How Bitcoin Is and Isn’t Ideal Money

Often I am told bitcoin is not Ideal Money because Ideal Money is this (wiki):

Ideal Money is a theoretical notion promulgated by John Nash, to stabilize international currencies. It is a solution to the Triffin dilemma.
“He proposed that international exchange rates be fixed by pegging the value of each currency to a standardized basket of commodities, called the industrial consumption price index. Such a policy would curtail the ability of central banks to make monetary policy.”

But the first citation on the bitcoin.pdf whitepaper clearly pertains to the direct definition of Ideal Money. Let’s look at a post from the Net.nym “Wei Dai”:

…my monetary policy views were firmly mainstream, which considers rapid unpredictable changes in prices, in either direction, to be a really bad thing for a currency. So I designed b-money to have a stable value relative to a basket of commodities, and until Bitcoin came along, never thought anyone might deliberately design a currency to have a fixed total supply.

How far then can we truly say bitcoin is from ideal money?

So Bitcoin is Ideal Money?

Well not exactly.

To understand “Ideal Money” we have to think in terms of what it means to “print” a money based on an actual non biased aggregate price index. In other words what goods and commodities are ACTUALLY worth!

How can this be achieved? By taking the money printing abilities away from the governments that are fixing the markets with, among other tactics, instability and regulation.  What is needed is a single currency in this world that has a stable money supply so you can create a standard of measurement to valuate all currencies:

Our view is that if it is viewed scientifically and rationally (which is psychologically difficult!) that money should have a the function of a standard of measurement…

But no government has ever been able to achieve this in any significant manner because the economics of war ensues (notice many great wars of the past and present involve “money printers” (“Western”) vs those that denounce processes of usury (Islamic)).

…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.

Creating a money system via computers is not a new idea as the webpage from bitcoin’s wiki on its money supply points to a video with Milton Friedman describing such a system from his writings. In fact the decentralized scheme is a very Austrian ideology Nash is admittedly familiar with:

…after consulting with some of the economics faculty at Princeton, I learned of the work and publications of Friedrich von Hayek. I must say that my thinking is apparently quite parallel to this thinking in relation to money and particularly with regard to the no-typical viewpoint in relation to the functions of the authorities which in recent times have been the sources of currencies (earlier “coinage”).)

What is Asymptotically Ideal Money?

Asymptotically Ideal Money is the means with which we achieve the ends. Friedman and Hayek were both known for the introduction of “partway plans” to move from the current “sick” system to a more favorable one, knowing that simply switching over would be an impossible shock for the peoples to handle. How far then is a deflationary money supply from a school voucher system to facilitate privatization and truly free markets.

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.

So what is bitcoin’s role in relation to “Asymptotically Ideal Money”? Bitcoin is the tool that allows the peoples of the world to trade in and out of their respective currencies. This puts pressure on governments to maintain a currency of stable and good quality (ie stop arbitrarily printing money):

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 maybe 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 deprecation in value.

And so there arises a global asymptotic slide towards a market in which the prices are set at their true value. Their true value being the free market prices as described by Adam Smith (alluded to in different versions of Ideal Money).  It’s true that the infrastructure for citizens to have the option to put pressure on their national fiat still needs to be built, but it’s clear bitcoin has created the economic incentive (and educational tool) needed to create that means.

Does the Total Money Supply Matter?

In this discussion entitled “Why 1BTC should equal 10^8 satoshi ?” Ray Dillenger recalls:

I remember this discussion, actually.
Finney, Satoshi, and I discussed how divisible a Bitcoin ought to be.  Satoshi had already more or less decided on a 50-coin per block payout with halving every so often to add up to a 21M coin supply.  Finney made the point that people should never need any currency division smaller than a US penny, and then somebody (I forget who) consulted some oracle somewhere like maybe Wikipedia and figured out what the entire world’s M1 money supply at that time was.
We debated for a while about which measure of money Bitcoin most closely approximated; but M2, M3, and so on are all for debt-based currencies, so I agreed with Finney that M1 was probably the best measure.
21Million, times 10^8 subdivisions, meant that even if the whole word’s money supply were replaced by the 21 million bitcoins the smallest unit (we weren’t calling them Satoshis yet)  would still be worth a bit less than a penny, so no matter what happened — even if the entire economy of planet earth were measured in Bitcoin — it would never inconvenience people by being too large a unit for convenience.

Ideal Money is About the Future Economy

It comes later than now when the world understands they can “choose” what kind of global economy they want to participate in.  And this why Nash feels:

…there may be an analogy to this as regards those called “the Keynesians” in that 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”

And after comparing such practices to Bolshevik communism announces:

…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 option for where to place their “savings”.

Is there another “process of political evolution” going on?

The author believes rather we are living it.  Nash spent 20 years lecturing about it country to country…it seems no one was paying attention.  These days all eyes are on the ghost of Satoshi Nakamoto (Ya I know “I am Nash Sato Koto”).

One thing is for sure, when it comes to every government and major banking entity in the world holding meetings on how to react to today’s rapidly changing economic climate (ie. bitcoin)…the intelligent thing to do would be to FORMALLY ask Dr. Nash for advice and help, regardless if we think he created crypto-currency or not.

Not that he didn’t already give his advice.

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