
A quick reminder why Bitcoin was created in the first place - js7745
https://medium.com/founder-playbook/a-quick-reminder-why-bitcoin-was-invented-in-the-first-place-f9ae7430bc17
======
apeace
Try this one with your friends. Tell them that if there were no debt, there
would be no dollars, because debt and dollars are the same thing.

You can quote the former chairman of the Federal Reserve Board, Marriner
Eccles[0]: "That is what our money system is. If there were no debts in our
money system, there wouldn't be any money."

This is a simplification, but it's an accurate one, and is widely understood
by anyone paying attention[1].

Without even getting into a debate about the merits of our central banking
system (or cryptocurrencies), most people are surprised by this fact. Most
folks I have spoken to think that the dollar is still backed by gold.

[0] [https://mises.org/library/our-money-based-
debt](https://mises.org/library/our-money-based-debt)

[1]
[http://www.npr.org/sections/money/2011/10/21/141510617/what-...](http://www.npr.org/sections/money/2011/10/21/141510617/what-
if-we-paid-off-the-debt-the-secret-government-report)

~~~
seanalltogether
And if you take it a step further, you learn that debt and IOU's are at the
very heart of human transactions, going back as far as society has existed.
The currency needs to reflect the lossy nature of payments that people make
between each other.

~~~
Frondo
Yeah. The common myth is that barter preceded currency, like primitive man was
going around, trying to swap his carcass for some arrowheads or something. The
myth is that the development of currency followed from that, as a way to
facilitate barter.

Not so, according to this guy:

[https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years](https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years)

Worth a read.

Edit: another good, quick read:
[https://www.theatlantic.com/business/archive/2016/02/barter-...](https://www.theatlantic.com/business/archive/2016/02/barter-
society-myth/471051/)

~~~
apeace
Right, debt came first. Then we invented currency as a store of value, so that
we could perform even transactions. To _avoid_ creating debt!

~~~
Terr_
> Then we invented currency as a store of value

The book actually says the opposite: Currency is a standardized to-the-bearer
IOU, a credit that always has a corresponding debt or obligation _somewhere_
else, usually from the issuer.

The US dollar, for example, has always been a debt instrument, even if that
debt was once "IOU some shiny metal" as opposed to "IOU services", or "IOU -1
on your tax bill".

Even with rare-metal coinage, it was important to users that the issuer would
honor its stated debt-units, even if its value as a "X grams of metal Y" could
go lower.

The easiest way to see that currency is not a store of value is to consider
how many old bills get shredded to scrap fibers and replaced with fresh ones,
all without triggering a crisis over the "value destruction" going on. It's
impossible to imagine the same with, say, burning worn-down diamonds into
carbon-dioxide.

~~~
apeace
I think you're ignoring the larger "currency" and focusing on "fiat currency".

When people traded in gold (or Native Americans traded wampum, etc) it was
certainly never destroyed! And there was no one in particular who would
necessarily trade it for something specific, so it was not an IOU.

The book sounds great, and I loved his other book _The Democracy Project_. I
will have to check it out.

But just because debt came first, and fiat currencies have always been based
on debt, does not mean that all currencies have to be or have been.

~~~
Terr_
Gold chunks (and wampum) aren't currencies though, they're _commodities_.

------
kevindkeogh
> After all, banks remained basically insolvent in this fractional reserve
> scheme.

This is incorrect. Bank solvency has to do with the assets of the bank, even
in markets with commodity (e.g., gold) or representative money (e.g., gold-
backed paper). The assets of a bank include loans, the liabilities are the
money the bank owes to depositors. There is no reason a bank can't take a gold
deposit and loan it out (thereby, "creating" gold).

The purpose of a central bank, at least in orthodox economics, is to loan to
solvent banks that are nonetheless cash-poor. Imagine a mismanaged bank, that
has loaned too much, and cannot meet the demands of depositors. If the loans +
cash are more valuable than the deposits, the central bank will loan to the
bank to meet their temporary cash shortage. [0]

This is essentially what happened in the case of AIG. The Fed believed that
the value of AIGs assets were greater than its liabilities, and loaned them
the money at a penalty rate. The Fed believed that AIG was _solvent_. There
were a number of extenuating factors here that I'm glossing over, but that is
the underlying point. The reason that Lehman was not saved was that the Fed
had substantial reason to believe that the assets (primarily the sub-prime
loans) were not worth more than the liabilities, and the Fed will not lend
into hole. Lehman was _insolvent_.

Fractional reserve banking, by itself, does not suggest solvency or
insolvency. Without fractional reserve banking, there cannot be credit. Sharia
banking is an example of full-reserve banking, because interest is prohibited,
so there is no incentive to loan. (There are ways Islamic banks get around
these prohibitions).

[0] I would suggest looking at Bagehot (1873) for a full description of this
idea.

~~~
pash
There is no well defined financial distinction between insolvency and whatever
you want to call the situation in which the marked to market net value of a
bank's assets goes negative due to a fall in prices during a liquidity
crisis.† There almost certainly were such situations during the last crisis,
when a bank's book value went negative, and yet it was not deemed to be
insolvent.

That's because in practice insolvency is not so much a financial concept but
an accounting and legal one, and in those domains it refers only to situations
in which a corporation cannot meet its financial obligations as they come due.
In ordinary circumstances that convention gives corporations some leeway to
re-negotiate their obligations to stave off insolvency. But during a liquidity
crisis it means that an institution whose book value goes negative
(temporarily?—who knows?) will or won't become insolvent in part depending on
whether third parties are willing to lend to it to plug the hole that exists
in its books at the moment. That means that solvency during such periods is a
bit of an artificial thing, depending in part on the of vagaries of the
marketplace, as well as the judgement and munificence (or whim, if you'd like)
of central bankers and other governmental actors.

 _> Without fractional reserve banking, there cannot be credit._

This is not true. There can be credit, just not with the simultaneous fiction
that creditors retain access to the money they've lent. Bond markets and old-
fashioned money-market bank accounts operate without that fiction, for
instance.

† — Or for that matter during a classic bank run, which is another form of
liquidity crisis. A typical bank operating on fractional reserve is solvent in
the sense that over some indefinite future time horizon it should be able to
give its depositors their money if they demand it, since the money the bank is
owned in loans exceeds the money the bank owes its depositors. But a bank does
not enough money in its vaults to pay all its depositors if they all want it
back at the same moment; if no third party is willing to lend cash to the bank
suffering the run ("provide it liquidity"), then it will become insolvent, no
matter what its book value.

~~~
kevindkeogh
I agree that the definition of solvency is wrapped up in the value of the
assets, which can be difficult to assess. That's why I said "The Fed
/believed/ that the value of AIGs assets were greater than its liabilities"
[emphasis added]. That being said, I think we can agree this has very little
to do with fractional reserve banking as a concept. To put it simply, you can
only have insolvent banks in a fractional reserve system, but a fractional
reserve system doesn't necessitate insolvency by any means.

I'll agree to the second critique re: the credit in a full-reserve banking
case.

------
BenoitEssiambre
This is full of misunderstandings about monetary policy and money creation.

Currencies that are not designed to lose value over time can not be stable.
Intrinsically worthless tokens engineered to have better than market risk
adjusted, liquidity adjusted, real returns compared to real productive
investment will always be unstable and fluctuate increasingly wildly as they
get more popular. This is a result of physical limits of production. As people
hoard worthless tokens, their price increases which causes more people to
hoard them instead of investing in real businesses with real production
capacity.

This eventually causes production capacity to drop. That's right, when enough
people do it, token hoarding displaces investment in businesses and factories
and lowers global production capacity. This means token hoarding causes a
future drop in things available to buy with these tokens.

Eventually there will be people who want to buy real things with their stock
of tokens. The tokens will be chasing fewer goods which means prices for stuff
will rise (tokens will lose value). This might happen suddenly when people
with large stockpiles of tokens notice that value is dropping and that there
are tons of other tokens waiting on the sideline to make it drop even further.
Hoarders might rush to get rid of their stockpile all at the same time before
they're worthless which will cause their fall to worthlessness. This drop will
bring the tokens closer to their natural intrinsic value of zero. The cycle
can then start again, such is aggregate economics.

The 1920s and 1930s suffered from this type of cycle but with gold tied
currencies instead of cryptocoins. It happened to a lesser extent in 2007 when
western world central banks failed to keep inflation rates high enough. It's
important for the world's sake to not let deflationary currencies become too
popular.

When savings or financial promises are insufficiently tied to future
production or to accumulation of real goods, there will be disappointment when
many people try to exchange them for real stuff. That is true for crypto
currencies as well as government currencies (that is why the system is
designed to make banks invest people's money in real businesses and minimize
the proportion of money that is stockpiled idly).

It's true that crypto currencies are currently not sufficiently widely held to
significantly affect the macroeconomy but speculation already keeps them
rather volatile and the knowledge that as they get more popular you get
additional volatility pressures, will keep the speculation wild and the
deflationary cryptocoins unstable.

~~~
mindslight
The problem you point out is real; similarly Gresham's law. And while
something like gold _does_ have an intrinsic value based on its engineering
uses, that value tends towards relative zero as the monetary bubble inflates.
And I suppose you could say something similar about Bitcoin, with its
intrinsic worth being the value of a distributed-trust _ordering_ (eg
timestamping) system, but I digress.

But the problem pointed out by the hard money enthusiasts is real as well.
Once more tokens are being created for systemic reasons, a principle agent
problem on _who gets_ those newly created tokens is also created. In our
present system it's the banking cartel, as they can spin it to sound as if
they're impartial by loaning most of the money out. But they do take the first
cut (points) and ongoing fees (interest) for use of the money that their
privileges conjured, and nowadays have even dropped all pretense of being
symmetric by stopping _paying out_ interest.

We don't know what the resolution is between these conflicting frameworks
(otherwise, the problem would be solved). But it's not particularly surprising
that when the second problem grows in scope as it has in our modern society,
benefiting the well connected while further eroding the power of the masses at
the edge, that the first problem will be ignored while seeking refuge from the
second.

~~~
BenoitEssiambre
The "banking cartel" doesn't create new money and doesn't get new money for
free. They can only borrow it at market rates. The central bank can create
money but it is not allowed to spend it. It can only lend it or swap it for
collateral.

If what you have in mind is fractional reserve lending as indirect money
"creation", this also creates liabilities for the banks. The banks owe to
depositors all the money they "create" this way. It's not free money.

------
yumaikas
This post is a repost of:
[https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quic...](https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quick_reminder_why_bitcoin_was_invented_in/)
Similar to that Paul Graham article earlier. Could we get a relink?

------
EGreg
The part about the Liberty Dollar is fearmongering. It was shut down because
it looked and sounded too much like the US Dollar.

Toronto Dollars existed. Bristol Pounds exist now and are thriving. Oakland
just opened their own bank. Nebraska had its own banks. There are time banks,
Berkshares, and so on.

I used to think local currencies are illegal but as long as they are
Complementary Currencies and fiat is still legal tender for all debts, that's
not true.

Look it up on wikipedia (virtual currencies, complementary currencies).
Congress retains the power to mint coins, that's it. There has never been a
court case that tested whether Congress can crack down on complementary
currencies. And the USA never did, except in the Liberty Dollar case for
sounding too similar.

So the article is wrong about that. You can actually make a centralized
currency as a city or even as a community. What do you think payment networks
like VISA, PayPal, Patreon etc. do? Sure some need to register as money
transmitters. But others are just marketplaces like AirBNB. They do payouts
via Stripe etc.

~~~
protomyth
> Nebraska had its own banks

I thought North Dakota was the only state with its own bank. Did Nebraska
create one?

To add to your point, many cities have "Christmas Cash" as a form of local
currency for holiday spending to help local businesses.

~~~
EGreg
Sorry I meant North Dakota, nice catch :)

------
Justin_K
Dumb question, because I'm still trying to grasp bitcoin... Doesn't the recent
"split" show that bitcoin still isn't addressing the common need? It still
appears that a few central players are controlling how it is created, backed
and exchanged.

~~~
bluejekyll
This might be wrong, someone correct me if so... I'm thinking of the split
that occurred as being nearly if not actually just like a stock or other
securities split. In effect some portion of the original security 20% or so
left. That reduced the market cap of the original security, and created a new
market cap for the new one.

Now it's possible the new one could eventually become worth 0 and the original
would increase back to it's pre-split. A question this then raises for me, is
if you went through this split, would you account for this in capital gains
the same way you would with a stock split?

------
Cakez0r
> People used to pay each other in gold and silver. Difficult to transport.
> Difficult to divide.

It would be interesting to hear some of the history behind why gold and silver
were decided to have value. What are the steps leading up to the first point
in this post?

~~~
jcranmer
Gold really wasn't used for currency outside of the main area known to ancient
Western civilization. China did use silver for bullion, but mostly avoided it
in the everyday coinage, which would be made out of metals like iron, copper,
or bronze. Other civilizations chose a variety of things for coinage--Aztecs,
for example, used cacao beans and bolts of cloth.

So why did gold and silver become the major standard in the Western world?
Well, gold and silver are fairly unreactive--you're not going to lose coinage
by leaving them it in open air to spoil. Gold is also remarkably malleable,
and both metals are fairly easy to work with in terms of metallurgy. The final
notable feature is that gold and silver are actually relatively rare in the
Mediterranean and Northern Europe. By contrast, where they were quite common--
the Americas in particular--they were purely used for decoration and
ornamentation, never for currency. Thus the Spanish conquest of the New World
was promulgated because they found cultures who were literally covering their
walls in money, and Spain was desperately short of cash for their commitments
in the Wars of Religion in the 16th century.

------
taw55
If you ever did econ 101, you might be shocked to read this:

R.A. WERNER, A lost century in economics: Three theories of banking and the
conclusive evidence

[http://www.sciencedirect.com/science/article/pii/S1057521915...](http://www.sciencedirect.com/science/article/pii/S1057521915001477)

------
neilwilson
The fundamental purpose of a currency is to pay taxes and debts.

Which means that bitcoin isn't really a currency, it's just a particularly
transportable bottle of wine. Nothing more than an intangible asset.

You still have to swap it for some actual currency at some point - or go to
jail for tax evasion.

------
TearsInTheRain
How long until somebody issues paper money backed by bitcoin?

