The Fiat Emperor Has No Clothes

By Jon Matonis
Forbes
Thursday, April 18, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/18/the-fiat-emperor-has-no-clothes/

A piece from Paul Krugman in The New York Times this week criticizes bitcoin for being antisocial and for not having a State-controlled supply while secretly admiring its powerful abstractness.

As a complicit minion in the State’s appropriation of the monetary unit, Krugman perpetuates ‘The State Theory of Money’ myth that the sovereign’s power to collect taxes and declare legal tender imbues a currency with ultimate value.

While that may be a reason to acquire a certain amount of government fiat currency, it is a transitory value because in the end it is still based on a State-sanctioned illusion. Anyone who has visited a weekend flea market has noticed the old coin and currency collector displays filled with past experiments in national fiat money. Those paper notes were at one time valued for something too.

We don’t want a pristine monetary standard untouched by human frailty as Krugman claims. We want freedom in the monetary standard untouched by the politicizing process.

In a Krugman world, centralized management of the money supply is preferable to a market-based outcome because the academically-informed economists will serve the best interests of the economy at large. However, our monetary overlords possess no special knowledge or secret sauce that justifies dictatorial control over money any more than it would justify dictatorial control over the market for something like soda beverages or dog food. Trust in mathematics trumps trust in central bankers.

The question of political control over a monetary system is the greatest litmus test for discovering those that seek control over others. Usually, it will be cloaked in terms like full employment, price stability, temporary stimulus, quantitative easing, and economic growth, but manipulation of the money supply serves only to favor the issuers of that particular monetary unit.

Money has a lot in common with religion. At some level, it requires a huge leap of faith. Yes, a belief in gold requires this too as the non-monetary value assigned to gold is probably no more than 5% of its market price. However, this is also what makes bitcoin the ultimate social money because for its value it merely requires others, not the law. Money is already the most viral thing on the planet and the network effect exponentially reinforces that.

Krugman actually struggles to assert that bitcoin is antisocial because he cites economist Paul Samuelson who once declared that money is a “social contrivance,” not something that stands outside society. Samuelson is absolutely correct on that point and bitcoin stands firmly within society. It is no one’s right to question why some place value on bitcoin and some do not since all value is subjective. The rationale for assigning value to bitcoin is as varied as the human fabric itself.

In this context, society can be defined as those mutual users willing to agree to a medium of exchange and a store of value. Since bitcoin, just as the Internet, recognizes no political boundaries, Krugman resists seeing the global monetary unit as something social. Krugman sees society only as a multitude of aggregated fiefdoms where he is the emperor’s cherished tailor.

Though, just like the untainted child in the Hans Christian Andersen fairy tale, some of us are beginning to notice. It’s not the illusion itself that so offends our sensibilities, but more the notion that a competitive illusion is not to be permitted. If a free market illusion voluntarily agreed to from the bottom up is so desperately feared, then the protectors of the State-sanctioned illusion must not have the most benevolent of motives in store for us plebeians.

I don’t know about you, but I for one can stand up and exclaim: “the fiat emperor has no clothes!” What if more of us did?

Government Fees, Parking Tickets May Soon Be Paid in Bitcoin

By Jon Matonis
PaymentsSource
Monday, April 8, 2013

http://www.paymentssource.com/news/government-fees-parking-tickets-may-soon-be-paid-in-bitcoin-3013753-1.html

While some call Bitcoin an “existential threat to the state,” local governments could soon embrace the digital currency and payment system as a practical alternative to credit and debit cards.

E-Gov Link, an Ohio company that helps municipalities accept payments online for parking tickets, permits, and the like, now allows its customers to take bitcoin. Noting that "credit card purchases tend to carry high transaction costs due to the middleman and due to the high costs of fraudulent online purchases," E-Gov President Bill Nadler emphasized in a press release, "having a payment option that doesn’t carry that heavy transactional cost is definitely a plus." Bitcoin transactions can be processed at a fraction of the cost of other payment methods because they avoid the interchange structure of the legacy card processors.

Aside from the benefits to merchants, bitcoin payment choices have significant benefits to consumers who may have already received bitcoin from others in the sale of products or services and do not necessarily want to convert out of the digital currency. Broadening merchant acceptance expands the "network effect" of a young currency and starts to make Bitcoin viable as an end-to-end payments system.

"We know the bitcoin community is passionate about using bitcoin for payments, and will be demanding it of their local governments," said Nadler. "We’re happy to be here to answer the call, as municipalities scramble to find partners to help them with bitcoin."

Naturally, the use of bitcoin in local government settings will not be leveraging its optional anonymity properties, thus demonstrating bitcoin's overall flexibility when compared to physical cash.

"We look at bitcoin as a competitive advantage," says Jerry Felix, Vice President of Software Development at E-Gov Link. The company sees it as a natural evolution for governments to accept bitcoin as the currency gains popularity and like in other merchant categories, supporting bitcoin first creates a first-mover advantage. E-Gov Link focuses on integrating bitcoin payments into the shopping cart experience while relying on payment processor BitPay to manage the bitcoin wallets and currency conversion.

"We have customers across the U.S., in over 30 states. We're dealing with small and medium sized municipalities – cities, towns, townships, villages, and counties, and we provide web solutions for them," adds Felix. Marquee client examples for the web solutions provider include municipalities like Niagara Falls, N.Y., and Skokie, Ill.

For now, a municipality has to step forward and ask E-Gov Link to enable bitcoin payments – which is peculiar because other payment methods are not selectively disabled.

It would be far more interesting for these local governments to make it known to citizens that the bitcoin payment choice is an option. Still, the offering from E-Gov Link is a major step in that direction because bitcoin first has to be a viable option for the local government. Whether bitcoin demand is merchant-driven or consumer-driven, one thing is clear. Greater merchant choices and new payment categories contribute to the increasing value of the Bitcoin network.

Payments to government entities stand as one of the primary economic lynchpins for the preferred monetary unit. The obligation of the political authority to accept tax payments in government fiat currency is what underlies its value. While this E-Gov Link move does not cover tax payments demanded in a particular monetary unit, it can be seen as a precursor to a political authority expressing a preference for payments in a digital currency.

Bitcoin Obliterates "The State Theory Of Money"

By Jon Matonis
Forbes
Wednesday, April 3, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/03/bitcoin-obliterates-the-state-theory-of-money/

Once you get past the childish title, the recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists. Denninger is an intelligent student of the capital markets and his essay deserves a serious reply.

The economic contribution of his essay is that it represents the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an expose advocating the Chartalist approach to monetary theory claiming that money must have no intrinsic value and strictly be used as tokens issued by the government, or fiat money. Today, modern-day chartalists are from the school of thought known as Modern Monetary Theory (MMT).

Without getting into the intrinsic value debate, this is where I strongly depart from Denninger, because if we accept the thesis that all money is a universal mass illusion, then a market-based illusion can be just as valid or more valid than a State-controlled illusion. What Denninger and Greenbackers and MMT supporters reject is the notion that monetary illusions themselves are a competitive marketplace, falsely believing that only the State is in a ‘special’ position to confer legitimacy in monetary matters.

Regarding this issue of State-sanctioned legitimacy, bitcoin as a cryptographic unit seeks and gains legitimacy through the free and open marketplace. It is not a governmental instrument of legal tender that requires regulatory legitimacy and coercion by law in order to gain acceptance.

Therefore, the path to widespread adoption of bitcoin hinges on three primary market-based developments: (a) robust and liquid global exchanges similar to national currencies that can offer risk management via futures and options, (b) more user-friendly applications that mask the complexities of cryptography from users and merchants, and (c) a paradigm shift towards “closing the loop” such as receiving source payments and wages in bitcoin to eliminate the need for conversion from or to national fiat.

Even after graciously accepting Denninger’s definition of what the ideal currency would be (which I don’t) and searching for any economic nuggets of value, his arguments can be distilled into four main criticisms of bitcoin as a monetary instrument. First, bitcoin does not provide cash-like anonymity. Second, bitcoin transactions take too long for confirmations to be useful in everyday transactions. Third, bitcoin exhibits irreversible entropy.  Fourth, the decoupling of the stateless bitcoin from the obligation of monetary sovereigns is considered a fatal weakness.

Now that we identified the objections, let’s take these in order.

On the first point surrounding bitcoin anonymity, Denninger only embarrasses himself with this criticism. By default, bitcoin may not offer anonymity and untraceability like our paper cash today, but it is better described as user-defined anonymity because the decision to reveal identity and usage patterns resides solely with the bitcoin user. This is far superior to a situation where users of a currency are relegated to seeking permission for their financial privacy which is typically denied by the monetary and financial overlords. Also, his capital gains tax issue is a non-starter because it’s a byproduct of a monopoly over money.

His second criticism of a lack of utility in the ‘goods and service preference’ due to timing of sufficient block chain confirmations has some merit. However, advances have been made in the use of green addressing techniques that solve the confirmation delay problem by utilizing special-purpose bitcoin addresses from parties trusted not to double spend.

Denniger’s third criticism that bitcoin exhibits irreversible entropy is confusing. Typically, entropy refers to a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system’s disorder. In the case of bitcoin, I suspect Denninger is taking it to mean the degradation of the matter in the universe because of his explicit comparison to gold. While it is true that bitcoins lost or forgotten are ultimately irretrievable, I view that as a feature not a bug because it is the prevailing trait of a digital bearer instrument. Two bitcoin digital attributes that make it superior to physical gold are its ability to create backups and its difficulty of confiscation. Furthermore, the number of spaces to the right of the decimal point (currently eight) is immaterial to bitcoin’s suitability as a monetary unit.

Now for the big and final one. Denninger asserts that monetary sovereign issuers possess not only the privilege, but the obligation, of seigniorage, which Denninger refers to as bi-directional since sovereigns have the responsibility of maintaining a stable price level during times of both economic expansion and economic contraction. As a product of Hayekian free choice in currency, market-based bitcoin is decentralized by nature and poses a false comparison to the century-old practice of central bank monetary manipulation. Fear not deflation.

Governments have appropriated the monetary unit for their own benefit by declaring it the only preferred monetary unit for payment of taxes to the State. Believing that governments have sincere and good intentions in administering the monetary system is akin to believing in fairy tales. Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign’s spending activity to the detriment of the unfortunate users of that monetary unit. Decentralized Bitcoin obliterates this sad state of affairs.

Denninger’s biased and establishment preference for a monetary sovereign serves only to harm his analysis because it undeniably closes him off from alternative, and usually superior, free-market monetary arrangements. More damaging, however, is the fact that it places him outside of the mainstream in free banking circles and squanders his remaining quasi-libertarian credibility as a champion of markets.

How Cryptocurrencies Could Upend Banks' Monetary Role

By Jon Matonis
American Banker
Friday, March 15, 2013

http://www.americanbanker.com/bankthink/how-cryptocurrencies-could-upend-banks-monetary-role-1057597-1.html

Peter Šurda

I recently had a fascinating chat with the economist Peter Šurda to discuss how nonpolitical cryptocurrencies like bitcoin could alter the future of fractional reserve banking.

Peter is also a software developer experienced in the online payments industry and will present at the Bitcoin 2013: The Future of Payments conference in San Jose in May. His 2012 master's thesis at Vienna University of Economics and Business was entitled Economics of Bitcoin: Is Bitcoin an Alternative to Fiat Currencies and Gold? He's an abstract thinker, but the implications of his work are tantalizing: that digital money like Bitcoin opens up possibilities for banking without central planners or a lender of last resort, where interest rates and reserve requirements are driven purely by the market.

The debate between the full reserve bankers and the fractional reserve bankers is an old one and it has been explored in depth by the Austrian school of economics. More recently, the debate has been broadened to include the dynamics of introducing the bitcoin cryptocurrency, which is the functional equivalent of digital gold, since its supply is predictable and fixed. (There are currently 10.9 million bitcoins in circulation with a total fixed supply of 21 million expected to be mined before 2140, 99% of them by the year 2032.) The Austrian school economist Michael Suede and the technologist Eli Gothill have speculated that fractional reserve banking can indeed appear within a bitcoin monetary environment. This is where we join up with Peter.

JON MATONIS: I enjoyed your blog post, "Market Forces and Fractional Reserve Banking." Do you consider fractional reserve banking to be compatible with Austrian economics?

PETER ŠURDA: First of all, I would like to separate fractional reserve banking and credit expansion. On one hand, there are ways of increasing the money supply, in the broader sense, which do not require fractional reserve banking or changes in the monetary base such as a system based on the principle of mutual credit like LETS [local exchange trading systems], or a fiat currency that uses bitcoin as reserves (i.e. they are not claims in the sense that Ludwig von Mises uses them, but they act as full substitutes). From the opposite direction, fractional reserve banking does not necessarily lead to credit expansion.

I agree with the full reservists that credit expansion has the effects described by the Austrian Business Cycle Theory. However, I agree with the free bankers that fractional reserve banking is not necessarily a violation of property rights and other ways of increasing the money supply also are not necessarily a violation of property rights.

So I think that the economic and legal analysis are two separate issues and need to be addressed separately. I avoided the legal analysis in my thesis and concentrated on Austrian Business Cycle Theory and policy issues, but in an earlier draft I have several pages about legal aspects too, and I discussed the topic with [the legal theorist] Stephan Kinsella.

JON MATONIS: How does a nonpolitical cryptocurrency like bitcoin alter the landscape in the "full reserve" versus "fractional reserve" banking debate?

PETER ŠURDA: Austrians have made arguments in the past that lead to the conclusion that fractional reserve banking does not necessarily lead to credit expansion, even though they never explicitly formulated it this way and might not have realized the connection. The reason is that if credit instruments do not decrease transaction costs over the monetary base, they are unlikely to act as a part of the money supply. Bitcoin shows that this is not only a hypothetical but empirically possible to implement. With Bitcoin, it is much less likely that credit expansion will occur.

In other words, we need to separate two things. Why do people want to hold fractional reserve banking instruments, which may include the interest payments as one of the reasons, and why do people want to use fractional reserve banking instruments as a medium of exchange which, I argue, requires that the fractional reserve banking instruments decrease transaction costs. That they historically manifested themselves through a common instrument is an empirical quirk and not an economic rule. The ability to loan money is beneficial. Contrary to many Austrians, I agree that maturity transformation can be beneficial, and if the loan ends up being a liquid instrument, it also can be beneficial. But if it is so liquid that it becomes a part of the money supply, that's when it has a detrimental effect on the economy.

For full reservists, Bitcoin shows that the question of fractional reserve banking is less important than they thought. Fractional reservists, on the other hand, need to think about the nature of the mechanisms equilibrating the money supply. I tried to explain the issue to [the economists] George Selgin and David Glasner in comments on their websites, but I wasn't successful in getting my point through.

JON MATONIS: If bitcoin is digital gold, does that portend a future where a bitcoin standard (akin to the gold standard) can emerge or partial bitcoin backing for other currencies?

PETER ŠURDA: They probably can emerge, but the more important question is whether they would be preferred to bitcoin. Only something that provides a significant improvement would be preferred. I only know two potential candidates for that: Ripple and OpenTransactions.

JON MATONIS: In a bitcoin world, is fractional reserve banking only possible with offline substitutes (such as physical coins or cards, which can be traded hand-to-hand, containing the private key to a bitcoin address) or an intentional "fork" in the block chain ledger?

PETER ŠURDA: Hypothetically, the reserves can be offline and the substitute can be a clearing system like Ripple, so there are other possibilities too. But if I understand your point correctly, offline "substitutes" might have a higher chance of actually becoming full substitutes because they might have more obvious advantages.

JON MATONIS: As the recent block chain fork episode demonstrates, there is a need for offline bitcoin transactions to continue. Is this demand sufficient for a money substitute to evolve, such as offline substitutes with full or partial bitcoin backing?

PETER ŠURDA: This is primarily an empirical question, so we can't be completely sure about that. I think the probability for this is significantly lower than with the currencies that we've known historically. The end result is also path-dependent; for instance, it depends on how quickly bitcoin matures and/or adapts to changes compared to the potential substitute.

Fractional reserve banking does not come into existence magically. It must follow economic rules. With gold and similar commodities, fractional reserve banking comes into existence for these reasons: On the demand side, there is a demand for money substitutes, because they provide something that money proper does not; and on the supply side, money substitutes carry maintenance costs for the issuer (e.g. storage of gold) and these need to be offset somehow. The issuer can charge on holding (e.g. demurrage of bank notes), transacting (e.g. check clearing), or, obviously, externalize the costs through fractional reserves. From the point of view of an individual user, fractional reserve banking appears to be the least costly alternative. So obviously fractional reserve banking wins.

Putting it together: If there is a general demand for money substitutes, this leads to fractional reserve banking. Unless it's illegal. Then it might not. Solution: Have money which does not lead to the creation of money substitutes. Bitcoin shows that at least hypothetically, this is possible. I might even go a bit further and make this statement: If on a free market money substitutes do not develop even though there is no legal or technical obstacle for them, it means that the choice of money is Pareto-optimal since no change in the monetary system leads to an increase in utility.

JON MATONIS: Does a demand for positive return on bitcoin balances lead to an environment of competitive bank lending with risk-adjusted interest rates? And will this lead to an environment of fractional reserve banking with depositors offered higher interest rates in exchange for the additional risk premium of running a fractional portfolio?

PETER ŠURDA: Yes, I would say it does, but until there are industry niches that primarily use bitcoin, it is probably not much different from gambling.

This might lead to negotiable credit instruments with maturity-mismatching or maturity transformation, depending on which economic school you use for terminology. However, I don't think this feature alone is sufficient for these instruments to be accepted as full substitutes whereas George Selgin appears to think it is. Now, whether to call such a situation "fractional reserve banking" even though no credit expansion occurs is unclear. I lean towards yes, but there could be other interpretations.

JON MATONIS: How do you see bitcoin changing interest rate structures and lending practices?

PETER ŠURDA: Using Bitcoin for loans only makes sense for those businesses that use bitcoin as a unit of account, unless, of course, you're just speculating on the market but don't actually sell any goods or services. I think this will only occur at much higher levels of liquidity or until we can be quite sure that it deserves the label "money." Until these higher levels of liquidity are reached, the price of bitcoin will probably be quite volatile, which reduces the likelihood that people use it as a unit of account.

However, there could be niche market segments that use bitcoin as a primary medium of exchange and [bitcoin] mining is the most obvious candidate. For these, the unit of account function would make sense even if the global market penetration is lower.

Assuming one of these thresholds is crossed and the money supply remains inelastic (i.e. no significant credit expansion), the interest rate of bitcoin should be a good reflection of the time preference of those market participants that use it as a unit of account. Bitcoin also makes it much easier for lending to occur in a decentralized manner, I think. Rather than a small number of "too big to fail" institutions, we should see smaller specialized teams that act as facilitators without owning the liabilities or being liable themselves.

JON MATONIS: Can a free market fractional reserve system (as opposed to a central banking fractional reserve system) coexist with full reserve banking? Or will one drive out the other?

PETER ŠURDA: I think that if money substitutes emerge, fractional reserve banking will out-compete 100% reserve banking in the market. I deal with this a bit in an earlier draft of the thesis. If they don't emerge, on the other hand, we'll have a money supply equivalent to the monetary base and debt will not cause changes in the money supply. It would be viewed as merely highly liquid credit. I don't think they can coexist for a long time assuming the same underlying money in the narrower sense, of course.

Government Ban On Bitcoin Would Fail Miserably

By Jon Matonis
Forbes
Monday, January 28, 2013

http://www.forbes.com/sites/jonmatonis/2013/01/28/government-ban-on-bitcoin-would-fail-miserably/

In a blog post last week at Unqualified Reservations, the author described a fictitious account of how bitcoin dies because a "DOJ indictment is unsealed" naming any and all BTC exchange operators as criminal defendants and the "BTC/USD price falls to zero and remains there."

While this U.S.-centric plot would seem more plausible in a cryptographic flaw scenario, it does bring to light some interesting game theory strategies for both regulators and free market monetary proponents. Aside from the impact on price, would a government ban on bitcoin, including a direct ban for law-abiding merchants, shrink the available size of the so-called bitcoin market? Is an officially "illegitimate" bitcoin a useless thing?

I maintain that a government ban on bitcoin would be about as effective as alcohol prohibition was in the 1920s. Government prohibition doesn't even do a good job of keeping drugs out of prisons. The demand for an item, in this case digital cash with user-defined levels of privacy, does not simply evaporate in the face of a jurisdictional ban. One could even make the case that it becomes stronger because an official recognition that Bitcoin is not only a "renegade" currency but a "so-effective-it-had-to-be-banned" currency would imbue the cryptographic money with larger than life qualities.

Ironically, the ban would create something like the Streisand effect for Bitcoin generating an awareness for entire new demographic groups and new classes of society. Unlike alcohol, bitcoin itself might not be considered a consumption good but it certainly makes it easier to acquire and sell certain consumption goods.

The under-banked people of System D would awaken to using bitcoin for eliminating onerous fees or the risk of handling cash. The individuals seeking drugs without violence or prescriptions would understand the imperviousness of sites like the agorist Silk Road. The anti-banking crowd would race to get their hands on some bitcoin as a symbolic gesture to weaken bankers' firm grip on payments. The pro-gambling casino people would all of a sudden realize how play money bitcoin bypasses the ridiculous and religious anti-gambling laws. The asset protection wealth managers would start to become fascinated with esoteric things like deterministic brainwallets and Tor.

Which brings us to the giddy, pro-banking-integration spokespeople for Bitcoin that tend towards full compliance because it's required or, worse, preemptive compliance because they believe it to be safe. What happens to their rosy world when bitcoin exchanges can no longer operate in the open without fear of State retaliation? After all, they were patiently counting on 'railroad tracks' and connected links with existing financial institutions to grant Bitcoin a legitimacy mandate.

Now with burgeoning covert and in-person exchange opportunities plus a variety of reliable exchanges operating outside of the U.S., the Bitcoin of our fictional story is far from fading into obscurity. Conversely, it is the ambitious opportunities for crony capitalism that fade into obscurity because a closed-loop bitcoin economy not requiring meatspace exchanges would emerge and accelerate.

One doesn't drive Bitcoin underground. A free Bitcoin was designed to be 'underground' for its own survival otherwise it wouldn't need such an inefficient, decentralized block chain. The low-cost and non-reversible bitcoin transactions that appeal to mainstream commerce are merely byproducts of a mutinous system that doesn't rely on trusted third parties. Joel Bowman writing at The Daily Reckoning clearly recognizes that bitcoin's future doesn't depend on State legitimacy let alone low-cost sanctioned transactions:

"In the end, bitcoin is a bet on the other side of The State’s coin; the free market side. It’s a bet that voluntary trade will, in the end, overcome neanderthalic force and coercion. It’s a wager that the conversation currently underway in the shadowy 'black' market is far more intriguing, far more complex, far more nuanced and exceedingly more interesting than the yip-yapping that distracts the undead, mainstream TV-consumer for an hour or so around feeding time every evening."

I would add that it's also a bet on income and consumption privacy becoming the norm over 'reportable earnings' and invasive transaction tracking. It's a bet that career mobility and independent contractor businesses will eventually outstrip the growth of the corporate wage-slave population. It's a bet that the degree of an individual's financial privacy is selected solely by the individual and not by what the State reluctantly permits.

Prohibiting bitcoin is the opposite of what a rational game theorist would conclude. But are our regulatory overlords smart enough to advocate a hands-off policy? If the State cannot plausibly ban bitcoin, why would they want to give it the additional power to grow and propagate? Bitcoin challenges the State as monetary sovereign and that has grave implications for their monetary authority and quasi-peaceful taxing authority. A savvy and smart regulator would seek to avoid the confrontation that "Old Bitcoin Radical" foresees.

Their best response to Bitcoin is irrelevancy, or failing that, extreme gold-like market manipulation for as long as possible. The end game for the State is perpetuating the fiat myth -- their fiat myth not the populace's cryptographic Bitcoin myth. They have always known that faith in money is a mass illusion, however they never considered that they wouldn't be in charge of the illusion.

In the meantime, just enjoy the spectacle and relax people for mining bitcoin, holding bitcoin, sending bitcoin, and receiving bitcoin is not against the law in any country in the world.

U.S. Secret Service Bans Certain Gold and Silver Coins On eBay

By Jon Matonis
Forbes
Saturday, December 15, 2012

http://www.forbes.com/sites/jonmatonis/2012/12/15/u-s-secret-service-bans-certain-gold-and-silver-coins-on-ebay/

eBay was contacted by the U.S. Secret Service sometime last month to remove the Liberty Dollar precious metal coins. Citing consistency with eBay's general policy of not listing counterfeit items, eBay spokesperson Ryan Moore confirmed the ban with Coin World.  The following email was sent to affected sellers when the systematic removals began:

"The United States Secret Service has requested the removal of all Norfed Liberty dollars on the eBay site as counterfeits. … Please do not relist this item(s). We appreciate that you chose to list this coin on our site and understand there was no ill intent on your part. Your listing fees have been credited to your account."

Real is fake and fake is real. That's pretty much the monetary world that we live in now as we are coerced to trade and pay taxes in the designated and one 'legitimate' State currency. Certainly, the U.S. Secret Service wouldn't want anyone purchasing pure (.999 fine) gold and silver medallions mistakenly thinking that they might be getting official and real money issued under the authority of the United States.

Deriving its authority from Title 18 of the United States Code, Section 3056, the United States Secret Service is one of the nation's oldest federal investigative law enforcement agencies and it was originally founded in 1865 as a branch of the U.S. Treasury Department to combat the counterfeiting of U.S. currency. In addition to its mandate of protecting the president, vice president, and others, the U.S. Secret Service is responsible for maintaining the integrity of the nation's financial infrastructure and payment systems:

"The Secret Service has jurisdiction over violations involving the counterfeiting of United States obligations and securities. Some of the counterfeited United States obligations and securities commonly investigated by the Secret Service include U.S. currency (to include coins), U.S. Treasury checks, Department of Agriculture food coupons and U.S. postage stamps."

Rather than the beginning of a second wave of gold confiscation, this action to remove coins at eBay and other sites is aimed directly at NORFED Liberty Dollars issued from the now defunct mint of monetary architect Bernard von Nothaus who was convicting of counterfeiting in 2011. For those that haven't followed every twist and turn of this landmark case, I would recommend the amicus curiae brief filed by GATA, the brilliant piece from Lew Rockwell, and the possible implications of the von Nothaus case on other attempts to start a new currency.

The State's nervousness with alternative money creation extends far beyond the lookalikes and the replicas. It goes to the heart of creating a new monetary system evidenced by the targeted shut down of systems that achieve significant market adoption or present an embarrassing dilemma. At issue in the von Nothaus motion to set aside his conviction is the larger constitutional question of whether the government has the power to outlaw the private coinage of money.

Presiding over one of the most egregious assaults on monetary freedom in history, District Court Judge Voorhees still has not set a date for the von Nothaus sentencing. In announcing the verdict, U.S. Attorney Anne M. Tompkins declared:

"Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism. While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country. We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government."

"It's a loser's game to suppress private money that is sound in order to protect government-issued money that is unsound," writes Seth Lipsky in the Wall Street Journal.

For budding monetary entrepreneurs that may be seeking legitimacy to avoid von Nothaus' fate, Robert Murphy of the Mises Institute points out the folly of searching for legal loopholes because "if any attempts to circumvent the dollar actually got off the ground, then the government would find some legal pretext to shut it down." If a competing system posed a genuine threat to its monopoly on money, the government would find a way to prosecute it, "meaning no entrepreneur would spend the resources and time trying to launch an alternative system."

Decentralized and digital currencies without a single point of failure are starting to show some resiliency to arbitrary and capricious shutdowns.

Political freedom can only be preceded by economic freedom which is preceded by monetary freedom. And, critical elements of monetary freedom are currency competition and the right of private coinage. We need more entrepreneurs that rely on the free market, not the law, as their weapon of legitimacy.

For further reading:
"Thoughts On The Liberty Dollar Debacle", Brandon Smith, undated

Bitcoin Prevents Monetary Tyranny

By Jon Matonis
Forbes
Thursday, October 4, 2012

http://www.forbes.com/sites/jonmatonis/2012/10/04/bitcoin-prevents-monetary-tyranny/

Mel Gibson as William Wallace wearing woad.

Bitcoin is not about making rapid global transactions with little or no fee. Bitcoin is about preventing monetary tyranny. That is its raison d’être.

Monetary tyranny can take many ugly forms. It can be deliberate inflation, persecutory capital controls, prearranged defaults within the banking cartel, or even worse, blatant sovereign confiscation. Sadly, those threats are a potential in almost any jurisdiction in the world today. The United States does not have a monopoly on monetary repression and monetary tyranny.

Once the State is removed from the monetary sphere and loses the ability to define legal tender, its power becomes relegated to direct legislative and enforcement measures that do not immorally manipulate a currency. Taxes for wars and domestic misadventures will have to be raised the old-fashioned way — that is to say government money cannot be raised by simply debasing the currency.

Just as the Second Amendment in the United States, at its core, remains the final right of a free people to prevent their ultimate political repression, a powerful instrument is needed to prevent a corresponding repression — State monetary supremacy. That task has fallen to an unlikely open source project that is based on cryptography protocols and peer-to-peer distributed computing. As the mechanism for a decentralized, nonpolitical unit of account, the Bitcoin project uniquely facilitates this protection.

The timing of Bitcoin’s appearance, and subsequent growth, is no accident either. If one follows the relevant sentiments and trends, it’s evident that society was approaching a breaking point. Essentially, bitcoin is a reaction to three separate and ongoing developments: centralized monetary authority, diminishing financial privacy, and the entrenched legacy financial infrastructure. An alternative money provider that was centralized would probably not survive long in any jurisdiction. The emergence of Bitcoin was baked into the cake already.

We can see from the case against digital money provider e-gold that an efficient challenger to the provision of a stable monetary unit will not be permitted… really. In 1996, a humble oncologist named Doug Jackson bravely built an auditable and verifiable system of transferring ownership rights to gold and silver bullion in an online digital environment. Wired’s Kim Zetter described it this way:

"E-gold is a privately issued digital currency backed by real gold and silver stored in banks in Europe and Dubai. Jackson says about 1,000 new e-gold accounts are opened daily, and the system processes between 50,000 and 100,000 transactions a day.

With a value independent of any national legal tender, the electronic cash has cultivated a libertarian image over the years, while drawing the ire of law enforcement agencies who frequently condemn it publicly as an anonymous, untraceable criminal haven, inaccessible to police scrutiny."

Where have we heard that before? Then in December 2005, the U.S. Federal Bureau of Investigation and Secret Service raided e-gold’s Florida offices. Jackson tells Wired, “They basically raped our computers and also took us offline for 36 hours, took all the paper out of our office.” Jackson says that the government also froze parent company Gold and Silver Reserve’s U.S. bank account but the company survived, “only because its euro, pound and yen accounts are maintained outside the United States.” The physical bullion assets were subsequently seized as well.

With the prosecution resting on a civil complaint charging Gold and Silver Reserve, Inc. with operating as an unlicensed money-transmitting business, Jackson finally acquiesced in July 2008 and plead guilty to conspiracy to commit money laundering (a victimless crime) and operation of an unlicensed money transmitting business rather than the alternative threat of 20 years in jail and a half million dollar fine.

Wired magazine, in June 2009, published this excellent account of the e-gold business in the wake of the federal investigation entitled “Bullion and Bandits: The Improbable Rise and Fall of E-Gold”. Also included in the article is probably the most telling photo of all — Doug Jackson sitting on the floor surrounded by file boxes labeled U.S. Secret Service.

Zetter writes, “At e-gold’s peak, the currency would be backed by 3.8 metric tons of gold, valued at more than $85 million.” E-gold founder Doug Jackson wanted to solve the world’s economic woes, “but instead got an electronic ankle bracelet for his trouble.”

Recently, in 2009, Bernard von NotHaus was indicted on counterfeiting charges for manufacturing a private metallic coin that actually contained some precious metals. After 23 years of research and development plus 11 years of operating in the marketplace, Liberty Dollar suspended operations. Following the conviction and for the appeal, the prominent Gold Anti-Trust Action Committee filed an amicus curiae brief in support of acquittal and revolving around the question of whether anyone but the government has the right to issue money. Afterwards, many commentators pointed out the absurdity of penalizing honest money to strengthen the facade of manipulated money.

Further contributing to the disturbing trend against monetary freedom and financial privacy are initiatives like the Foreign Account Tax Compliance Act (FATCA), which has been written about many times on these pages and also in The New York Times. Other countries around the world would not even contemplate such a brazen endeavor that imposes a costly withholding and disclosure regime on sovereign foreign entities and financial assets. Furthermore, they see it as American arrogance and American hegemony run amok.

However, society will not be ready to fully embrace the promises of decentralized nonpolitical currency until it can come to terms with the fact that money in a free society should not be used for the purposes of identity and asset tracking. Banks and governments may be concerned with that goal, but it is not the role of our money.

What is Free Banking?

In this video interview, George Selgin defines free banking as a monetary arrangement where currency is competitively supplied by private commercial banks and, consequently, not monopolized by a central bank.

He sets as examples the Scottish and Canadian’s free banking systems, which flourished in the eighteenth and nineteenth centuries; yet, he clarifies that a completely free banking structure has not existed, since there has always been some form of government involvement. He discusses the possibility and feasibility of implementing such system in the present time, stating, as well, the negative macroeconomic implications that a central banking system has, especially for a developing country such as Guatemala, and suggests that more liberty and less government intervention could be a source of wealth and growth.

Selgin concludes by explaining how transaction costs are managed within this system, in addition to the effectiveness it entails when dealing with crises, such as bank runs or instability, in the current banking organization.

Lucas Rentschler
Universidad Francisco Marroquín
Business School
Guatemala, July 31, 2012

Economist Appearing On Max Keiser Show Forced To Resign

By Jon Matonis
Forbes
Sunday, August 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/08/26/economist-appearing-on-max-keiser-show-forced-to-resign/

It's been confirmed now that economist Sandeep Jaitly has been forced to resign his position from The Gold Standard Institute following his on-air remarks about Ludwig von Mises and Ayn Rand. Jaitly, a follower of Antal Fekete, originally tweeted that "If it ain’t Menger or his direct student Eugene [sic] Von BB, it ain’t Austrian. Sorry #Mises: respectfully, too many mistakes were made."

On August 16th, Jaitly elaborated further on Russia Today's Keiser Report:

"Mises didn’t look back to Menger’s original axiom which was that value is not outside of your own consciousness. And he didn’t observe what Menger observed about market action in the sense that there are always two prices, there’s a bid and an offer. And von Mises didn’t like to admit that interest was a market phenomenon. He sort of wanted to imply that it’s a sort of natural consequence of not having a present good basically. So to develop a theory of interest without going back to Menger’s original observations is not continuing the tradition in the Austrian way as we would see it."

Then, after much debate in the blogosphere, someone known as kdt posted this text purporting to come from The Gold Standard Institute on August 25th:

Lest there be any misunderstanding, the views expressed by Sandeep Jaitly in his interview with Max Keiser (http://maxkeiser.com/tag/carl-menger/) are not the views of The Gold Standard Institute. To the contrary, we strongly disagree with those views. There is no doubt that Ludwig von Mises made mistakes; that should not diminish the respect due to a great scholar. The mistakes of Mises are dwarfed by the enormity of his positive contributions. The Institute believes that history will judge Ludwig von Mises far more kindly than does Mr. Jaitly. The Ayn Rand diatribe was of a tone that displayed little understanding of her philosophy and needs no further comment. The philosophy of The Gold Standard Institute has always been, and will remain, to debate and promote ideas, not to attack people.

Sandeep Jaitly has resigned from his position as Senior Research Fellow with the Institute and we sincerely thank him for his past contributions.

Philip Barton
President

In an email confirming the action, Sandeep Jaitly explained to me, "apparently, they don't want to burn bridges," and I take this to mean bridges with large benefactors and partners. However, Jaitly is unfazed and vows to continue his work including a PhD acceptance speech on the Ludwig von Mises split from Carl Menger and Eugen von Böhm-Bawerk regarding certain aspects of interest rate theory.

I like Sandeep because he challenges orthodoxy in a thoughtful way. Aside from the illuminating monetary debate sparked by Jaitly, as a guest on the Keiser Report myself, the forced resignation of an economist is both interesting and disturbing. Frequently, I find myself challenging the orthodoxy of the Mises' Regression Theorem on the origin of money when it comes to the nature and value of bitcoin as money.

Mises has written that, "Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment."

While I and other Austrians wholeheartedly agree with Mises on this, the notion of a decentralized bitcoin has eluded many in the economics profession. Peer-to-peer bootstrapped currencies secured by cryptography in a distributed computing project were not anticipated by Menger nor Mises. They are a reaction to our 'politically-hostile' environment for free market currencies. Public-key cryptography, as opposed to symmetric key cryptography, is a relatively new phenomenon that Austrian economics has not yet come to terms with.

Some may not like it, but bitcoin is a Mengerian-, Misean-, Rothbardian-, Austrian-currency in its purest form. Still actively debated within the Austrian economics community on whether or not bitcoin satisfies the regression theorem, I have gone so far as to propose a corollary.

It's not surprising that this Max Keiser television dialogue caught the attention of Austrian scholar Tom Woods who responded swiftly on LewRockwell.com. According to Jaitly, Woods is still refusing to appear on a television debate about the issues. I encourage Woods to accept Jaitly's offer to appear and I also agree with John Robb who said, "The only real debate that remotely matters between the Mises faction and the Fekete faction regards their difference in perspectives on the merits and pitfalls of the Real Bills Doctrine. That would make a fine core issue for debate between Sandeep Jaitly and Joe Salerno or Guido Hülsmann."

As Lawrence White has pointed out, while real bills circulation via discounting can function adequately as a credit instrument in an environment of free banking, the Real Bills Doctrine is a dangerous idea when applied to a central bank that has no true market-based restrictions on issuance. The fractional-reserve free banking contingent within the Austrian School would largely agree with this notion too. (For the anti-fractional-reserve Austrian viewpoint on real bills, please see Did Real Bills Enable the Growth of Trade? by Robert Blumen.)

Lately, I have become a regular reader of Dave Harrison's Trade With Dave, which covered Keiser's original interview with Jaitly in July 2011. Dave also writes a lot about how the Austrian School of  economics is "being co-opted by the progressive political movement through a very crafty scheme known as Libertarian Paternalism." He sums up the entire Keiser - Woods, Fekete - Mises debate nicely:

"What is relevant, at least from Dave’s perspective is how the debate revolving around gold is most definitely rising in the consciousness both inside and outside the Beltway. Just this week, as you probably read, the Republicans are forming a 'gold commission' as part of their official platform pre-convention. You can attack this subject matter on lots of levels. There’s a debate at the lowest level that I would say is where the powers that be in the Republican Party are coalescing around the subject matter. There’s a debate at a slightly higher level between the libertarians and libertarian paternalists which is how I would describe the debate between Max and Tom and the Fekete – Mises smackdown that I have provided numerous links to below. That’s a very interesting and highly educational debate which I would encourage anyone who wants to expand their mind should dive right into. But there’s a third level to this debate.  That level is about free will, [and...] human consciousness."

For further reading:
"Sandeep Jaitly, Ludwig von Mises, Ayn Rand and the Gold Standard Institute", Darryl Robert Schoon, August 28, 2012
"I Hear a Train a Comin, It’s Comin Down the Tracks", Robert Murphy, August 24, 2012
"Testimony on fractional-reserve banking", Larry White, July 2, 2012
"The New Austrian School of Economics", Antal Fekete, May 15, 2010

Monetary Laws of the United States

In painstaking detail covering two epic volumes, Mr. Matt Erickson has laid out the steps leading to the full political appropriation of the monetary unit in the United States (July 2012).

Monetary Laws of the United States, Volume 1, Narrative 
Monetary Laws of the United States, Volume II, Appendix

Parallel Currencies And The Roadmap To Monetary Freedom

By Jon Matonis
Forbes
Tuesday, August 7, 2012

http://www.forbes.com/sites/jonmatonis/2012/08/07/parallel-currencies-and-the-roadmap-to-monetary-freedom/

It may not be as historically significant as President Nixon closing the gold window in 1971, but Rep. Ron Paul laid out the framework for the inevitable monetary confrontation of the future in his final U.S. Domestic Monetary Policy Subcommittee hearing on "Sound Money: Parallel Currencies and the Roadmap to Monetary Freedom."

The experts testifying included Robert Gray, Executive Director of the American Open Currency Standard, Forbes contributor Nathan Lewis, author of Gold: The Once and Future Money, and Dr. Richard Ebeling, Northwood University economics professor. Rep. Paul also included a prepared statement from constitutional lawyer and monetary expert, Dr. Edwin Vieira, who was unable to attend.

Summarizing the August 2nd Congressional hearing, Alex Newman wrote for The New American:

"According to Paul, the only way to stabilize the economy is by returning to monetary freedom and legalizing constitutional money. And until the U.S. government and the Fed get out of the way so the American people can choose what money to use without government coercion, the economy will never be truly stable and the supposed 'recovery' will be 'illusory,' he added. Meanwhile, other nations are already catching on to the hoax even as Americans lack the freedoms that citizens in some other parts of the world have to invest and protect their wealth from inflation."

Largely echoing the sentiments of the chairman, the experts agreed that since the creation of the Federal Reserve in 1913 the dollar has lost 98% of its value and that central banking is a form of central planning with no place in a free society.

Generally, the repeal of legal tender laws will allow individuals to decide what to use as the preferred medium of exchange and open the door to alternative currencies without threat of prosecution.

Rob Gray has been a tireless advocate for alternative open currency systems and he is right to say "leave our money alone" but I fundamentally disagree with his stance on legal tender laws. He believes that the only effect of legal tender laws is that if a debt is incurred without a specific agreement for a particular type of payment, then that debt can be discharged with the declared legal tender, or federal reserve notes. He even goes on say that, in addition to not calling for repeal, he is in favor of existing legal tender laws because they are so innocuous.

Although technically correct in stating that legal tender laws do not result in "tax obligation, exclusive requirement, and/or mandatory acceptance," Gray misses a major and symbolic effect that they do have and sometimes it's a chilling effect.

The legal tender laws have the effect of giving one form of money an artificial preference over another by making that form of money acceptable for the payment of taxes. Therefore, it indirectly puts forms of money without legal tender status at a disadvantage because people will perceive the ‘legally’ preferred monetary unit as having an underlying value greater than zero. That is why I oppose legal tender laws, Mr. Gray.

Then, a bit of bitcoin drama occurred when Rep. David Schweikert (R-Arizona) initially referred to the cryptocurrency as "um....what was one of them called?....something....coin" near the end of the hearing. To my knowledge, that is only the second time that bitcoin has been entered into the congressional record. The first being when Prof. Larry White mentioned bitcoin in his prepared testimony for the Free Competition in Currency Act of 2011.

Contrary to Nathan Lewis' statement that "every currency has an issuer," bitcoin does not require an issuer.

Proving once again that events in the real world unfold faster than those in power can comprehend, the participants probably did not know that bitcoin is currently the largest distributed computing project in existence today, passing the Search for Extra-Terrestrial Intelligence (SETI) project some time ago.

They probably were also not aware that bitcoin is a three-year-old decentralized bootstrapped currency with a $100 million plus monetary base that is immune from government regulation and, more importantly, immune from the crippling effects of monetary policy.

Wikipedia Accepts 'Enemies Of The Internet' Currencies

By Jon Matonis
Forbes
Friday, June 29, 2012

http://www.forbes.com/sites/jonmatonis/2012/06/29/wikipedia-accepts-enemies-of-the-internet-currencies/

In their annual donation drive to attain $29.5 million for 2012, the non-profit Wikimedia Foundation and its largest project, Wikipedia, will accept donations in four of the 12 'Enemies of the Internet' currencies. Far from bastions of liberty, these are regimes noted for their egregious censorship and systematic repression of Internet users -- Bahrain, China, Saudi Arabia, and Vietnam. Of course, it's great to get donations from the suffering and violated netizens of those regimes. But just don't try to donate safely in bitcoin -- it's not accepted.

Here's a list of notable organizations that accept bitcoin donations and Wikimedia is mysteriously absent. Following the disappointing example last year from the Electronic Frontier Foundation, Wikimedia specifically excludes donations in bitcoin and explains it with this odd statement:

"Why does the Wikimedia Foundation not currently accept Bitcoin? The Wikimedia Foundation, as a donor-driven organization, has a fiduciary duty to be responsible and prudent with its money. This has been interpreted to mean that we do not accept 'artificial' currencies - that is, those not backed by the full faith and credit of an issuing government. We do, however, strive to provide as many methods of donating as possible and continue to monitor Bitcoin with interest and may revisit this position should circumstances change."

It is not a breach of fiduciary duty to accept near-frictionless bitcoin instead of funneling 3% or more to the PayPal-credit card oligarchy. That is just a silly statement because cryptocurrency donations are far more efficient than dealing with payment processors and physical in-kind donations. Donations are distinctly different than regular consumer purchases and it behooves the non-profit organization to provide flexibility to donors and to maximize fundraising efforts.

Also, let's look at some of those issuing governments that provide their full faith and credit as backing for "non-artificial" currencies that Wikimedia Foundation is so pleased to accept. I realize that to a certain extent currencies do not have a morality. However, political Statist currencies that are underwritten by repressive regimes and then further manipulated by the regime's corrupt monetary authority would at least carry some stigma when donated to an entity that depends on Internet freedom.

The decentralized nonpolitical 'real' bitcoin would appear to be the least tainted of the bunch, Jimmy. Bitcoin is immune to the political pressures faced by PayPal, VISA, and Mastercard during the infamous Wikileaks payment blockade. Given that Wikipedia 'blacked out' on January 18, 2012 in ardent opposition to SOPA and PIPA, bitcoin would also appear to be amazingly aligned with objectives for a free and open Internet.

In their Internet Enemies Report 2012, Paris-based Reporters Without Borders details some of the countries (I mean... issuing governments) that pose the gravest threat to basic Internet freedom through their aggressive deployment of online surveillance and content filtering:

Bahrain "offers a perfect example of successful crackdowns with an information blackout achieved through an impressive arsenal of repressive measures: exclusion of the foreign media, harassment of human rights defenders, arrests of bloggers and netizens (one of whom died behind bars), prosecutions and defamation campaigns against free expression activists, disruption of communications."

China perhaps may have the most sophisticated online censorship and surveillance system in the world. "The soaring expansion of the 'Participative Web' and related impact on social and political debates are making it harder each day for Chinese censors to do their job. Harsher controls and crackdowns on netizens and their online tools have been symptomatic of the regime’s increasing concern over potential fallouts from Arab Spring and the Internet and social networks’ role as sounding boards."

Saudi Arabia, with harsh censorship and intolerant of criticism, "did everything possible to dissuade the population from supporting the Arab revolutionary movement. Its rigid opposition to the simmering unrest on the Web caused it to tighten its Internet stranglehold even more to stifle all political and social protests."

Vietnam is aware that they cannot impose complete control over the news and authorities are afraid of an increasingly connected population. "The regime’s attention is focused on the Arab world and its protest movements. Paranoid authorities have stepped up repression and control to stave off any possibility of a regime collapse, favoring surveillance over increased filtering. Bloggers have been the target of a new wave of arrests."

There you have it. The Bahraini dinar, Chinese yuan, Saudi riyal, and Vietnamese dong are all acceptable to Wikimedia as currencies backed by the full faith and credit of their governments! Turkmenistan and Uzbekistan are two other declared enemies of the Internet but Wikimedia allows them to select Russian rubles as the donation payment currency.

In the slightly less offensive "countries under surveillance" category, selected entries represent the following donation currencies acceptable to Wikimedia: Egyptian pound, Indian rupee, Kazakhstani tenge, Malaysian ringgit, Russian ruble, South Korean won, Sri Lankan rupee, Thai baht, Turkish lira, and United Arab Emirates dirham.

Shining a spotlight on repressive Internet cultures points out that it may be only a matter of time until freedom of payment to politically incorrect causes is threatened as well. Moreover, it might become extremely dangerous for some of those citizens to be personally attached to a traceable Wikimedia credit card donation. Accepting anonymous bitcoin in addition to political currencies can be a way of declaring that freedom of speech still does matter. Sensibly, the New York City chapter of Wikimedia rejects the party line and is accepting bitcoin donations for its local outreach programs.

The Case for Monetary Freedom

By Jon Matonis
Forbes
Thursday, May 31, 2012

http://www.forbes.com/sites/jonmatonis/2012/05/31/the-case-for-monetary-freedom/

The Cato Institute has just come out with their Spring/Summer 2012 edition on Monetary Reform in the Wake of Crisis. It is the published version of their 29th Annual Monetary Conference which addressed the fundamental issue of how to prevent another global financial crisis without merely tinkering on the edges of the government fiat money regime.

"The first step is to rethink the role of government and central banks in the existing system, and then consider alternatives — such as the gold standard — that would substitute rules for discretion, increase choice in currency, and allow markets to determine the optimal quantity of money. After nearly a century of U.S. central banking, it's time to reconsider whether the Federal Reserve's monopoly status, discretion, and growing regulatory powers are more a source of crisis than a cure."

Always relevant and informative, this issue has two particular noteworthy addresses -- the first by Dr. Ron Paul and the second by James Grant of Grant's Interest Rate Observer.

Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and in 2009 he introduced the Free Competition in Currency Act. This article is based on his Keynote Address at the Cato Institute’s 29th Annual Monetary Conference, November 16, 2011, in Washington, D.C. In stark contrast to the Paul Krugman, Bill Still, and Ellen Brown inflationistas, Paul's keynote address, "Why Monetary Freedom Matters," passionately makes the case for denationalizing money and repealing legal tender laws as the only remedy to restore a functioning and free market monetary system:

"I took the position that I wouldn’t close the Federal Reserve down in one day. The Fed will close itself down eventually when it destroys the value of the dollar. But I don’t want that to happen, either closing it down in one day or waiting for a collapse of the whole system. My idea is similar to what F. A. Hayek (1976, 1978) had talked about. Why don’t we denationalize money, legalize competition, allow free markets to work, and allow free-market banking to work? I think we should legalize competition in currencies, which means that first we recognize the Constitution and repeal the legal tender laws.

I have a bill that actually legalizes competition. We also would have to address the subject of fractional reserve banking—I think what we have put up with in fractional reserve banking and the pyramiding of debt is atrocious, but there is a disagreement in libertarian circles about exactly what you do with fractional reserve banking in a free market—but that is a small argument compared to whether or not we should have competition in currencies and allow something else to circulate."

Then, in "Banking Dysfunction," James Grant systematically exposes both the fallacy and folly of capital adequacy reserves and examines the misdirected regulatory thrust:

"Let us be clear: on Wall Street, there was never a capitalist Eden. There was, however, an era of capitalist clarity in which the owners of the banks and investment banks not only reaped the profits but also bore the losses. Insolvency, in the case of a nationally chartered bank, meant a capital call for the stockholders, the proceeds earmarked for the depositors and other senior creditors. It was, after all, the investors’ bank, not the taxpayers’.

What’s truly and importantly new in banking is the definition of cash. When cash was gold, or notes convertible into gold, the basis of credit was gold. There could be only so much credit because there was only so much gold. Today, cash is paper, and paper is the basis of credit. There can be a titanic volume of credit because of paper there is no end."

In a separate Cato paper this month on "Competition in Currency: The Potential for Private Money," Thomas Hogan writes that, "the lack of participants in the private banknote market appears to be due to the uncertain legal status of private note issue and the rigorous prosecution of currency-related crimes."

MintChip Misses the Point of Digital Currency

By Jon Matonis
Forbes
Thursday, April 12, 2012

http://www.forbes.com/sites/jonmatonis/2012/04/12/mintchip-misses-the-point-of-digital-currency/

A new digital currency from the Royal Canadian Mint dubbed MintChip boldly claims to represent "the evolution of currency." However, digital currency is not simply about taking official money and making it useful for online and offline environments in a digitized form. The point of digital currency, and especially free-market digital currency, is to broaden the avenues for issuance and adoption of alternative nonpolitical monetary units. Most electronic cash systems already expand and revolve around the State-issued currencies although they don't have to.

I am reminded of the Mondex experiment during the 1990s which is actually when I first met MintChip Challenge judge David Birch of Consult Hyperion. Originally and laudably, Mondex wanted to replicate the characteristics of physical cash via a smart card but due to centralized authorizations, it only embraced partial and contingent privacy for the user. The true test of any anonymous cash-like system is what happens when your device or digital tokens are permanently lost or destroyed similar to burning a paper $100 bill. If they can be recovered and returned to you, then you don't have full privacy.

Then there was DigiCash and the brilliant blind signature protocol from Dutch cryptographer David Chaum. Combining a powerful centralized issuing mint with true transaction irreversibility and anonymity, DigiCash would have flourished if it weren't for the legacy intermediaries that tend to insert themselves into fledgling centralized systems when they smell a loss of revenue. The misadventures of DigiCash paved the way for needing decentralized systems and bitcoin elevated it to marquee feature by resolving the double-spend problem through the distributed block chain.

Yes, the functional goals of MintChip are commendable and we have indeed come a long way when we witness a monetary authority advocating the protection of privacy and emulating the attributes of physical cash, even if they are trying to remove physical cash from circulation at the same time. At its core, MintChip is a smartcard integrated circuit that holds electronic value and can securely transfer value from one chip to another. Since it's based on tamper-resistant proprietary hardware and currently supports microSD cards, USB sticks, and special high-end hardware security modules, it can perform transactions without an intermediary.

According to bitcoin analyst Vitalik Buterin, "It even has a few advantages over Bitcoin; secure transactions are instant, it’s backed by the Canadian dollar and it even manages to solve the double spending problem without connecting to the internet." Cautiously however, Vitalik goes on to say:

"There are other aspects of the system that Bitcoin users are likely to object to. The currency creation model is centralized: value is originally injected into the system by the Royal Canadian Mint and customers can purchase value to spend by going through trusted brokers. The system is designed to be able to force upgrades, giving the Mint the power to introduce onerous tracking features over time if it so desires. Innovative means of value storage like paper and brain wallets are out of the question, since nothing can be done without the physical chip, and it’s impossible to have an online wallet that does not require trusting the provider."

Wow! That's a litany of show-stopping issues to be vigilant about -- not to mention the potential fallibility of the proprietary hardware and the sure-to-come AML (Anti-money laundering) provisions or arbitrary transaction size limitations. I get the feeling that MintChip might be better off if it processed in bitcoin units rather than Canadian dollar units but that would be redundant. Ironically, one of the leading ideas for the use of MintChip in the MintChip Challenge is to purchase bitcoin with it since it's irreversible.

My objection still lies with the fact that it is a non-free-market approach to the payments issue. Bitcoin has so far demonstrated its exchange value without being backed by anything that isn't backed by anything. Remove the standing armies and all money is essentially a mass illusion. Bitcoin just happens to be a voluntary, bottom-up mass illusion with scarcity, like gold.

If the integrated circuit chip is not hacked first, I can imagine a prestigious future gathering in the beautiful resort city of Victoria, British Columbia (similar to Jekyll Island in 1910) where the Royal Canadian Mint officials and the Government of Canada carve up the country into 12 MintChip Reserve Districts and bestow the privileged monopoly of issuance to their well-connected financier amigos. May the odds be forever in your favor.

For further reading:
"Canada Moves Closer to Cashless Society With Digital MintChip Currency", Alex Newman, April 16, 2012
"Bitcoin - The Libertarian Introduction", Erik Voorhees, April 11, 2012
"Bitcoin - Finally, Fair Money?", Scott Lenney, Mute, February 21, 2012
"The (Non-Monetary) Value of Cash", Rivendell, December 1994