This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

"Can the Monetary System Regulate Itself?"

Here's audio of a talk I gave at CEVRO Institute in Prague earlier this month.

  • I'm sorry to hear professor White thinks Bitcoin does not follow the regression theorem. I briefly explained the origin of Bitcoin in my master's thesis and wrote a slightly more detailed blog post about it just a couple of weeks ago:

  • Larry White

    Peter, thanks for your linked post. My view was that Bitcoin had "bootstrapped" itself into a positive value based on expectations about its having future value, which is not consistent with a backward-looking version of the regression theorem but requires a forward-looking version. If I understand the point of your Bitcoin history, you argue that we should regard Bitcoin as having had, in fact, a positive market value like an ordinary commodity, which served as the starting-point for its becoming a medium of exchange via the standard regression theorem. I think these two ways of looking at it are perhaps not incompatible. If the positive value of Bitcoin before its MOE use was not based on forward-looking expectations, then on what? Besides being a potential MOE, what other want does it satisfy?

    • John S

      Besides being a potential MOE, what other want does it satisfy ?

      Some have postulated that Bitcoins originally had value as "nerd status points" or as collectibles, like baseball cards. Even if this accounts for a small % of its current value, it may have been enough to get the ball rolling. (I suppose this is still forward looking, though, since collectors had some hope that Bitcoins would be used a MOE).

      Also, any thoughts about Ripple and its potential to lead to a kind of free banking (perhaps in conjunction with Bitcoin)?

      • Thank you for mentioning Koning's "geek cred" theory. Dror Goldberg, in Famous Myths of "Fiat Money", explains that regarding interpretations of historical examples of early monies:

        "how extremely easy it is to focus on the monetary object itself, take it out of context, ignore laws, customs, religion, trade relations, subjective cultural tastes and fashion."

        So Koning might be right.

  • Dear professor White,

    I think that viewing the foundation of the regression theorem as "backward looking" is a misinterpretation of both Mises and in particular Menger. Or at least an incomplete interpretation. That a medium of exchange logically needs to have a price before it can act as a medium of exchange economists knew before Menger already (e.g. Adam Smith). But a medium of exchange also needs to have liquidity and that was Menger's insight. We know what the price of apples was yesterday, for example, but apples are unlikely to act as a medium of exchange because they have relatively low liquidity. It is not the price of apples yesterday that has to explain the monetary demand for apples now. It is their (il-)liquidity that has to explain it.

    The problem becomes even more apparent when dealing with fiat money. The initial price of fiat money (fixed exchange rate to a pre-existing money) is only a part of the solution, because it does not explain the liquidity of fiat money ("monetary demand") after a reform. For that you need to add Gresham's Law (as I explained in the thesis) into the mix. I believe Selgin wrote a paper about fiat money and the regression theorem but I haven't read it, maybe he addresses the issue too.

    I must admit I am not entirely sure what the initial demand for bitcoin was. I do not even remember why I bought my first bitcoins, how can I know what others thought? I can just hypothesise what it was. The fact is, it did happen, so the objection is absurd. That it happened quickly and in an apparently unusual way is an empirical issue and has nothing to do with praxeology.

    We however may conjecture why it happened the way it happened. We already have a monetary system, we are not in a barter anymore. So we do not need to re-discover the liquidity-generating actions and institutions from scratch, we can just copy the existing ones. Indeed, it would be silly not to copy. The quotes from the early entrepreneurs show that they were aware that their actions have the potential to assist in generating price and liquidity. Why did they have to act as if they weren't aware of the concept of liquidity and its connection to media of exchange? That makes no sense. Heck, Menger himself gained his insight from analysing organised markets and writing about them. How come his followers miss this is very strange. In this respect, the initial demand for Bitcoin could be said to be "backward looking", because people looked at monetary institutions and forex and that gave them the knowledge to create similar ones for Bitcoin and integrate it with the encumbent ones. It's obviously not enough on its own, but it would explain why it can happen so quickly and at such an apparently small scale. The first price of Bitcoin that I could find (see my master's thesis) indicates that the whole supply of bitcoins at that time was only worth about 900 USD. That's small, but it's not zero and purely logically that eliminates the objection.

    We also have a crappy system, and we know that it can be made better, we had the crises, and we knew from previous attempts at cryptocurrencies that the system needs to be decentralised. That might explain why the timing was beneficial for Bitcoin.

  • dumky

    You may be interested in Bob Murphy's recent post on BitCoin. He seems to agree with you that BitCoin growing marketability can indeed be reconciled with the Austrian theory of money and regression theorem. The potential bootstrap would be a small number of people who like the idea of a decentralized digital currency (that satisfaction is the initial consumption value).