very
little money in the form of cash, because it's the least reliable. Cash,
currency, is valuable as a medium of exchange, not of storage.

------
pjc50
So I read this until I came to the first badly misleading reference:

 _" When it comes down to it, the leaders of the Weinmar Republic were just
running an experiment."_

This makes it sound like the hyperinflation was the consequence of some
recklessness, or an experiment carried out in a vacuum. The reality was very
different (via WP):

 _" The "London ultimatum" in May 1921 demanded reparations in gold or foreign
currency to be paid in annual installments of 2,000,000,000 (2 billion)
goldmarks plus 26 percent of the value of Germany's exports.[6]"_

The Weimar government had no choice but to keep shovelling hard currency
across the border to France while simultaneously being limited in its ability
to earn more. This looks, economically, like a huge trade imbalance which
drove down the value of the Mark, and the printing started as an attempt to
keep up with the rapidly collapsing exchange rate.

It was not so much an experiment as an act of desparation by a government that
was being looted at gunpoint.

Just as famine in the modern world is a political problem rather than
primarily an agricultural one, hyperinflation is driven by political or
economic collapse rather than some vaguely defined irresponsibility. Also,
anyone in the US or UK who is scared of hyperinflation at the moment must not
be aware of how close to zero and well-managed inflation actually is.

~~~
digitalengineer
>hyperinflation is driven by political or economic collapse rather than some
vaguely defined irresponsibility.

All hyperinflation in modern history has occurred for one reason, and one
reason only. That is loss of confidence in currency.

Loss of confidence in a currency can be brought about by many reasons, but
there is one constant factor. When hyperinflation has occurred in modern
history every economy involved was decimated as and when it occurred.
Examples:
[http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...](http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation)

Is it well-managed? Bernake himself said we're in uncharted terretory:
[http://www.businessinsider.com/bernankes-2010-qe-2012-8](http://www.businessinsider.com/bernankes-2010-qe-2012-8)

~~~
pjc50
"Confidence" is not really an economic variable, nor does it magically
evaporate. Go through that list of countries; filter out all those where:

\- it's a very poor third world country (Angola, Zaire, Zimbabwe etc)

\- countries coming out of Communism (all the 1992 events) or other revolution
(revolutionary France)

\- hyperinflations triggered by war (Germany, Greece etc)

\- those predating a 20th century understanding of economics

You're basically left with South America, which is somewhat exceptional and
has a strong connection with the tendancy for revolutions, coups, US
interference etc to trigger crises there.

US inflation, meanwhile, ticks over at a few percent and is resolutely stable,
despite the best efforts of the House to trigger a crisis.

~~~
digitalengineer
Yeah, the US has the massive advantage of being the world's reserve currency
(for now). As such they can EXPORT inflation. Se the Wall Street Journal: The
Latest American Export: Inflation

What do the years 1971, 2003 and 2010 have in common? In each year, low U.S.
interest rates and the expectation of dollar depreciation led to massive "hot"
money outflows from the U.S. and world-wide inflation. And in all three cases,
foreign central banks intervened heavily to buy dollars to prevent their
currencies from appreciating.

When central banks issue base money to buy dollars, domestic interest rates
are forced down and domestic inflationary pressure is generated. Primary
commodity prices go up quickly because speculators can easily bid for long
positions in organized commodity futures markets when interest rates are low.

The world saw a surge in the dollar prices of primary commodity prices in
1971-73 following the Nixon shock of 1971 when the U.S. abandoned the gold
standard. There was also a commodity price surge during the Greenspan-Bernanke
shock of 2003-04, when the federal-funds rate was reduced to an unprecedented
low of 1% followed by a falling dollar.

[http://online.wsj.com/article/SB1000142405274870440570457606...](http://online.wsj.com/article/SB10001424052748704405704576064252782421930.html)

------
pathy
>One Bitcoin user created an exchange which completely solved the problem of
violence in the drug trade.

Except he also ordered hits on his enemies, or at least tried to. Feels
violent to me.

>That’s what’s threatened by taxation, regulation and intimidation.

If bitcoin will have any chance of becoming a legitimate currency it will have
to be regulated and most importantly taxed. Bitcoin doesn't somehow make you
exempt from paying taxes just because it is a digital currency.

On the flip side, I agree that bitcoin can serve as a useful tool to conduct
experiments that may be hard to conduct with other currencies and that opens
up very interesting possibilities.

~~~
netcan
OTOH, there's something about the need for an economy to be highly taxable
which is anti-progress.

1950-2000 Copyright laws were a natural fit for the technologies of the day.
It made sense to sell music on discs or tapes. It was easy and possible to
create and enforce laws which regulated this. This happened to result in an
enormous industry where big profits were made. Then technology changed in a
way that made copyright laws a bad fit. The power accumulated in that industry
allows them to fight to try and force the world to behave as it had
previously, to keep their business model alive.

Over the last decades technology and the general structure of advanced
economies (especially in Europe) have allowed a relatively (relative to other
times & places) high levels of taxation government services. Governments
learned how tax while avoiding destructive reactions in the economy. In a lot
of cases this was trial and error (eg, >60% marginal tax rates for high
earners). Subsequently a lot of European countries are now at a point where
public spending is ~43% of the total.

If technology starts to threaten these models, I think we'll find it very hard
to adjust. Governments will have the choice between adapting (unlikely),
raising taxes in less disciplined and potentially more disruptive ways, or
trying to keep the world as it was by preventing the new technology from being
adopted.

I don't think bitcoin is the only such threat. Income inequality might be such
a pressure. Mobile freelancers are another. Anyway, if bitcoin gets to the
point where it genuinely threatens a government's ability to collect taxes,
we're in for trouble.

~~~
eli_gottlieb
You're confusing taxation with rent-seeking.

------
nathan_long
>> everyone who plays with Bitcoin is a scientist

Bitcoin is neat, but this is not correct.

"Try something and see how it goes", while worthwhile, is not science. Science
requires controls and repeatable experiments.

The reason that macroeconomics is at least 50% palm reading is that there is
no way to, say, take 2,000 identical universes, bail out the banks in half of
them, and compare.

(Science is not the _only_ way to determine truth; for example, you can't do
repeatable experiments to identify a murderer.)

------
sfjailbird
I love that the free market has come up with a working currency, not
originated or controlled by a single, or a few, players, and I love that the
internet has made this possible.

------
tedsanders
I hate to be a cynic, but I disagree with many of the points put forth in this
article, points that are critical to supporting its thesis. I list some
disagreements below.

>Then you have what we’re seeing in America, which is the long, slow erosion
of wealth and savings through a steady stream of monetary inflation.

Inflation does not reduce wealth. Inflation reduces the value of money. All
real goods and services are worth what they're worth, regardless of the stick
used to measure them. Inflation only changes the nominal measure of wealth,
not wealth itself!

Furthermore, economists generally regard a small amount of inflation as better
than a small amount of deflation. First, inflation helps keep prices and
salaries less sticky, by constantly devaluing them. Second, inflation helps
keep the banking system working (I believe). If nominal interest rates ever go
negative, people will withdraw deposits from banks and just hold cash (which
always has a nominal interest rate of 0%).

>Not only does inflation slowly eat away at individual wealth, but it also
disincentivizes savings.

How does inflation disincentivize savings? Assuming that nominal interest
rates are constant, then yes, inflation leads to lower savings. But when
inflation is high, nominal rates are high, and when inflation is low, nominal
rates are low. The relationship is not clear. Also, remember that S=I,
savings=investment. A common misconception is that savings is putting cash
aside for the future, whereas investment is spending cash on the future.
However, they are actually the same thing. Read more about why
savings=investment here:
[http://www.themoneyillusion.com/?p=12617](http://www.themoneyillusion.com/?p=12617)

>One Bitcoin user created an exchange which completely solved the problem of
violence in the drug trade.

This user also allegedly hired a hitman to murder someone.

>Governments try to control currencies. With all that power, shouldn’t they
seek to learn as much about them as possible? Why would anyone attempt to
kneecap thousands of unpaid, volunteer experimenters, who are constantly
sharing with the world what we’re learning about how money works? It’s very
odd.

I think the US Government is concerned with people breaking its laws. In this
case, illegally buying drugs and illegally not paying taxes. It sounds like a
reasonable concern to me, though I admit I'm not well informed and I welcome
additional comments.

\---

One big downside of a "free" currency is that there are no restorative forces
to keep its value constant. A huge advantage of having the US government
behind the dollar is that the US can control the value of the dollar. Most of
the value here comes, paradoxically, not from controlling the dollar but in
markets believing that the US can control the dollar. Those market
expectations then themselves keep the value of the dollar mostly constant.
Having a currency with a predictable and constant value is hugely important
for trade. For this reason, I can't imagine Bitcoin ever succeeding on a large
scale for a long time.

~~~
xenophanes
> Inflation does not reduce wealth.

Inflation (a jargon word that basically means printing money) transfers money
from savers to debtors. This is destructive.

It's destructive because the amount of money the government will print is not
fully predictable, so it creates financial risks for people who plan ahead.

It's destructive because the new money enters the economy unevenly -- and
basically unpredictably and unfairly, not efficiently.

It's also destructive because it discourages savings and capital accumulation,
which are important to wealth creation.

So inflation does reduce wealth, overall.

~~~
eli_gottlieb
>Inflation (a jargon word that basically means printing money) transfers money
from savers to debtors. This is destructive.

Call it destructive, but historically it's the only way to prevent society
from blowing up in an exponential debt meltdown.

Well, that or banning usury.

>It's also destructive because it discourages savings and capital
accumulation, which are important to wealth creation.

Except that the actual source of wealth is just labor and materials, and
capital accumulation is a vampiric disease on the honest economy.

~~~
grinnbearit
> Well, that or banning usury.

Or banning maturity transformation, [http://unqualified-
reservations.blogspot.in/2008/01/straight...](http://unqualified-
reservations.blogspot.in/2008/01/straightforward-explanation-of-present.html)

~~~
eli_gottlieb
I don't think that would actually get rid of deflationary financial crises. At
least, not under the Hudsonian model I'm using, which is very simple: a
financial crisis occurs when the total financial debt exceeds the salable
productivity of the nonfinancial economy.

------
kennethh
Some good links about inflation, fractional reserve money.

Short version, the people with first access to money (banks, hedge funds) are
able to get the new money and use it before the increase in the money supply
is reflected in the asset prices.

[http://globaleconomicanalysis.blogspot.no/2013/02/reader-
ask...](http://globaleconomicanalysis.blogspot.no/2013/02/reader-asks-me-to-
prove-inflation.html)
[http://globaleconomicanalysis.blogspot.no/2013/03/inflation-...](http://globaleconomicanalysis.blogspot.no/2013/03/inflation-
targeting-revisited-three.html)

------
tehabe
I wonder to which experiment in the Weimar Republic, Cathy Reisenwitz is
referring to.

The reasons for the high inflation until 1923 are very well understood. And
IIRC the German government knew that inflation would be caused by their
policies, maybe they were surprised by the extent but certainly not by the
inflation itself.

Much more interesting was the sudden end of the hyper inflation through the
introduction of the Rentenmark. Which wasn't an official currency.

------
conformal
unfortunately, the US, its various security services and most of the elected
officials are less-than-excited about the idea of a _truly_ free society.
currently, the 1st world state has an enormous amount of control over the day-
to-day lives of its citizens, moreso than at any other point in history, imo.
some things are particularly hard for the state to do vs historically, e.g.
institute mandatory military service of some sort, but others have become much
easier, e.g. wage economic warfare on opposing states, drone strike small
groups.

bitcoin definitely goes a ways towards fixing some of these problems and i
think the author is right to cite it as an epic experiment.

------
Mikeb85
The entire concept of money cannot be separated from government. The reason
why money has any value in the first place is because a government guarantees
that value. Without that guarantee money is merely a piece of paper, or a few
bytes on a hard drive...

~~~
maxerickson
Money has value when another party will exchange it for items of value. Banks
issued money not all that long ago, people fool with private currencies in the
present day, etc.

Government backing can certainly be a valuable feature of a currency.

------
ddebernardy
"Why a plutocracy needs state-issued money"

FTFY. :-)

