The free market is at work in attempting to come up with alternative solutions to government-controlled fiat money. One interesting innovation is the development of “Bitcoins.” A Bitcoin is simply a piece of information stored on a computer that is designed to be used as a medium of exchange and a store of value. That is, Bitcoins represent a privately produced “money.”
The purpose of Bitcoins is stated as follows:
“Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.” (https://en.bitcoin.it/wiki/Main_Page)
We greatly applaud the founders of Bitcoin. Creating a new “money” that eliminates the government and central bank’s monopoly on currency manufacturing is a significant move towards economic freedom and transparency. However, there is a drawback to Bitcoins: Like fiat money, Bitcoins are not backed by anything real. One way to obtain a Bitcoin is to purchase it with government-created fiat currency. The other way to get a Bitcoin is to generate it through a process of computer “mining.” Either way, there is nothing of real value behind it.
Of course, there is nothing of real value behind government-created fiat money either. And at least Bitcoins are designed to be of fixed quantity. In these days of across-the-globe money printing by governments and central banks, the promise of a fixed quantity of Bitcoins is precisely what is giving the new money some appeal in the marketplace.
Better than a Bitcoin would be a privately-created medium of exchange that is actually backed by something having real value. The evolution should be toward a money that is traded electronically, and when it is exchanged it represents the transfer of ownership of a small sliver of the economy’s productive capital.
We believe Bitcoins are unlikely to be widely accepted as a medium of exchange for the simple reason that the public is rightly suspicious of a money that is backed by nothing other than a promise to not create too much of it. However, Bitcoins represent an important first step in the development of a private money that does have real value: Capital as Money.