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Response to Michael Suede “Against the gold standard”

BitcoinThis article is a response to Michael Suede´s Artcile “Against the gold standard“.

First of all, I would like to state that I am a BitCoin supporter and I also think that gold is and has been the best money around until some other thing is discovered.   Regarding the gold standard , I have a problem with the word “standard” as I think that money should be provided by the free market and not being subject to any other standard or regulation appart from law (civil and trade laws) that would apply equally when providing and exchanging any other goods and services.

That being said, I think it is important to remark the economical nature of Gold and Bitcoins: Both of them are present goods. The fact that gold is tangible and BitCoins are intangible might be a relevant issue, but it is not something new at all.  Software or trademarks are also present goods and they are not tangible.  The most important thing about present goods regarding monetary utility is that they are not anyone else´s liability.

Since I believe Bitcoins are  present goods, and considering the Theory of Economic Time (TTE) from the austrian economist Carlos Bondone, they would qualify as money.  Conversely, currencies that are not present goods can only be credit.   I totally agree whith Michael Suede on his previous article about Bitcoins when he says “In summary, Bitcoins are money because of the properties they have“.   An explanation of why agree with him within the TTE theoretical framework can be found here.    Austrians say that Bitcoins don´t qualify as money because they don´t comply with the Regression Theorem of Money from Mises, which is true, but the problem is that the Regression Theorem is a very unfortunate interpretation from Mises of Menger´s origin of money.   Monetary utility, which is the need for liquidity, is valuable enough by itself, no need a link to anything else to have value.

I understand that Mises could not tolerate that fiat currencies (in fact credit currencies just as he realized) could be used the same way as commodity money, which was the “true money” on Mises perspective.  But that was because he did not separate the concepts medium of exchange (currency) and present good used as medium of exchange (money).   Currencies that are not present goods, can only be credit, and credit might be a currency, but it will never be money (understood as a present good) .  A sound monetary theory has to be unmistakable clear on this: money ≠credit.

Now, regarding counterfeiting and fraud, I do not agree with Michael.  From a theoretical point of view, fraud, theft and counterfeiting are not very relevant, specially when we talk about money or currency.  Because all kinds of currency will always be subject to these risks, including Bitcoins.  Also, any bearer currency such as Bitcoins or physical gold coins, are inherently sensitive to theft.

I also disagree with Michael regarding clearing services (i.e. limiting all transcations to P2P).  I think it will be very hard for Bitcoins to have a wide success with no clearing services at all.  Even transactions involving electronic currencies can be complex and expensive processes, which could certainly be simplified by clearing services.  That would be financial institutions’  role, and I think that it could be perfectly done if all indebtness priveleges they currently have are removed.   Bitcoins could be an excellent pressure to change these laws since they are best suited to work without these institutions, but I have no doubt that Bitcoins would perform better with those sound clearing services.

Also, not all the people have enough knowledge to handle all system security needed to protect bitcoins, and would prefer to ask for a custody service, even giving up anonimity but on the other hand improving security.  A free market surely would cover all needs, and I think this need for security and the aforementioned need for clearing services will always exist.

Manuel Polavieja

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7 Respuestas a “Response to Michael Suede “Against the gold standard”

  1. michaelsuede junio 23, 2011 en 2:01 am

    I think you are misinterpreting what I’m saying in the article.

    When I say “counterfeiting” – I’m really saying “fractional reserve banking”

    I totally agree that clearing services can play an important role in facilitating transactions, and I have no problem with them. What I’m trying to get at though is that the supply of Bitcoins can not be arbitrarily inflated through banking practices, unlike gold receipts.

  2. manuelgar junio 23, 2011 en 7:19 am

    Ok, but fractional reserve banking is a legal practice (unfortunately), while counterfeiting is not. Is not the same thing. Is not the same thing to issue currency with no backing at all than issuing currency backed by supposedly risky (debt) assets (mortgages, bonds, etc). People like fractional reserve banking because it allows them to monetize their liabilities. In my opinion fractional reserve banking is a response to market demand for credit.

    Once you use clearing services, then you could be exactly in te same situation than fractional reserve banking because you stop moving bitcoins all the time and instead you move account entries representing Bitcoins.

    Gold receipts under 100% reserve gold standard could not be issued without physical gold backing unless the bank breaks the law, which I agree is much easier than issuing fake Bitcoins.

  3. michaelsuede junio 23, 2011 en 6:18 pm

    They are the same thing. While one is legalized and the other is not, it has no relevance as to the fact that both are immoral actions that victimize people.

    Clearing services would not create the same situation as fractional reserve banking. While the services could engage in direct theft of money from the pool, this is totally different than being able to perpetuate a debt based ponzi scheme.

    Because Bitcoins are used directly in exchanges, and are not represented by receipts or tokens, they can not be used in a fractional reserve ponzi.

  4. manuelgar junio 23, 2011 en 6:40 pm

    There was a time that when bankers issued more certificates than gold they had, and the people realized it, they were executed on the main square of the town. That was when people was reluctant to get indebted. For the last 100 years people are demanding tones of credit, they want to get indebted very badly (I hope this crisis is the end of that extremely risky attitude). As I see it, fractional reserve banking is the market response to that credit demand.

    People find normal that banks pay them interest on their deposits. How in the world is the bank suposed to profit that money if they are safekeeping it in a vault? Since the people don´t reject interest on their deposits, I am sorry but they are passively authorising fractional reserve banking.

    Regarding clearing, if a financial institution accepts bitcoins as currency and they safekeep the bitcoins in their vaults, — “big e-wallets” :-) — then they would have Bitcoins in their assets and account entries for Bitcoins in their liabilities.

    Then payments within bank´s clients would be a simple transfer from one account to another with not need to move around the bitcoins and all the network verification process would be avoided. And also, banks could make just net payments between them, instead of moving back and forth every single transaction between them.

    If the bank is honest, that´s all right. But what if the bank begins to offer interests on Bitcoin deposits and clients begin to accept it?

    • michaelsuede julio 8, 2011 en 11:49 pm

      Interest on deposits in a 100% reserve gold standard come from time-deposit savings accounts.

      When money is deposited into a savings account under a 100% reserve standard, it can not be accessed for a specified period of time.

      This is because the money is not residing with the bank, since the bank has lent it out.

      Under a 100% reserve standard, the bank acts more like a warehouse than a bank. It charges fees for the storage of money unless the account holders agree to let the bank lend money out on time deposit.

      • manuelgar julio 9, 2011 en 12:48 pm

        Yes, but today account holders accept interests on demand deposits.

        I am going to write another post, centering more on the central argument of yours (gold standard vs. Bitcoins), which I found very interesting.

  5. Jorge Antonio Soler Sanz junio 23, 2011 en 11:58 pm

    Excelente artículo. Está bien escrito y tienes razón en lo que dices.

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