OK, I’m being melodramatic. But the question actually posed by the PanAm Post, “Will Bitcoin’s Fixed Money Supply Be Its Downfall?”, was only slightly less so. They had me take the “yes” position. But as my doubts about Bitcoin’s future are far from certain, I was delighted to see that they got Konrad Graf, a Bitcoin fan who has done some very good work on that cybercurrency’s early development, to oppose me.
The crucial questions, I believe, are whether any exchange medium can become widely adopted without also serving as an economy’s medium of account–that is, the medium to which prices and other payment contracts refer–and whether a new unit is likely to displace an established one unless it’s purchasing power is considered to be relatively stable and predictable. Think about your own employment contract, and of the alternative of having a contract written in Bitcoin, and you have some idea of the challenge. Of course, Bitcoin’s value is bound to be less predictable now than it would be were bitcoins more widely employed in making payments. But its popularity must remain limited unless it can somehow be perceived as offering a relatively stable unit of account.
In this regard it is worth considering Leland Yeager’s plea, in several of his writings, for “separating” the medium of exchange from the unit of account. (Here is a good summary by Bill Woolsey, comparing Yeager’s ideas to those of Market Monetarists.) Although Yeager’s perspective, which argues that it’s better to have a medium of exchange that isn’t also an economy’s medium of account, superficially appears to hold out more promise for Bitcoin than my own arguments, the appearance is deceiving. For what Yeager has in mind is a system in which the unit of account is a stable-value unit, with the value of actual exchange media fluctuating relative to the fixed nominal value of that unit. So while Yeager’s argument does suggest the desirability of a “separated” system, it is only for the sake of being able to have a more stable unit of account that he favors such an arrangement. Otherwise separation doesn’t achieve much, for macroeconomic problems can still arise in consequence of unanticipated changes in the value of the medium of account, and the consequent disruption of contracts that such changes will entail, regardless of the media actually employed in making payments and in settling accounts due. That’s one reason why I, for one, look forward to seeing further experimentation and innovation in the cybercurrency world.