[liberationtech] Bitcoin and The Public Function of Money

Tue Oct 30 14:10:22 PDT 2012

I want to write a bit about the public function of money, especially as  
compared to the market function of money, in light of some of the recent  
discussion about Bitcoin.

Bitcoin is already a very useful technology due to the fact that it allows 
transactions to take place without any central authority. This alone is 
significant. The technology behind it is also perhaps applicable in other 
areas, such as the Namecoin project to replace the centralized Domain Name 
system.

Does Bitcoin have the potential to replace Government fiat money? No. It 
doesn't. It only has the potential to be one commodity form within the 
money economy.

Countless books and papers have described money, money is a very complex 
thing which serves many functions. Keith Hart has written about the "Two 
Sides of the Coin," heads on one side, tails on the other. One way to 
interpret this might be to contrast between the public function and the 
market function of money.

The origin of money is tribute. The source of money is the public, in  
whatever form, whether empire or democracy or something else, money is  
spent on public expenditure and demanded back as tribute. Whatever its  
commodity value, whether minted on gold, printed on paper or electrified  
as bits in a database, this sort of money has value because it can be used 
to fulfill tributary obligations, for example, it can be used to pay taxes. 
As the entire source of this money is government spending, the amount of 
this money is determined by the amount we want to provide on behalf of all 
as a society. This is the "Heads" side.

Not all economic activity is done for money. Much of it takes, and has  
historically taken, gift and kin-communal forms, where work and wealth is 
shared without specific prices for specific commodities, but rather on a 
basis of social trust and reciprocation. Markets emerge as economic  
activity extends beyond communal and neighbourly forms, markets extends  
the social to beyond the kin-communal, and along with such social distance 
come more transient relationships that can not rest on trust and 
reciprocation, and thus must be encompassed by spot transactions, and as a 
result specific prices for specific commodities and specific price 
relationships between commodities. With these transient relationships comes 
money. But this sort of money is different.

Commodities can also be traded directly, even if their relative worth is 
counted in "Heads" money, and trade can also be done on-account, by  
credit. The amount of which is not limited to the physical amount of  
"Heads" money in circulation. In the wider economy, money is endogenous,  
the amount of money circulating in the economy is not a function of any  
monetary base, but rather is a function of the amount of things we want to 
make and do for each other. More specifically, the amount we want to make 
and do for each other for money. This is the "Tails" side.

This is vertical money and horizontal money. Vertical money is created and 
destroyed by the public, horizontal money expands and contracts as a  
result of the economic activity of private individuals and their  
incorporated forms.

Money that has a commodity base, i.e. Gold, is not completely rooted in a 
particular public form, since it's value can cross international borders.

This is where Bitcoin, a digital specie essentially, emerges as a new and 
rather unique form of money. It's built-in cryptographic limits on supply 
make it essentially a virtual commodity form of money, fixed and "hard", 
like Gold, yet digital and transferable electronically across global 
telecommunications networks. As such, it has attractive features as both 
means of exchange and store of value. Yet, while it certainly is useful on 
the "Tails" side of money, as one of the various kinds of assets 
circulating in the global market economy, it does not serve public function 
well.  There is a reason that modern public forms of money are not 
commodities, why modern economies use "fiat" money, money that is not based 
in or guaranteed by conversion to any sort of commodity.

If the public restricts itself to commodity-money for public expenditure, 
this means that what it spends must be limited to what it taxes plus what 
it borrows, since commodities have a fixed available supply. And though 
many ignorant or simply disingenuous commentators, such as promoters of 
austerity, present this to be the case even now, in a modern monetary 
economy based upon fiat money issued by the public for public purpose, this 
is factually not the case.

The thing about public money is that we can have as much of it as we want 
to have. How much we spend relative to how much we tax is a public policy 
choice, and the right-wing dogma that the appropriate choice is for the 
budget to be balanced, for taxes to be equal to spending, is universally 
understood to be false, even among the most celebrated right-wing 
economists. In his 1948 article "A Monetary and Fiscal Framework for 
Economic Stability", "Chicago Boys" patriarch Milton Friedman proposed a 
counter-cyclical policy, where government spending would be increased 
beyond taxation during economic downturns, similar to Abba Lerner's 
"Functional Finance" which is often referred to as "Keynesian" economic 
policy. Whatever their ideological stripes, there is little disagreement 
among economists that to the degree that public budgets need to be 
balanced, they must be balanced relative to economic cycles and sectoral 
balances and not merely between annual public spending and taxation.

The balance between spending and taxes is simply the balance of the public 
"Heads" side of the coin, always in counter-balance with the private 
"Tails" side of the coin, as expressed by the activity of private interests 
in the global market.

It is no secret that the national State form is unsatisfactory. Not only is 
it burdened by its aristocratic roots, and not only is it corrupted by the 
fact that its modern form is largely captured by the international 
corporate elite, but the State is clearly unsatisfactory for modern publics 
as a result of the fact that static territorial forms are increasingly 
ineffective and inappropriate structures to serve global, distributed 
communities.

The public form has to evolve from the state form to the networked form, 
but for that to happen, new, networked public forms will need to emerge 
that are able to take over the socially necessary public functions. 
Including the management of forms of public money.

The critical feature required of public money is that we can socially  
determine how much of it there is, and how much of we want to apply to  
public purpose. We need ways to create and destroy public money so that we 
can can have a counter-balance to private activity, to manage cycles, to 
counter-balance economic sectors, and to socially pursue public  
objectives, such as health, education, and justice.

Thus, Bitcoin's innovation in terms of creating a networked form of  
commodity money is not useful in creating networked forms of public money, 
and as a result it does not create a way for networked public forms to 
replace the current State forms.

I'll be at Stammtisch this evening at 9pm, please come if you're in  
Berlin, if not, R15N continues at Mal au Pixel in Paris, you can join the 
network by calling +33 181 97 97 11

online version is here: http://www.dmytri.info/bitcoin-and-public-money/

-- 
Dmytri Kleiner
Venture Communist
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