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The exponential growth of Bitcoin value explained

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Re: The exponential growth of Bitcoin value explained

#51

Post by thaumasiotes »

betterunix wrote: post #49
thaumasiotes wrote: post #48

Earlier quoted context omitted.

This is only true if the relevant government sets prices by law. Every time that's been tried, it's been a complete disaster.

...or if the law requires certain payments to be made (taxes, fines, etc.), provides legal protections for creditors when people default on their debts, and gives courts the legal power to require one person to pay another. This is what drives the demand for fiat currencies, and as long as the supply remains limited the currency will have value.

If you and I draw up a contract denominated in Bitcoin (or anything, really), and you default, the courts will protect me and require you to pay, in the form specified by the contract. Courts already have the power to require one person to pay another in any form; US courts routinely enforce judgments in foreign currency.

It's true that US taxes get paid in US dollars, but, as I point out in another comment, that fails to distinguish "fiat currency" from metallic weights, which are universally considered "not fiat currency". So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?

> as long as the supply remains limited the currency will have value.

A technicality: e.g. Zimbabwe's money lost 100% of its value (it was abandoned by the population) long before an infinite quantity was available. I don't really disagree with the idea here, but the phrasing isn't right.

EDIT:

I might also point out that the Somali shilling (a paper currency) is widely used in transactions despite not being backed by any law or government at all. Since anyone can print them, they tend to trade at a value roughly equal to the cost of printing.

Re: The exponential growth of Bitcoin value explained

#52

Post by thaumasiotes »

stinkytaco wrote: post #29
thaumasiotes wrote: post #26

Earlier quoted context omitted.

> I am not going to claim that fiat currency will be so enduring I don't get what you're trying to say. Bitcoin is a fiat currency.

He means to distinguish it from currencies that have value by government fiat. You cannot require businesses to take bitcoin like the US government requires them to take cash.

> You cannot require businesses to take bitcoin like the US government requires them to take cash.

How exactly does the US government require businesses to take cash? I briefly looked into the state of the law concerning this, and there were two lessons that people discussing it take pains to pound into the reader:

1. Those places that say "we will not accept $20 bills" are on completely safe ground, legally.

2. The text "this note is legal tender for all debts, public and private" on US paper currency was added for historical reasons and has no legal meaning.

Re: The exponential growth of Bitcoin value explained

#53

Post by betterunix »

thaumasiotes wrote: post #51
betterunix wrote: post #49

Earlier quoted context omitted.

...or if the law requires certain payments to be made (taxes, fines, etc.), provides legal protections for creditors when people default on their debts, and gives courts the legal power to require one person to pay another. This is what drives the demand for fiat currencies, and as long as the supply remains limited the currency will have value.

If you and I draw up a contract denominated in Bitcoin (or anything, really), and you default, the courts will protect me and require you to pay, in the form specified by the contract. Courts already have the power to require one person to pay another in any form; US courts routinely enforce judgments in foreign currency. It's true that US taxes get paid in US dollars, but, as I point out in another comment, that fai…

"So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?"

I would argue yes, because:

(1) Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency).

(2) You would be hard-pressed to find a market where silver (by weight, not by "face value") is used as currency in today's world. Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things).

As for people saying that metal-based currencies are not fiat currencies, the subtle assumption hiding in there is that there is some other source of demand for metals that has nothing to do with the law. I am not a huge fan of this sort of idea, because to me it looks like this:

Step 1: Metals have certain properties that are useful for currencies to have.

Step 2: ???

Step 3: People use metals as currency (profit, at least if you can dig up some metal).

Are you wondering what step 2 might be? Step 2 is the reason people use particular metals rather than wampum, geodes, or Somali shillings. Step 2 is usually ignored in these discussions, but it should not be. To bring things full circle, let's turn your question about silver around: if the government allowed taxes to be paid with wampum, would wampum be a fiat currency? If your answer is "yes" then the real question is, "What differentiates wampum from silver?" If your answer is "no" then the real question is, "What differentiates wampum from dollar bills?"

Re: The exponential growth of Bitcoin value explained

#54

Post by thaumasiotes »

betterunix wrote: post #53
thaumasiotes wrote: post #51

Earlier quoted context omitted.

If you and I draw up a contract denominated in Bitcoin (or anything, really), and you default, the courts will protect me and require you to pay, in the form specified by the contract. Courts already have the power to require one person to pay another in any form; US courts routinely enforce judgments in foreign currency. It's true that US taxes get paid in US dollars, but, as I point out in another comment, that fai…

"So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?" I would argue yes , because: (1) Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). (2) You would be hard-pressed to find a market where silver (…

I agree that the argument that metals have intrinsic monetary value is rather strained. I tend to believe that the "metal has inherent value" mindset comes from the fact that you can take it anywhere in the world and you'll still be able to trade it for goods and services, which is not true of government-issued notes. That will also be the difference between silver and wampum, but it's entirely empirical; there's no theory that explains why one is inherently different from the other.

> Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency).

This is false. Read some history.

> Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things).

The history of Chinese taxation (and currency) is quite interesting. I'm only minorly informed, but here are some things that seem relevant:

In what I'll call "phase 1" of the chinese economy, farmers conducted transactions in copper, merchants conducted transactions in silver, and taxes were assessed in kind (grain). This led to major logistical issues in collecting taxes; there was a point where the government announced a tax increase because the ships were arriving at the capital empty. (After a successful effort at reforming delivery, the increase was canceled!)

In "phase 2", farmers still used copper, and merchants still used silver, but taxes were assessed in silver. This was an enormous boon to the logistics of collection, but occasionally beggared farmers when the exchange rate swung against them.

At some point in all this, the government started issuing paper notes. (Notably, these were very common as "reciprocal gifts" to trade missions.) Merchants in the capital would accept these, but silver was far and away the dominant medium of exchange.

It all suggests to me that silver was a way to pay taxes for the same reasons that it was used as a currency, but not because the government needed to have silver available to spend; clearly it didn't. Instead, silver was fairly dense (in terms of buying power per unit volume) and didn't spoil like grain does.

I'm not clear on what you think the difference is between using silver by weight and using silver by face value. The whole idea of a mint is that coins have a standard weight. (Also potentially of interest: over the whole period I've described, China minted copper coins, but never silver ones. This didn't stop silver from being the metal of large-scale commerce and tax collection.)

Re: The exponential growth of Bitcoin value explained

#55

Post by betterunix »

thaumasiotes wrote: post #54
betterunix wrote: post #53

Earlier quoted context omitted.

"So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?" I would argue yes , because: (1) Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). (2) You would be hard-pressed to find a market where silver (…

I agree that the argument that metals have intrinsic monetary value is rather strained. I tend to believe that the "metal has inherent value" mindset comes from the fact that you can take it anywhere in the world and you'll still be able to trade it for goods and services, which is not true of government-issued notes. That will also be the difference between silver and wampum, but it's entirely empirical; there's no…

I think you are leaving out a few details about the history of currency in China, like the fact that the metal coins were minted by the government, and that at different times there were different governments minting coins (from different kinds of metals). You are also ignoring the fact that the metal coins from China were also being used as currency in neighboring countries, and so even when the Chinese government stopped minting (or banned) older currencies it took time for those currencies to fall out of circulation. To put it another way, Chinese farmers did not decide to use copper on their own; copper was chosen by a government in certain rural regions.

"I'm not clear on what you think the difference is between using silver by weight and using silver by face value"

The face value of a coin does not need to track the market value of the metal used to make the coin. Typically it is advantageous for the face value to be higher than the value of the metal (otherwise people will just melt down the metal); it could happen the other way, e.g. what happened with US pennies. "Face value" only makes sense with fiat currency, which is why I drew the distinction.

"The whole idea of a mint is that coins have a standard weight"

This is not true of modern coins; all the really matters with modern coins is their face value, which can have nothing to do with their weight. It is not uncommon for a smaller coin to have a larger face value than a larger coin. Relating the physical measurements of a coin with its face value is convenient but not at all necessary in a fiat currency. The US has dollar coins with different weights and dimensions, all with a face value of one dollar, and the value of those coins is independent of the market value of the metals they are made from.

Re: The exponential growth of Bitcoin value explained

#56

Post by thaumasiotes »

betterunix wrote: post #55
thaumasiotes wrote: post #54

Earlier quoted context omitted.

I agree that the argument that metals have intrinsic monetary value is rather strained. I tend to believe that the "metal has inherent value" mindset comes from the fact that you can take it anywhere in the world and you'll still be able to trade it for goods and services, which is not true of government-issued notes. That will also be the difference between silver and wampum, but it's entirely empirical; there's no…

I think you are leaving out a few details about the history of currency in China, like the fact that the metal coins were minted by the government, and that at different times there were different governments minting coins (from different kinds of metals). You are also ignoring the fact that the metal coins from China were also being used as currency in neighboring countries, and so even when the Chinese government s…

> at different times there were different governments minting coins (from different kinds of metals).

Copper, bronze, and iron (depending on location). But not silver, even when taxes were required to be paid in silver. You've taken the position that the medium of tax payment will necessarily be used as a currency, but this isn't true.

What distinguishes the farmers, with their tax obligations in silver and their business in minted copper (or iron), from the merchants with their tax obligations in silver and their business in unminted silver? It can't be the tax obligations. I've taken the position that the distinction is in the amount of value they generally handled; silver was worth more than copper and used for large transactions.

> "Face value" only makes sense with fiat currency, which is why I drew the distinction.

This is actually untrue; clipping a minted coin creates a discrepancy between its face value (which it has, since it's minted) and its value by weight. Forging an adulterated coin does the same. Clipping only makes sense for "non-fiat" coins; it would be pointless to clip a fiat coin as they are not made from precious metals. The value of a traditional, minted coin of precious metal was entirely in the weight; the minting was a QA program.

Anyway, I don't think a fiat currency can be said to "use silver" in any sense, which is why I was confused at your distinction between using silver by weight or face value. The GBP is named the "pound sterling", but that's just a name. I guess in my mind, if we use $10 of platinum to mint commemorative not-intended-for-use $500 coins, the use of platinum is more of a coincidence than an actual use of metal-based currency.

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