Friday, March 14, 2014

Neither Bitcoin nor dirty socks are money

Today, I submitted this to the Albuquerque Journal. They didn't publish my last one. I thought this one might be more fun. It was published on March 20 under the title "Bitcoins may be bartered, but they are not money."
In recent, interesting, Journal articles Winthrop Quigley has pointed out that any things can be used as currency (money) if people accept those things. Dirty socks were used as an example. Hyman Minsky has pointed out that anyone can issue money, the problem is getting it accepted. So, what is money? And, why should we accept it?

Bitcoin and old socks are just things. In order to be money things, they must represent debt. Debt is just an IOU (I owe you), and for thousands of years money has been IOUs. For Joe's old socks to be money things, Joe must be willing to redeem them for something of value say, a dollar bill, a bit of gold, or a cup of sugar. Otherwise, if Joe gives Mary a pair of old socks for an old toaster it is just a straightforward barter agreement. But, if Joe is willing to redeem the socks for something of value, Mary can give the socks in trade for something else and Joe will be in debt to that third person.

So it is with Bitcoin, which is just a thing even though it is only a number on a spreadsheet in a computer somewhere. Indeed, the dollars we generally use are mostly entries on spreadsheets at our banks. As Bitcoin is not an IOU, it is not a money thing, and any exchange of it for something is just a barter agreement. Consistent with this argument, the governments of Japan and Canada have declared that Bitcoin is not money.

A grocery store coupon is money. It is an IOU issued by a company for a limited time and is a credit against our bill at the checkout counter.

Even though an IOU is money, it may not be generally accepted. If Joe's socks represent cups of sugar, there may not be many takers, but there may be more takers for gold. Then there is the US dollar. Why is it generally accepted? After all, it offers less than a cup of sugar. 

The dollar is an IOU of the government, and it offers only itself in redemption. A ten-dollar bill will get you ten one-dollar bills. Big deal, what's the attraction in that? 

What drives our need to acquire dollar IOUs? It might be that the government has declared dollars to be legal tender or that we generally agree to use them. Actually, we all need dollars, because we must pay our taxes with them. As a grocery store coupon is a credit at the checkout counter, so a dollar is a credit against your tax bill. Even a child with no tax liability, must pay for candy with dollars, because the candy maker needs them.

A sovereign money thing is issued by a sovereign government and is a tax credit. Bitcoin was invented supposedly to bypass government money. Money in any form can not compete with state money for acceptance.