I'll start with a quote from Mises in Money and credit, emphasis mine:
The Necessity for a Value Independent of the Monetary Function before an Object can serve as Money
If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value ofthe money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use. This provides both a refutation of those theories which derive the origin ofmoney from a general agreement to impute fictitious value to things intrinsically valueless' and a confirmation of Menger's hypothesis concerning the origin of the use of money. This link with a pre-existing exchange-value is necessary not only for commodity money, but equally for credit money and fiat money.' No fiat money could ever come into existence if it did not satisfy this condition...
OK, now for the Ithaca Hour. It is a fiat currency, used in Ithaca, New York and for 20 miles around that city.
Links:
Wikipedia: http://en.wikipedia.org/wiki/Ithaca_Hour
Home Page: http://www.ithacahours.com/
How it got started: http://www.ithacahours.com/archive/0001.html
Cute cartoon: http://ithacahours.com/weprint.jpg
Two quotes:
...on October 19, I bought a samoza at the Farmer's Market with Half HOUR #751 from from Catherine Martinez-- the first use of an HOUR. Neither of us knew what a Half HOUR was worth, since the $10/HOUR rate was then merely suggested.
...He established that each HOUR would be worth the equivalent of $10, which was about the average hourly amount that workers earned in surrounding Tompkins County,[8] although the exact rate of exchange for any given transaction was to be decided by the parties themselves.
Seems to refute Mises' regression theorem. Would appreciate enlightenment.
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It's easy to refute an argument if you first misrepresent it. William Keizer
I think I have the answer to why both Ithaca Hours and Bitcoin are not money. Voila:
If you and your kid sister set up a system of paying each other for lollipops with tarot cards, that doesn't make tarot cards money, right? And why not? Because money has to be something accepted 1. by a whole community 2. in exchange for anything and everything. That's what medium of exchange means. [So it's not a "no true Scotsman" argument]. When everything has a price in tarot cards, for a large group of people, not just a few close friends, then they can be legitimately called money. Bitcoin is not money yet, because there is no community, [even if we call a group of people connected by computers a community], who will buy and sell everything for bitcoins. Same for Ithaca Hours. In my posts, I tried to get across why it will never be a money in the above sense [=medium of exchange].
I think you are oversimplifying the regression theorem. Mises is explicit in saying that in order for money to have value the commodity (or whatever makes up said money) has to have some previous value. That is, the value of money comes from the value of something else. In bitcoin's case, that something else is the dollar.
Yes, bitcoins derive their value from the expectation that one may readily exchange them for actual money (money proper), i.e. dollars. In this sense, bitcoins sort of function like secondary media of exchange, but they're not employed nearly as regularly as traditional secondary media of exchange (precious metals, securities, etc). Thus, we can say that bitcoin are essentially tertiary media of exchange.
But money is defined as a commonly employed media of exchange, which means that, by definition, bitcoins are not money. Your grocer will not accept bitcoins, laborers will not accept bitcoins as payment, etc, etc. In order for bitcoins to emerge as actual money, in a way which consistent with Mises' regression theorem, they would have to be absolutely interchangeable with actual dollars but more convenient, so that eventually the employment of bitcoins completely surpasses the employment of dollars (in all of its various forms) altogether.
If bitcoins actually become money (again defined as a commonly employed media of exchange) in any other way, then Mises' regression theorem will become empirically invalidated.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Bitcoins is a pyramid scheme, period. The fact that some delusional people call it money doesn't make it money. If I started a pyramid scheme today and gave in return for US dollars some digital certificate and said: "hey, that's so valuable that you can use it as money, believe me!" it wouldn't make my digital certificates money. That exactly describes bitcoins today. There are around 100 million US dollars worth of bitcoins today, yet there is no one accepting it as money except people who want them to speculate with them themselves. Many pyramid schemes have lasted for years, I wouldn't be surprised if we continue to see all this madness around this pyramid scheme for quite some time, but bitcoins will never become a widely accepted currency.
Frederique,
I have a few questions about your reply.
1. I don't see how you can call it a pyramid scheme, the way wikipedia defines it.
2. If what you are saying is right, that the only people accepting bitcoins are speculators, that would be a coup de grace. But how do you know this?
3. What are your thoughts on the Ithaca Hour?
Yawn.
Frederique Bastiao:Bitcoins is a pyramid scheme, period.
False.
Find another pejorative term.
If I started a pyramid scheme today and gave in return for US dollars some digital certificate and said: "hey, that's so valuable that you can use it as money, believe me!" it wouldn't make my digital certificates money. That exactly describes bitcoins today.
False. No one person can create bitcoins out of thin air and with no capital investment. And the more people that participate, the less likely you are to receive any that get created.
There are around 100 million US dollars worth of bitcoins today, yet there is no one accepting it as money except people who want them to speculate with them themselves.
Do you have proof that the only people using bitcoins are speculators?
Many pyramid schemes have lasted for years, I wouldn't be surprised if we continue to see all this madness around this pyramid scheme for quite some time, but bitcoins will never become a widely accepted currency.
And of course, you have some proof (or even a compelling arugment to suggest) that that is true. Is this really the best you can do?
Clayton,
Bitcoin isn't worth much more of my time debunking the nonsense surrounding it. I will simply reiterate the key points:
1) The Regression Theorem is praxeological... if Bitcoin or some other empirical fact disproves it, then humans do not prefer greater satisfaction of wants to lesser satisfaction of wants and we must revise our most basic ideas about what human nature is.
2) Money experimentation is possible and the Regression Theorem does not say it is impossible. Bitcoin is certainly a money experiment but it is not money. I'll quote Lew Rockwell on the subject:
Just imagine what would happen if legal tender laws were repealed and the government stopped intervention in the market for money. Virtually overnight, we would see the appearance of hundreds if not thousands of new payment systems and alternative monies online. Merchants would be free to accept any means of payment. There would be intense competition among them. Some would be foreign currencies like the Euro. Some would be new currencies based on existing commodities such as gold and silver. I'm certain that we would see a period of wild experimentation take place before the market settled back down again into a standard system that was famed for its reliability and stability and honesty.
Would we be able to endure the process of discovery? Certainly. We do this every day with our shopping online, or searches for good providers of services and products in the physical world, and our habits on how to invest our money. The market is a process of trial and error, one that never stops innovating and changing. We see everyday on the World Wide Web how this process of creation and change create the right balance between chaos and order, experimentation and standardization. This would happen in the field of money too.
I can envision Bitcoin as one of thousands of experimental monies emerging in the wake of currency denationalization as Rockwell vividly describes here. Bitcoin has the virtue that it is an experiment that can go forward despite currency nationalization... it doesn't have to wait for denationalization. But I think that is Bitcoin's only virtue and I believe that it is ultimately a doomed experiment based on theoretical considerations. That doesn't mean I think it should be outlawed... more power to the people participating in it. But it does mean I will never hold a Bitcoin and if I were a venture capitalist I would have nothing to do with Bitcoin or Bitcoin-based businesses.
Clayton -
In bitcoin's case, that something else is the dollar.
To the extent that it actually is acting as a money, I agree with you. However, there is no necessary correlation between Bitcoin and dollars... Bitcoins have no guaranteed exchange value. Their exchange value in dollars is whatever the market price of Bitcoins happens to be. There is no brick-and-mortar institution standing behind Bitcoins saying "no matter what else happens, we exchange $1 per Bitcoin". There's no one to sue if you can't exchange your Bitcoins. Bitcoins can only be exchanged for what others will voluntarily give up in exchange for them. Hence, the value of Bitcoins is liable to wild fluctuation. If Bitcoins become big enough to be noticed by The Powers That Be, their continued non-zero value is completely at the mercy of the regulatory climate. Sure, as a technological matter, they can't stop people from exchanging Bitcoins but, if it starts to be a thorn in their side, you don't think the Department of Justice and Department of Treasury would start kicking down doors as they have with Liberty Dollar and e-gold? You don't think the chilling effect of a couple raids would knock the wind out of the Bitcoin price?
Early adopters will see the value of their Bitcoin holdings rise and rise as late adopters join. If early adopters cash out before the system crashes, they will have effectively walked away with the money of the late adopters who bought after the price of Bitcoins had risen. I prefer to call it pump&dump but it's basically the same idea. This explains why there are so many avid promoters of Bitcoin around on the Internet... it makes money sense for them to be pushing Bitcoin adoption. The more people that buy in, the higher the value of their holdings go. The deflationary nature of Bitcoins accentuates this effect as the computational effort expended by early adopters is much less than that expended by late adopters... that is, every day it is becoming exponentially harder to mine new Bitcoins in the manner that early adopters did. So, it becomes increasingly the case that the only way to get Bitcoins is to exchange away something of value (e.g. dollars) for them.
This is one of the most obvious problems with Bitcoin. Why 21 million? There can be no reason why 21 million, it's a number plucked out of thin air. Bitcoin should at least have allowed the number of Bitcoins to be determined by a market process, as well. Even if everything else in Bitcoin were sound, this would be a fatal flaw.
Clayton: In bitcoin's case, that something else is the dollar. To the extent that it actually is acting as a money, I agree with you. However, there is no necessary correlation between Bitcoin and dollars... Bitcoins have no guaranteed exchange value. Their exchange value in dollars is whatever the market price of Bitcoins happens to be. There is no brick-and-mortar institution standing behind Bitcoins saying "no matter what else happens, we exchange $1 per Bitcoin". There's no one to sue if you can't exchange your Bitcoins. Bitcoins can only be exchanged for what others will voluntarily give up in exchange for them. Hence, the value of Bitcoins is liable to wild fluctuation. If Bitcoins become big enough to be noticed by The Powers That Be, their continued non-zero value is completely at the mercy of the regulatory climate. Sure, as a technological matter, they can't stop people from exchanging Bitcoins but, if it starts to be a thorn in their side, you don't think the Department of Justice and Department of Treasury would start kicking down doors as they have with Liberty Dollar and e-gold? You don't think the chilling effect of a couple raids would knock the wind out of the Bitcoin price? Clayton -
I still dont get it... there was no' brick and mortar instutiton' regulating the objective exchange value when gold emerged as a medium of exchange out of a bartered system, right?
My Blog: http://www.anarchico.net/
Production is 'anarchistic' - Ludwig von Mises
Clayton:Bitcoin isn't worth much more of my time debunking the nonsense surrounding it.
I assume that means you won't be around such threads any more, which is good because you haven't debunked anything.
But I think that is Bitcoin's only virtue and I believe that it is ultimately a doomed experiment based on theoretical considerations.
You have yet to present any such considerations. Again, the only arguments I have heard are:
1) Bitcoin will fail because I know it will fail and everyone agrees with me because my reasoning is not flawed.
2) "How will you convince anyone to use bitcoin?"
3) Bitcoin is a pyramid scheme. Everyone using bitcoins is a speculator.
4) By virtue of being unbacked, Bitcoin is at the mercy of the Establishment because it has nothing but its convertibility into other fiat monies. (As if bitcoins couldn't be traded for anything else...oh wait, isn't that kind of what they do?.)
If I've missed anything please enlighten me. But to be honest if this is the best anyone can come up with, I really don't see how people could be so sure of themselves and still call others "irrational."
Clayton:Early adopters will see the value of their Bitcoin holdings rise and rise as late adopters join. If early adopters cash out before the system crashes, they will have effectively walked away with the money of the late adopters who bought after the price of Bitcoins had risen. I prefer to call it pump&dump but it's basically the same idea.
For one thing, you have not proven that bitcoin value will disappear.
For another, the reason a pyramid scheme doesn't mathamatically work is because people pay for a privelege of selling the privilege to sell priveleges to sell priveleges. There is no unit of exchange value. People pay money in the hopes of making a return generated from selling other people who pay money for the same thing. The only way bitcoin could even come close to even resembling a pyramid is if every single person who ever got involved with a fraction of a bitcoin was a speculator who had no intention of using it as a unit of exchange. (Which is why, I would have to assume, you selected Frederique's useless post as the answer to a question he didn't even address. (Check the thread title)).
So again, I'd love to see any actual proof of any of this.
Yes, there were. Banks issued banknotes which were a convenient, secure means of exchanging money which were backed by a contractual obligation of a particular brick-and-mortar institution (the issuing bank) to redeem the note for a particular amount of gold. Failure to redeem was (during the "wildcat banking" era) could get you sued. An institution's notes had value precisely because they were redeemable in gold on pain of bankruptcy. No one is required to redeem Bitcoins for anything.
Smiling Dave: 1. I don't see how you can call it a pyramid scheme, the way wikipedia defines it.
Smiling Dave:2. If what you are saying is right, that the only people accepting bitcoins are speculators, that would be a coup de grace. But how do you know this?
Smiling Dave:3. What are your thoughts on the Ithaca Hour?
John James:False.
John James:False. No one person can create bitcoins out of thin air and with no capital investment.
John James:And the more people that participate, the less likely you are to receive any that get created.
John James:Do you have proof that the only people using bitcoins are speculators?
John James:And of course, you have some proof (or even a compelling arugment to suggest) that that is true. Is this really the best you can do?
Frederique Bastiao:See my explanation above and please explain to me how bitcoins' value can at least stay where it is if more people are not brought into the scheme.
See a definition of "pyramid scheme" and explain to me how bitcoin is a "is a non-sustainable business model that involves promising participants payment, services or ideals, primarily for enrolling other people into the scheme or training them to take part."
First, bitcoins are being created out of thin air right now. Only because some day in the future (2030!) its expansion will stop doesn't mean it is scarce as something physically tangible, for example. If all bitcoin miners but a single one stopped mining today the output of bitcoins would still be the same. If only one person was mining gold today, the gold output in the world would be insignificant. I wish people could notice the fundamental difference between the scarcity of something physically tangible and the so called bitcoin scarcity. Actually, I wonder if Bernanke said that by 2030 the FED would stop printing money you would say that dollars aren't being created out of thin air.
You literally quoted what I said. Please tell me how any of that debunks what I said.
Only because some day in the future (2030!) its expansion will stop doesn't mean it is scarce as something physically tangible, for example.
This should discount your assessment right here. You evidentely have no understanding of what scarcity is or what makes something scarce.
Once again, please explain to me how the value of bitcoin can remain at least the same if no more people inject money into the bitcoin economy.
So let me get this straight. Bitcoin is a "pyramid scheme" because more bitcoins are going to be created, and therefore, ceterus peribus, the value will go down unless demand goes up. Is this your argument? This is all it takes for something to be a "pyramid scheme"?
John James:Do you have proof that the only people using bitcoins are speculators? See my answer above.
I did. It was basically a long winded "no."
Please refute my argument that without hundreds of million of dollars having to be injected into the bitcoin economy in the next months/years its value will not fall greatly.
See my question regarding your definition of "pyramid scheme" above.
Frederique Bastiao: Take a look at the bitcoin forums and check out their marketplace session. I mean, there are 100 million dollars worth of bitcoins out there, by that point you would expect a small but quite robust marketplace around it. But it doesn't exist. There are only people selling stuff related to bitcoin mining and even the few people selling non-bitcoin related stuff want the bitcoins to speculate. (I have looked at the post history of some of them and they're always speculators.) I'm not asking you to take my word for it, go there and spend a few hours/days examining their forums.
The Bitcoin forum is not intended to be a marketplace. Such posts are tolerated, to an extent, but ongoing operations are not permitted to advertise there, it creates too much noise. I should know, since I'm a mod there. There is quite a large and growing bitcoin economy elsewhere. Take a look at the trade page, for starters. I've traded bitcoins for handmade stuff a number of times, with more than one person who advertises on Etsy.com.