The FED’s Real Monetary Problem: Bitcoin

By Thomas Luongo
LewRockwell.com
Friday, July 23, 2010

http://www.lewrockwell.com/orig6/luongo7.1.1.html

Since being "converted" to both libertarianism and, by extension, Austrian economics I have developed a passion for money. The monetary regime lies at the heart of so many symptoms of societal conflict that studying the nature of money seems axiomatic to me. In our current mixed economy of Keynesian Shamanism and Monetarist Voodoo reading through even poor synopses of the Austrian business cycle was like finding the Rosetta stone. The money promulgated by the Federal Reserve and backed the full force and aggression of the U.S. Government could easily be seen as the motive force for all manner of secondary and tertiary effects, especially after a reading of Hayek’s The Road to Serfdom. There is nothing in the FED’s arsenal of monetary tools to combat this problem; the rejection of their basis for existence.

Since those moments of awakening I’ve spent much of my time thinking about how to inject a new currency into an existing regime without using force like with the Euro. I was an adopter of The Liberty Dollar, which was an interesting idea until the raid by the FBI in 2007. It highlighted the growing concern with the US Dollar; giving people the illusion of a silver-backed currency while hedging against its own success or failure by buying their coins and storing them away.

E-Gold’s troubles with The Man were equally predictable; thieves hate competition. The Liberty Dollar was being persecuted over a broad interpretation of counterfeiting laws (irony duly noted) while E-Gold was harassed over their customer’s actions, not any actions of their own. The Federal Government is allowed to run the twin Ponzi Schemes of Social Security and Medicare but U.S. citizens are not allowed to engage in commerce with those engaging in similar activities while not actively engaging in those activities themselves.

In other news, water is wet.

E-Gold is still in business, as are others like GoldMoney. They are all solutions for overcoming one of the real problems with hard currencies; the physical movement of metal from point A to point B in a speed of light economy. Unfortunately, they are all built on the same poor foundation, which the modern banking system exploits ruthlessly; trusting a third party to manage your property from a remote, central location. For GoldMoney, this is a feature not a bug, having vaults located outside the U.S.; a hedge against potential flight-of-capital diktats issued from Mordor-on-the-Potomac.

I have been tempted by these systems, but I have not placed funds with them. I’m willing to believe that many of them are legitimate in both their intentions and business practices, but I can’t afford to take that risk.

I prefer the promise of my dogs to someone I’ve never met.

It’s funny that I have no issue with using PayPal linked to my checking account but am unwilling to fund a GoldMoney account for the same purpose. Of course, I can hear Gary North on my shoulder whispering in my ear like a fiscally savvy Iago saying, "Obviously, you have a problem with that. Gold isn’t money." He is right. Because of Gresham’s law I value it more highly than its notional value. Why would I transact in it, when people will take these stoopid federal reserve notes? Gold is insurance against the depredations of the central bank upon the dollar. It may trade on the COMEX like a currency, but a medium of exchange it is not. As this hilarious video shows, the people of Harvard Square do not even know what to do with silver being offered to them for practically nothing; no less conceive of a use for it as a monetary instrument.

This is a warning to the hard money crowd that a return to commodity money will happen organically or not at all; an outgrowth of a loss of confidence in the dollar and the institutions that circumscribe our daily reality. Without any kind of fundamental shift in mass perspective, I see no future for a commodity exchange standard that bears any resemblance to the International Gold Standard.

People are more trusting of digits than physical gold.

To that end, I came across something the other day that piqued my curiosity. It was called Bitcoin. Compared to the systems mentioned previously, to call this idea a currency would do violence to the idea of a currency. It is, as of right now (vers. 0.3.2 beta), an exercise in what a digital currency could look like that is not dependent on third-party trust or centrally issued by a monopolistic agent of force.

Quoting from the FAQ Bitcoin is:

…a peer-to-peer network based anonymous digital currency. ''… there is no central authority to issue new money or to keep track of the transactions. Instead, those tasks are managed collectively by the nodes of the network.

Yes, but what is it? In deference to Dr. North again, the answer is simply, "Digits."

But, they are digits with a twist. New bitcoins are generated via lottery within its proof-of-work system where the records of previous time-stamped transactions are hashed into a chain, which is verified by all the members of the P2P system. There is planned inflation of a known and slowing rate up to a point. After that, deflation is built into its structure. It is currently in this early phase of development. The longer the chain the more secure the system is by nature of the algorithms at work. For details, see the white paper. They are currently divisible to 8 decimal places. Transactions can be completely anonymous.

Seriously, Tom, digits? These are intriguing digits, though.

It’s obvious to see (after translating the geek-speak) that the system was designed to be a digital analogue to gold and silver mining. The rate of generation is normalized to a set rate regardless of the number of people (CPU’s) working on it. The cost to generate digits is the electricity used by the CPU and the opportunity cost of using your computer for something else. Increasing the network size increases the rate at which independent verification of the transactions is performed.

How resistant to attack this is has yet to be seen. There is one underway right now. How successful can this be? I have no earthly idea and could care less. For me watching the rate at which new ideas are spawned when people are motivated to produce solutions to ancient problems is what is important.

So, yes, digits, which I said I believe to be the future of money, sadly. But, these are digits whose movements are verified by hundreds of incentivized auditors 24/7/365. Hell, the FED won’t submit to a one-time audit by those for whom they supposedly work! Yet we are loath to stop using their product.

I see Bitcoin as a metaphor for the Web itself. It is what happens when people of common tastes are able to find each other over vast distance to find their niche in the division of labor. Synthesizing cryptography, programming and monetary theory into a unique offering could not have happened without the Web; itself that which subverts attempts at control as a natural consequence of its own structure. Any success Bitcoin enjoys exists as a means to an end (improving how humans interact via mutual exchange), not the end itself (adoption in the marketplace). All knowledge is fractal; each new exploration implying a completely new host of questions that need answers... and right now we need answers.

I know that the current system is not only immoral but also failing. I’m fond of saying that the two most abundant things in the universe are hydrogen and the human capacity for self-delusion. Hyperinflation always occurs after a mass awakening from the delusion about the issuer’s ability to protect a currency’s value. We are flying into the monetary equivalent of "coffin corner" and will eventually stall. If, as Gary North has been saying for years that gold is not money, digits are, then digits that are designed to be "as good as gold" may be one way to disabuse us of our delusions.

And, if the empire does strike back at us for doing so, so what? Someone is working on that problem as well. It’ll be in version 2.0.

Thomas Luongo is a professional chemist, amateur economist and obstreperous recovering Yankee residing in North Florida. Reprinted with permission.

For further reading:
"Bitcoin And The Electronic Frontier Foundation", Bitcoin Blogger, November 13, 2010