BITCOIN AND THE IMPUTATION OF VALUE BY RESTORING THE LOST ART OF SOUND COMMERCIAL BANKING
This article was originally published as Occasional Paper Number One, January 2nd, 2014 and has been edited to emphasize bitcoin (the blockchain) rather than crypto-currencies in general.
By Conrad Jules Braun
There is an interesting debate in the free market money world about the viability of crypto-currencies. See Bitcoin v. Gold: Peter Schiff debates Stefen Molyeneau: http://www.youtube.com/watch?v=mFcTJAQ7zc4
It goes something like this.
Bitcoin detractors argue that unlike gold or silver bitcoin has no intrinsic value; hence, the value is dependent solely upon acceptance in the market place. These detractors articulate that free market acceptance alone does not impute intrinsic value; hence there is no exit mechanism. Without intrinsic value, whatever the market value may be today can completely disappear tomorrow. They go on to argue that even fiat paper money is preferable to bitcoin as it has imputed fiat value (legal tender status) to pay taxes and other debt. The conclusion by this school of thought is that bitcoin is ultimately a bubble and a vehicle doomed to fail.
Bitcoin supporters argue use, even if it is only for a more efficient payment transfer system, imputes value. Some go on to imply (wrongly) that free market acceptance also provides intrinsic value. But free market acceptance can be zero or 10 million undermining this line of reason. And bitcoin with a zero value also has zero value for a more efficient payment transfer system. No intrinsic value is imputed. Finally, this school argues that bitcoin is in its infancy and innovations that come from an unfettered marketplace can and will find solutions and provide an efficient exit mechanism and bitcoin value is derived from anticipation of these solutions.
Essentially the first school argues fiat paper has derived or imputed value from its legal tender status while the second school argues bitcoin’s intrinsic value is derived or imputed because it an unconfiscatable payment transfer system.
In June 1974 gold standard advocate E.C. Harwood authored The Lost Art Of Commercial Banking https://www.aier.org/research/lost-art-commercial-banking describing how sound commercial banking developed in the private sector under a gold standard. “For about a hundred years it was sustained at an advanced level of development before retrogression began . . . Even the most ardent advocates of sound money, of the gold standard, of a useful accounting unit seemed not to realize that until the lost art of commercial banking is revived and generally applied there can be no hope for the money-credit system of Western civilization…”
The Lost Art of Commercial Banking
By E.C. Harwood Economic Education Bulletin Vol. XIV, no. 6 | June, 1974 Edward C. Harwood (October 28, 1900 - December…
Harwood concluded, “For nearly a century prior to World War I, the leading English banks applied the basic principle of sound commercial banking most of the time with outstanding success. The basic principal become more widely understood and applied among industrial nations. Even the United States, which had been one of the ‘slow learners,’ did embody this basic principle in the legislation that initiated the Federal Reserve System in 1913. The Federal Reserve banks originally were permitted to rediscount for the member banks only commercial paper directly tied to the volume and value of things flowing to markets. Such widespread application of the basic principle of sound commercial banking marked the farthest advance by the human race in the evolutionary development of a money-credit system that could serve a modern industrial society.”
Harwood’s white paper went on to describe what objective was achieved by sound commercial banking and listed in detail various aspects of its useful procedures.
“At this point we are focusing attention on some of the facts and are not attempting to describe how those facts came to exist. These are aspects of the entire problem and need not concern us here, however, interesting they may be to students of economic history. The fact is that gold was the unit of account for modern industrial civilization”
Harwood goes on to describe the art of creating non-inflationary money by private bankers. Essentially new purchasing was limited in the unit of account (gold) to an estimate of value of new goods being offered in the marketplace. Money creation was limited to represent new goods (cars, computers, wheat, or bread for example) coming into the market place. The money creation was used by the car or computer producer or farmer or baker to pay suppliers, employees, etc. In turn, those receiving this newly created money could redeem this money into gold, cars, computers, bread, or any other goods being offered into the marketplace. As the newly created purchasing media eventually works its way back to the private issuing bank, it was retired. The function of providing a relatively stable non-inflationary supply of money was accomplished and conversely prevented a deflationary money issue. The newly created purchasing media represented not just gold, but other newly created goods be offered in the marketplace. So while the unit of account was gold, the purchasing media represented an estimate of the total amount of gold and other new goods offered into the marketplace. It was essentially the development of a production backed currency accounted for and governed by accounting units of gold.
Harwood described the distinction in banking between creating non-inflationary money representing new goods coming into the marketplace (sound banking) and the creation of inflationary money representing no new goods in the marketplace (unsound banking). Harwood went on to distinguish non-inflationary savings and investment from non-inflationary commercial paper.
“As commercial banking has developed, especially in the United States, two quite different functions have performed by the same institutions. In addition, to commercial banking as already described, most banks also accept savings to be invested.”
“Savings are purchasing media that the original holder decides not to spend himself but instead requests the bank to invest for and pay him interest on his savings account, sometimes called a time deposit. The bank invests such purchasing media by lending it to a borrower who perhaps is buying new equipment for his factory or to a borrower who may desire to buy a new car or for some other purchase. . . . The borrower from the bank in the savings-investment transaction is not at that time sending to or otherwise offering things of equal value in the markets to be sold. He does not desire purchasing media so that he may distribute it to employees and suppliers who participated in preparing things for the markets. His desire is to claim things from the markets, either equipment for his factory or a new car for personal use, and any multitude of other things available, such as new bricks for construction of a factory, etc. Consequently, the bank should not create new purchasing media for such a borrower but should lend him purchasing media already in existence that some present owner or owners save and deposit in the bank.”
Essentially Harwood recognized that without market freedom in banking a gold standard alone cannot rescue Western civilization from what he termed The Money Mirage of fiat paper currencies. Nor can a savings and investment scheme accomplish this task. Rather specie is needed that represents the totality of goods being offered into the marketplace. The restoration of the lost art of sound commercial banking will provide this solution and provide a relatively soft landing for a world awash in inflationary fiat paper money. Gold simply acts a governor, referee and standard for the banks issuing specie representing these goods.
In 1976 in Denationalisation of Money Nobel Laureate F.A. Hayek argued for free market in currency and banking. In a nutshell Hayek argued that the idea that money and banking should be in the hands of governments is a superstition similar the Divine Right of Kings over 200 years ago. Hayek went on to suggest one solution might be an indexed basket of commodities which would provide more stable money than a traditional gold standard and could more easily transcend national boundaries, difficulties apparent with the gold standard. But regardless what emerges Hayek’s proposition is that innovation in an unfettered market of money and banking would provide a relative smooth transition from the gross distortions caused and hidden by the global fiat political money. Hayek recognized the need for intrinsic value of currency to keep it independent from the manipulations of any issuing authority. But Hayek did not agree that gold was necessarily the best solution or that gold should be imposed via fiat. Hayek recognized the limitations of gold and distanced himself from what this author termed Gold Socialism (those who would impose a fiat gold standard). Hayek proposed that such innovation should not be limited to a gold standard alone.
When Harwood and Hayek were on the scene there was no internet and no bitcoin and there was no possibility of a decentralized peer-to-peer network for money creation and verification. The idea of free market money and banking apart from a gold standard, a silver standard, a basket of commodities standard, or some other standard of without intrinsic value was simply a foreign idea in 1976. What was recognized is that a standard was necessary with value apart from the issuer and apart from any central authority. Gold creation is limited and due to its unique characteristics acts as its own verifier. Gold has a long history of being money as well as having other uses. These other uses is the classical definition of intrinsic value.
Only with the introduction of free market sound commercial banking can additional value be imputed on bitcoin. Only with the development of sound commercial banking (along with savings/investment mechanisms) can voluntary imputation of value by participants through contract compete with the fiat imputation of value by governments. The full potential of bitcoin can be realized along with other competing standards.as additional value is imputed by a multitude of new goods and services being offered in the marketplace through voluntary contract in non-inflationary specie creation and savings and loans type investments that are obligated to be repaid in kind.
This imputation of additional value occurs by voluntary contract whether the underlying standard (unit of account) is gold, silver, an index of commodities, or one or several crypto currencies. Each of these standards has its own strength and its own weakness. And each can and will develop side-by-side given the freedom to return, relearn and build upon the farthest advance in the money-credit system ever known to mankind. The obstacle is not now and never has been the lack of innovation; the obstacle is lack of freedom to innovate.
Will the innovation of Satoshi Nikamoto realize the visions of its most ardent evangelists? That remains to be seen. http://bitcoin.org/bitcoin.pdf What cannot be denied is a new vehicle has been created that exposes the fundamental problem of fiat paper, opening widespread global discussion that did not exist 40 years ago, 20 years ago or even 2 years ago. What cannot be denied is that this innovation has inspired a new generation with a vision that recognizes and is determined to correct the monetary sins of their fathers. A new hope has been provided to an expanded audience that recognizes meeting this challenge is essential and possible.
But free market money is only half of the equation. Crypo-currencies alone are limited in use, just as are gold, silver, and a commodity index without the side-by-side side development of free market banking.
Whether Bitcoin or any crypto-currency will be a vehicle that will improve the advances reached in the early 20th Century gold standard and sound commercial banking remains to be seen. However, a window of opportunity to restore the lost art of sound commercial banking is opening in large part due to the emergence of bitcoin and the exposure of the fundamental flaw in fiat currencies. By studying history, bitcoin advocates and all sound money advocates have a strong foundation upon which to build and pioneer this development in sound commercial banking.
Already the central banking crowd sees the light. The irony is the traditional hard money crowd now points to “imputed” worth of fiat paper to pay taxes and other government in their denigration of crypto-currencies, while the central banking crowd now points to the “intrinsic” worth of a gold standard in their denigration. Both have come full circle in defense of their untenable positions and are either unable or unwilling to let go of their canards.
Hard money advocates are defending fiat currencies and central bankers are defending the gold standard. These are strange bed fellows indeed. See Bitcoin is Evil by Paul Krugman versus Bitcoin is a Bubble by Peter Schiff. http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/?_r=0 http://www.cnbc.com/id/101192216 http://www.youtube.com/watch?v=0L7SOPDOvvI
Both the traditional hard money crowd with little understanding of sound commercial banking and the central banking crowd responsible for our current mess of unsound inflationary centralized banking, denigrate this new innovation which provides for a decentralized peer-to-peer network with a fixed issue of the underlying specie. While this writer does not portend expertise in the back-end of how bitcoin works, if the underlying unit creation is truly limited and this can be independently verified through open source and open participation, bitcoin is truly a new innovation with limited value.
But this same innovation of open source, peer to peer network verification of money creation needs to be expanded to free market banking for widespread acceptance and success.
Just as President Ronald Reagan resurrected an old Russian proverb to end the insane doctrine of mutually assured destruction (MAD) in the military world, so the same principle should be applied to end the insane mutually assured destruction of the global fiat paper money world, “Доверяй, но проверяй (doveryai, no proveryai). Trust but verify.” We now have the vehicle to bring this to fruition, not by government treaties, but by a voluntary open network involving individual global participants.
Superstition dies hard. Entrenched special interests and their adherents who propagate the religion of fiat state money monopolies and banking will not relinquish the power to inflate and/or control others without a fight. Opposition to free market banking promises to be fierce. Yet sound money in a modern society can prevail with the side-by-side restoration of free market money and free market banking. Exposing this superstition is the daunting task that lies ahead for this new generation.
Conrad Braun is a student of monetary theory, a modern pioneer in free market money and founder of failed Gold Standard Corporation which was from 1978 to 1992 the largest private money experiment of its kind. While holding to the highest of ideals and minting gold, silver, platinum coins with the moniker “For Integrity There Is No Substitute” and issuing specie advocating “Separation of Money and State“ and “Money by Choice, Not by Force.” Mr. Braun failed miserably due to his own depraved sinful nature and is a living example of the importance of a decentralized network of money and banking provided by innovations in crypto-technology and guided by the principle of, “Trust, But Verify.”
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