Thomas at the Breakfast Impossible blog has a post with some provisional thoughts on Bitcoin. Thomas is one of the few people who is deeply knowledgeable in both economics and computer programming. His post is a complement to George Selgin’s recent post. Thomas suggests that one important practical aid to the further spread of Bitcoin would be an app allowing parties using Bitcoin to easily determine an exchange rate with national currencies. He also expresses skepticism that Bitcoin will become popular as a unit of account, for reasons similar to those that George discusses in his recent paper. I agree that Bitcoin’s low upper limit of supply is a hindrance to it becoming a true currency as opposed to an object of speculation, like Beanie Baby dolls (remember them?). The low upper limit means that if many more people start using Bitcoin, its value will increase even more sharply than it has. But unless people think everybody is going to use Bitcoin, so that the price has nowhere to go but up until leveling off after everybody is using it, the ever higher price will deter many potential users from switching except under a dire scenario where people are willing to abandon national currencies as they do in hyperinflations.
George's paper, “Synthetic Commodity Money,” uses simple but powerful logic to make a definite advance in monetary theory. The paper observes how there are certain monies that do not fit the standard classification of commodity or fiat, and proposes to replace the two-way classification with a two-by-two classification (where, however, one of the cells may be empty). It’s a fundamental idea, so fundamental that after further discussion it deserves to be in money and banking textbooks. Put it in your cap along with your work on free banking and your discussion of good and bad inflation and deflation, George.
I am reading Dick Timberlake’s book Constitutional Money, which George describes in the preceding post. Dick’s earlier book Monetary Policy in the United States: An Intellectual and Institutional History sought to distinguish itself from Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960 by covering a longer period, delving less into statistics, and focusing more on Congress and less on the executive branch than Friedman and Schwartz. It succeeded. Dick’s new book extends coverage of monetary policy to key decisions of the Supreme Court. So, now we have all three branches of the U.S. government covered.
An important point that came up at the Cato Institute presentation of Dick’s book a few days ago is that the U.S. Constitution, while intended to restrict the kind of money that states and the federal government can issue, contains no explicit restrictions on the private sector, and under the reading of the Tenth Amendment that Dick and other advocates of limited government favor, reserves to the people the power to issue and use whatever kind of privately issued money they wish. To summarize: for the government, gold coin; for the private sector, Bitcoin if people want. (Curious why Dick’s book stops with the 1930s, I asked him if there were any cases since then he would consider anywhere near as important. His answer was no, the decisions of the 1930s have cemented the legal framework the United States has had since in the aspects his book discusses.)