[patriciacolling]

Dear Professor Herbener, I have a question regarding Bitcoin that goes along the lines as to how you commented on the cellular phone minutes’ question on the live session. Every time I hear about Bitcoin, I wonder about Bitcoin relative to the dollar in that if the dollar didn’t exist, how would Bitcoin as it stands right now. In other words, can it be said that the proper accounting is being done in Bitcoin to make it a medium of exchange that can become money? I always feel like I’m missing important aspects to the Bitcoin phenomenon. Sincerely, Patricia Colling

[jmherbener]

At this point, I think Bitcoin is, at most, a localized medium of exchange among a small number of persons. Another small group invests in Bitcoin as an asset. They are anticipating a capital gain from holding Bitcoin, like investors in real estate. To be money, an item must be accepted as a medium of exchange by most people. It is, by definition, the most widely traded item in the market. For this reason, people conduct economic calculation in money.

[patriciacolling]

I guess I just don’t see how Bitcoin can become money unless the dollar was to collapse in which case the exchange rate up until that time defines its value and it goes from there…Does that even make sense? Something like it piggy-backing on the regression theory for the dollar having been a commodity at one time…

[jmherbener]

When the Zimbabwe dollar collapsed in hyperinflation, Zimbabweans starting using foreign currencies. If the U.S. dollar were to collapse, Americans too would choose widely-traded items to use as money. Bitcoins have exchange value in the market, so they pass the regression theorem test. What they lack to be money is general saleability.

[patriciacolling]

Interesting. Thank you. I’m looking forward to a Q & A, hopefully in the near future, with you and Bob Murphy–perhaps Manish, too. That would be great, but it would probably have to run an extra half hour to an hour. Thanks again.

[jmherbener]

The regression theorem is a necessary but not sufficient condition for something to become money. It rules out any item that has not been traded on the market and therefore, lacks exchange value against other goods (i.e., there are no prices of other goods in terms of the item). In particular, no government can merely declare a non-traded item as money and have people accept it as money. If Obama criminalized the use of the dollar and declared that a new currency, say the Obama, is now money in the USA, it would not be used by people as money. Instead, people would trade their goods and services for something that has known exchange value. So, any good that is traded in the market passes the regression theorem test and is a viable candidate to become money. But of all the traded goods, some are superior as a medium of exchange to others. Those that are already widely traded are superior to those that trade more narrowly. Durable goods are superior to perishable goods. Divisible goods are superior to indivisible goods. Portable goods are superior to stationary goods, and so on. Of all the traded goods, the most suitable good to be a medium of exchange is widely-traded, durable, divisible, portable, and so on. That is the good people choose as money.

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