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."
The Ithaca Hour, like Bitcoin, is used by a very specific type of person. Reading their website is one big face-palm.
Smiling Dave:Conza, On another thread, someone argued that in a complex economy, people will want a currency because it makes everything run so smoothly. Bitcoin has all the features a great currency has, total fungibility, divisibility, scarcity etc. The only thing it is missing is a demand for it in a non trade context. But so what? The need for a currency is enough in and of itself to be a legitimate demand that bitcoin will satisfy as nothing else can. Yout thoughts?
On another thread, someone argued that in a complex economy, people will want a currency because it makes everything run so smoothly.
Bitcoin has all the features a great currency has, total fungibility, divisibility, scarcity etc.
The only thing it is missing is a demand for it in a non trade context. But so what? The need for a currency is enough in and of itself to be a legitimate demand that bitcoin will satisfy as nothing else can.
Yout thoughts?
It has artificial scarcity. It was fiat'd as currency from the start. They want something to eliminate the double-coincidence of wants. And yet bitcoin is essentially no different from federal reserve notes in the sense that - ie. "This is money!" ORLY? Says who? "The need for a currency is enough in and of itself to be a legitimate demand that bitcoin will satisfy as nothing else can."
This does not follow. There have historically been other currencies which worked well. But also that - given a free society, what are the arguments in favour of bitcoin - over other money which has already proven itself?
John James:So just to be clear...something X would be irrelevant, but only in a certain situation A, but said situation A is not even close to existing...and yet this something X that would be irrelevant only in that situation A "is even more relevant" now, in situation B. Well. I must say you might be due for some intellectual award.
John James:That's cool, we can use a different example. Would you like to give an argument for the existence of vision correcting-eyeglasses in a society which has genetically and surgically eliminated all vision problems?
John James:The point is, if your argument for bitcoins being useless hinges on the caveat that there must a "voluntary society (free market in money & the law)", then you haven't made an argument against bitcoins in today's world.
Ithaca is known for being a reservoir of hippies. When you have that many burnouts that haven't progressed mentally since the 70's it's not surprising that one of the IH "successes" is bringing a "Hometown Money Starter Kit" to a town in Russia to promote syndicalism.
Conza88: John James:That's cool, we can use a different example. Would you like to give an argument for the existence of vision correcting-eyeglasses in a society which has genetically and surgically eliminated all vision problems? Different argument, same flawed principle.
How is it flawed? You mean you don't have one?
John James:The point is, if your argument for bitcoins being useless hinges on the caveat that there must a "voluntary society (free market in money & the law)", then you haven't made an argument against bitcoins in today's world.It doesn't hinge on it, it is one of the arguments.
Uh. K. So what are these other arguments that prove bitcoin is useless? (I really hope you don't consider the things numbered off in that post actual valid arguments)
Proposing the state collapses (or the US empire crumbles - or is it your position this is an impossible scenario?), legal tender laws are removed, fed ended etc. the monopoly over money is removed. A freemarket in money commences and in that of law.... what is the use of bitcoin? Why would anyone use it anymore? What would give it value?
Yeah, you want bitcoin defended in a completely hypothetical, voluntary society scenario. We got that. A voluntary society doesn't exist. So, I'm still waiting on your argument that bitcoin is useless in today's non-voluntary society. And yet again, I'm also waiting on these "theoretical considerations" that prove "[bitcoin] is ultimately a doomed experiment". Any time now.
Bitcoins are by construction useless. Hashcash - which Bitcoin is simply a modified form of - is useful but has no value in exchange. Useful data are things like software programs, media, anti-spam proof-of-work (Hashcash), encrypted data, and so on. Bitcoins are just proof-of-work for proof-of-work's sake. The work done has no use. Bitcoins have no use as a consumption good. They have no use as a capital good. They are not money.
I designed my own digital currency system back in 2008, before Bitcoin was around. My system doesn't use proof-of-work since it is concerned with proof of backing. The principle of operation after creation of a digital token between my system and Bitcoin is essentially the same though my system minimizes the use of public-key cryptography since I'm paranoid about the breakability of PK cryptography. My system requires extensive auditing of issuing digital reserves to verify that they are, in fact, maintaining full reserves. However, I eventually scrapped the whole idea once I realized that any system that requires the holder of the reserves to be known could be - and would be - raided and shut down. I call this the auditing-versus-anonymity problem.
I've got an idea of how to solve this problem. It's not simple and it's not elegant but I think it would work.
The system consists of two basic ideas. The first is to use a physical one-way function to track physical gold coins/bars. The way this would work is that you actually cast the bar or coin with the POWF embedded into it such that attempting to remove the POWF would result in its destruction. Anyone who has physically held the coin or bar could then take samples from the POWF to verify at any future time that a particular individual is, in fact, holding the coin or bar to which it is attached. The company that does this would be acting as a remote auditor. Using this idea, you could construct a network of anonymous gold reserves so long as the remote auditors were brick-and-mortar institutions that can be sued for fraud.
The second idea is to set up the system so that it is constantly experiencing a "bank run", that is, where anonymous reserve holders are constantly required to satisfy "virtual withdrawals" to other reserve holders. Basically, the network would be constantly remapping the reserves so that 10% of Reserve A's reserves are currently being held by Reserve B and must be physically transported from Reserve B to Reserve A, thereby proving that Reserve B actually had those reserves. I think of this as "cash Tor". The minute a reserve fails to satisfy a virtual withdrawal - or a real withdrawal - it is ostracized from the network and the remote auditor which had vouched for its physical possession of the gold coin/bar in question can be sued for fraud.
Basically, the way it would work is this. Say I want to purchase a gold-coin-backed digital token from JohnnysDigitalGold.com. First, I request the ID of a POWF-embedded gold coin for sale. Once I receive the ID, I independently transmit the ID to the brick-and-mortar remote auditor - say TrustworthyAuditor.com - to verify that JohnnysDigitalGold.com is, in fact, holding that gold piece (which the remote auditor had to, at one time in the past, have physically held). If TrustworthyAuditor.com gives a thumbs-up, then I can be as confident that JohnnysDigitalGold.com is in fact holding a gold piece as I am that the remote auditor is not fraudulent.
The honesty of the auditors themselves is checked by the network. Basically, the core of the network would consist of generating random requests for ID checks to random auditors to detect double-counting and physical loss of coins/bars. Let's say TrustworthyAuditor.com is colluding with JohnnysDigitalGold.com and says that they are holding a particular gold coin when they are, in fact, not holding it. If the coin is being held by someone else in the network, the lie will eventually be detected through random checks and the auditor sued. If the coin has simply been sold out into the regular gold market, then whenever JohnnysDigitalGold.com receives a command from the network to transfer that particular coin, it will be unable to do so. Failure to do so will result in presumption that the gold coin has been stolen. Since JohnnysDigitalGold.com is anonymous, there is no legal recourse. However, this isn't the end of the story since TrustworthyAuditor.com has been saying all this time that JohnnysDigitalGold.com actually had the gold coin when they did not and so TrustworthyAuditor.com can be sued for fraud. Sooner or later, any fraud attempt will be discovered.
Now, there are still some remaining problems. First of all, this network would be capital intensive to bring online. Second, the integrity of the system rests on the ability to sue the auditors in national courts of law and have just outcomes to these lawsuits. Since the system would be explicitly competing with national fiat money systems, it is reasonable to expect that they may intentionally undermine the integrity of the system through unjust rulings in lawsuits against auditors.
Clayton -
Clayton, that is a fantastic and creative design. Thank you for sharing it. Are you involved in the DGC community?
The essential problem in digital currencies is storing the value in a way that minimizes the risk of seizure, fraud, or other type of loss. Your system addresses that in a very elegant way. Ultimately I'm not sure that as a practical matter and at the current time it would more secure than a centralized system such as Pecunix or GoldMoney, two systems which have weathered the storm and seem relatively secure from raids and seizures due to the jurisdictional arbitrage strategy they've employed. But it's certainly a radical and interesting concept.
With additional brainstorming perhaps we can come up with something that would require less initial capital. Digital Gold Currencies have long been an interest of mine and I even was involved professionally for a while.
@HH: Thanks for the positive feedback. No, I have not actually participated or worked in a DGC, I prefer to maintain physical possession. I've thought that this idea (embedding POWFs in gold coins/bars or encasing them in POWF sealed containers) might be a technology that the existing gold assaying industry might take an interest in. I don't think I'm the person to drive such a venture but I'm happy to share my ideas on it since any advancement in real monetary technology is a blow against the fiat money system which I loathe and despise. I can imagine a gold assayer performing an assay and then sealing the assayed bar in a container which cannot be opened without damaging the POWF and then taking a series of digital samples of the POWF. With this digital data, the original assayer could provide a measure of assurance that a gold bar is the very one which they assayed at a fraction of the cost of performing a new assay. This could reduce the premium on good delivery bars.
Combined with ultrasonics (which I understand is a relatively new tool in the assay business), gold assaying and certification of good delivery could become significantly less costly. Somebody posted this a while back: