Home > Economics - General > The Bitcoin Bubble and a Bad Hypothesis

The Bitcoin Bubble and a Bad Hypothesis

April 17th, 2013

That’s the title of my latest piece at The National Interest. The blurb sums it up pretty well. Under the efficient-markets hypothesis, a worthless digital currency should have never gotten off the ground.

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  1. Greg vP
    April 17th, 2013 at 15:40 | #1

    Excellent, clear piece, John.

    I could never understand the hype about Bitcoins – they always were clearly just another tradable collectible, like postage stamps from Belize, or Malibu Barbies In Original Packaging. It was purest fantasy to think that they would attain the status of Cartoons by Da Vinci, let alone that of a currency. Are people so easily gulled that just by calling something a ‘coin’, you can make them think of it as money?

    I guess we put the whole mess down as another case where the Overton window has shifted so far that some people can no longer see reality through it.

  2. April 17th, 2013 at 15:42 | #2

    Your criticisms of bitcoin are a poor rehash of the many out there before you

    bitcoin is not a fiat currency

    it’s a medium of exchange that various people have decided to have varying degrees of faith in

    that it might be silly (simply, there can always be a bitcoin2) is beside the point when you look at why people might want to use them

    unless you investigate who is using them and how and why then all you have to offer is hot air

    if, say, everyone had some for some reason specific to each person then any argument you might make to the contrary they are then a currency

    i don’t have any, simly because the effort to be able to own them is too high

    but i do know two groups of people who do – one the tin-hat variety and the other trying to move money from within a controlled jurisdiction to outside of it

    mostly it’s the later

    want to move you money?

    ok buy some bitcoins using one currency – sell them elsewhere in another

    you think you are pretty smart but you really don’t understand gold or bitcoins

    people hold such things simply because there are loopholes in laws that enable them yo use those mediums to escape taxes, observation/visibility, or currency controls

    people don’t actually save them – maybe some do – i don’t know

    they use them to hide their tracks

    as such bitcoin is better than gold

    gold you can use to thwart currency controls across most borders – but you are at risk of being robbed and some borders do control the flow of gold (very few)

    bitcoins can’t be controlled – at least right now

    there’s an infrastructure for bitcoins and it’s that infrastructure that gives them value

    let’s hope it lasts – because having the sort of people i work with examining every transaction of your life makes me cringe because they are intrinsically dishonest and selfish beyond words

    they are called government

    and you are part of them


  3. Jordan
    April 17th, 2013 at 15:52 | #3

    There is this analysis that is taking more of a mental view of bitcoin hype. It is an addition to JQ and also Austrian view in the comments (first comment) that is similar to the Peak Oil Poet’s.

    Although the original bitcoin has a mathematical algorithm and finite supply limiting how many of them will exist, there’s no theoretical limit to the number of alternative competing currencies that are functionally identical to bitcoin

  4. TerjeP
    April 17th, 2013 at 16:06 | #4

    I’ve been meaning to seek your view on bitcoin. Now I know. I like the article even if I don’t entirely agree. I think it is a good conversation starter and I’ll be circulating it in selected social media circles for that purpose.

    Just for completeness can you explain the ten year success of the Iraqi Swiss dinar (before the US bought it all at market rates) which in the Kurdish region of Iraq during the inter war period sustained both it’s value and utility in commerce in the absence of any government backing by command, or demand, or taxation?


    My view of bitcoin at the moment is that it only satisfies two of the three requirements of money. And those are the trivial two. And it doesn’t always do them well either.

    Medium of exchange – yes
    Store of value – yes kind of sometimes
    Unit of account – fail

    I’m quite optimistic about much of the underlying technology however. And bitcoin may yet prove me wrong. I don’t think it’s value will plunge to zero or even close to it any time in my lifetime. Such a prediction was made of gold in the 1970’s when the gold standard ended. Yet gold continues to attract a strong following just as it has for thousands of years.

    Absent a gold standard or a bitcoin standard I don’t think either will be money that often. But it is possible for either to become a standard in the shadow economy at some point if the benefit is sufficient. When Zimbabwe destroyed it’s currency gold itself did for a time become a currency there. See video:-


  5. TerjeP
    April 17th, 2013 at 16:37 | #5

    In terms of the efficient market hypothesis this is what Wikipedia says:-

    The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or “insider” information.

    I’m not sure where bitcoin violates such assertions. I’m not even sure it qualifies as a financial instrument rather than being a commodity. Clearly it’s utility does not relate to some claim to an income stream.


    (p.s. earlier comment in moderation)

  6. wilful
    April 17th, 2013 at 16:44 | #6

    As Jordan’s link notes, the only legitimate use for bitcoins is for illegitimate transactions. As long as the seller knows he can cash them in for real money, they do allow readily anonymous online cash transfers.

    Not that I know anything about that.

  7. April 17th, 2013 at 16:50 | #7

    Deleted – racism, attacks on other commenters, snark, general uselessness; JQ

  8. John Quiggin
    April 17th, 2013 at 16:52 | #8

    Your link states quite clearly that the government of Iraqi Kurdistan accepted “Swiss” dinars, presumably in payment of tax obligations.

    @the Peak Oil Poet

    Your last comment breached multiple rules – take a week off commenting.

  9. TerjeP
    April 17th, 2013 at 16:54 | #9

    As Jordan’s link notes, the only legitimate use for bitcoins is for illegitimate transactions.

    Which is a legitimate reason to use it. For example it makes buying drugs online at places like Silk Road a lot safer. About a million dollars worth of bitcoins change hands there each month.


  10. John Quiggin
    April 17th, 2013 at 16:55 | #10

    @Greg vP

    Actually worse than Malibu Barbies, since there are presumably genuine collectors who want them

  11. April 17th, 2013 at 16:59 | #11

    @the Peak Oil Poet




  12. April 17th, 2013 at 16:59 | #12

    the Peak Oil Poet :
    Deleted – racism, attacks on other commenters, snark, general uselessness; JQ

    I kind of expected this from you. You’re permanently banned.

  13. TerjeP
    April 17th, 2013 at 17:01 | #13

    @John Quiggin

    Good point. The article has been updated since I last reviewed it. Mystery solved.

  14. rog
    April 17th, 2013 at 17:19 | #14

    @John Quiggin That is probably one of if not the most critical test of a currency, whether a sovereign will accept payment of taxes in that currency.

  15. Newtownian
    April 17th, 2013 at 17:34 | #15

    Regarding all this discussion about trading in currencies commodities and derivatives could someone enlighten me on the taxes payable which if high would tend to discourage speculation and wild gambling/fluctuations.

    I presume for example that if you bought gold physically here in Australia you would have to pay GST of 10% plus profit to the trader.

    But if you trade gold as a futures commodity the cost is far less? Whatever the trade cost from Comsec etc. is?

    This suggests that much of the gold currently being traded is perhaps leveraged/illusory just like bit coins? Or are we seeing notionally big chunks of physical heavy metal changing hands only notionally via the Virgin Islands from one Swiss Bank Account to another – or at best possibly involving moving material extracted from one hole which is currently in another hole to yet another hole.

    Which all suggests the Bitcoin mania is not that much less insane than the Gold mania.

    Just checking. Ta.

  16. Jim Rose
    April 17th, 2013 at 18:48 | #16

    There is an alternative interpretation of bitcoins based on money as memory. Money is a record keeping device for imperfect and sometimes dishonest memories of past exchanges.

    Stephen Williamson blogged on this using the money parable by Joseph Ostroy:

    There are two people, George and Martha, who agree that they will eat dinner at one or the other’s home each Saturday night.

    They want to share the burden of the cooking equally, but they have very bad memories, and can never remember who last cooked dinner.

    However, they have a stone.

    George and Martha have good enough memories that they each can remember where the stone is stored in their respective homes.

    On Saturday night, each looks in that spot.

    If the stone is there, they take it over to the other person’s house and eat dinner.

    If the stone is not there, they cook dinner and wait for the other to show up.

    The person who brought the stone leaves it behind, and the other stores it.

    This money parable explains Keynesian macroeconomics well as Williamson explains:

    There are two farmers, George and Martha (again).

    George grows peanuts, Martha grows cranberries. George eats only cranberries, and Martha eats only peanuts.

    These are weird peanuts and cranberries which sprout from the ground every morning, and have to be picked or they rot.

    Each evening, George and Martha meet at Martha’s house, drink beer, and play cards.

    They get quite drunk, which is what it takes for them to settle down and negotiate the price at which they will trade in the morning.

    George’s peanuts must be harvested before Martha’s cranberries each morning.

    On a typical day, George gets out of bed, harvests his peanuts, and goes to Martha’s house.

    When George arrives, Martha harvests her cranberries, and they trade peanuts for cranberries at the price they negotiated the night before.

    However, there are days when George wakes up, and it’s not a day when he is so enthusiastic about eating his cranberries.

    The price of cranberries is too high, so he rolls over in bed and goes back to sleep. Martha makes up, and George has not arrived. Martha knows what has happened.

    She could call George on the phone and renegotiate the price, but she can’t bear to do it, and goes back to bed. The situation is bleak.

    Both George and Martha express a desire to work, but there is no demand.

    However, there is a government, which is monitoring the situation.

    The government agent gets George out of bed, and puts them to work digging holes.

    In exchange for the hole-digging, George is given some bonds which are claims to tomorrow’s peanuts.

    The government plans to tax George in peanuts on the next day, in order to deliver the payoff to the bondholder.

    However, George does not see through this. His circumstances are now changed.

    He goes to Martha’s, trades bonds and cranberries for peanuts, and everyone is happy.

    see http://newmonetarism.blogspot.co.nz/2011/02/bedtime-stories.html

  17. April 17th, 2013 at 20:33 | #17

    As I understood it, part of bitcoin’s appeal is a form of scarcity via mathematical problems (?). Don’t know, but this post reminded me of the late Douglas Adam’s brilliance:

    “Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich. […]

    “But we have also,” continued the management consultant, “run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship’s peanut.” […]

    “So in order to obviate this problem,” he continued, “and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and…er, burn down all the forests. I think you’ll all agree that’s a sensible move under the circumstances.”

  18. Jordan
    April 17th, 2013 at 22:15 | #18

    The rare information on bitcoin is how it grows to its limit of supply to prescribed 25 Mil BC which acctually plays into the demand for it.
    The information on who gets newly issued supply is; those that provide their computer as carrier of a bitcoin algo program is getting 10 BC for the service. This is the major demand for BC. They pick receptors of newly issued BC by lottery of all newly offered computers.

    When the BC increased in value, it was almost free to get a chance at 10 BC. When BC was valued at $100, that was $1000 of free value. I tought that once the available BC reached its limit, the demand from new users would dissapear and value of BC would go too. It happened earlier then that.

    I can not find the link for that information right now. Once evreyone knew about that and about ability of new alternative bitcoins to apear on the market, the value crashed.

  19. April 18th, 2013 at 00:26 | #19

    I can’t remember all the details but I remember a story from a few years ago along the following lines.

    There was some online fantasy warrior game in which performing certain, relatively mundane and uncomplicated, tasks would earn the player some kind of widget. When a certain amount of widgets had been accumulated the player could turn them into something like a bigger weapon or better armour.

    The widgets could be traded with other players and there was even a ‘secondary’ market for widgets in the ‘real’ economy. Apparently gamers were buying widgets for real cash.

    Whichever entity owned the game was worried about robot programs playing the game only for the purpose of accumulating the widgets to on-sell for cash profit. Apparently they thought this was against the spirit of the game and viewed it as a gross effrontery.

    So they organised a kind of cyber police force to pay a virtual visit to computers who’s activity fit the profile of such behaviour. They would put a notice on the screen saying they suspected this computer wasn’t being played by a real person and if a verification word wasn’t typed in within 60 seconds the computer would be banned and all widgets would be confiscated.

    Apparently, somewhere (I think it was Malaysia??), some ‘evil’ gamer terrrsts got around this by having a room full of computers running the widget-gathering trick and one real human person keeping an eye out for the ‘verification’ message to pop up – dutifully typing in the corect word when it did, on each of the bank of computers.

    Complex, smart, arguably victimless, enterprising innovation. Apparently the ‘scam’ was worth millions of dollars (real cash, not bitcoins!).

    Amazing what people will be willing to pay for, and what other people will do to satisfy that need.

  20. April 18th, 2013 at 00:44 | #20

    Aha! Apparently it’s called ‘Gold Farming’. They example I was thinking of was about a decade ago, but I saw one on the Grauniad site from 2011. In that version prisoners were being used by guards to crank up widgets.

    People really pay for this stuff??:

    According to figures from the China Internet Centre, nearly £1.2bn of make- believe currencies were traded in China in 2008 and the number of gamers who play to earn and trade credits are on the rise.

    If so, how does that sit with JQ’s criticism of bitcoin?

  21. John Quiggin
    April 18th, 2013 at 05:13 | #21


    I dealt with this in a fair bit of detail here


    For present purposes, what matters is that people are willing to pay to enter these games at a high level, avoiding the “level grind” of acquiring widgets.

  22. Collin Street
    April 18th, 2013 at 07:05 | #22

    Even if you accept the thesis that people can and will use private by-agreement money [even if the kurdish government accepted swiss dinars, there’s still brixton pounds and so forth], the thing is… bad money drives out the good, no? High-inflation currency circulates more than low-inflation currency, for obvious reasons. And bitcoins are set up to appreciate: given that everyone who deals with bitcoins will also deal with normal currency [since they have to pay their taxes] people will have govcoins to spend and will spend them in preference.

    So few transactions will be made in bitcoins: not for lack of acceptance by vendors, but on account of the fact that buyers would rather keep what they have. And this will in turn mean that there’ll be little pressure on or benefit to vendors to accept bitcoins, so they by-and-large won’t, and so bitcoins by-and-large won’t be readily usable to exchange for goods and services.

    Or in other words they won’t become socially established. The whole project is doomed, what the users want — “low inflation” “widely-circulating medium of exchange” “not backed by a state or large organisation” — is essentially impossible. Pick any two. The bad money drives out the good, after all.

  23. Ikonoclast
    April 18th, 2013 at 07:19 | #23

    I am pleased JQ has posted on the bitcoin. I was meditating a post on it myself. My son took some interest (mental not financial) in the bitcoin phenomenon. Here are my diverse obervations (I am addicted to numbered lists);

    (1) It does indeed appear to contradict the EMH.
    (2) It may have some utility in the sense that drug traders, drug buyers, money launderers and other assorted crooks feel that is has utility in evading justice.
    (3) It is most obviously intrinsically worthless and a bubble (that has burst recently).
    (4) My 19 y.o. son assessed it was a gamble, wished he had got on it earlier for a $100 he could afford to lose. He had developed some mathematical models (uni maths and engineering student) which he hope would predict the bubble collapse so he could get out in time if he got in.
    (5) I took one look at the graph (before the recent collapse) and said “too late”, it’s going to collapse “very soon”. I was right. Lucky guesstimate!
    (6) He had trouble using University PCs (running v, slow) and found they were hacked and using 95% of CPU for mining bit coins. He reported this to admin or his faculty.

  24. TerjeP
    April 18th, 2013 at 07:26 | #24

    Collin – there is a bit more to Greshams law than what you have stated. Greshams law says bad money drives out good money when they have equal face value. Bitcoins do not have equal face value with fiat currency. Greshams law is simply supply and demand doing it’s thing in the context of a price fixing arrangement. If you accept gold and silver in payment for tax debt and fix the rate of exchange between the two for that purpose then the cheaper one will be imported in large quantities. This is exactly what happened in the US era of bimetalism.

    Botcoin has generally been deflationary since the get go. More so since Cyprus announced it would be confiscating cash from bank accounts. Yet in spite of the deflation circulation has increased. In fact the deflation occurs precisely because of growing demand.

  25. TerjeP
    April 18th, 2013 at 07:34 | #25

    Claims that bitcoin violates EMH seem to be based on the fact that the market price is above zero and an assumption that the correct price is zero. I think it is the later assumption that is flawed.

  26. Brian
    April 18th, 2013 at 08:58 | #26
  27. Brian
    April 18th, 2013 at 09:07 | #27

    There is another complication to BitCoin. The exchanges are like roach hotels for your money. You can buy in with as much as you want. But you can only withdraw $1000 per day in non-Bitcoin.

    The Winkelvoss twins are sitting on some 40,000 or so bitcoins, that had a market cap of roughly USD10 million at the $266 per bitcoin peak and $3.6 million at today’s $92 price. If they want to cash out, it would take them 10 years at today’s valuation, or 27 years at the peak.

    That means that the Winkelvoss twins and the Maltese hedge fund will have to make deals off-exchange.

  28. Brian
    April 18th, 2013 at 09:15 | #28

    This feature of Mt. Gox trading limitations, and the way that orders are executed, suggests strongly to me that the guys running Mt. Gox are operating for their own benefit. Trades can take an hour to clear, and price at clearance can be quite different than the price at time of intended sale. That allows Mt. Gox to make extra money both as buyers and sellers.

    When price is rising, Mt. Gox can execute a buy on behalf of buyer and then sell it to them at a price higher than they bought it for. When price is declining, Mt. Gox can execute a sale to a buyer, and then buy it later for a lower price.

    The truly outstanding feature of Bitcoin is that the largest single stash of them that is known is some 500,000 that a scammer stole from trusting internet denizens who invested in his site.

    I have also seen complaints for a while from bitcoin miners that after mining for months or a year, they haven’t gotten credited with a single bitcoin. That suggests to me that somebody is snaffling up bitcoins that get mined by the trusting digerati.

    Lately, this Flexcoin bank appeared. Since it is impossible to run a banking operation using Bitcoins, for the same reason you can’t run a bank on a strict cash-coin basis, it appears to me inevitable that the purpose of Flexcoin is a type of Ponzi scam.

  29. Tim Macknay
    April 18th, 2013 at 11:27 | #29



    A Freudian slip? 😉

  30. Ernestine Gross
    April 18th, 2013 at 11:27 | #30

    I agree with TerjeP on both, the definition of the Fama et all EMHs and on Grasham’s law.

    I still maintain, for reasons given in my 1986 paper and on this blog-site, the Fama et all EMH is not testable (non-refutable). It should simply be ignored. Other notions have been associated with EMH (eg one way to value a physical asset, or bundle of physical assets, by means of discounting future net revenue; eg JQ’s argument). I don’t believe this is helpful.

    Otherwise, the bitcoins are but another form of off-balance sheet money. Other historical examples of off-balance sheet money can be found in societies which did not use the financial accounting framework (balance sheet). For example, cowrie shells have served as money, and even a huge stone.

    In contrast to the ‘money’ generated by the proverbial Wall Street bankers, bitcoins are harmless with respect to Grasham’s law. This is because bitcoins are denominated
    in ‘bitcoin’ and not in USdollars.

    I don’t agree with TerjeP that bitcoin is not a unit of account (there are many units of account in reality).

    I don’t agree with TerjeP that a bitcoin is a commodity. There are very few words in Economics which are well defined. A ‘commodity’ is one such word. A ‘commodity’ is described by its physical characteristics, time of availability, location of availability (and state of nature) ocnditional upon which it is made available. (Arrow-Debreu and all math econ theoretical models since then, which I am familiar with). IMO, the physical aspect of entering digits in a computer system over-stretches the the crucial aspect of physical characteristics in the definition of a commodity.

    I agree with TerjeP @25

    The call for ‘regulation’. The regulatory failure, which showed up in the GFC, concerns the failure to appropriately regulate financial securities denominated in national currency units.

    I really would object to ‘regulation’ extending to me paying a tax on exchanging my home made apple cake for strawberries grown next door. On the other hand I would object to people using complex company structures, trusts, and tax havens to avoid paying taxes on the proceeds (profits) from transactions denominated in national currency units.

    The exchange of an apple cake for strawberries is entirely driven by technological knowhow, natural resources, and preferences. This is what underwrites ‘value’, whether people bother to count it in bitcoins or US dollar is, at the most fundamental level, irrelevant.

    As I have said over the past years, we need a concept of monetary objects, their creation, circulation and destruction, which is independent of the balance sheet. The theoretical framework should be so general that any form of ‘money’ is representable. Which form of money appears where an when and under which condition is then an empirical question.

    Bitcoins did not appear at the time when the USdollar was non-convertible for a short period of time in or around 1974 – the technology was not available.

    To what extent the creation, circulation and destruction of the monetary object ‘bitcoin’ reflects personal preferences for trying out something new or individuals expressing their lack of trust in the management of national currencies are empirical questions.

  31. Rusty Russell
    April 18th, 2013 at 11:35 | #31

    Interesting analysis, but I use my bitcoin as a v. cheap way of doing small (< $10) international transfers, particularly for donations and payment of online assets.

    It's less useful than it could be because of the difficulty of acquiring bitcoins initially, the price volatility, and the security concerns around holding virtual currency on a PC. The first and third are significantly improving, the second not. I'm not sure how you'd start a payment system like this without being subject to speculative exchange bubbles, but perhaps this is a problem which will be resolved in time?

    But it's still providing useful value to me. Though I'm not an economist, so perhaps I'm not rational?


  32. John Ransley
    April 18th, 2013 at 11:44 | #32

    What about bitcoin as an emergent phenomenon (as in complexity theory)? It is completely virtual, completely independent of government, decentralised, global, cryptographicaly secure, fast, anonymous and intrinsically valuable because of the “genius of the technology”: http://www.businessspectator.com.au/article/2013/4/9/currency/why-mind-spinning-bitcoin-revolutionary.
    Bitcoin is to dollars as the car was to the horse and cart?


  33. David Irving (no relation)
    April 18th, 2013 at 12:08 | #33

    I saw some young bloke on the TV the other night who was into Bitcoins. He’d attempted to sell some through a local exchange, which had closed its virtual doors before he actually got paid. The principals are proving difficult to contact …

    The really funny thing is, this bloke still believes they have value.

  34. Ikonoclast
    April 18th, 2013 at 12:39 | #34

    I think one does not have to be an academic (like JQ and EG) but just a moderately intelligent old dog who has walked a hard road to know that;

    (1) Bitcoin is a scam; and
    (2) Bitcoin is a pyramid scheme or ponzi scheme.

    The creation and trading of bitcoin is not transparent nor subject to any regulatory oversight. It is clear that creators (with inside knowledge) can do anything they like in certain respects. This is notwhithstanding claims that the code that runs it is open source and open to scrutiny.

    Bitcoin is an elaborate and ingenious scam and it faciliates trade in illegal and dangerous goods. It also wastes computer resources. Bitcoin and like schemes should be subject to heavy regulation and a hefty Tobin style tax. You want to trade in spurious currency that facilitates illegal transactions? You pay heavily for the privilege. I have zero tolerance for this sort of financial chicanery which is totally non-productive and which once again works to shift wealth from workers and unsophisticated people (if they get caught up in it) to too-clever-by-half shysters and con merchants. Bitcoin (as a creation) is a quasi-criminal activity and perhaps even a criminal activity in the moral sense.

  35. tgs
    April 18th, 2013 at 13:04 | #35

    Bitcoin and like schemes should be subject to heavy regulation and a hefty Tobin style tax.

    If one of the key features is to facilitate anonymous transactions, how would the users you seek to regulate and tax be identified?

  36. April 18th, 2013 at 13:05 | #36

    I’d just like to say that if any one has any Malibu Barbies in their original packaging, or alternatively fabulous new packaging, I am willing to pay for them in bit coins. And I’d like to state that on all my bit coins you can clearly see the tooth marks.

  37. Ernestine Gross
    April 18th, 2013 at 13:13 | #37

    @Ronald Brak

    This leaves the problem of distance. Do you have a contract with all postal services world-wide in bitcoins? If not, some if not all trade remains virtual.

  38. April 18th, 2013 at 14:31 | #39

    @Ernestine Gross
    If we use registered mail I’m sure I can post my bit coins just about anywhere in the world. Postage costs will be low as most of the coins I have bit are aluminium Japanese coins.

  39. Ikonoclast
    April 18th, 2013 at 15:29 | #40


    I don’t think it is really up to me as a layperson in matters of jurisprudence, law enforcement and financial compliance to come with the methods of proscribing and/or regulating and/or taxing shadowy activities like bitcoin. It should be enough for me to state my principles, state which approach I would support and give my vote to the political party (if any) which will tighten financial regulation across the board.

    It would not be beyond the collective knowledge and experience of the relevant and responsible bodies to come up with ways of tightening regulation and throttling back, if not stamping out (no pun intended) shonky schemes like bitcoin.

    The FBI and others went after Kim.Com albeit with debateable success. There is no reason on the face of it why such government organisations and Interpol could not go after the creators of Bitcoin and like schemes if certain aspects of them were proscribed. (Not that I support the notion of US agencies in particular going after people in other jurisdictions.) All it would take internationally, would be an International Agreement on accepted currencies and proscribed currencies for inter-national trade and exchange. The bar could be set relatively low. The official currencies of all nations and like polities recognised by the UN General Assembly (with no Security Council veto) would get a guersney. Trade in any other currency or currency mimicking unit would be illegal under international law. I am fairly sure the distinction between currencies and securities etc. could be clearly defined.

    The fact that something bad or damaging is hard to stamp out is no reason to resile from attempting to stamp it out. Slavery still exists today. It is impossible to stamp out. But enormous strides were made in stamping out 99% of it when people, nations and the international community got serious about proscribing it. Artificial financial instruments and schemes which game our national and international monetary and financial systems and play and prey on greed, gullibility and weakness for no genuine net productive return are THEFT. They should be stamped out as far as is humanly possible.

  40. TerjeP
    April 18th, 2013 at 15:30 | #41

    I don’t agree with TerjeP that bitcoin is not a unit of account (there are many units of account in reality).

    Almost any traded good can satisfy the three characteristics of money (store of value, medium of exchange, unit of account). However if we set the bar too low then everything is money and the concept of money becomes meaningless. When there are many businesses that offer their price book in BitCoins and do their double entry book keeping in BitCoin units then I will concede that it is a unit of account. In the interim I think such a claim entails stretching the language of such things.

    Accordingly I don’t generally regard gold as Money outside the context of a gold standard.

  41. TerjeP
    April 18th, 2013 at 15:32 | #42

    Ikon – I don’t think buying or selling drugs or inventing and / or using BitCoin is immoral. Can you justify such assertions.

  42. Jordan
    April 18th, 2013 at 16:27 | #43

    If i may do it too.

    Avoiding taxes is immoral, and bitcoin serves that.
    Tax redistribution is essential to prosperity of a whole society. Without tax, health, retirement, education systems ability to redistribute accumulated wealth you would get increasing accumulation of wealth/ money in smaller and smaller hands while there would be less and less money which enables exchange on the bottom. Prety soon (50 years) you would have all money in a system, being placed in single hand, while nobody else would have any. and production would find no buyers since they have no money.

    That lack of redistribution can be aleviated by loaning accumulated money to poor so they can buy products that made wealthy wealthy, but at some point in time the debt placement will stop or be reduced just as it did in 2008.

    It is the circulation of money that makes an economy prosperous, the process which i call Nominal Surplus Circulation.

    94% marginal tax provided the most prosperous times in USA history because redistributed money from top to bottom without increasing debt enabling purchasing power to keep those on the top wealthy and those on the bottom to enjoy real goods.

    Avoiding taxes is imoral.

  43. tgs
    April 18th, 2013 at 16:31 | #44


    Oh, I didn’t mean to suggest that you personally need to come up with the technical solution as to how that was to be done. Sorry if I gave that impression.

    I suppose I was just trying to highlight the fact that the anonymity aspect of BitCoin was designed at least in part to avoid the kind of scrutiny which you think should be applied to it.

  44. tgs
    April 18th, 2013 at 16:34 | #45

    94% marginal tax provided the most prosperous times in USA history because redistributed money from top to bottom without increasing debt enabling purchasing power to keep those on the top wealthy and those on the bottom to enjoy real goods.

    Probably not a popular view on this blog, though:

    I would be wary of correlation vs causation in this instance.

    I would also be skeptical if many, or any, paid an effective marginal rate of 94% due to loopholes, deductions, off-shore havens, etc. I would be really interested in data on that front however and am always happy to be proven wrong.

  45. Ernestine Gross
    April 18th, 2013 at 16:50 | #46

    TerjeP, which of following is not a unit of account at present?


  46. Jordan
    April 18th, 2013 at 17:19 | #47

    No, it is not a popular view at almost any blog in the world today, not even on the circuitists blogs like MMT. But it was popular at Robert Reich’s blog, but he closed off comments few years back. This is the view that only small precentage of relly progressive population is holding.

    Then you should try to disprove that time when 94% marginal tax rate was present correlate with the most prosperous times. No matter the real tax rate. I believe that psychological effect on wealthy and managements is also very important by not allowing for incentives for fraud, or financial abuse, or fighting with workers about share of the productivity rise.

    I want to prove that debt replaced tax redistribution effects that lead to prosperity.
    Lets try to clear all, absolutely all, of the debt in a system, liquidate all assets to pay of debt. What would you get?
    Without firesale prices you would get what net wealth charts at the present show. In USA chart from 2007, 1% of population holds 34.6% of accumulated money in the system while 40% at the bottom holds 0.2% of all money (net worth) in the system while top 10% holds 73% of money.
    With firesale prices you would get much worse relation. You would get that only about 5% of population holds any money. Can you have any kind of economy where only 5% of population holds any money?

    Of course there would be developement of barter economy and alternative money before all people without money die off.
    Just try to imagine clearance off all debt/ liquidation.
    Money pulls production and exchange. In other words, as Liza Minelli sings “Money makes the world go around”.
    In other words debt, makes the world go around.
    In other words, money is debt.
    In other words, when tax and social net redistribution of money is replaced with debt as agregate demand enabler, it will hit the ceiling and crash the economy.

    94% marginal tax rate prevents debt growth and provides for sustainable agregate demand and supply side interaction. Which is requierd for prosperity growth.

  47. TerjeP
    April 18th, 2013 at 17:24 | #48

    EG – For each example you offer there are many businesses that do their double entry book keeping and issue a price book denominated using that currency. So by my own criteria they all function as a “units of account”.

  48. Jordan
    April 18th, 2013 at 17:33 | #49

    My long comment is in moderation even tough it has only one link with a response link. weird.

    Agregate demand and supply side are interactive components of an economy, i would say that everyone agrees with that.
    94% MTR gives support to both sides at the same time in addition to strong safety net. It prevents increasing accumulation of money on one side while giving to those that provide demand for products of supply side. It is a redistribution that keeps the ballance between demand and supply at the highest levels.

    You can replace such redistribution with debt which also speeds up the accumulation onto supply side, but only up to some point in time, untill it hits the ceiling like in 2008.

  49. TerjeP
    April 18th, 2013 at 18:10 | #50

    Avoiding taxes is immoral

    Not in my book.

  50. Ikonoclast
    April 18th, 2013 at 20:06 | #51


    I am sorry, but sometimes I feel like libertarians are morally naive in a childlike manner and that I thus have to explain social morality to them kindly and patiently as I would to a child. But I will use grown up concepts.

    Broadly speaking, dangerous or deceptive goods are immoral. This ethic may be said to derive from the Golden Rule. The Golden Rule or ethic of reciprocity is a maxim, ethical code or standard of morality that essentially states the following. One should treat others as one would like others to treat oneself. The corollary: One should not treat others in ways that one would not like to be treated oneself.

    None of us of who is of sound and healthy mind likes or wants to be sold dangerous or deveptive goods. Thus none of us should sell dangerous or deceptive good to others. Dangerous and deceptive goods can damage or destroy any or all of life, utility, happiness and freedom. Thus they are anti-life, anti-utilitarian, anti-felicitous (for want of a better term) and anti-freedom.

    In practical terms, (coming down from “pure” morality to custom and law) a general principle of our Law (common and legislated) is that all is permissable except that which is explicitily proscribed by law or regulation or which does not meet explicit prescription by law or regulation.

    It is the accumulated set of community and customary determinations, especially in a democracy, that decide what specific laws and regulations we have to meet our general understanding and consensus (conscious and unconscious) that the Golden Rule is the only valid and workable underpinning of social morality and workable reciprocities in human affairs.

    Broad categories of goods like “drugs” or “currencies, pseudo-currencies and virtual currencies” admit of a wide spectrum of both uses and dangers, of goods and ills in other words. Thus we tend to have a wide spectrum of control for individual items in those categories from ‘free sale and use’ to ‘restricted sale, access and use’ to strongly controlled to strictly prohibited. The determination of a each case is made on a case by case basis by one or other of our democratic or administrative agencies. Not all of these determinations are perfect or undebateable but many cases are also quite clear-cut.

    It is clear in many cases why we restrict substances or restrict financial instruments to lesser or greater degrees on a case by case basis. It is clear that many of these restrictions exist to restrict to proscibe dangerous and deceptive goods that can damage or destroy any or all of life, utility, happiness or freedom.

  51. Jordan
    April 18th, 2013 at 20:38 | #52

    What about my thesis that without taxes and social safety nets (state) the money would keep accumulating in smaller and smaller percentage of population while leaving majority without money which would destroy economy/ living standards? Is it correct?

  52. Ikonoclast
    April 18th, 2013 at 22:39 | #53


    All of history shows your thesis is correct.

  53. April 19th, 2013 at 08:32 | #54

    this got in as did another.

    A big scetion on R&R as well.

  54. Jim Birch
    April 19th, 2013 at 13:08 | #55

    At present Bitcoin is a small economic curiosity so is harmless, techno and interesting. Tamagotchi money perhaps; not really a threat to anyone.

    However, it is also a facilitating mechanism for doing certain sorts of deals that are already illegal like drug dealing and tax avoidance. As I see it, sooner or later someone will want to stamp on it for this, eg, making Bitcoin transactions above $1000 reportable and requiring tax auditability on all transactions. Law enforcement isn’t 100% effective but it would certainly take the sheen of Bitcoin. They didn’t get Al Capone for bootlegging, extortion or murder, it was good old tax avoidance.

    Taking it up a level, if Bitcoin ever developed into a major transnational currency the change is almost impossible to contemplate. It would more or less eliminate the potential of governments to control “their” economies, something like a global eurozone of wildly different economies and an always-on global Asian crisis. This might be naively appealing to some people, and gameable by others, but I just can’t see it happening in reality. I’d expect the full force of the state to hit Bitcoin transactions well before this happened. Bitcoin’s key user base – drug dealers, techo-libertarians and crime syndicates – aren’t likely to do much save it. OTOH, they let CDOs happen so who knows?

  55. TerjeP
    April 19th, 2013 at 15:51 | #56

    Jordan :
    What about my thesis that without taxes and social safety nets (state) the money would keep accumulating in smaller and smaller percentage of population while leaving majority without money which would destroy economy/ living standards? Is it correct?


  56. TerjeP
    April 19th, 2013 at 15:56 | #57

    The corollary: One should not treat others in ways that one would not like to be treated oneself.

    So if I would like others to sell me drugs and digital currencies then it is okay for me to sell them drugs and digital currencies.

    As I said it is not immoral to buy and sell drugs or to invent a digital currency or to buy or sell such a currency.

    Nor is it immoral to buy or sell dangerous goods. I routinely buy petrol and I don’t regard this as immoral.

  57. Jordan
    April 19th, 2013 at 16:36 | #58

    Could you please answer my last question about accumulation of capital in ever smaller percentage of population?
    Thank you.

  58. TerjeP
    April 19th, 2013 at 16:51 | #59

    Jordon – I did answer your question. See two up from your latest post.

    As an aside the following link shows two charts which look at income for poor people in countries with high levels of economic freedom versus in countries with low amounts of economic freedom.

    The top chart shows that in countries with high levels of economic freedom the poorest 10% of people only receive 2.58% of national income. However for the countries with the low levels of economic freedom the figure is 2.47%. In other words economic freedom appears to have no impact on how much of the income pie the poor people get.

    The second chart shows that poor people do better in countries with high levels of economic freedom.


    Let me know if you need me to explain it further.

    Yes I know that your question was about wealth not income but I had this link handy and thought it useful to share it.

  59. Ikonoclast
    April 19th, 2013 at 16:55 | #60


    You did not read or did not assimilate the detail of my argument. If you had you would realise I have dealt with such issues. Petrol is both a useful and a dangerous substance. As such we have have many safety laws and regulations dealing with petrol. In our current economy we must use it and must trade it but we must also use it and trade it safely. Petrol is marketed, it is also regulated in a great number of ways (mainly in terms of safety issues).

    Your solipsistic application of the Golden Rule is faulty. That’s like a sadomasochist saying I like being hurt so it’s ok for me to hurt others. The Golden Rule in society is not applied solipsistically but socially and communally.

    “Drugs” is a broad category but you continue to use the word without qualification or specification. Many drugs, even therapeutic drugs, are controlled as their proper uses are beneficial and their improper uses are harmful.

    You seem to think the whole social and civilizational world revolves around the market and that the market is some kind of obviator of all other concerns; that if everything could be bought or not bought at individual wish in the market then all the problems of the society would be solved. This is so simplistic and naive I am just flabbergasted. I don’t think I will waste any more time debating with libertarians. Like all fundamentalists they reason from blind belief not from empirical observation and logical analysis.

  60. TerjeP
    April 19th, 2013 at 16:57 | #61

    You seem to think the whole social and civilizational world revolves around the market and that the market is some kind of obviator of all other concerns; that if everything could be bought or not bought at individual wish in the market then all the problems of the society would be solved.

    Your putting words in my mouth. I never said anything like that.

  61. Jordan
    April 19th, 2013 at 18:07 | #62

    No, you did not answer the question. And i do not intend to get into arguing about whether you did or not while you avoid the answer.

    That chart does not say how economic freedom is defined and if they use only income earners while presenting it as all population (poorest 10%).
    As we all know that the most prosperous countries today are in northern Europe which by your definition of economic freedom that suposedly means lowest taxes are the least free.

    If you want to use definitions that are not controlled by you (do not know them) then everyone can lie to you if it is sofisticated enough.
    I know that those countries with the least economic freedom (highest taxation and strongest social nets) are the most prosperous/ lowest Gini coeficient.

    You still did not give the answer.

  62. Jim Rose
    April 19th, 2013 at 18:49 | #63

    @Jordan accumulation of capital in ever smaller percentage of population! I assume you contribute to a super fund. Retirement savings and similar funds own the majority of the share and bond markets.

    Marx predicted the growing misery of working people would lead them to revolt.

    I agree with G.A. Cohen that there is no group in advanced societies united by:
    1. Being the producers on which society depends;
    2. Being exploited;
    3. Being in conjunction with their families the majority of society; and
    4. Being in dire need.
    Because of the rather unforeseen withering away of the penniless proletariat, Marxism failed to predict the natural course of the evolution of capitalism.

    to quote Brad De Long at his best:

    “The principal reason that Marx feared market economies turned out to be false: they did not have a powerful inner dynamic leading to a polarization of the distribution of wealth. This had become clear by 1883, or at least by 1900, even though it had not been clear in 1848.

    The appropriate reaction to the fact that growing material wealth was trickling down should have been enthusiasm.

    Markets are powerful instrumentalities for controlling and guiding persons and organizations. They generate a rapid pace of innovation, provide for efficient recombinations of factors of production into new enterprises, and pressure large organizations toward effective fulfillment of their productive missions.

    To the extent that markets can be harnessed for the purpose of building Utopia, scarce public administrative capacities and competencies can be redirected to other uses…

    But the response of those who had positioned themselves left of social democracy was not enthusiasm that it would be easier to approach utopia than Marx had expected.

    Instead, the response was the continued denigration of systems that assigned a prominent role to either private production or market exchange, and a worship of hierarchical administration and bureaucracy-under the name of “conscious social control and administration of production for use”-as the answer to all problems.

    Whatever utopia is, it does not consist of one big corrupt bureaucracy.

    And so the left has had little constructive to offer social democrats and others trying to manage and reform the “mixed economies” of the twentieth century.”

  63. Jordan
    April 20th, 2013 at 02:59 | #64

    Jim Rose
    You are glorifing what was achieved by fiscal transfers and then claiming that fiscal transfers are bad.
    Yes, Cohen is mostly true, but that is situation with FT, not without it. What would situtation look like without good FTs you have to go far back in history to find times without FT and there is almost no times like that.
    Then the only comparable situations are to compare a single country across different times of strength of fiscal transfers, or you can compare present countries with various degrees of fiscal transfers. You will find that countries with highest rate of fiscal transfers like in northern Europe are the most prosperous while those with weak fiscal trasfers like in south of Europe are with low prosperity.

    Conclusion is that fiscal transfers are needed for prosperitiy of a society and there is no indication that there is a limit of how high level of fiscal transfers will cause the opposite effect.

  64. Jim Rose
    April 20th, 2013 at 09:47 | #65

    Jordan, you have the order reversed in the rise of the welfare state. take sweden.

    Assar Lindbeck has shown time and again that ‘Sweden became a rich country before its highly generous welfare-state arrangements were created’. See http://www.project-syndicate.org/commentary/the-three-swedish-models

    Sweden moved toward a welfare state in the 1960s, when its government sector was then about equal to that in the United States in size. Sweden was one of the fastest growing countries between 1870 and 1960.

    Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality than the USA.

    By the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.

    Swedish economists encountered a new phenomenon that they named Swedosclerosis:
    1. Economic growth slowed to a crawl in the 1970s and 1980s.
    2. Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
    3. about 65 per cent of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or live off transfer payments.

    Sweden is a classic example of Director’s Law. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth to the middle class. so was the USA in the 1960s on a smaller scale.

  65. April 20th, 2013 at 10:43 | #66

    National fiat currencies are protected from competition by the fact that they can be used to pay taxes, but bitcoins have no such protection. Apart from perhaps nostalgia there is no reason for people to prefer bitcoins over more or less identical competitors such as Radcoins, Ronald Dollars, or the iQuatloo.

  66. Jim Rose
    April 21st, 2013 at 11:27 | #67

    John, Tom Sargent, George Selgin and Bruce Champ have all written on the minting of private coins and private scrip money. Chronic shortages of small coins and small denomination government bank notes have occurred throughout history.

    A shortage a small denomination pesos is common in the Philippines, especially around election times when politicians need them to bribe voters, so taxi driver rarely offer change

    The economics of coinage amd monetary demoninations has a long history. Adam Smith advocated the banning of small denomination bank notes because small denomination bank notes are less likely to be redeemed for gold. Redemption as a discipline on monetary inflation is lessened if the government can issue larger amounts of small denomination banknotes.

    Hoarding was originally of coins whose copper or silver value had become greater than their exchange value because of inflation. Indian rupees are currently spirited across to Bangladesh to be made into razor blades.

    Selgin has built on his long book on private mints to write on bitcoins and Swiss dinars in Synthetic Commodity Money. A summary by Matt Ridley is at http://www.thetimes.co.uk/tto/opinion/columnists/article3743384.ece who also mentions that mobile phone credits are used as a currency in Africa.

    The supply of pennies was taken over by privately minted coins in the UK for 20 years from the 1790s. The private coins were backed by a promise to redeem them in gold. there were 20 private mints by 1818 when they were banned.

    Bruce Champ has written on scrip money. Bank failures, bank runs, and bank suspensions cause and exacerbate cash shortages in the 1930s and earlier times. Municipalities, civic and business organizations, and individuals stepped in to issue scrip money.

    Mining, limber and canal companies issued script money to pay workers. They shared the seigniorage and redeemed the outstanding script for government banknotes later.

    Irving Fisher even wrote a paper called Stamp Scrip. Stamped script were a few of script money in the 1930s in the USA, Germany and Austria that was also time-dated to encourage spending.

    Most currency in the 1800s in the USA was private banknotes. The newspapers of the time carried daily tables listing the discounts on the face value of these competing private banknotes based on how familiar they were, how far away was the issuing bank and other risks to acceptance.

    It took government’s centuries to supply coins at a level that met transactional demand. The market was able to do it overnight.

  67. galt
    April 21st, 2013 at 14:39 | #68


    @Jim Birch

    It might not be easy (or even possible) to restrict bitcoin trading as it is a peer to peer network. Just as the torrent of bits are. All the holywood looby has tried to shut it down and it is still up, because it’s decentralized

  68. galt
    April 21st, 2013 at 14:46 | #69

    @Jim Rose

    I’m no economist (neither was Marx) but I think Marx was wrong because he did not expect that the Capitalists would also compete amongst themselves, thereby raising the wages values for the good employees. Also, he did not foresee that, in searching for a greater profit, capitalism also brought us more efficiency and cheaper processes that enables goods to be produced for a fraction of what they were produced for a few years back. Mass producing and the like have made it very cheap indeed for people to have access to all sorts of things so even if capitalism generates some inequality, it also makes the economy much more efficient so that even the poorest can afford a living, all brought about by the search for higher profits. That’s only if you are a below-average worker, however. If you are above-average, you have every chance of ascending socially and becoming richer – provided you are productive.

  69. Julie Thomas
    April 21st, 2013 at 17:05 | #70

    oh sweet lord galt, you are awesome. Jim Rose knows nothing of this theory of capitalism. He will be very happy to hear about your theory.

    Have you read that book by Ayn Rand ? I saw on my facebook page the other day, “There are two novels that can change the life of a bookish young person; one is The Lord of the Rings and the other is Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

    I bet youo have not read Prof Quiggan’s book “Zombie Economics” have you?

  70. tgs
    April 22nd, 2013 at 10:40 | #71

    Then you should try to disprove that time when 94% marginal tax rate was present correlate with the most prosperous times.

    I would urge you to read my comment again. I stated that I would be wary of confusing correlation with causation with respect to the US experiencing its most propserous times during the period it faced a marginal tax rate of 94%.

    You then challenged me to disprove this correlation.

    What I am saying is that you are claiming that this correlation implies a causal link. I would be careful of making such claims without convincing evidence.

  71. Ernestine Gross
    April 22nd, 2013 at 11:17 | #72

    “National fiat currencies are protected from competition by the fact that they can be used to pay taxes”

    Quite right, they ‘can be used’ but are not necesarily used for this purpose because experts in some large legal firms together with proverbial Wall Street bankers find suitably ‘small’ sets of people who say they have a country and have politicians to create tax havens – at a fee of course.

  72. Ernestine Gross
    April 22nd, 2013 at 11:21 | #73

    So, Terje, libertarians don’t belief in private money, such as bitcoins. Why should anybody believe in libertarians when there is no clearer contradiction than that? I mean, one has to draw the line in the sand somewhere.

  73. TerjeP
    April 22nd, 2013 at 14:11 | #74

    Ernestine Gross :
    So, Terje, libertarians don’t belief in private money, such as bitcoins. Why should anybody believe in libertarians when there is no clearer contradiction than that? I mean, one has to draw the line in the sand somewhere.

    I don’t really understand the basis of your assertion. Plenty of libertarians believe in private currencies. I do. However so long as there is a state offering up an alternative and using coercive power to give it primacy (through taxation laws etc) then any assessment need to be made in that context.

    If the government is giving away free ice cream I might like the ice cream and still loath the policy. Perhaps you think libertarians live their personal lives in some bubble trying to insulate themselves from ever touching products provided by the state, but that would be a rather naive and stupid characterisation of libertarians. Few of us have cut up our Medicare cards or ditched the use of fiat currency.

    Libertarianism is a political philosophy not a lifestyle choice. It is a set of views on what government should and should not do. It isn’t a hippie commune.

  74. Ernestine Gross
    April 22nd, 2013 at 15:12 | #75


    o.k. I’ll file libertarianism under utopias in my mental ‘knowledge management system’.

    (‘knowledge management’ – other than IT technical stuff – is filed in the same category in my head. Hope you appreciate the implications of the certainty of the finiteness of life of an individual for my radical method of solving puzzles.)

  75. TerjeP
    April 22nd, 2013 at 17:54 | #76

    We had an abundance of private currencies circulating in Australia prior to 1910. It was not utopia but it worked.

  76. Jordan
    April 22nd, 2013 at 18:10 | #77

    What i wanted you to accept is that 94% marginal tax did not hurt prosperity if it existed at the same time. Not to show causation to the prosperity.

    Why such policy causes prosperity i explained few times with Nominal Surplus Circulation and incentives such tax gives.

  77. Jordan
    April 22nd, 2013 at 18:17 | #78

    But those private currencies were backed by gold in their respective bank waults. And gold can never loose its value down to o since it has practical aplications too, unlike bitcoin that is not backed by anything of value, just by pure trust in the system.

    These private currencies were slowly replaced by state debt (Treasuries) as value backing which were cut up in size and time by banks in order for public to find it useful. This state debt backed currencies is present monetary system while gold backed currencies are removed as too volatile and make prosperity dependent on ammount of gold that can be digg out of ground.

    Gold backed currency is less useful then fiat currency.

  78. TerjeP
    April 22nd, 2013 at 18:55 | #79

    But those private currencies were backed by gold in their respective bank waults.

    No they weren’t. Banks were pretty conservative in terms of reserve ratios but none did 100% gold backing or anything like it. The private notes were more akin to the demand deposits that circulate via EFT today.

  79. Jordan
    April 22nd, 2013 at 19:00 | #80

    But i did not even say at what ratio the currencies were backed? I said they were volatile which includes the variable of the ratio.

  80. TerjeP
    April 22nd, 2013 at 19:06 | #81

    The subsequent 100 years of fiat currency was far less stable.

  81. Jordan
    April 22nd, 2013 at 20:08 | #82

    The world did not get off gold untill 1933-1939. Most of the countries did in 1933. Untill that time you can not claim that fiat currency was the rule of the day. And even if you do start from 1913 when FED was formed then i wonder how do you define stability?

    Looking from 1933 with exception of WWII which was caused by gold pegg and the debt burden that produced such bank collapse and unemployment which in turn looked at opposing spectrum of solutions: communist or fascist solution to capitalist crisis, i would say that stability was remarkably improved in next 70 years comparing to the line of depressions that were present in previous 100 years under old system.
    Pre 1933 period had depressions every 20-30 years. Sure the depressions lasted lot less, but the level of misery was depressionary.

    I really do not know how do you define stability????

  82. TerjeP
    April 22nd, 2013 at 22:06 | #83

    Fiat was the wrong word. I mean government currency. The opposite of private currency which dominated in Australia pre 1910.

  83. TerjeP
    April 22nd, 2013 at 22:09 | #84

    Feel free to share your definition of stability. And show how the private currencies pre 1901 were “too volatile”.

  84. Jordan
    April 22nd, 2013 at 23:32 | #85

    I am not afraid to explain my comprehension of terminology and to back my statements.
    I will define the term at US example since i do not know Australian history.
    By volatile private currencies i meant that banknotes of different banks would be used only in an area that is in a proximity to the bank and many times the areas would overlap and 20 dollar notes would have different values in the same place. Even the 20 dollar gold coins have different values and different weight. Even the values of a gold coin would change over time and also have different values in different places. Every teritory would be its own optimal currency area with market forces that determine its own value. Around gold mines the prices of goods measured in gold would be different then in other places due to market forces. In times of gold rush the gold would change its value.

    Currencies were too volatile just on their own.
    Then the banks would cover their expenses with issuing banknotes without adding the gold and that would make gold ratio uneven over multiple banks.

    Can you have a federation with such a system?
    Speading communication with railroad and roads the issues became unberable for any united consistency with such large teritories as USA. It needed more unified monetary system in order to remove trade bariers. You can draw a parallel with EU that used to have multiple currencies trying to make trade fllow easily. Just a mess.
    The real reason for Civil War in US was uniting into a single currency market with Federal system while Confederacy wanted to keep their own private currencies in each state, hence “state’s rights” and slavery that Southern politicians claimed hiding the real reasons. Confederate politicians did not want to loose individual state banking power to print money.
    Confederat wanted their “state right” to print money and distribute it which by federalizing it they would loose.
    This is what is also happening in EU today. North is for more banking union under ECB while South politicians are against such loss of sovereignety of distributing money as they see fit.
    North have higher taxes on rich and stronger safety net while southern politicians do not want that.
    In order to have sustainable banking union under single currency they also have to federalize retirement, health, social systems which will provide required fiscal transfers. Before that they should have equal standard of taxes and safety net across the countries in order to make transitions easier. I do not think that is necessary but they do.

    In order to have such thriving large economies like USA or Australia, or EU or China, you have to have standard on currencies equal accros teritories and time in order to have free flow of trade. It is the free market that demands such change 🙂

  85. tgs
    April 23rd, 2013 at 07:19 | #86


    What i wanted you to accept is that 94% marginal tax did not hurt prosperity if it existed at the same time. Not to show causation to the prosperity.

    OK, so you’re not claiming a causal link any more.

    Why such policy


    prosperity i explained few times with Nominal Surplus Circulation and incentives such tax gives.

    You are now claiming a causal link again… in the immediately following sentence no less. I must admit I’m not sure what it is you are trying to say here when two adjacent sentences appear to contradict each other.

    Yes, I did read your proposal of a hypothetical mechanism by which this causal link may have taken place.

  86. Gaz
    April 23rd, 2013 at 10:29 | #87

    “The subsequent 100 years of fiat currency was far less stable.”

    Of course, Terje. It’s not as if we had devastating depressions in the 1840s and 1890s or anything, is it, or that the 1890s depression was so much longer and deeper than the one in the 1930s.

    A fiat currency and central banking have really ruined it for everyone.

  87. Jordan
    April 23rd, 2013 at 14:18 | #88

    Causal link is side note and i wanted to show that it is not the main topic right now by explaining that causality came from somwhere else.
    Just wanted to get agreement that high prosperity existed with 94% top tax which gives conclusion opposite to what neoliberal claim; that high top taxes hurt prosperity.
    And i have never heard such concession from “free marketeers”

    You want to keep avoiding such implications by conflating implications of a corollary and causality, nobody can stop you.

  88. tgs
    April 23rd, 2013 at 14:47 | #89

    Just wanted to get agreement that high prosperity existed with 94% top tax which gives conclusion opposite to what neoliberal claim; that high top taxes hurt prosperity.

    Well no, I am not disputing any historical data as it currently stands.

    However, the correct counter-factual to your point would be whether prosperity would have been greater if the nominal marginal tax rate was lower than 94%.

    I don’t know the answer to that. I’m sure that you have a very strong opinion on that question and that there would be opinions out there that would disagree with yours.

    You want to keep avoiding such implications by conflating implications of a corollary and causality, nobody can stop you.

    I assume you mean correlation where you have used the word corollary.

    I am not sure what you are accusing me of trying to avoid or what you really mean by your last sentence.

  89. tgs
    April 23rd, 2013 at 14:48 | #90

    *not sure of what

  90. Jordan
    April 23rd, 2013 at 16:04 | #91

    Well no, I am not disputing any historical data as it currently stands.

    This is what i looked for. Thank you.
    Don’t you think that implications of that should be included in today’s conversations? Or what history can teach us is not applicable?
    I think that such implications are of the most importance to talk about at least to figure out how such policy affected the performance.
    Since preveiling thinking is that taxes are bad, there is nothing to figure out about such policy since we already made up our mind, right?

    However, the correct counter-factual to your point would be whether prosperity would have been greater if the nominal marginal tax rate was lower than 94%.

    How much better can be then already the most prosperous time in history?
    If true that prosperity would have been better, it would be only marginaly better and rising inflation is showing that it was at the maximum.

    I apologize for missusing the word corollary, i usualy do not proofread even tough i should.

  91. tgs
    April 23rd, 2013 at 17:02 | #92

    Don’t you think that implications of that should be included in today’s conversations? Or what history can teach us is not applicable?

    Of course history is important and can teach us valuable lessons about the present. I suppose I am not as convinced as you appear to be as to exactly what the lesson to be drawn in this instance is.

    If the lesson is that high nominal marginal tax rates and high economic growth are not mutually exclusive given a certain set of domestic and global macroeconomic conditions then I would wholeheartedly agree.

    If the lesson is, as you seem to be claiming, that high nominal marginal tax rates cause high economic growth then I would find this position far less convincing. However, I am always willing to change my opinion in the face of evidence.

    This is what I was getting at when I suggested you should consider the difference between correlation and causation. Correlation is relatively easy to demonstrate, causality is typically much, much harder.

    If true that prosperity would have been better, it would be only marginaly better and rising inflation is showing that it was at the maximum.

    Like all historical ‘what-ifs’, it is probably difficult to prove such a claim. I suspect that there would be people who would disagree with your opinion just as there may be those who agree.

  92. April 23rd, 2013 at 17:16 | #93

    Reality check
    People still see a future in bitcoin or its successor

    “If the venture capital community wants to make bitcoin the “Next big thing”, staving off regulation by bringing the currency into the light is just as important as their other goals. Yes, the U.S. Treasury recently issued some guidance, essentially bringing bitcoin into the regulatory fold. At the same time, regulators do have the facility to make life difficult for bitcoin if they so choose.”

    “In summary, bitcoin is what I would call a “Beta currency.” To the tech world, that means something that is still in development. It’s eventual success or failure is a technological challenge, mixed with business development issue”

    Regardless of the ethics and merits of alternative currency systems, this looks like something that will need to be dealt with. Perhaps a government approved design (eg secondary private key to decode all transactions as per various key escrow proposals put forward by government for other cryptographic systems).

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