US Congressional Research Service on Bitcoin rebuttal via John Nash’s lecture Ideal Money

All quotes not in bold taken from http://sites.stat.psu.edu/~babu/nash/money.pdf

…it cannot be irrelevant whether or not the future quality of a currency is really assured or whether instead that it depends on the shifting sands of political decisions or the possibly arbitrary actions of a bureaucracy of “officials”.

The Federal Reserve conducts monetary policy to affect the flow of money and credit to the economy in order to achieve stable prices, maximum employment, and financial market stability. At Bitcoin’s current scale of use, it is likely too small to significantly affect the Fed’s ability to conduct monetary policy and achieve those three goals.

… I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money” is better than “good money”.

So let us define “Keynesian”…

…a “Keynesian” would favor the existence of a “manipulative” state establishment of central bank and treasury which would continuously seek to achieve “economic welfare” objectives with comparatively little regard for the long term reputation of the national currency…


However, if the scale of use were to grow substantially larger, there could be reason for some concern. Conceptually, Bitcoin could have an impact on the conduct of monetary policy to the extent that it would (1) substantially affect the quantity of money or (2) influence the velocity (rate of circulation) of money through the economy by reducing the demand for dollars.

…it is sometimes remarkable how political contexts can evolve. And in relation to that I think that it is possible that “the Keynesians” are like a political faction that will become less influential as a result of political evolution.

Regarding the money supply, if Bitcoin transactions occur on a pre-paid basis whereby Bitcoins enter into circulation when dollars are exchanged and then are withdrawn from circulation when exchanged back to dollars, the net effect on the money supply would be small.

The Keynesians implicitly always have the argument that some good managers can do things of beneficial value, operating with the treasury and the central bank, and that it is not needed or appropriate for the citizenry or the “customers” of the currency supplied by the state to actually understand, while the managers are managing, what exactly they are doing and how it will affect the “pocketbook” circumstances of these customers.

Regarding the velocity of money, if the increase in the use of Bitcoin leads to a decrease in need for holding dollars, it would increase the dollar’s velocity of circulation and tend to increase the money supply associated with any given amount of base money (currency in circulation plus bank reserves held with the Fed).

It was the observation of a new “line” that has become popular with those responsible for “central banking” functions relating to national currencies that gave us the idea for the study of “asymptotically ideal” money.

In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy. At a minimum, a substantial use of Bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain.

The idea seems paradoxical, but by speaking of “inflation targeting” these responsible officials are effectively CONFESSING that, notwithstanding how they formerly were speaking about the difficulties and problems of their functions, that it is indeed after all possible to control inflation by controlling the supply of money (as if by limiting the amount of individual “prints” that could be made of a work of art being produced as “prints”).

And if “inflation targeting” were used as a “line” by the managers handling all of these various internationally prominent currencies the various currencies would have rates of exchange so that they could be realistically compared in terms of their actual values.

Also, a substantial decrease in the use of dollars would also tend to reduce the size of the Fed’s balance sheet and introduce another factor into its consideration of how to affect short-term interest rates (the instrument for implementing monetary policy).

“How do `good money’ and `bad money’ differ, if at all….if we consider contracts having a relatively long time axis then the difference can be seen clearly. Consider a society where the money in use is subject to a rapid and unpredictable rate of inflation so that money worth 100 now might be worth from 50 to 10 by a year from now. Who would want to lend money for the term of a year? In this context we can see how the “quality” of a money standard can strongly influence areas of the economy involving financing with longer-term credits.

Our observation, based on thinking in terms of “the long term” rather than in terms of short range expediency”, was simply that there is no ideal rate of inflation that should be selected and chosen as the target but rather that the ideal concept would necessarily be that of a zero rate for what is called inflation.

However, the Fed’s ability to conduct monetary policy rests on its ability to increase or decrease the reserves of the banking system through open market operations. So long as there is a sizable demand by banks for liquid dollar-denominated reserves, the Fed would likely continue to be able to influence interest rates and conduct monetary policy.10 11

…while they have claimed to be operating for high and noble objectives of general welfare what is clearly true is that they have made it easier for governments to “print money”.

(1): Games with transferable utility.
(and)
(2): Games without transferable utility

In the world of practical realities it is money which typically causes the existence of a game of type (1) rather than of type (2); money is the “lubrication” which enables the efficient “transfer of utility”. And generally if games can be transformed from type (2) to type (1) there is a gain, on average, to all the players in terms of whatever might be expected to be the outcome.


Again, any sizable effect on the U.S. monetary system is predicated on Bitcoin’s scale of use becoming substantially greater than it is at present. An important force that is likely to hinder call network externalities (i.e., the value of a product or service is dependent on the number of others using it).

Illustrating the principle of these optional choices, the people of Sweden recently had the opportunity of voting in a referendum on whether or not Sweden should join the euro currency bloc and replace the kronor by the euro and thus use the same currency as Finland.

The voters in the U.K. are expecting to have the opportunity to vote in a referendum relating to the adoption, for the U.K., of the euro…

So the British have the alternatives of accepting adoption of the euro when first voting, or after a delay, or never.

We can legitimately wonder how the speediness of its adoption or delays in its adoption might affect the policies operating to control the actual exchange value of the euro. The constitutional structure of the authority behind the euro is of the “paper money” character in that nothing is really guaranteed as far as the value of the euro is concerned. But this is typical of all currencies used in the world nowadays.

Network externalities create a self-generating demand for a dominant currency.

So here is the possibility of “asymptotically ideal money”. Starting with the idea of value stabilization in relation to a domestic price index associated with the territory of one state, beyond that there is the natural and logical concept of internationally based value comparisons. The currencies being compared, like now the euro, the dollar, the yen, the pound, the swiss franc, the swedish kronor, etc. can be viewed with critical eyes by their users and by those who may have the option of whether or not or how to use one of them. This can lead to pressure for good quality and consequently for a lessened rate of inflationary depreciation in value.

But it seems very likely that, although that scheme for arranging for a system of money with ideal qualities would work well, that, on the other hand, it would be politically difficult to arrive at the implementation of such a system.

The more often a currency is used as a medium of exchange, the more liquid it becomes and the lower are the costs of transacting in it, leading, in turn, to its becoming even more attractive to new users.

And also, if we view money as of importance in connection with transfers of utility, we can see that money itself is a sort of “utility”, using the word in another sense, comparable to supplies of water, electric energy or telecommunications. And then, if we think about it, we can consider the quality of money as comparable to the quality of some “public utility” like the supply of electric energy or of water.

Network externalities create a tendency toward having one dominant currency and confer a substantial incumbency advantage to the dollar in both domestic and international use.

It is observable that certain types of financial enterprises, such as large internationally operating insurance companies, tend to migrate to national homes where the national currency is of at least comparatively higher quality (such as, e. g., Switzerland)

And so the various currencies managed with “inflation targeting” would be comparable by users or observers who would be able to form opinions about the quality of the currencies. And what I want to suggest is that “the public” or the users, those for whom a medium of exchange functions as a basic utility, may develop opinions that are critical of currencies of lower “value quality”. That is, the public may learn to demand better quality of that which CAN be managed to be of better quality or which can be managed to be of the lower quality observed in so many of the various national currencies in the 20th century.

The legal tender status of the dollar, discussed below, reinforces this advantage.12

In the USA the standard domestic “cost of living” index has a long history and it actually originated back in the days when the USA was still on the “gold standard” with regard to the monetary standards being accepted then.

The paper called “ideal Money” that was recently published in the Southern Economic Journal presented a possible conventional basis for money of “ideal” type. This variety of money would be intrinsically free of ”inflationary decadence” similarly to how money would be free from that on a true “gold standard”, but the proposed basis for that was not the proposal of a linkage to gold.

The U.S. economy reaps considerable benefit from having a single well-defined and stable monetary unit to work as a medium of exchange and unit of account to facilitate its vast number of daily economic transactions.

…it can be said that they tend to think in terms of government agencies operating in a benevolent fashion that is, however, beyond the comprehension of the citizens of the state.

(All over the world varieties of states make claims to have governments very properly or even ideally devoted to the interests of the citizens or nationals of those states and always an externally located critic can argue that the government is actually a sort of despotism.)

It seems to be relevant to the politics of state decisions that affect the character of currency systems promoted by states that there are typical popular attitudes in relation to money.

…since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like about a technology, such as radio, to be used more or less efficiently.

Our view is that if it is viewed scientifically and rationally (which is psychologically difficult!) that money should have the function of a standard of measurement and thus that it should become comparable to the watt or the hour or a degree of temperature.

If greater use of Bitcoin (and other cryptocurrencies) leads to multiple monetary units, these benefits could be threatened, particularly if these new currencies continue to exhibit a high degree of price volatility. (Price volatility is discussed more fully below.)”

For example, if all sorts of non-European countries decided to define the values of their currencies as on a par with the euro, without actually joining into any system of cooperative regulations associated with that, then the effect of that would seem likely to destabilize the stability of the euro if it would otherwise be highly stable and of good value quality.

In the near future there may be a smaller number of major currencies used in the world and these may stand in competitive relations among themselves. There is now the “euro” and the old inflationary history of the Italian lira is past history now. And there COULD be introduced, for example, a similar international currency for the Islamic world or for South Asia, or for South America, or here or there.

And this parallel makes it seem not implausible that a process of political evolution might lead to the expectation on the part of citizens in the “great democracies” that they should be better situated to be able to understand whatever will be the monetary policies which, indeed, are typically of great importance to citizens who may have alternative options for where to place their “savings”.

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