If you’re reading this piece, you likely already know that El Salvador recently decreed Bitcoin legal tender. The dollar will similarly continue as legal currency in the Central American nation.
Word has it that Bitcoin will enable much easier and safer remittances from Salvadorans working outside the country. The giant leap for the once obscure medium doubtlessly has some crypto-optimists with stars in their eyes about the future of decentralized money. El Salvador is the surely the beginning of increasingly common Bitcoin circulation.
The enthusiasts would be wise to curb their enthusiasm.
Bitcoin’s not about to replace the dollar, or any other broadly circulated money form. While there’s much to dislike about the dollar, Bitcoin’s creator(s) don’t know why the greenback is disliked.
To the reflexively libertarian in our midst who aren’t quite sure why they’re libertarian, Bitcoin is logically superior because it’s not “government money.” Fair enough, at first glance. Except that the lack of trust in the dollar is not because it’s government money; rather more than a few disdain the greenback because it lacks stability as a measure. More than that, they hate when the dollar is devalued. Stop and think about it.
Money isn’t wealth. Money is an agreement about value that facilitates the movement of wealth. I’ll pay you $10 for your HoneyCrisp apples, and you’ll sell them to me because you eye the butcher’s ribeye longingly. Money well predates government simply because money is as old as trade is. For as long as producers have been producing, they’ve used a variety of money forms (agreements about value) to exchange their surplus with others eager “to get” for their own surplus.
Gold eventually became “money par excellence” (Marx) because it was so price constant. When gold moves, it’s a consequence of the currencies in which it’s priced moving up and down. Which is why currencies have so long been defined in terms of gold. The connection between gold and money for thousands of years hasn’t been some randomly arrived at association as much as it was a logical market conclusion: an agreement about value facilitates the most trade among producers if its value is viewed as constant. The golden constant was married to money, and trade logically took off.
Back to the Honeycrisp/ribeye example, it’s hopefully a reminder that no one exchanges money. All trade is products for products; money merely the value agreement that enables producers of disparate production and wants to relentlessly exchange with one another. But since money is the measure that binds us, trust in the measure is of utmost importance. Gold was yet again connected with money long ago to enhance trust among eager-to-exchange producers; trade the central purpose of production.
Except that money hasn’t had a stable definition since the early 1970s. Keynesians, monetarists and mercantilists to varying degrees fell for the fantasy that a “floating” or shrunken measure would boost prosperity, which was and is the equivalent of a short-in-stature basketball player shrinking the inch in order to catch the eye of NBA scouts. No one would be fooled. No one’s fooled by unstable, untrustworthy money either.
Evidence supporting the above claim is the fact that currencies are traded daily to the tune of nearly $7 trillion. No one trades feet or inches simply because they’re uniform in length. Money used to have feet and inch qualities. Now its value is largely ignored by the U.S. Treasury, which means endless trading takes place each day to mitigate the dollar’s lurches, along with those of other currencies.
Looked at through the prism of the Honeycrisp owner and the butcher, the owner of the ribeye doesn’t exactly rejoice in giving away a tangible cut of meat for dollars that might be worth less, and subsequently exchange for much less. Which explains frenzied currency trading. Since currencies aren’t as trustworthy as they used to be, we must hedge all manner of product for product transactions to at least somewhat protect producers from being ripped off when they exchange real goods for “money” that bounces around in value.
Looked at from a Bitcoin perspective, hopefully readers can see where this is going. Bitcoin and other private money forms are arguably a market response to “government money” that hasn’t been very trustworthy since the early ‘70s (a dollar bought 1/35th of a gold ounce in 1971, now it buys roughly 1/1800th), but there would likely be greatly reduced interest in the cryptomonies if “government money” were stable in the way that it used to be.
Of course, the problem is that Bitcoin’s volatility as a measure makes the dollar appear rather rigid by comparison. Put another way, Bitcoin magnifies the dollar’s worst qualities many times over. And it’s not going to get better.
Indeed, when it comes to “money,” the focus can either be on price stability or supply; never both. Bitcoin’s creator(s) have made plain that supply will not be elastic, which means its price will be much more than elastic. The previous truth no doubt pleases the monetary cranks in our midst who think “inflation” a phenomenon of rising “money supply” as opposed to it being a logical consequence of currency devaluation (two very different phenomena), but with Bitcoin being a supply-limited concept, it can logically never exist as money. What’s a speculation, and Bitcoin is a speculation, rarely does.
To then pretend that what’s a wildly volatile speculation (“I’ll pay you in Bitcoin.” Ok, which Bitcoin?) will replace less volatile “government money” isn’t serious. It won’t happen in El Salvador, and it won’t happen in the U.S.
This isn’t to say that cryptomoney won’t replace the dollar and other well-circulated “government” currencies. Of course it could, and should. Good money is a stable measure of value, and right now government money isn’t living up to its billing. Neither is Bitcoin.
Much of the above content was originally published here on Forbes.com.
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