When I began exploring the topic last year, I expected to find dozens of different, compact histories of the gold standard in the U.S. In fact, I didn’t find but one, which left a number of what I considered to be important aspects of the topic unaddressed. I dare to hope, therefore, that no-one will say (as Moses Hades is reported to have said of some poor scholar’s book) that my just-released Cato Policy Analysis “fills a much needed gap.”

That’s the phrase Leland Yeager likes to use to describe those persons in the publishing industry who, given the task of correcting errors in an author’s page proofs, or of making such changes as are dictated by a house style, can’t resist otherwise “improving” the author’s writing by changing his or her grammar, punctuation, and word choices so as to make them more consistent with the copy-editor’s own notions as to what constitutes good prose, or what a writer really means.

Yeager himself, I recall, once became particularly irate at discovering that, whereas in a typescript he’d referred to James Buchanan as a “theorist,” in print he’d instead called him a “terrorist.” Presumably Yeager’s copy editor had not heard of the prize-winning economist, but had heard of a bomb-throwing person of the same (or similar) name.

I’ve also had more than my share of run-ins with the itchy-fingered bunch–or so I imagine, perhaps because (like Yeager) I’m fussy (o.k., anally retentive) when it comes to my prose. In fact, although I dream about one day managing to get something published without a single typo–let alone some unwanted editor’s “improvement”–it hasn’t happened yet. That’s one thing I like about blogging: there’s no one to mess around with your prose, and you can always go back and fix the boo-boos you make yourself.

One sort of itchy-fingered editing that I find especially galling is the sort that happens when an editor assumes that he or she knows more about my subject than I do. It’s not that that’s impossible. But the odds are agin’ it. Many years ago, for example, in writing about Chile’s free banking episode, I referred in several places to Frank W. Fetter’s writings on Chilean monetary policy. But when the published version arrived in the mail, I discovered to my surprise and dismay that “Frank W.” had become “Frank A.” How come? It happens that the publication was an “Austrian” one, and that Austrian economists, or some at any rate, are rather fond of Frank Albert Fetter’s writings on the theory of capital and interest. So am I, in fact. But whereas the person who copy-edited my article apparently had never heard of Frank Whitson Fetter, we monetary economists know that other Fetter pretty well, since he is a rather highly-regarded historian of monetary thought, who happens to have been the capital theorist’s son.

That sort of editorial meddling is, of course, annoying because the author gets the blame for not getting his facts straight, when in fact they were perfectly straight until some smart-aleck bent them. But for those of us who are fussy about our prose, changes that don’t alter any facts are hardly less mortifying. Not long ago, for instance, I was starting to go over the galleys for my and John Turner’s JLE article “Strong Steam, Weak Patents” when, to my surprise, I read the word “indicated.” Now, “indicated” is one of those words I go to great lengths to avoid, unless I’m referring to a dial of some sort. Yet here was I, about to go to press having (apparently) written that something other than a dial–I think it was James Watt–had “indicated” this or that. Naturally I turned to the typescript, and found, sure enough, that I’d written, not “indicated” but “meant.” At that point, my surprise gave way to horror: the JLE, I realized, have got themselves an itchy-fingered copy editor! As I feared, my prose (I say “mine” because I was responsible for writing-up the article) had been altered throughout, without my consent and without the slightest indication of where changes had been made. And, believe me, the changes were all of them the sort one might expect from an editor who thinks that “indicate” is better than “meant.”* So, after calling the managing editor and “indicating” my feelings to her, I spent the better part of two days seeking out the changes and restoring the original text. Alas, one change at least got away, resulting in an incoherent sentence. To this day I still can’t bear to look at the published version. (That the JLE’s typographic design is also one of the worst I’ve ever seen doesn’t help.)

A preference for stilted words over their more natural counterparts is just one of the many foibles of bad copy-editors at academic journals and also, of course, of bad academic writers themselves. Another is a peculiar aversion to the word “I,” even when its use is motivated, not by an author’s lack of modesty, but by his or her desire to keep things honest. (The habit of assuming that “I” should never appear in an academic work seems especially ingrained among the natural scientists, who no doubt find the rule easy to insist upon at least in part because they seldom write anything except with the help of half a dozen coauthors.) I had a run in with an editor on this issue when, near the beginning of a long article, I wrote “I will assume… .” The editor replaced it with “It is assumed… .” I queried back, “Assumed by whom, if not by me? By God?” As I’m an atheist, and didn’t wish in any event to pretend that I’d consulted any higher power concerning what was or wasn’t to be assumed in the course of arguing my thesis, I refused to accept the passive-voice alternative. But the editor was no less unwilling to let that dreaded “I” in. Finally we settled on “Assume… .” And none too happily, so far as I was concerned, since I don’t much like ordering my readers around. (“Let us assume” would have been a better compromise, in retrospect.)

Itchy-fingered copy-editors seem to imagine that someone’s writing can always be improved by making it conform to strict rules like “never use the first person.” But the truth is rather that most of the rules that such editors are especially likely to be sticklers for–“never split an infinitive,” “every sentence must have a subject, object, and verb,” “never end a sentence with a preposition,” and so on–are just so many hollow superstitions that conscientious writers know better than to never break, and up with which self-respecting writers never put. Never.

Not surprisingly, given their preference for stiff language and strict (if phony) rules, itchy-fingered copy-editors are not people who can safely be assumed to have any sense of humor. I found that out the hard way when, in making corrections to the proofs for Good Money, I drew up the usual list of page numbers, desired changes, and my reasons for making the changes (e.g., typesetting error; error in manuscript). In one instance, I asked that a word be changed simply because I had thought of a better one. So under “reason” I wrote simply, “(le mot juste)”. I leave it to you to imagine my reaction when I found those same words, parentheses and all, inserted in the published book!** (Did I mention that itchy-fingered copy-editors don’t seem to know any French?)

Am I suggesting, then, that copy-editors ought never to try to improve an author’s prose, or to correct what they believe to be errors of fact? Not at all. What they ought never to do is to make such “corrections” without letting an author know what they’re up to, and hence without giving him or her a chance to reject the changes. Good copy-editors get this. The itchy-fingered sort ought to be doused with calamine lotion or Benadryl until they get it too.

_____________________________________________________

*If you think so too, then you probably prefer “disseminate” to “spread,” “utilize” to “use,” “feasible” to “possible,” and “beverage” to “drink,” in which case, I’m sorry to have to tell you, it is evident that you are not human at all but some sort of infernal machine, and as such not to be reasoned with.
**They didn’t make it, thank goodness, into either the second printing or the paperback.

That’s the title that the Adam Smith Institute assigned to the talk I gave there a couple weeks ago. Not having realized that the talk was being taped, I was pleasantly surprised to discover it on YouTube today. It offers, I think, a pretty accessible half-hour overview (not counting question and answer) of my arguments concerning “good” deflation. I noted one gaffe, where I say that Keynes’s theory assumes that prices are generally “below” equilibrium. Of course I ought to have said “above,” or (alternatively) that equilibrium prices are generally below actual ones.

Do please pass the video on to anyone you know who believes that central banks should never allow prices generally to fall. Of course, we can’t expect central bankers themselves to change their stripes. But we can and should try to encourage the public to question their arguments to the effect that having the general level of prices double every generation or so is a sine qua none of responsible monetary policy.

Addendum. O.K., I admit to having replied flippantly to the question concerning whether productivity-driven deflation would not cause a problem by encouraging everyone to put off buying things because they are likely to cost less in the future. But can you really blame me? I mean, consider: when the expected productivity growth rate goes up, so, ceteris paribus, must real interest rates and, hence, the return on saving. It follows that, in fact, people will be more inclined to put off consumption until later, that is, that they will be inclined to save more, but only to a limited extent. But what’s wrong with that? Answer: nothing. Moreover, the extra saving will be inspired whether prices are allowed to decline or not, because it is a reaction, not to deflation per se, but to the increased return on capital, which is bound to manifest itself in higher equilibrium real interest rates no matter what the general price level does. If the price level is kept stable, both real and nominal rates will increase in response to improved productivity. If it is allowed to fall in accord with a productivity norm, nominal rates stay unchanged, but the deflation itself raises realized real returns. The only difference made by the productivity norm is that under it money balances also earn a return, making the overall inducement to save somewhat greater than it would be otherwise. And there’s nothing wrong with that, either.

It’s usually a good thing when representatives of the Von Mises Institute and George Mason ends of the Austrian-economics spectrum agree with each other. But I can’t say I found it much to my liking when Joe Salerno and Pete Boettke agreed with each other concerning a CNBC interview I gave a week ago. For both held that, by declaring during that interview that “a case existed” for quantitative easing back in late 2008 and 2009, I seemed to forget my own case for free banking, joining ranks instead with apologists for monetary central planning.

Having defended myself against this particular accusation at the two sites where it came up (and in Joe’s follow-up post), I don’t intend to repeat my defense here, except to observe again that “a case existed” isn’t the same as “a slam-dunk case existed,” or something equivalent. I do, however, want to further engage the broader question concerning the pitfalls of the second best. For while I agree that the pitfalls are real, it hardly follows that what might be called the “intransigent first best” strategy, which is to say the strategy that treats second best prescriptions as slippery slopes to be rejected out of hand, is a more prudent alternative.

In considering whether it is, let’s not conflate the question at hand with questions concerning the merits of the Fed’s actual, recent undertakings. It seems to me relatively easy to find fault with those undertakings, including all three rounds of quantitative easing, even considered merely as second-best means for encouraging recovery, and I have for that reason not found it especially difficult to resist endorsing them. Instead, let’s suppose that it is the autumn of 2008, that the wholesale credit market has shut down (thanks in large part, admittedly, to the combined shenanigans of the Fed and the FDIC), and that aggregate demand has consequently begun its downward spiral. Let us also assume (again, for the sake of argument, but also because there is, I believe, plenty of evidence for it) that the collapse of demand, if allowed to go on, is bound to lead to falling sales and unemployment and other sorts of hardship, beyond the hardship made inevitable by the end of any unsustainable boom, in part because prices, and wage rates especially, can only be expected to adjust downward in response to fallen demand very gradually, if at all.* Let’s assume, further, that a free banking system would tend automatically to counter the tendency for demand to shrink, even despite a fixed monetary base, by allowing banks to operate on lower reserve ratios as the real demand for their deposits and notes increases. Finally, let’s suppose that we are fully aware of the mischief that discretionary central banks can do, and that we are all anxious to avoid making any statement that might be construed as approving of, much less further empowering, such institutions.

The relevant question then is: given the existing, centralized arrangement, what should the Fed do? Suppose the question is asked of you on a popular, live TV broadcast. How to respond prudently?

Will merely insisting on the first-best solution suffice? I don’t think so. In the present context that would mean saying something like, “The Fed should freeze the monetary base; but that isn’t all: Congress should then wind it up, while allowing other banks complete freedom to meet the public’s monetary needs, including the freedom to issue their own notes. This would also require doing away with deposit insurance and…” etc. Even supposing one could elaborate the argument in a few sound bites, or that one could go on for hours, the obvious problem remains that the steps required would take months to accomplish even if they could be instantly and universally agreed upon. The answer, therefore, begs the question, “What should the Fed do in the meantime?” We remain more or less where we began.

Nor, as some commentators (myself included) have noted elsewhere, is saying that the Fed should do “nothing” any better. So long as it exists the Fed is, of necessity, doing “something.” So “nothing” here must actually refer to some particular Fed policy. Most often (I gather) it means that the Fed should refrain from any further lending or open-market activities, or from otherwise expanding its balance sheet. It amounts, in other words, to recommending that the Fed maintain a constant monetary base. But is asking the Fed to maintain a constant base really indicating any more principled opposition to monetary central planning than one indicates by calling upon it to alter the base by some particular amount, or by whatever it takes to achieve some particular target? I don’t see why. Indeed, what some have wrongly taken to be the more principled of the two alternatives seems to me to be hardly more principled, though rather less prudent, for it calls, not for the avoidance of monetary central planning, but for the implementation of a monetary central plan that is likely, according to “our” theory, to be particularly lousy. Nor will it do to say that the “keep the base constant” alternative is superior in that it might be proposed, not just as a suggestion for the present, but as a hard-and-fast monetary rule, for the same might be said concerning the suggestion that the Fed expand the base only when doing so serves to keep spending stable.

The option of recommending that the central bank “do nothing” is, by the way, precisely the one Hayek chose to take back in the early 1930s when, despite having recognized in print the desirability of a constant “money stream,” and despite the fact that the money stream had dried up dramatically, he campaigned against expansionary monetary policy. As he explained many years later, with regrets, Hayek’s reason for departing from his own theoretical ideal had to do, not with any slippery-slope considerations, but with his belief that allowing the collapse of demand to go on could be just the thing needed to wrench the British labor market free from labor unions’ stranglehold.** Still it is difficult to see why the results would have been any different if, instead of having opposed monetary expansion because he hoped by doing so to help thaw a rigid labor market, he did so on other political-economy grounds. To say that Hayek’s strategy backfired is putting it mildly, for it was not labor unions but Hayek’s own theoretical legacy that suffered.

Must one, then, simply endorse monetary expansion, setting aside the first-best alternative altogether, while also neglecting those political-economy considerations as point to the inherent dangers of such a compromise? I don’t believe so. It seems to me that making a case for monetary expansion is not the same as making one for monetary central planning. It is a matter of choosing one’s language carefully. The prudent answer to the interviewer’s question may be something like this: “For better or for worse, we are forced to rely on the Fed to prevent such a collapse in demand, so the Fed should do what it is supposed to do. But the Fed is a deeply flawed system and continuing to rely on it is asking for trouble. There are better alternatives, and now is as good a time as any to start taking them seriously.”

Perhaps putting it so would still make one an apologist for central banking. In that case, my plea to Pete and Joe is, “guilty as charged.” But why settle for that, fellows, when you can throw the whole first-best book at me? After all, I also believe that, until better (free market) alternatives are in place, the USPS ought to deliver my first-class mail, and the FAA ought to keep the airplane I’m flying in from attempting to land on a busy runway.

____________________________________________

*I understand that the Salerno-Austrians will regard these assumptions as proof of my being a “Keynesian” and of my failing to understand Say’s Law. In answer I can only observe (1) that if I’m a Keynesian so, too, are Milton Friedman and Leland Yeager, among others; and (2) that my “problem” is not that I don’t understand Say’s Law; it is, rather, that, like most neoclassical (and some classical) economists, I happen to think that Say erred in assuming that people (or banks) never attempt to accumulate reserves or broader-money balances. I know not how anyone can look at recent statistics regarding banks’ (and other firms’) accumulations of cash reserves and still treat Say’s position as if it were irrefutable.
**See Lawrence H. White, The Clash of Economic Ideas (Cambridge, UK: Cambridge University Press, 2012, p. 95.

I just learned that Richard Doty, who served as Coin and Currency Curator at the Smithsonian’s National Museum of American History for over a quarter of a century, passed away yesterday, having lost a battle with cancer.

I had the good fortune of getting to know Dick while doing research for Good Money, and his help proved absolutely indispensable in shaping my understanding of the workings of the British token coinage industry and of Matthew Boulton’s Soho Mint in particular. Of course I drew heavily on Dick’s magisterial 1998 book, The Soho Mint and the Industrialization of Money. But I will be forever indebted to him for much more than that crucial resource, for Dick also answered countless questions I posed, and responded very thoughtfully to my own developing thesis, in the course of what ended up being a quite lengthy correspondence. Then, when I finally visited him in Washington, Dick shared with me–no, he gave me–whole thick files of notes and other materials he’d assembled in conducting his own meticulous research at the Boulton and Watt archives in Birmingham. Thanks to his kindness I was able to make much more efficient use of my own scarce time spent buried among Soho’s dusty records.

Dick did all of this, and much more besides, not just unstintingly but with evident pleasure. What’s more his enthusiasm only seemed to heighten as my findings and conclusions began to diverge from those he reported in his own work. So far as he was concerned, what mattered was that I was doing my best to build upon what he had begun, and not whether I did or didn’t do a little demolishing in the process. Would that some other builders whose labors my own encroached upon had been similarly supportive!

And what a pleasure he was to correspond and talk with! Whatever he said or wrote, he said or wrote with great elan, leavened with wit. That he took great joy in his work was abundantly evident; but so too was his seriousness. He was, like most passionate scholars, not one to suffer fools gladly. Yet there was, even in his most caustic remarks, a hint of the jovial and effervescent. A big fellow, he came across, with his sometimes savage humor and generous nature, as a curmudgeonly version of Santa Clause.

A few years ago, when I’d long since moved on from my work on private tokens, I was surprised to get a call from Dick. He was, he told me, planning to step down from his position at the Smithsonian, and looking for a successor. He then encouraged me to apply for the job. Of course I was flabbergasted. “But Dick,” I said, “I’m an economist. The only coins I know anything about are the Birmingham tokens.” “You can learn the rest,” he said (or some such words). Of course, I didn’t end up applying for the job. But I won’t easily forget that invitation: I never had a nicer compliment from anyone.

I don’t know whether, when he called me that day, Dick had already been diagnosed with the cancer that was to kill him. In fact, I did not know that he’d been ill until I learned about his death earlier today. If I had, I would surely have made a point of staying in touch. Fortunately I did keep most of our correspondence, which I’m now planning to go through again, for old time’s sake–and also, I’m sure, for a few good laughs.

Well, it seems that Free​bank​ing​.org may be having its own little Bitcoin bubble, what with all the recent posting on the topic by Brad, Kurt, and myself. Still I can’t help adding one more, having planned to do so since my last post on the topic, and having as well a selfish motive in mind, to wit, that of supplying myself with some materials with which to revise and expand my paper on “Synthetic Commodity Money.”

I wish to accomplish that end by challenging Bitcoin fans to propose means by which one might combine the same advantages as Bitcoin presently offers with a mining or production protocol that, instead of adjusting mining rewards so as to achieve some predetermined output rate and limit, adjusts them so as to automatically alter the rate of coin production as needed to achieve some other objective. For example, the objectives might be that of achieving a steady rate of cybercurrency appreciation (as measured by the cybercurrency-equivalent CPI), or a steady level or growth rate for the total value of cybercurrency payments. But there are many others also worth contemplating. The general question is whether it is possible to have a more “elastic” or otherwise macroeconomically friendly alternative to Bitcoin. (Even the output of gold, after all, tended in the long run to respond to changes in that metal’s relative price, thereby ruling-out both persistent inflation and persistent (or sharp) deflation.)

In putting forward this challenge I don’t mean to endorse any particular monetary or macroeconomic policy ideal. I’m only interested in exploring the extent to which it may be possible to have mining protocols other than those calling for a steady (or steadily declining) rate of coin output. If there are, then the question whether any of them would in fact supply the basis for a “better” cybercurrency is one that would then be worth taking up.

As food for thought to those pondering the challenge, here are a few of the very interesting suggestions I received concerning it in the comments to my original Bitcoin post:

(Peter Surda): you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured.

(Derka): Yes you can certainly base altcoin production (supply inflation) on any parameter (nominal or real GDP, employment, etc.), the tricky part is doing it without centralizing trust. For the sake of demonstration, call the parameter of interest X.

Option 1) Centralize authority. Give the WSJ authority (via public/​private key encryption) to report the value of X to the altcoin network. The altcoin network responds algorithmically to this news. Perhaps if X is NGDP and is down, increase production!

Option 2) Give the authority to the miners. Every miner could record the current value of X in the blocks they produce. Problematically, the miners will collude and devalue the currency to reap the hyperinflated rewards.

(Koen): but would it not be possible for the network to respond to patterns that occur in the network but that are reliably associated with (e.g. being the effect of or having the same cause as) certain (macro-)economic phenomena? I mean, for example, contractions in the money supply seem to have both a (macro-)economic reality outside of the network and specific effects within the network

(Justin Reitz): Off the cuff, it might be possible to use the Federal Reserve’s FRED API to automatically pull data on a chosen economic aggregate. Of course there are all sort of issues: timeliness of Fed data, data updates, security of the the FRED API, how to reduce the virtual currency in circulation, etc.

(tdbtdb): Perhaps this is what you mean when you mention the security of FRED, but clearly having such a system depend on FRED would put it under the control of whoever controls FRED, nagating the whole point. So there are 2 risks, one that unauthorized hackers could compromise FRED, the other that the people feeding data to FRED might feel tempted to lie.

I wish I could offer some real prize for more thoughts like those above, let alone for any more substantial answer to my challenge. But as I am no fatcat but only a humble college professor, I can offer nothing save my gratitude, and the modest reward of doing whatever I can to credit those responsible for their contributions to one component of what H. G. Wells (himself no mean futurist) considered the “permanently effective task before Mankind,” namely, that of “working out and applying…a Science of Currency.”

The University of Georgia having, in its infinite wisdom, decided long ago to make its faculty do without sabbaticals, yours truly, sensing impending burnout, determined to do the next best thing, by taking leave for several months from all extra-curricular economics, including participation in economics discussions in this forum, in the blogosphere generally, and (so far as he could manage it) in the larger world.

Having thus refreshed myself, I now feel fit not only to return to the monetary-economics fray, but to plunge straight into the bitcoin melee, by means of a declaration calculated to make every true-blue bitcoiner take aim for my jugular.

The declaration? Simply, that no matter how often bitcoin enthusiasts state otherwise, bitcoins aren’t currency. Nor are they money of any other sort. They aren’t–to employ economists’ standard technical definition—a “generally accepted medium of exchange.” Perhaps some day they will be. But not yet—not even by a (very) long chalk.

But that bitcoins aren’t money doesn’t mean that monetary economists shouldn’t be interested in them. On the contrary: they ought to find them very interesting indeed, both because of the puzzle their presence poses, and because of the possibilities that presence points to.

What’s puzzling about bitcoin is that it has gained a foothold at all. Thousands of retailers (some are listed here) now accept bitcoin in payment for everything from restaurant tabs to dating site dues, not to mention marijuana and other black-market stuff. And the number keeps growing daily. That growth itself isn’t puzzling, for once a payments-network bandwagon gets going it becomes more and more tempting for merchants to hop on. But how did it get going in the first place? It is said that the first person to eat an oyster had to have been exceedingly brave or exceedingly crazy or some of each. But that primordial mollusc eater had nothing on the first, equally anonymous person to receive bitcoins in exchange for valuable merchandise, in the hope of somehow fobbing them off in turn on others. The earlier pioneer might, after all, have simply taken his cue from a seagull or oyster-catcher.

Unlike the rise of bitcoin’s network, that of various past money commodities like tobacco, cowries, and salt poses no puzzle: whoever first toyed with accepting such commodities for goods could count on the existence of persons who desired the commodities in question for their own sake, even if no one else was prepared to hazard their employment as exchange media. By adding their own willingness to try a commodity as an exchange medium to the preexisting non-monetary demand for it, such experimenters enhanced the likelihood of success on the part of others who made the same gambit, and so on. Such, in essence, is the basis for Menger’s famous (if controversial) conjecture regarding the spontaneous evolution of early (commodity) monies. The first person to accept bitcoins in exchange, in contrast, couldn’t hope to smoke them, make them into a nice bracelet, or sprinkle them on his food, in case he couldn’t trade them away: he (or she) could only hope that someone else would attempt a similar leap of faith, or face the consequences of trading some useful goods or service for so many units of digital dross.

It’s owing to the leap (or leaps) of faith required to turn otherwise useless stuff into exchange media that it has generally been supposed that fiat money could never become such except by means of government coercion, meaning not simply that the government must stamp “this is legal tender” on otherwise worthless pieces of paper, but that it can only get such pieces of paper to circulate in the first place by first making them convertible claims to either a commodity money or some established fiat money (which must itself have once been convertible into either a commodity or some other fiat money, and so on). Once it has managed to get its convertible paper into orbit, a government can then (suddenly) withdraw the convertibility launching pad without having its paper spiral back to earth, thanks to the now established demand for it as a pure exchange medium. Such, at any rate, has been the standard view of those (including the present writer) endeavoring to bridge the chasm separating Menger’s theory of commodity money from the modern reality in which irredeemable fiat monies rule the roost.

Such bridge building has had as its counterpart several studies casting doubt on the possibility of a “private” (which is to say voluntarily adopted) fiat money of the sort that Benjamin Klein and (despite his Austrian heritage) Friedrich Hayek have thought possible. According to such critical studies, such a money, being potentially infinitely expandable, would tempt its suppliers to reap high short-run profits by hyperinflating, rather than settle for the more modest periodic gains they might have by preserving their currencies’ purchasing power. Knowing this to be so, rationale persons will steer clear of such would-be exchange media, making them non-starters.

So much for received wisdom. Bitcoins challenge this wisdom, not quite by flatly contradicting it—to do that bitcoins would have to be money, which (as I’ve said) they aren’t—but by having managed to get off the ground at all, despite lacking any sort of convertibility “launching pad” and despite being “intrinsically” useless. Just as a toddler’s first steps don’t qualify it for the Olympics, the first barely above-ground flight of bitcoin is far from guaranteeing that it will stay aloft, let alone keep gaining altitude. Still it does seem to show that otherwise useless stuff can become an exchange medium without resort to trickery, and indeed without any sort of government encouragement. And that’s neither a mean nor an uninteresting accomplishment.

Just how did bitcoin manage to overcome what (for want of a better name) I’ll call the “oyster” problem? My partial answer is that, at least for some time after they first became available in 2009, bitcoins possessed three qualities such as no other actual or potential exchange medium had yet managed to combine. First, the open-source software providing for them to be “mined” by persons commanding sufficient computer-power allows only for a strictly limited annual output, with steadily diminishing returns such as will make unit mining costs approach infinity as total output approaches 21 million coins (as it is scheduled to do in 2040). In short, with just over 11 million bitcoins outstanding so far, no amount of computer power or time will ever expand the quantity by more than another 10 million. No one, in other words, is able to make a bundle by striking bitcoins at libidum. The problem of securing trust that might confront a prospective issuer of private “fiat” money is thus averted. In this respect bitcoin is more like a commodity than a fiat money, which is why I prefer to label it a “synthetic” commodity.

The other features that made bitcoin unique are (1) the untraceable nature of transactions conducted using it and (2) the fact that, being a “digital” money, it can circulate electronically. Bitcoin, in short, was the first medium to allow for perfectly anonymous transactions, avoiding both a paper trail and face-to-face contact, and to do so with the same convenience as any other sort of “digital” payment. Bitcoin’s inventors were thus able to take advantage of an unfilled niche. But filling it guaranteed nothing: the water was there for the horses to drink, but whether any would risk a first sip remained to be seen.

Risk it, of course, some did; and now, after some dramatic gyrations, with more undoubtedly to come, bitcoin, having already merited at least a footnote in the history of exchange media, might well manage to do considerably better than that. It is, after all, the nature of network goods to go from strength to strength, with every uptick in network size enhancing the prospects for further growth. That, so far as bitcoin enthusiasts are concerned, is the good news.

The bad news is, first of all, that bitcoin remains a bit player relative to established moneys, which for all their shortcomings command vast networks that are correspondingly self-reinforcing. Second, bitcoin’s relatively tiny network goes hand-in-hand with a high degree of market volatility, and a correspondingly reduced attractiveness to retailers, with large orders placed by one or two “big players” sufficing to generate huge price swings. Finally, the very success of bitcoin is bound to inspire imitations combining the original product’s desirable features with others such as might cause it to suffer the same fate as Betamax and BlackBerries. Consider, for example, a private cybercurrency based on a “mining” protocol aimed at dampening short-run swings in its exchange value. Or consider MintChip, a cypercurrency now under development at the Royal Canadian Mint, which is supposed to be as anonymous as bitcoin, but with the very considerable advantage of being fully compatible and integrated with the already established Canadian dollar exchange network.

Paradoxically, the very innovations that may eventually doom bitcoin also explain why it deserves to be regarded as one of the most promising developments in the history of money since the invention of ordinary coins. For, as I explain in my paper on “Synthetic Commodity Money,” its otherwise modest achievement proves that, with the help of the right software, one might design an “ideal” money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes—be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it’s only a possibility. But what a possibility!

Addendum (April 23): Over at Bitcoin Forum a commentator observes, regarding my post: “I don’t understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010. It’s like they don’t want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty.”

While I can’t pretend to be chaffing at the bit to converse with ideologically-driven libertarians, whether anarcho- or anacrho- or both, I will say that I don’t see what the emergence of BTC/USD markets has to do with the “oyster” problem I pose. Sure, once bitcoins became desirable enough people wanted to be able to get hold of them without mining for them themselves, e.g., by purchasing them with dollars. Nothing puzzling about that. But the fact that entrepreneurs were quick to respond to that desire hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them. Should anyone at Bitcoin Forum wish to enlighten me and others on the matter, as I’m sure many can, I should be very grateful to him or her.