Monthly Archives: June 2013

WheelbarrowAn April 11, 2013 article in The Atlantic argued that bitcoins are not presently a currency, and that it “won’t be one until it has a central bank.”  According to the article, a serious problem with bitcoins as a currency is that an economy using bitcoins would be subject to a “massive deflationary bias.”  (See the article at

 Do bitcoins have a deflationary bias?  Let’s look at some numbers. 

 For starters, consider the 27-year period extending from now until 2040.  Presently there are roughly 11 million bitcoins in circulation.  By 2040 the amount in circulation will be 21 million.  With compounding, to get from here to there the average annual growth rate of bitcoins in circulation will be 2.4 percent.  Now, consider that growth in real GDP happens at a rate of roughly 3 to 3.5 percent per year.  If money (bitcoins) are growing at 2.4 percent and real GDP is growing at 3 percent, then one might expect prices (when measured in bitcoins) could be falling at 0.6 percent per year—hardly a “massive deflationary bias.” 

 Beyond 2040 the supply of bitcoins is fixed at 21 million.  If real GDP is growing at 3 percent, and the money supply is fixed, then prices might be expected to drop at an annual rate of 3 percent. 

 But there is a serious problem with the forgoing analysis.  That is, even though beyond 2040 the supply of bitcoins is fixed, the velocity certainly isn’t.  Bitcoins can be transferred between people at the speed of light.  The quantity of money in circulation may have been an important consideration back when currency had to be physically transported from point A to point B.  But when money can move at the speed of light, the physical quantity is circulation becomes a non-issue.  Whether prices when measured in bitcoins will ultimately rise or fall depends equally on the money supply AND its velocity, and nobody knows what the velocity will be.

 However, one thing is certain:  bitcoins cannot be printed up by central banks.  And, contrary to what appeared in The Atlantic, this is their biggest strength!  Governments working together with their central banks are able to steal real output from the private sector through running the printing presses.  Thankfully bitcoins are not controlled by self-interested politicians, central bankers, and greedy government bureaucrats, which is precisely why Capital as Money will soon be priced and sold in bitcoins.




Those familiar with the arguments and ideas of Capital as Money and also with “Bitcoins” will observe some striking similarities.  Both are attempts to replace our badly flawed and de-stabilizing fiat money and fractional reserve banking system with a simpler and more logical alternative.  Both take advantage of current technological exchange capability to build a private, endogenous, market-driven good used in exchange and valuation.

“Bitcoins” can be thought of as an artificial, infinitely divisible, cyber-commodity money whose supply will ultimately be fixed at a constant level.  Its fundamental value lies in this fact.  At eventual equilibrium the average value in exchange of a “Bitcoin” can be expected to be increasing at the growth rate of the economy.  Further, “Bitcoins” has the important advantage of already being initially employed, with growing success, as a private alternative money in exchange and valuation.  Another important advantage is that it doesn’t need banks to dilute or ruin its pure properties in value and exchange.  But what will that growth rate of the economy naturally be?  That is one of our fundamental reasons for advocating productive capital as money.

As we suggest in our book Capital as Money, we believe a broad index of capital as is the most logical choice for a privately determined money. Using capital as money could free the economy from our current fiasco of central bank manipulated fiat money, interest rates, and credit bubbles.  Capital as money also eliminates the role or need for regulated private banks and their associated Ponzi-scheme of leverage in repeatedly de-stabilizing our, money supply, our economy and its markets.  The beauty of using broad capital index shares as money lies in several attributes.  First, productive capital has a clear basis in the value of the real output it is responsible for producing.  This value is derived from the real marginal product of capital in production of output– also equal, at the “consumption-maximizing” capital intensity, to the rate of growth of the economy.  Further, using capital as a store of value and unit of exchange would tend to lead our under-capitalized economy toward the optimal level of investment and capital-intensity, referred to as the “Golden Rule” path in the economics literature.  Finally, broad productive capital not only has value, but it could be argued that it is the truest foundation of value in a high-tech market economy which is steadily moving toward minimization of commodity and labor inputs.

Both Bitcoins and Capital as Money represent good answers to a market need to replace our present badly flawed money, banking, and credit system.  Both are a recognition that we can do far better.  We are technologically past needing a central bank driven, regulated and exploited money system.  We are ready to emerge to a more rational alternative.  Only history and bureaucratic inertia keeps our present central-bank driven monetary system in place.  Both Bitcoins and Capital as Money seem infinitely preferable to what we are currently saddled with.  Which should prevail?

Both of them!  They are remarkably complementary.  A money founded on the value of productive capital (the economy’s tools of production) has the important advantages of being based on something of real value—in fact, perhaps the most fundamental real value of all within a market economy.  Its use as a store of value and medium of exchange will tend to drive the economy to a long sought optimal level of capital investment and capital intensity in production (read Capital as Money).   A money based on “Bitcoins” will have simplicity, divisibility and, given a stable fixed supply, and hopefully a relatively stable level of convertibility into other goods—in particular capital.  The two of them working harmoniously together could be the basis of a wonderful modern monetary system—a truly market-determined money based upon the growing real value of the economy.  Both of them are enabled by the technological fact that now the velocity of money in exchange is not a constraint or speed limit, but rather is simply determined by the cumulative demand for trading to satisfy human needs and desires.  The advance of technology has now permitted real freedom, instantaneous exchange.  The need for traditional banks and their role in creating money and pyramids of leverage, if it ever really existed in the past, has now certainly vanished.

In our view, the money that will emerge victorious in the marketplace of ideas is the one that will offer stable convertibility into a broad share of productive capital.  Without convertibility into something real, any number of costless-to-produce private fiat monies could compete, along with the promise of a fixed supply, with “Bitcoins.”  How would one choose amongst the potentially proliferating alternative candidates?  However, “Bitcoins” appears to be the first viable and acceptable alternative for a private market-based money—the unique position and acceptance it currently holds is not trivial.  If the value of “Bitcoins” was anchored by fixed convertibility into broad index shares of productive capital, the combination would be unbeatable.  Hence, the title of this blog.

The arrival of modern, market monies symbolizes the technological end of our current convoluted sad farce of a money and banking system.  The old system will not be missed.  But until it is entirely eliminated it can still inflict great damage.  Similar to a thrashing elephant with a fatal bullet in the brain, that doesn’t realize it is dead yet, it can still stumble about in its death throes crushing individuals, their property, and their wealth.

To celebrate the emergence of the first of the modern market monies, and our wish for their eventual success in simplifying exchange, protecting the wealth of all of us, and establishing a more rational market system of exchange and valuation, we must do what we can to support this welcome free-market trend.  Therefore, within the next several weeks we will begin to price and accept payment for our book, Capital as Money, in “Bitcoins.”




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