June 5, 2017 at 1:21 pm #18875
Hey Jeff Herbener,
From what I understand, the market tends to pick a money that keeps a steady value, as in it doesn’t fall or rise substantially. When gold was money, the price of goods in a freer market slowly fell, and gold production increased whenever there was a profit to be had for gold.
In this scenario, economic calculation seemed to be very accurate. Entrepreneurs had to deal (for the most part) with less uncertainty as they can better predict the value of money compared to the value of the goods they sell in the market.
With Bitcoin, entrepreneurs have a difficult time predicting its price, and it is very volatile. One day it can be $2000, the next day it could be $1600, and this seems to make economic calculation almost impossible if done in Bitcoin.
But the main attraction of Bitcoin is that it has a hard limit on 21 million coins. Once it hits that point, no more can be produced. I am curious if this limit will actually hurt Bitcoin since no more can be made (therefore making prices fall faster). I am also curious on your thoughts of Bitcoin as a whole.June 5, 2017 at 8:37 pm #18876
In the unhampered market economy, people are free to select whatever particular goods they think will best satisfy their preference and entrepreneurs are free to offer for sale whatever goods they anticipate will do so and thereby, render profit.
There are several desirable properties of money that narrow the range of goods that people would select. Widespread salability is the most fundamental since money, by definition, is the general medium of exchange. And, as you point out, it’s usefulness in performing economic calculation is another. Excessive price inflation or deflation is a detriment for something to be used as money. The volatility of bitcoin’s price, or the price of gold or that of silver, is always in terms of the dollar and so doesn’t imply volatility of overall prices in bitcoin, or gold or silver, if it were money. The fixed upper limit on bitcoin production, however, renders it much less desirable as money (as long as economic growth continues) compared to other goods, like gold or silver. In the 19th century, when the U.S. was under a gold standard prices fell mildly (even though gold production continued). But the decline was not large enough to interfere with credit transactions. With a fixed money stock, as under bitcoin, it might have been. For example, if an interest rate in the absence of price inflation or price deflation was 2% and price deflation under bitcoin was 6%, then there would be no loans. Lenders would hold money instead of lending it at a -4% rate of interest. Entrepreneurs would offer gold money or silver money instead of bitcoin to eliminate the potential problem of negative interest rates.
Here’s a wiki on bitcoin:June 9, 2017 at 11:07 am #18877
Thanks professor!July 20, 2017 at 2:47 pm #18878
“With a fixed money stock, as under bitcoin, it might have been. For example, if an interest rate in the absence of price inflation or price deflation was 2% and price deflation under bitcoin was 6%, then there would be no loans. Lenders would hold money instead of lending it at a -4% rate of interest.”
Another question, actually. If this were the case, wouldn’t the supply of credit fall and cause the interest rate to be positive again? Or would the holding of money cause prices to fall too fast?
Also, Rothbard has stated that there is no need for a larger money supply, that any will do. What did he mean by this?July 22, 2017 at 8:05 am #18879
Lending at a negative interest rate would be like selling a product at a negative price. No one would do so there would be no supply of credit at all and therefore no loans and no rate of interest at all. It could be the case, as you suggest, that the most urgent borrowers might be willing to pay an interest rate that more than compensates for the price deflation, say 10%. In this case, the inefficiency of an excessively deflationary money is partial instead of total. There are many willing lenders and willing borrowers at the pure rate of interest who would supply and demand credit and thereby, satisfy their time preferences. But many lenders will not do so given the extent of price deflation.
What Rothbard means is that people can make all the trades they want to make with any amount of money (above a technical minimum). If they have twice as much money, prices will be twice as high and if they have half as much money prices will be half as high. But, they can make all their trades regardless.July 22, 2017 at 5:58 pm #18880
So Rothbard was not making the case that a capped money supply is the most efficient one, but any supply of money will do to perform its function as a medium of exchange? Also, do you know what book that was from? I do not remember.
So it makes sense that Bitcoin may not be a desirable money due to the excessive price deflation, but there are other cryptocurrencies like Ethereum that do not have a supply cap. There is a certain algorithm (the difficulty) that regulates how much is produced. When more people mine for cryptocurrencies like Ethereum, the difficulty rises, and each person mines less and less slowly over time. In order to find the “perfect” cryptocurrency, it seems that there must be a good algorithm, one that doesn’t allow so much do be produced at once, and at the same time not produce enough.
But there are a few other things that may make it hard for any cryptocurrencies to become money. One is the amount of people that currently trade it. While gold has a very wide market and many people trade it, the market for cryptocurrencies is way smaller and way fewer people trade it. Is a good that isn’t widely traded make it less likely to become a money?
Also, if something is not traded widely were to try to become a money, wouldn’t the value of that good have to increase dramatically? For example, Bitcoin is not widely used right now as a money, and it is valued above $2000 right now. If it were to become a widely used money, it seems that the value would have to increase dramatically, making it to where prices fall rapidly, leading to the problem with economic calculation.July 24, 2017 at 12:53 pm #18881
Rothbard repeats this point made by David Hume many times. One place is What Has Government Done to Our Money, pp. 24-26.
For something to become money, it must displace the existing money as the general medium of exchange. People must become convinced that it serves as a general medium of exchange better than any thing else. Of course, government intervention can suppress people’s preferences to choose a market-produced money.
It seems likely, but it’s not logically necessary, that if Bitcoin became money it’s market price would rise. It may be that it’s current price is driven by what proves to be wild speculation.July 25, 2017 at 9:49 pm #18882
“July 25, 2017 at 11:55 pm #18883
Also, what were to happen if the economy became so productive in a gold standard that prices fell excessively compared to gold produced? Would it become less desirable for gold to be momey and something like silver to take its place?July 25, 2017 at 11:59 pm #18884
Im also trying to understand, in a growing economy, the prices of goods would fall, but does the demand for money increase in a growing economy? If the economy grows but the demand for money doesnt increase, how can more be produced?July 26, 2017 at 10:28 am #18885
Price deflation would not cause a special problem for gold production. In an economy of capital accumulation, which is what causes rising productivity, the prices of inputs decline. Falling input prices generate more profit from production of output and therefore, entrepreneurs produce more output which pushes down output prices. Prices of inputs in gold production, too, would be falling which would make gold production more profitable and it’s production would be increased. Thus, there is no special problem of production of gold during price deflation.
If gold production is inadequate to prevent price deflation at rates sufficient to impair credit transactions, then (as you say) entrepreneurs would simply switch to silver or some other commodity that is more readily produced.
In a growing economy, people’s wealth is increasing and they desire to hold a larger stock of goods, including money. Even if the demand for money didn’t increase, production of money would be stimulated by falling costs of production as described above. This is a general phenomenon for all goods: their production is stimulated by larger profit which can occur from a rising prices for their outputs or falling prices for their inputs.July 26, 2017 at 5:12 pm #18886
Ok, that makes sense. I was sort of thinking the same thing but I didn’t know if it was correct.
“It may be that it’s current price is driven by what proves to be wild speculation”
– I am not too familiar with reading charts like this. How does the chart show wild speculation?
“Lending at a negative interest rate would be like selling a product at a negative price. No one would do so there would be no supply of credit at all and therefore no loans and no rate of interest at all. It could be the case, as you suggest, that the most urgent borrowers might be willing to pay an interest rate that more than compensates for the price deflation, say 10%. In this case, the inefficiency of an excessively deflationary money is partial instead of total. There are many willing lenders and willing borrowers at the pure rate of interest who would supply and demand credit and thereby, satisfy their time preferences. But many lenders will not do so given the extent of price deflation.”
– Where can I learn more about the affects of inflation/deflation on credit transactions?July 27, 2017 at 6:35 pm #18887
The chart below shows the price movements more clearly. Extend the time to “1 yr” and you can see the current speculative surge. Extend the time to “all” and you can see previous speculative excesses.
There is Mises’s book, Theory of Money and Credit:
Also, Fritz Machlup’s book, Stock Market, Credit, and Capital Formation:
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