>Why is this a fiat currency?
I am glad you caught that. Here are some passages from Wikipedia:
- Fiat money is money that has value only because of government regulation or law.
- money without intrinsic value.
- While specie-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of specie, fiat money's value is unrelated to the value of any physical quantity.
-A feature of all fiat money is its acceptability to the government for payment of taxes and charges.
Bitcoins don't have intrinsic value, but they are not legal tender either. So, I think the author of the article equates fiat money with money that is not backed by an agreed upon physical entity.
I would say that it's not the physical entity that we are interested in, but the labor required to produce that physical entity. However, there is no way to conveniently "store" labor for trade in the future, so physical entities (like gold) act as a proxy.
The interesting feature of the Bitcoin seems to be that no human is involved in determining its supply. This is left to a computer algorithm. The algorithm, I guess, is not open to tinkering. Its parameters must have been set at the beginning. I have not read anything else about the Bitcoin, so I need to do that before I continue with the discussion.
The experiment is very interesting and we may learn a lot from it. For example, this passage is of interest to me:
"Forster began charging 75 Bitcoins for each pair in February and has since had to lower the price to 5 due to extreme appreciation in the currency's value. "I wish I had kept all of them," says Forster, who traded his Bitcoins on the way up for cash and web services."
It seems that some are busily attempting to figure out how fiat currency can be replaced with yet another fake, difficult to understand, system that reflects the age of electronic communications. It’s just more smoke and mirrors of the same old central bankster system of creating digits on a computer screen.
Enough with these attempts to defraud through various currency schemes. The US Constitution had it correctly. PM miners present their output to governments, who in turn assay what is presented to them. If the assay is of sufficient purity the ingots are turned into coins, be they gold, silver or copper. Governments need to be involved only to the extent that they guarantee that the coinage meets specifications. The Coinage Act of 1792 created the required sanctions to ensure that specifications of purity were met.
If others wish to experiment at their own risk with “Bitcoins”, that should be their decision. No one should step in to save them from losses due to fraud. That, of course might be the biggest risk, a la TARP, if the “Bitcoin” crowd gets their way.
Nice try though, attempting to convince those who can see beyond the complexities to where “Bitcoin” money will eventually make headlines, and not in a good way.
Visits to this website, and threads authored by the bunch who seem determined to find a way to discover (and perhaps be part of) the next currency scam in the age of the Internet, are truly enlightening. However, you should realize that your view of the general level of human intelligence is highly underestimated.
As far as comments by Adam Smith are concerned, one thing that he emphasizes continually is “exchange”. When he wrote “An Inquiry into the Nature and Causes of the Wealth of Nations”, through his grasp of history he undoubtedly understood fraudulent fiat monopoly money currencies. But it is unlikely that he foresaw the level of central bank fraud that exists today, including the usage of said fiat money by a current central banker in the news, Dominique Strauss-Kahn to have his way with a hotel maid. Of course, having to claim one’s rights in such a situation against such a well known figure is probably an unlikely positive outcome, as high profile figures such as OJ Simpson and a number of others are testament to.
>So you say, “Unfortunately, your response is unrelated to the
>question.”, but according to Wikipedia and the U. S. Constitution,
>and your original post which is really non-specific (no question
>was posed) the answer you received, despite unspecified
>expectations, was right on the mark.
Let me try for the third (and last) time. Here again is what I asked:
Here is a post I made a few days ago in which I said what I think about Bitcoins and why I don't think they would work any better than paper:
>>So let me put this to you three (I hope others will join too) as a
>>question: What is the actual difference then between Bitcoins'
>>value as money versus gold if we assume that neither's supply can
>>be expanded at will and neither is based on borrowing.
And I started my reply with:
>These assumptions are in practice unenforceable, but for the sake
>of the discussion here are some differences: ...
Now, here is how you interpreted my stand:
>Otherwise it seems impossible to discuss your Topic of “Creation of
>a currency” simply because you apparently are unable to accept the
>notion that banknotes are fraudulent, whether they are bits or
>bark, and persist in attempting to convince others that they are
>not. Whether this springs from an effort to propagandize what many
>of us consider an absurd fraud, paper or electronic currencies, or
>whether you actually haven’t arrived at the conclusion that they
>are, is unknown. Only you can make that “perfectly clear”.
So, I will demonstrate how one can clearly answer the two yes/no questions that I asked you (three times):
1. I do not believe that a bimetallic currency standard is a workable solution, and
2. I do not believe that any economy can function competitively in the present world if ALL trade is conducted with physical gold (or silver, or copper).
See ... it was just a yes/no thing.
Just so you know the history of discussions on this board, a lot of energy has been spent by many of us (over a period of years) discussing the issue of a practical but less fraud-prone form of money than what we have now. The conclusion some, or maybe even most of us reached is that the system would probably be good enough for practical use if gold were used as a backing and freely convertible at all times. "Freely convertible" means that there would be no emergencies during which it is not convertible, that its "appreciation" would not be taxable, that it would be acceptable as a form of payment in exactly the same way as paper is nowadays, etc. In simple terms, a true dual currency system.
I just read your response to Vonmiser. Just so that you are crystal clear about my take on the Real Bill Doctrine:
Antal Fekete's prime objective was to overcome the perceived shortcoming hard money poses - its inelasticity to respond to money shortage and usury, price deflation, and decay into barter - without losing hard money's safeguard against currency inflation. He solved this "dilemma" by pointing to the benefits of self-liquidating, production-based so called "Real" Bills of Exchange fully redeemable for gold when the bill unwinds after final product changes hands from producers to consumers. Benjamin Franklin would agree with this system and we know this because of this quote from "A Modest Inquiry into the Nature and Necessity of Paper Currency":
"There is a certain proportionate Quantity of Money requisite to carry on the Trade of a Country freely and currently; More than which would be of no Advantage in Trade, and Less, if much less, exceedingly detrimental to it."
2 years ago, Vonmiser and I tossed around a similar system based on production-based money in parity with unit production output AS OPPOSED TO MONEY PARITY with UNIT OF LABOUR PERFORMED which is what hard money alone preserves.
My criticism of production-based trade money/bills is that it anchors prices to output instead of unit labour. As labour becomes more productive, its production money price inflates. By contrast, the hard money price of labour remains at par, while labours output deflates in price as labour becomes more productive. Money is used more efficiently just a labour, both in commerce and in capital markets and the cost of money remains embedded in the liquidity premium, which drives capital use efficiency. So the upshot is that the shortcomings of hard money are nothing but conjured ghosts and demons. In reality a hard money system works well because productivity growth and capital efficiency alleviate the presumed threat of money shortage obviating the need for elastic currency.
A monetary system must be fool-proof and account for moral hazard and human frailties. Antal Feket's defense of the Real Bill Doctrine as having merit independent of any further requirement of its fool-proofness is the difference between the value of theory and the demands of real life.
The only way to make a monetary system fool-proof AND elastic is to build into it the threat of redemption as virtually guaranteed by the Gresham effect. Vonmiser and I arrived at this conclusion 2 years ago having scoured through money systems of the world over 3 Millenia: The best way to elminate the mal-effects of moral hazard is to factor moral hazard into your currency system but impose a free market price on it. Therefore, it is not the expiry or redux of bills, but the force of redemption of bills for that which backs them at the source of the bill emitter, which imparts merit of an institution IRRESPECTIVE OF THE BEHAVIOUR OF THOSE SET TO DESTROY IT.
Look at Pheight's comment below. Assume a user-independent mining algorythm which ties digital gold coins to actual physical gold output. That anchors any virtual supply to a real base and may overcome the weaknesses (trust, circuitry-dependence) of a stand-alone digital currency.
Jim Turk's GoldMoney comes to mind. Does that fit the bill?
A bill of exchange has similarity to other sorts of transactions that are in place currently, such as bank drafts. For example, escrow is commonly understood by many. In an escrow documents, real estate, money, or securities are deposited with a neutral third party (the escrow agent) to be delivered upon fulfillment of certain conditions, as established in a written agreement. In a fiat world un-backed currencies are the common medium, except for settlements for billion dollar transactions internationally.
There is no reason that such funds could NOT be gold and/or silver, per agreement with the payee, except laws allowing such payments gaining acceptance in some states in the US are written for settlement at face value (Utah). That is a ridiculous option reflecting the arrogance of leadership. Hard currency payments have existed for a short period of time with companies such as eGold at valuations reflecting current trading on the LME. This could be a widespread and generally accepted payment system, other than the fact that it has been under attack by government regulators.
Bitcoins, on the other hand, probably should be under attack, since it appears to be ripe for fraud. So this is not to suggest that there should be no regulations to counteract fraud.
However, eGold is a much less risky way to engage in commerce than, for example, continuing the system of fiat currencies currently in place (implied by vonmiser), as events unfolding are making abundantly clear. As time proceeds more are going to realize the loss of buying power from depreciating currencies, euphemistically called “inflation” by the banksters in their efforts to keep in place their definition of hard currencies of gold/silver/copper as “barbarous relics”.
Now with such systems in place there is no reason that governments could not end fiat currency systems and replace them with the sort of real money that is specified in the US Constitution. In an Internet world where many transactions had formerly been done with local businesses the eGold payment system, for example, could constitute settlement.
The ONLY reason that these changes are not gaining acceptance is because it would end the ongoing robbery of populations everywhere by politicians and banksters, and that ends the discussion on their end with the help of their handmaidens in the media. The money of the US Constitution would put an end to the socialist schemes of current political leaders.
The attempt here has been to extend an explanation that is without the complications of esoteric economic terminology, which has been the objective of bankster types in order to disguise the fraud they engage in. This, by the way, appears to have been the objective of the Founders when they wrote the US Constitution, as it was quite readable by most literate people of the day. Undoubtedly the socialist objective has been to destroy literacy, as witnessed by the performance of most current high school graduates. And by destroying literacy their doubletalk is nothing but an old college “snow job”.
The Medici perfected the Bills of Exchange system, basically designed to conceal usury outlawed by the church.
"Quidquid sorti accedit, usura est"
Not only did they embed the interest by discounting the bills, they also basically invented fractional reserve banking in my opinion, way before the British goldsmiths and here is how they did it:
Holographic Bills of Exchange...LOL
Basically, a sham deposit certified by one Medici branch and cashed at discount (by arbitraging currency exchange rates, an easy thing to do for a multi-national bank in those days) by another.
What's the upshot?
Not only is the Bill of Exchange System easily manipulated into a paper shuffle, it actually is the forerunner of fractional reserve banking.
What the Medici did is to create a sham deposit in one currency on the front end as an "asset" against which they issued and obligation, the bill of exchange, in another currency made out to the payee. This obligation therefore only partly backed by real deposits at the Medici bank. The bigger this operation, the less of a threat of insolvency. It was a race to grow the branch quickly but in the end it became its downfall.
Fractional reserve banking is a real initial deposit on the front-end which becomes an obligation to the bank backed by an initial interest-less asset, the reserve. That reserve is then lent at interest and deposited without debiting the original deposit.
In both cases, the bank has less reserves than obligations. In the case of the Medici, the difference was a phantom deposit. In the case of a fractional reserve bank, it's a loan.
I hope that clears it up. Sometimes I rush these posts...sorry.