In a very nice piece, Paul Krugman blasts the anti-social orientation of those who tout gold or bitcoins as an alternative to state money

Author: L. Randall Wray  ·

You see, Uncle Sam is hell-bent on generating hyperinflation through President Obama’s run-away deficits and Chairman Bernanke’s money-dumping helicopters. To protect yourself, you need to buy gold and bitcoins—like NOW!

Of course, gold sellers as well as the Winklevoss twins (you remember them from the Social Network film—they are big investors in bitcoins) love to hype the comparison of the US today with Weimar and Zimbabwa of the past. Sure, very soon you will need to take wheelbarrows of green paper money to buy a loaf of bread from your local Hannafords or Safeways. The goldbugs and bitbugs have been rushing to the safety of gold and bitcoins, respectively.

I had been encouraged to write a blog on bitcoins by commentators, and had been accumulating some research to do a column. Whoops. Too late. Bitcoins are collapsing faster than internet stocks in the dotcom collapse.

Krugman correctly fingers the problem with these “alternative” currencies: no State stands behind them. In the case of State money, as Krugman says, “paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.”

Note how he slipped in MMT’s claim that “taxes drive money” (without attribution, of course, but no matter—if he gets it right, that’s good enough).

Our claim: legal tender laws are neither necessary nor sufficient to drive a currency. They are not sufficient because they are extremely hard to enforce—Kings used to heat coins fire-hot and press them into the foreheads of those who refused to accept them, but I doubt we’d let President Obama do that to our goldbugs and bitbugs today. Nor are they necessary because a legal obligation to pay taxes in the form of the currency is sufficient to drive it.

So, as we say, while taxes might not be necessary to “drive” a currency, they certainly are “sufficient”. Impose an obligation to make payments to the state in the state’s own currency and the trick is done.

Now, what drives gold and bitcoins? Well, gold does have nonmonetary value, and so only a fool would turn down an offer. The question is at what value. You know you can always resell the gold at the dentist’s office or at the jewelry. So, on the margin, you will accept gold at the value determined in the market for nonmonetary use of gold. As I recall, the total global volume of gold bullion is only something like nine meters cubed. A bit big to store in your basement, but small relative to global population. Gold will remain valuable until alchemists learn how to make it out of common elements.

What about bitcoins? Well, the supply is limited by some mathematical formula (confession: I do not know what it is, and most likely could not solve it even if I knew it so I won’t be counterfeiting it). That was supposed to be the beauty of it.

Krugman quotes Winkledinker as follows: “We have elected to put our money and faith in a mathematical framework that is free of politics and human error.” So, the supply will be kept scarce, unlike dollars that the Obama-Bernanke team is printing up by the boatload. No human errors will destroy bitcoin’s value!

For that reason, with demand continually outstripping supply, bitcoins can only go up in value. At an accelerating rate. Better buy them now!

Whoops, something happened on the way to blissful riches. Before I could write a blog, the darned speculative bubble burst.

You see, bitcoins have no use other than to circulate illegal products. And while there’s still plenty of illegality in the world, 500 euro notes work just fine to keep those illicit drugs and arms circulating.

(By the way, Uncle Sam, why not print up $1000 notes to keep abreast of the Europeans in helping to finance the drug trade? Heck, make it even more convenient with some $50,000 notes—issued through HSBC’s ATMs. Who needs trillion dollar coins to “solve” the US budget deficit problem?)

The thinking was that bitcoins are the perfect “fiat” money. No hyperinflationary government destroying their value. Let the market determine value.

But why would you accept them? Because everyone else does. I accept bitcoins because I know that BillyBob accepts them. And BillyBob takes them because BuffySue takes them. And so on. As long as we’ve got cokeheads, bitcoins have value because cokeheads will take them.

I’ve always called it the “infinite regress” argument. For the past 20 years, the critics of MMT have always argued that we’ve got it wrong. Dollars are NOT accepted because of the tax liability that stands behind them. No, they are accepted because we all believe they willbe accepted.

We don’t need no stinking taxes (or State) to back them up. It is just some sort of mass delusion that gives them value. They have value because we think they have value. And so long as we all think they have value they will be accepted. And because they are accepted they will have value. Nice circular logic there.

Indeed, that is the main alternative story about money’s origins. You see, Robinson Crusoe and Friday agreed to use seashells as a medium of exchange. The otherwise (nearly) worthless seashells were accepted because they agreed to accept them. It was more convenient, you see. And so on, up to the present day. Monetary systems rely on BillyBob and BiffySue and the trust that they will continue to accept dollars and yen and euros and marks and pesos and on and on and on.

Right. Bitcoins were the real world experiment to test the infinite regress view of money.

How’s that working for you?

Me, I’ll stick with tax driven money.