(This item originally appeared at Forbes.com on March 6, 2014.)
Bitcoin, as I have said, is a junk currency. But, it has gained a lot of attention, and has prompted people to think about these monetary issues. Thus, it serves as a good teaching tool.
“Never before has the world seen a startup currency,” claims bitcoin.org. Can you believe anyone could be so ignorant? Japan alone had over 1,600 independent currencies in 1850, most of them issued by private parties.
The supply of bitcoins in the world, or what we call “base money,” is a fixed number that grows a little each year.
What about the demand? The demand naturally varies for all sorts of reasons, including pure speculation. The intersection of supply and demand produces the market value of Bitcoin, just as it does for anything else including vintage Superman comic books or muscle cars from the 1970s.
If nobody “demanded” bitcoins, in other words if nobody had an interest in owning one, then they would have no value. I could draw a happy face on a piece of paper, and offer it for sale. The supply is one! It is unique. However, nobody wants my happyface drawing. So, the value is nil.
Van Gogh made only one of his famous painting “Starry Night.” It is not much different than my happyface drawing, just some images on paper. Maybe my two-year-old would even prefer the one Dad made. During his lifetime, Van Gogh only sold one painting, the “Red Vineyard at Arles.” The demand for his paintings was about the same as the demand for my happyface drawing.
But, today, there is a lot of demand for “Starry Night,” whose selling price might be over $50 million at auction today.
So, we have a painting that was worthless at the start, and is now worth a ton of money. The supply is still the same. But, the demand has changed. It’s a lot like Bitcoin.
Before Bitcoin, there was another guy who proposed a currency whose supply grew at a slow, stable rate per year, perhaps around 4%.
The guy’s name was Milton Friedman. The currency would have been the U.S. dollar.
Friedman even proposed a Constitutional Amendment basically forcing this condition upon the American public. He wrote about it in books like A Program for Monetary Stability (1960) and Free to Choose (1980).
In A Program for Monetary Stability, he proposed this wording:
Congress shall have the power to authorize non-interest-bearing obligations of the government in the form of currency or book entries, provided that the total dollar amount outstanding increases by no more than 5 percent per year and no less than 3 percent.
The term “obligations of the government in the form of currency or book entries” clearly refers to base money, not “M2″ which is mostly bank deposits. Bank deposits are liabilities of banks, not the government (or Federal Reserve).
What would have been the result?
The result would have been a lot like Bitcoin. Extreme volatility — because, although supply grows in a slow and predictable fashion, demand can vary for all number of reasons, on a day-to-day basis.
I’ll let you decide for yourself if that degree of volatility would have been a good thing. Bitcoin is an entertaining little trading sardine, which might have within it some templates for use in the creation of a much better currency unit. But, to propose this for the U.S. dollar? And make it a Constitutional Amendment?
Ha ha ha.
Friedman was a dope. It’s funny that decades have gone by, and practically nobody has figured this out. He said some nice things about Libertarian principles in general, which gained him some support. But, in terms of monetary understanding, he wasn’t much better than the people you’ll find leaving comments below.
Are you ready to move beyond this? I hope some of you are.