This is an opinion editorial by Taimur Ahmad, a graduate student at Stanford University, focusing on energy, environmental policy and international politics.
Author’s note: This is the first part of a three-part publication.
Part 1 introduces the Bitcoin standard and assesses Bitcoin as an inflation hedge, going deeper into the concept of inflation.
Part 2 focuses on the current fiat system, how money is created, what the money supply is and begins to comment on bitcoin as money.
Part 3 delves into the history of money, its relationship to state and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.
Money, Society And The State
The guiding principle behind the Bitcoin standard is the separation of money and The State, borrowing from the enlightenment mantra of separating The State and religion. Admittedly, this sounds catchy and attractive, a true rallying cry (although I will say that even the separation of religion and state isn’t as distinct in practice as it is in theory). The argument seems to be that Bitcoin acts as some technologically juiced up version of the gold standard, where the money supply is exogenous, and The State enters the marketplace for money as any other entity would. This then constrains the capacity of The State to also embark on wasteful spending sprees and allows the flourishing of the market — a dream reality straight out of neoclassical economic textbooks!
The truth is that the Bitcoin standard isn’t as similar to the gold standard as it may seem. Commodity money was accepted as legal tender and required regulation through state authority, whether to set its value through the levying of fines and taxes, quality control through maintaining standards, increasing supply through the discovery of new sources of the commodity, etc. More importantly, it is critical to understand that even under commodity money regimes, other forms of money, basically IOUs created through the magic of double-entry bookkeeping, were an important driving force behind economic development. This occurred both through The State and private actors. For example, Christine Desan in her book “Making Money: Coin, Currency, And The Coming of Capitalism,” talks about how during the early days of the United States, there was a shortage of commodity money as the cost of imports exceeded proceeds from exports. The government decided to issue IOUs as a means of paying its soldiers and created economic value for this money by making it acceptable as tax payment, thereby overcoming the drag of a constrained money supply on economic activity. This story is repeated across history, whether to fund wars and imperialism — the French colonial power did something similar in Africa to mobilize labor — or to finance infrastructure and development.
On a more micro-level, commodity money was mostly used for trade with people outside the community and where political authority was minimal, thereby overcoming an inherent lack of trust between parties. Within communities, however, IOUs and debt were the primary fuel for commerce. Michael Hudson, David Graeber and others have shown with evidence the importance of this form of money across civilizations, from the Babylonians and Romans to the Middle Ages and even early modern societies.
Since there were no substantive constraints on the issuance of debt, and hence money supply, while economic activity and resources had upper bounds (imagine a S-curve), there was an inherent and imminent mismatch between these two metrics. Therefore, the concept of widespread debt cancellations, done in different ways across civilizations, was common in order to protect the private debtors from bondage, especially when faced with economic shocks such as wars and natural disasters.
This realization is critical because a lot of the arguments for the Bitcoin standard rest on the following assumptions: state control of money is a new, fiat concept; the cost of creating money being zero is new and evil; pre-fiat economies operated under a fixed money supply. These are categorically false. Private monies have existed but The State, or political authority more generally, has always been there to varying degrees. Temples, chieftains, monarchs, etc., have played an important, albeit not always productive, role in defining and governing money. As with many examples today, states have misused their authority and created financial crises through mismanagement, but that is merely the cyclical nature of politics and history.
Similarly, this notion that suddenly the cost of creating money has become zero which leads to all forms of moral corruption is based on a false understanding of history. As argued above, double-entry bookkeeping and the concept of debt as money has been around for thousands of years — essentially, money creation has been “free” for a long time.
People will point to European colonialists and their violent search for gold and silver as a counterpoint, but I will reemphasize here that it’s important to be clear about what form of money we are talking about. Gold and silver primarily played a role in international trade while also having inherent value through their use in jewelry and so on, but that does not mean credit form of money was not simultaneously prevalent in domestic economies. Wherever there is either well established rule of law through political authority or requisite community trust, these forms of commodity money were not, and arguably are not, necessary. For global trade however, it is a different story.
This also is an argument against the notion that somehow Bitcoin is “backed by energy” or that its digital scarcity is some sort of quality as money. While it may offer a unique value proposition for other use-cases, these features do not offer any credence to bitcoin as money. The value of money does not come from its perceived scarcity but from its use, and use depends on material features and the political structures. Even where commodity money was used, gold and silver coins, barley, and other commodities were chosen not because of the energy exerted to create them or their perceived scarcity, but because of their qualities of durability, standardization, portability, etc. Using energy or an artificial sense of scarcity does not create some sort of inherent value as money — it never has, and it never should.
I want to be clear here. Money is not just one thing, it is a matrix of concepts that varies across who is using it, why it is being used, where it is being used, etc. My argument here is that the history of money shows that there have been different forms of money co-existing at different levels (e.g. within a community versus across communities versus between citizens and The State). For some of these levels, private IOUs were sufficient, for others commodity money (with and without state standardization) and for others state-sanctioned IOUs.
Money, therefore, comes out of social relations, it doesn’t come before them. Class relationships, ownership of the means of production, social institutions and political power create the monetary system. Money is not an abstract, exogenous concept that gets technocratically selected and imposed. It is born out of the ruling ideology of the time, which impacts all aspects of the system, of which money is just one part. I would argue here, giving away my political leanings if they weren’t clear by now, that it is class relations and the power structures around who owns the means of production that sets up the system.
For example, the current fiat system with its lack of accountability and transparency, the dominance of private financial institutions, the single-minded profit drive, and the state support for this unequal system is a result of the neoliberal ideology that took over in the 1970s. Banks and financial institutions were given this power under this garb of the free market, leading to misallocation of capital, inequality, climate catastrophe and overconsumption. The fiat system evolved to meet these objectives, not vice versa. Do VCs prefer to fund the 5th loss-making food delivery app over funding affordable housing because fiat is inflationary? No, it’s the incentive structures of the market.
Therefore, money is a concept perpetually in flux, with flexibility and dexterity to respond to divergent socioeconomic dynamics across societies and to how those dynamics evolve over time — whether this is done for the public good (however one defines it) is not inherent to a particular money form, but the social dynamics in which that money form is created.
Bitcoin In The Global South
Until this point I have largely been talking about the system in Western countries when referring to the current era and some reader probably has thought “Check Your Financial Privilege.” Let’s now move towards how the progressive narrative of hyperbitcoinization talks about its power to liberate the Global South from the dollar hegemony and the exploitative global financial system. The two main pain points upon which this argument rests are that these countries suffer from extremely high inflation and have large portions of their populations without access to financial services. Let me focus on the first value proposition because that is centered on the adoption of Bitcoin as money, while the financial services use-case can be achieved in multiple ways (this includes Bitcoin as an investment and a store of value — I think Bitcoin has a useful role to play here). The proposed solution is that through adopting a currency with fixed supply, governments won’t be able to print their way to high inflation and hence the cyclical economic crises these countries face will be…
Read More:Money And Alternative Roles For Bitcoin – Bitcoin Magazine
2022-09-04 02:00:00
