Bitcoins Are Not Money

EPJ asked leading Austrian economists if bitcoins were money and almost all either said not yet, or yes. Several of the respondents I have sat for in economics lessons.  I would begin to doubt my insistence on the correct definition of money if I was alone, but I think the lot of them suffer from a error Mish Shedlock is not making.

For example, as one respondent said,

The answer is "Yes". Money becomes real when people have faith in it.

No, if it is on faith it is credit not money.

Bitcoins are tallies.  There are tallies of who owes what to whom, and there is the credit extended.  So credit extended, and the records thereof.

Why does it matter?  Well, how come of all the Austrian economists, only Mish was able to see there would be no hyperinflation (yet).  Because Mish is the only one that could analyze the facts, by keeping definitions straight, and arrive at the correct analysis.

As a side note, when societies are wiped out by natural disasters, the archaeologists find tallies everywhere.  When wiped out by conquest, they find stashes of gold and silver (money).  Money shows up when faith in each other (credit) no longer works.

What is money? In summary: medium of exchange and store of value.

Money solves the problem of rare double coincidence: how often does the shepherd want 250 eggs, and the chicken ranger want a lamb, at the same time and place?  Not very often.  Gold and silver alleviates the necessity of double coincidence as the shepherd can trade lamb chops for this much silver, lamb shanks for that much, and by the time the market day is over, sell off the lamb parts to ten different buyers, and then in turn trade some silver for bread, some for wine, some for eggs.  Not only does it facilitate trade, it promotes division of labor, the essence of true wealth in society.

Money emerges from a known commodity, and is a store of value inasmuch as it is still a commodity. People mistake “a store of value” for “an absolute in price stability.”    They want something magical from money, and when it is not there, they prefer a king fight their battles for them, and accept the pretense of an absolute store of value in fiat currency.  Odd that, since without exception, every fiat currency in history has failed.  As will the USDollar in time.  No telling when, but it will.

Aristotle got the ball rolling in defining money as:

http://www.hangthebankers.com/aristotle-and-the-definition-of-money/

1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2.) It must be portable. Money (must) hold a high amount of ‘worth’ relative to its weight and size.

3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. 

4.) It must have intrinsic value. 

Please note that no piece of paper nor any binary electronic record fits that definition.

Number four gets to the issue of why money comes from a commodity.  Money has a value even if not used as money. There is nothing that says the intrinsic value as a commodity must be stable, but that human desire to have what cannot be causes much of the mischief around money. The commodity that backs money is often relatively stable, by a wide margin, but it is never absolutely stable.

So you can see why gold and silver have traditionally been money, given Aristotle’s definition.  And you can see why Aristotle defined money as he did by observing why gold and silver were commonly money.

Others have tried add to the definition of Aristotle, but note the error, the definitions get to circumstances around money, and not money itself:

1. Acceptability.  If it emerges as a medium of exchange, then the acceptability is already there.  Acceptability is not talking about money, but about circumstances.

2. Limited supply or scarce: simply not so...  the arguments for scarcity fail to apprehend portability means concentration.  Also, whatever the supply of money is necessarily perfect.  If a ball of gold from space dropped spectacularly onto Siberia immediately doubling the known above-ground amount of gold, the next day all prices would simply double.  Contracts in gold would be repudiated given the “act of God” and there would be some disputes, but a doubling would have little impact.  But never mind this, it has never happened.  What does happen, as Spooner noted, when the price of gold drops, there is more coin turned into plate, decoration and jewelry, when it rises, that plate, decoration and jewelry gets melted down into coin.  (And this is why jewelers have traditionally been bankers.)  Talk of scarcity is grounded in a misunderstanding of money.

Any talk of "money shortage" is simply Keynesian belief that the market can be stimulated by counterfeiting currency.  There is no shortage of money at any given time, but there certainly can be disruptions due to war and reactions to Government policy that wrecks credit among traders.

3. Noncounterfeitability.  Again, if it was counterfeitable, then it would not have emerged in the first place.  Gold and silver as commodities are almost impossible to counterfeit.

4. Money is uniform. Each denomination should be the same everywhere in the country. Gold and silver do this, and even worldwide. And this argument lets the camel’s nose in the tent.  To whom do we trust to define uniformity?  Why, the State of course!  This definition is not only dishonest, it is malevolent.  Federal reserve notes, for example, are not only fraudulent, they are backed by violence.

There is a definition I’ll add, that Aristotle could not have noticed, a characteristic I noticed: money is disinfectant.  Since money is usually used in international trade, while the goods laden on the vessel or camel are transferred to another conveyance, the merchant captain and the broker actually trade metal (gold or silver).  The disease on the hands of the traders are killed by the medium of exchange.  What is interesting is as new metals are discovered, the ones that are antibiotic are made into coins and the others are not.

When President Roosevelt seized all private gold back in the 1930's, the one exception was private sources of gold used for international trade.

So what is money? A medium of exchange and a store of value with these characteristics -

1.)  durable. 

2.) portable. 

3.) divisible. 

4.) intrinsic value. 

5. disinfectant.

As mentioned in a previous post, warehouse receipts are not money.  Fiat currency is not money. They are warehouse receipts or fiat currency.  If you can keep apples and oranges straight, why not warehouse receipts and fiat currency notes?

Tallies of credit allotted are not money.  Tallies are not money.  Credit is not money.  Electronic binary records of a tally of credit is not money.

If you do not mind being wrong in your analysis, then think in sloppy terms.  If you want to be sharp and tight and arrive at correct conclusions, as Mish has on the universally expected hyperinflation, then get your definitions right.

Why have my heroes all got it wrong on the definition of money?  I think because they all allow “interest” (usury) as acceptable in economics, and are confounded for their perfidy.  I too was perfidious on this point, and repented of it to good effect.

Keep the definition of money tight and you’ll benefit.

Also, I am completely satisfied that bitcoins originated in a State-sponsored experiment into "money" theory.  There is no Satoshi, only a USA researcher whose heyday was when Japan was king.

Feel free to forward this by email to three of your friends.

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Understanding Currency

Folks,

Currency is a big topic this year, as I have been suggesting, and this
article may be helpful with its fundamental explanations.

John


http://www.mises.org/fullstory.asp?control=991


The Supply-Side Gold Standard: A Critique



by Frank Shostak


[Posted June 27, 2002]


According to "supply-side" economics, the key to economic growth and

prosperity is low marginal tax rates. However, the supply-side school also

maintains that a low marginal tax rate will not be sufficient, that it must

be accompanied by a monetary policy that aims at achieving price stability.

The pillar of the proposed monetary policy is a gold-price rule, where the

central bank targets the dollar gold price at a specified figure.


Let us say that the Fed has concluded that the "correct" target must be $350

per ounce of gold. If the price of gold falls to below $350 per ounce, this

is indicative of growing demand for money, which the Fed then must

accommodate through open market purchases of government securities, i.e., an

injection of money into the economy. As a result of this injection, the

price of gold will go up.


Conversely, if the price of gold rises above $350 an ounce, it means that

people's demand for money has fallen and that the central bank must take

money out of the system. By selling government securities, money will be

taken out of the system. This, in turn, will exert downward pressure on the

price of gold.


Observe that, for supply-side proponents, gold is not money but rather an

instrument to stabilize the present paper standard. The chief role of money

within this framework of thinking is that money fulfills the role of a unit

of account. Since it is imperative that this unit must remain stable in

order to fulfill this role, supply-siders hold that anchoring the dollar to

gold will do the trick. This, in turn, will make the dollar as good as gold.


But is the definition of money as predominantly a unit of account valid?


Defining money

The purpose of a definition is to present the essence--the distinguishing

characteristic of the subject we are trying to identify. A definition aims

at telling us what the fundamentals of a particular entity are.


To establish a definition of money, we have to ascertain how the money

economy came about. Money emerged because barter could not support the

market economy. A butcher who wanted to exchange his meat for fruit might

not have been able to find a fruit farmer who wanted his meat, while the

fruit farmer who wanted to exchange his fruit for shoes might not have been

able to find a shoemaker who wanted his fruit.


The distinguishing characteristic of money is that it is the general medium

of exchange. It has evolved from the most marketable commodity. On this

Mises wrote,


There would be an inevitable tendency for the less marketable of the

series of goods used as media of exchange to be one by one rejected until at

last only a single commodity remained. Which was universally employed as a

medium of exchange; in a word money.[1]

Since the general medium of exchange emerged from a wide range of

commodities, money must be such a commodity.


Consequently, according to Rothbard,


Money is not an abstract unit of account, divorceable from a concrete

good; it is not a useless token only good for exchanging; it is not a claim

on society; it is not a guarantee of a fixed price level. It is simply a

commodity.[2]

Moreover, "an object cannot be used as money unless, at the moment when its

use as money begins, it already possesses an objective exchange value based

on some other use" ( Mises 1980, p. 131).


Why?


In contrast to directly used consumers or producers goods, money must have

pre-existing prices on which to ground a demand. But the only way this can

happen is by beginning with a useful commodity under barter, and then adding

demand for a medium to the previous demand for direct use (e.g., for

ornaments, in the case of gold). (Rothbard 1981, pp. 3-4).

In short, money is that for which all other goods and services are traded.

This fundamental characteristic of money must be contrasted with those of

other goods. For instance, food supplies the necessary energy to human

beings, while capital goods permit the expansion of infrastructure that in

turn permits the production of a larger quantity of goods and services.


In its capacity, money also fulfills the role of the medium of savings, the

role of a unit of account, and a store of value. The fundamental role--the

essence--of money, however, is that of a general medium of exchange. Because

of this, all other functions of money emerge. In short, the fact that a good

becomes the medium of exchange gives rise to these other functions.


Is there a need to accommodate the demand for money?

When we talk about demand for money, what we really mean is the demand for

money's purchasing power. After all, people don't want a greater amount of

money in their pockets so much as they want greater purchasing power in

their possession.


On this Mises wrote,


The services money renders are conditioned by the height of its purchasing

power. Nobody wants to have in his cash holding a definite number of pieces

of money or a definite weight of money; he wants to keep a cash holding of a

definite amount of purchasing power.[3]

In a free market, in similarity to other goods, the price of money is

determined by supply and demand. Consequently, if there is less money, its

exchange value increases. Conversely, the exchange value falls when there is

more money. In short, within the framework of a free market, there can be no

such thing as "too little" or "too much" money. As long as the market is

allowed to clear, no shortage of money can emerge.


Consequently, once the market has chosen a particular commodity as money,

the given stock of this commodity will always be sufficient to secure the

services that money provides. Hence, in a free market, the whole idea of

managing the supply of money in line with changes in the demand for money as

suggested by the proponents of supply-side economics is absurd.


According to Mises:


As the operation of the market tends to determine the final state of

money's purchasing power at a height at which the supply of and the demand

for money coincide, there can never be an excess or deficiency of money.

Each individual and all individuals together always enjoy fully the

advantages which they can derive from indirect exchange and the use of

money, no matter whether the total quantity of money is great, or small. . .

. the services which money renders can be neither improved nor repaired by

changing the supply of money. . . . The quantity of money available in the

whole economy is always sufficient to secure for everybody all that money

does and can do.[4]

But how can we be sure that the supply of a selected commodity as money will

not start to rapidly expand on account of unforeseen events? Would that not

undermine people's well-being? If this were to happen, then people would

probably abandon this commodity and settle on some other commodity.

Individuals, who strive to preserve their life and well-being, will not

choose a commodity that is subject to a steady decline in its purchasing

power as money.


This is the essence of the market-selection process and the reason why it

took several thousands years for gold to be selected as the most marketable

commodity. In short, the prolonged market-selection process raises the

likelihood that gold is the most suitable commodity to fulfill the role of

money.


Furthermore, the accommodation of rising demand through the expansion of

money supply will in fact achieve contrary results, because people do not

want more money but more purchasing power. However, raising the supply of

money will dilute its purchasing power and thereby deny people's wishes. It

is like suggesting that because the demand for the Mona Lisa painting has

gone up, we ought to lift the supply by producing counterfeit paintings.


"Dollar" not an independent entity

Since in a true free-market economy, money is gold, there is no such thing

as an independent entity such as a "dollar." Prior to 1933, the name

"dollar" was used to refer to a unit of gold that had a weight of 23.22

grains. Since there are 480 grains in one ounce, this means that the name

dollar also stood for 0.048 ounce of gold. This in turn, means that one

ounce of gold referred to $20.67. Now, $20.67 is not the price of one ounce

of gold in terms of dollars as popular thinking has it, for there is no such

entity as a dollar. Dollar is just a name for 0.048 ounce of gold. On this

Rothbard wrote,


No one prints dollars on the purely free market because there are, in

fact, no dollars; there are only commodities, such as wheat, cars, and

gold.[5]

Likewise, the names of other currencies stood for a fixed amount of gold.

The habit of regarding these names as a separate entity from gold emerged

with the enforcement of the paper standard. Over time, as paper money

assumed a life of its own, it became acceptable to set the price of gold in

terms of dollars, francs, pounds, etc. The absurdity of all this reached new

heights with the introduction of the floating currency system.


In a free market, currencies do not float against each other. They are

exchanged in accordance with a fixed definition. If the British pound stands

for 0.25 of an ounce of gold and the dollar stands for 0.05 ounce of gold,

then one British pound will be exchanged for five dollars. This exchange

stems from the fact that 0.25 of an ounce is five times larger than 0.05 of

an ounce, and this is what the exchange of 5-to-1 means.


The absurdity of a floating currency system is no different from the idea of

having a fluctuating market price for dollars in terms of cents. How many

cents equal one dollar is not something that is subject to fluctuations. It

is fixed forever by definition[6].


In a free market, therefore, the meaning of the gold standard is that gold

is money. Contrast this with the supply-side framework, which views gold as

separate from the dollar. Curiously, supply-siders call the scheme a "gold

standard," which is, of course, erroneous.


Once it is realized that in a free market the name dollar stands for a fixed

weight of gold, it will obviously be preposterous to contemplate the

gold-price rule as suggested by the supply-siders.


Furthermore, once it is realized that money is a commodity, it is obvious

that, in similarity to other goods and services, its exchange value cannot

stay still but will vary in accordance with the supply and demand of gold

and supply and demand of other goods and services. Any attempt to stabilize

prices amounts to stifling the operation of the market economy and results

in the misallocation of resources and economic impoverishment.


Gold-price rule: Recipe for boom-bust cycles

According to supply-siders, the major factor behind boom-bust cycles is not

the Federal Reserve but the high marginal tax rate. For instance, in his

various writings--including the book The Way the World Works--J. Wanniski

regards a high tax rate as the cause of boom-bust cycles. According to

Wanniski, the monetary policy of the Fed has very little to do with

boom-bust cycles. In fact, in a note he wrote, "But first, the Fed (and the

gold standard) needs to be absolved of guilt for the 1930s. The Great

Depression was caused by rising tariffs and taxes worldwide…"


The problem with all this is a failure to define what boom-bust cycles are

all about. The distinguishing characteristic of a successful producer is his

ability to "read the market correctly" and thereby establish a profitable

production structure. It is in the interest of every businessman to secure a

price where the quantity of goods that is produced can be sold at a profit.

In setting this price, a producer/entrepreneur will have to consider how

much money consumers are likely to spend on the product. He will have to

consider the prices of various competitive products. He will also have to

consider his production costs.


A producer must also pay attention to likely movements in interest rates. By

complying with market prices and interest rates, the producer is said to be

"in tune" with reality. Whenever he misjudges future prices and interest

rates, he is said to be "out of sync" with market conditions, and he suffers

losses.


A major factor that distorts producers’ judgments regarding the true

conditions of the market is the central bank’s easy monetary policy. This

policy leads to an artificial lowering of interest rates and thereby

falsifies an important market signpost that producers pay attention to.

Consequently, this triggers activities that are out of touch with reality;

an economic "boom" is set in motion.


The central bank’s easy monetary policy causes producers to make business

errors. Once the central bank tightens its monetary stance, however, the

facts of reality are revealed, various activities that sprang up on the back

of previous loose monetary policies are abandoned, and an economic bust

emerges. From this we can infer that a recession is: a process whereby

business errors brought about by past easy monetary policies are revealed

and liquidated once the central bank tightens its monetary stance.


This definition of a recession--a business-error liquidation

process--informs us that the driving force behind boom-bust cycles is

central bank monetary policies.


This definition of a recession embraces not only "ordinary" recessions but

also depressions. The only difference between a recession and a depression

is the extent of business errors. In other words, the longer the boom, all

else equal, the more severe the bust is going to be. Furthermore, the

severity of the slump is affected by the state of the real pool of funding.

A growing pool of funding--savings and capital stored up to make future

production possible--will make the business error adjustment process easy to

handle. Conversely, a stagnant or a declining pool will make the adjustment

process more painful.


While a growing government and hence higher taxes will weaken the real pool

of funding, which in turn will prolong the recession, they don’t of

themselves set in motion boom-bust cycles as such. In order to provide an

explanation of a bust, one must present a theory of a boom. But how can

rises in taxes by themselves explain the phenomenon of a boom, which is

accompanied by a general rise in prices? Without the increase in money

supply, no boom and general rise in prices can emerge. Moreover, if,

according to Wanniski, the Great Depression continued for a decade solely

because of high taxes, then why didn’t we have a permanent depression from

World War Two, since tax rates have been much higher since then?[7]


Obviously, then, if the Fed were to follow the supply-siders’ dollar-gold

rule, it would not eliminate boom-bust cycles. Thus, whenever the price of

gold fell below the nominated $350-an-ounce level, the Fed would pump money

thereby setting in motion an economic boom. Once the price of the yellow

metal rose above the $350 an ounce, the Fed would tighten its stance thereby

setting in motion an economic bust.


Observe that the boom and the bust are set in motion regardless of the

demand for money. Thus when the Fed pumps more money in response to the

lower gold price, the rise in the demand for money cannot neutralize the

effect of the expansion in the money stock. In short, the newly injected

money will always cause damage to the real economy by setting an exchange of

nothing for something, or consumption not supported by production.


Those of the supply-side movement like to project themselves in the image of

free-marketers and in opposition to government interference. Yet their

entire approach runs contrary to the spirit of a free market. In fact, they

are very much like the rest of mainstream economics. While mainstream

economists advocate the management of demand, supply-siders advocate the

management of supply. It is even argued that, in order to promote greater

production, there must be a preference for taxing consumption rather than

production. According to Raymond J Keating, "In addition, supply-side

recognition that supply comes before demand in the economic order leads to a

preference for taxing consumption rather than production."[8]


In the free-market economy, neither demand nor supply is managed. Both

consumption and production are equally important in the fulfillment of

people’s ultimate goal, which is the maintenance of life and well-being. In

short, consumption is dependent on production, while production is dependent

on consumption. The loose monetary policy of the central bank breaks this

unity by creating an environment where it appears that it is possible to

consume without production. This unity can be restored by bringing back the

market-selected money: gold.


Conclusion

The belief that the present unstable financial system can be cured by means

of a monetary policy that targets the price of gold is erroneous. This

framework, which is offered by the supply-side-economics movement, is likely

to further destabilize the economy. What supply-siders are advocating is the

replacement of one form of government monetary control with another form of

control--erroneously believing that their form of money manipulation will

achieve economic prosperity. What is needed, then, is not a reversion to the

bankrupt Bretton Woods system, as is suggested by supply-siders, but a

genuine gold standard where gold is money.

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Gilder on Gold and Bitcoin

When teaching I draw on some famous insights of George Gilder to make points.  He has come out in support of the gold standard, and inscrutably bitcoin.  I read his argument, and post-study, his position is still as inscrutable.

Let's start with his summary, to get to his point:

The likely path of Bitcoin’s advance begins on the Internet
and only later moves to the domains of government
currencies. As it gains momentum, its price will converge
with the price of gold, and Bitcoin will become bitgold.

OK, nothing special there, IF Bitcoin works out, it will be co-opted by governments to replace cash.  Well, that has been the conspiracy theory all along, that it is a government gig, always was.  That Gilder is predicting it will get there is nothing new, but his argument for its inevitability of becoming parallel to the gold standard, and mutually self-reinforcing is new.  He takes 100 pages to make his case, worth reading because it is Gilder, but Gilder usually makes sense.  Not this time.

Let's look at highlights of his paper, but check your premises before you go in.  He does a lot of definition shifting in this piece, unconvincingly.  How do you define wealth, time, money and do you believe the internet is a net benefit? Hang on to those so you can compare and contrast.  he comes at you out of the gate:

Is money a measuring stick that gauges the value of economic
activity? Or is it a magic wand wielded by central banks to
summon new economic growth?
Is money chiefly a source of information? Or is it an embodiment
of wealth that can be created out of thin air.

So he starts with a straw man argument about the definition of money, and offers a false dilemma as an answer.  He is spicing it up with name-dropping.  I told you to hold onto your definitions, because when you compare the standard definitions with his changes, the changes are useless in the real world, and only work in the transformed Gilderneueweltanshauung.  Why not just come up with new definitions for your novel ideas, instead of loading yet another set of definitions on terms economists keep layering up?

Anyway, techies love to think they world started in 1975 when they were born, because they were born, and before that nothing else happened.  So the world is completely new...  and Gilder knows how to rock this conceit:

To understand our current economic stagnation, we need to step
back from the current debate and ask a broader question: What is
money? And in particular what is its role in a new 21st century
information age economy?

That ain't gonna fly with those who've seen both sides of the 1975 divide.  Those of us who actually produce things, as opposed to the false economy David Stockman chronicles, know there is nothing new in the 21st century regarding info and economy, only that thing can move faster, but never better, that attendant to this putative improvement is astonishing waste, not efficiency.

Gilder does ask the right questions, one I have been answering in this blog repeatedly, because it is a premise upon which one proceeds, and determines direction:

The key to understanding good monetary policy is to address the
question: What is wealth, and how is it created? What is the role
of money in the creation of wealth?

And he answers the question:  "Wealth is knowledge."  Hmmm... ok, I certainly have argued a college degree should be in the humanities, but that is not what he means.  He then gives the standard anarchist means for economic development but weaves in his new definition:

Wealth is created by the learning curves that result from a million
falsifiable experiments in entrepreneurship by economic actors in
mostly free market economies.

Well, knowledge comes from the market process that Gilder mentions, and prices as quoted in money, are the signal as to whether your meeting the needs of the market, but please some how connect this to "knowledge is wealth"  No, all that is left behind, we are off to the races.

He goes on to make fairly standard criticism of monetary central planners, and he brings in another important estimation that is new to me:

Meanwhile, Wall Street bank profits, effectively guaranteed by
government policy, return to previous highs. Currency trading to
set the measuring stick of monetary values yields a hypertrophy of
finance. Transacting $5.4 trillion every twenty-four hours, foreign
exchange markets are now scores of times larger and even more
volatile than the markets for real goods and services that they are
supposed to measure. Rather than promoting enterprise, banks
harvest the profits of currency changes, imposing a volatility toll
on businesses that have to hedge all their activities against the
chaos of floating moneys.

Well, this is another example of the waste of the FIRE economy, finance, investment, real estate.  he also notes the trillions the banks have invested to track this valueless false economy activity, all to drain the resources of productive people to bankers.

Next he starts bringing in a Bitcoin conceit to fit in his new definitions:

The theorists of Bitcoin explicitly tied its
value to the passage of time, which proceeds relentlessly beyond
the reach of central banks.

From here he tells us "money is time."  Not time is money, silly, but the opposite!  And until you get that, you'll never get Bitcoin, and you need to get with the program.  The he ties bitcoin to gold:

Bitcoin is a major experiment in new Internet infrastructure,
but gold works the same way in the global economy. Gold can
function as money because it operates outside the financial
economy as an index of the time it takes to extract it from the
earth. Because it becomes more costly and time consuming to
extract thinner and deeper lodes of the metal from more remote
places, gold remains a lodestar amid the monetary turmoil. The
cost of extraction rises almost in proportion to the advance of
mining technology. Gold thus cancels capital and technology and
becomes almost a pure measure of time.

Ugh...  as though there are any similarities between gold mining and video games.  But as long as your brain is dulled by arguments grounded in logical fallacies and shifting definitions, while your brains is mush if you have not maintained your definitions, comes a new definition:

The source of the value of money is time—irreversible, inexorably
scarce, impossible to hoard or steal, distributed with remorseless
equality to rich and poor alike.

There, now it all comes together.  The new definition, its benefits, all to be contemplated at leisure while spending decades unemployed as the economy goes bad and there is not a single thinker on the horizon who can offer a solution.

Gilder cites a fact that perplexes most people.  The general impression is internet sales is what, 50%?, of all retail sales in USA.  It is not.  It has not risen above 6%, lower than what mail order catalog sales were in the 1980s, before the internet.

Although online purchases remain
between six and seven percent of all commerce, Internet
trade is expanding rapidly. 28

The fact of the matter is the internet is merely a self-service checkout option, and explicitly so in the case of internet sales titan Victoria Secret, with 1.5 billion in online sales, generated by 400 million catalogs mailed out a year.  "Order online" sure save VS a lot of money.

As an aside, my sources say 6% of retail, gilder puts it as "all commerce (online stock trades?), which, if his sources are correct, then online sales are negligible in the USA economy.  In any event, the idea that the internet has changed anything, that marketing on the net is a viable means for business development, is utterly delusional, and a very widespread delusion at that, up there with the "earth is flat" and the "sun revolves around the earth".

And Gilder clearly knows this, and points it out, yet he is bothering with a thesis that appeals to an extremely narrow group of very delusional people.  O well...  onward...

Money is the central information utility of the world
economy. As a medium of exchange, store of value, and
unit of account, money is the critical vessel of information
about the conditions of markets around the globe in both
time and space.

In his classic definition reiteration he goes partial, he leaves out "testable, divisible, verifiable," something bitcoin will never achieve, by design.  It is a relative store of value, inasmuch as it is also a commodity, and after spending so much time denigrating the problem of the measuring stick being part of what is measured, he necessarily (to advance his argument) calls "money" the vessel of information (another new definition!)  Prices are signals quoted in money.  Don't make a hash of what is simple and useful.


My best guess is Gilder has crafted a piece in which the necessary gold standard is wedded to the inevitable elimination of currency in favor of some sort of universal bitcurrency, and made it his thesis.  Two problems: no government wants a gold standard and there will always be tallies on other media besides electronic, making the universality unlikely.  Perhaps he is merely trying to entice techies into the gold standard camp, knowing full well bitcoin will never happen.  Who knows.  But this piece is not convincing or persuasive.

Gilder argues for sound money.  Good.  But he is trying to be all "futurist."

But human creativity and surprise depends
upon a matrix of regularities, from the laws of physics to the
stability of money. 38

B O R I N G !  You mean to repeat what Aristotle pointed out, to be interesting something has to be different?  I imagine people with a post 1980 college degree, meaning of less probity than a 1960 high school diploma, may be wowed by such overwrought typing, but spare the educated, if you want to keep their interest.

His ruminations on money are a mess...

Paradoxically, to serve as a store of value, money cannot
be hoardable. If money is not invested or spent, it rapidly
becomes worthless, as no goods are produced that it can
purchase. Time is the quintessential Heraclitean stream in
that it cannot be hoarded. Time is the basis for Say’s Law—
supply creates its own demand, and in one way or another,
depending on policy, savings are always invested.

Money has little to do with a free market economy.  the freer the economy, the more credit is extended by all of the players, not any nonsense regarding the velocity of money.  "Hoarding money" that is to have 100 oz of gold in a vault does not make it worthless, since it may be collateral on a legitimate (non-interest bearing) loan, and in any event is it at least a commodity, and a fairly stable store of value at that.

And as to his quote of Say's Law, someone should gentle point out Say never said anything so stupid (or stupid at all)... the only source for that quote is Keynes.  Sheesh!  Say did have some good things to say, and this is an example of the bad quotes crowding out the good.

Gilder reaches too far outside his ken, and makes beginner's errors:

According to Szabo, velocity is the critical element
differentiating money from commodities. Over the course
of human history, various commodities evolved from mere
consumables into collectibles and thence into wearable décor
and jewelry. On occasion, in a phase change, some of them
became “wampum” and clamware, shells and exchange. Thus
we “shell out clams” to buy stuff.

Or maybe not, he quotes Szabo on this, so Gilder is actually free.  Maybe gilder knows what he is doing.  Anyway, that's not what happened.  Clamshells and whatever else was traded were tallies of who owed whom what. Into the 1830s in the UK credit (non-interest bearing loans) was recorded on tally sticks and stored to be liquidated when the debt was satisfied.  Liquidation in this case was actually burning the tallies, but sadly the fire got out of control and burned down Westminster.  People did not use sticks as money in the UK in the 1830s.  What people have done through history is run tallies, and recorded on all sorts of media.  So Szabo, whoever he is, is kind of an idiot.  But Gilder only refers to him.

He points to the history of New Amsterdam (New York),
where a 17th-century Dutch entrepreneur had his bank
arrange a large debt in wampum. The Indian baubles had
crossed the velocity barrier to become a vessel for indirect
transactions—real money.

As if there was a meeting of minds between the Dutch and the Indians.  Absurd.  But there you have it, a straw man example to support whimsical definitions.

This goes on for 100 pages, satisfying where factual, pleasing when condemning the actual malefactors, but otherwise implausible call to action.

I wonder at it...  such a narrow audience.  Is this a pitch to techies to come over the the gold standard?  Who knows!

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Economic Science & Your Money

The pretense of economists is the field is one of science, in which there is no right or wrong, any more than there is right or wrong in physics.  If you increase the money supply, you spur demand, that is simple economics.  If you let go of a pencil, it drops.  That is simple physics.

If you try to argue that raising an interest rate on a currency used in an integrated worldwide economy has far wider effect than a dropped pencil, which is a local matter, they will argue it is merely a matter of scale, not kind.  And with computers, we can reckon at scales unimaginable heretofore.

The fellow who is credited with the founding of modern economics is Adam Smith.  You have not read Adam Smith, because no one reads these founding people, like Darwin and Marx.  They are generally unreadable.  If you were to read Adam Smith, you would learn that he was a moral philosopher, and his great work, shortened in title to the Wealth of Nations, was really a sort of encyclopedia (a common thing to produce in those days) of all economic ideas.  In it you'll find capitalism, free markets, communism, mercantilism, feudalism,  if only in contrast to his obvious editorial bias (if not by the terms we use today).  Karl Marx found communism in it.  Each reader finds his favorite system outlined.

But what to make of a "science" in which few people agree on definitions?  Within economics, there are many definitions, some actually opposite, of profit, money, corporation, the firm, labor, capital, interest and so on.

Where would physics be if physicists did not agree on the definition of thrust, lift and BTUs?  They may have different theories of how flight occurs, but they agree on terminology.  Not so in the "science" of economics.

 Yesterday USA's top politician and its top economist had an economic discussion in which they operated in different universes, based on definitions, in which they talked past each other and the moderator kept saying in the background "I don't understand..."

Note on the subject of the discussion, Krugman states, and I quote him:

"We live in an economy where money is not just green pieces of paper with faces of dead presidents on them.  Money is the result of a financial system that includes a variety of assets.  We are not even quite sure where the line between money and non-money is... it's kind of a continuum."

Now you are saying, "Wait... what?!  'Non-money?'  How come I've never heard of non-money?  What the hell is that?"

It's a dirty little secret.  The Greek debt is in non-money, but the Greeks are obliged to pay it in money.  Bankers and governments oblige taxpayers, ad infinitum (ad nauseum) with bonds for stadiums and wars (Seattle is getting a 3rd and 4th major league stadium, plus a multi-billion-plus 2 lane tunnel constructed under mud flats to replace an eight lane highway. San Francisco simply eliminated the rickety Bay Freeway after the Loma Linda quake damage, with no discernable economic loss.)

Here is how it works:  Seattle voters hated the idea and did not want such a tunnel.  A lawyer ran for mayor, staking his liberal credentials and lawyerly integrity on "no tunnel."  He won.  All interested parties now know the game: As the mayor says no, economic matters are arranged so the mayor and his are now and will ever be well compensated if the tunnel gets a go-ahead.  Seattle, drowning in debt and with bondholders on the hook for now FOUR new major league stadiums, is capable of having only so much more debt mulcted from the productive segment of the citizenry.

Although the mayor is "against" the tunnel he negotiates an obligation on the rest of the state taxpayers that any overruns will be at the rest of the states expense.  Now, the tunnel can command debt well beyond what mere Seattle can pay.  With all of this in place, a by-election brings in enough votes to "pass the tunnel" and the mayor "grows in his job" and now supports the tunnel project, based on a by-election in which a tiny minority outvoted a tinier minority.  Ka-ching!  Seattle still hates the idea, but too bad.

This is played out as President Obama (in his role as willing-puppet) cuts off energy resources in USA, and directs funding to the whimsical and ludicrous "renewable" sources, and funds Brazilian oil exploration, assuring when he is out of office he has access to riches beyond his wildest dreams.  They are greying his hair now, as they did Bill Clinton, so he can assume the role of sage elder statesman.

If my reading is cynical, why does it happen this way in every city, at every level, every time?

All of those bond obligations are non-money.  They must be paid off in money.  When USA builds dams in Peru, they are credited as a debt to USA in non-money, for which Peruvians must pay off in money.  Whereas the cohort of elite Peruvians who went to Harvard execute the deals, it is the common Peruvian who must pay it off.  It is not possible to pay it off, ever.  With so much wealth mulcted out from Peru to USA, Peru can never find the means locally to support local investment.

As a side note, in the science of economics, there is a strange term, "moral hazard."  Not inconceivable in a field laid out by a moral philosopher, but a strange term for a field purporting to be science.

Therefore, the problem in the "science" of economics of no set definitions, and its attending confusion, is not an accident.  It is a fundamental requirement.  Hey, who cares if the city runs up debt in terms of non-money?  Well, you will when you get less and less for more and more of your labor.  When those non-money pensions are paid out in less and less money because the value is diverted to bond holders.

USA perfected this practice overseas and brought it home.  What goes around comes around.

Iceland has said no to paying out money against non-money debts.  Iceland is recovering slowly but vigorously.  Greece is working on a way to pay off non-money debts with Greek workers money.  Greece is up in flames.  Iceland is showing the non-violent and proper response to the game.

The game is the concentration of power in the hands of a few who may oblige the many with non-money debts that must be paid in money.  The cover is economics as science.  But where science is ordered to knowledge and understanding, economics is an exercise in confusing people.

To understand it, you must understand the definition of money.  And non-money.  I suspect less than 1% of the 99% can define money properly.  Krugman can, which is why he can draw the distinction he does.  Ron Paul can too.  But they have a radically different view of the role of the state. If the 99% understood the terms properly, we'd say no.

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Bitcoins

One thing I love about Austrian economics is devotees cannot agree on a definition of money, interest, profit, the foundation of rights and so on.  But I see that as a strength not a weakness.  Keynesians and Marxists have their disputes, but neither side is ever right (Marxists do get their facts straight, something Keynesianism inherently cannot do, since Keynesianism is irrational, and must proceed from false premises to work).  At least in Austrian school, one side has often got it right.


I got into a Colloquy with a devotee of Austrian economics over bitcoins as free market money, which we join in progress...

P: And since you are thoughtful on this subject, let me point out to you that cowry shells were not universally accepted either, but they still were money in a broad swath of earth.

*** Internal contradiction - not universal/broad swath.... But I think you mean similar bagatelle items shells here, agates there, totems over there... but not universal.***

P: And why is universal acceptability a necessary criterion?

***Money is a medium of exchange.  If I cannot use it as a medium of exchange, it is not money, it is something else.***

P: Who hands down these edicts anyway?

***The market, the same people who said Euripides was a great playwrite....***

P: And who says that money MUST emerge from a commodity? (von Mises I know, but what makes that pronouncement authoritative?)

*** Von Mises is always just restating the obvious...  when time and again "money" (medium of exchange) emerges, it is from a commodity. 

This leads to "the store of value controversy" as part of the definition of money.  All commodities are a store of value, and when one emerges as money, it does not lose its inherent quality as a store of value.  Some austrians get worked up over money defined as medium of exchange AND a store of value since it offends against the principle of subjective valuation. But it is one item acting in two faculties, so the confusion is understandable.***

P: And is it really barter when you use another object (like bitcoins) to mediate an exchange?

***It is barter because bitcoins explains itself as barter, without saying the word. You and I can agree that I'll send you my book for 2 bitcoins (which you either mined or earned) and now I have 2 bitcoins to use to buy that 8 meg flash drive from Fast Eddie. Bitcoins role is to make an accounting entry on who owes who what, in this barter arrangement.  Alternatively, this could be called fiat money, but fiat and money together is an oxymoron.

An accounting entry is rather tenuous item to describe as an object.***

P: If so, then all money transactions are actually barter.

***I disagree, since in barter, like bitcoins, there is no medium of exchange.  In bitcoins, the exchange is in-direct, whereas in barter the exchange is direct (My pig for your goat).  Bitcoins may solve the problem of double coincidence, but it meets none of the other criteria the market has set for money.

With money, all of the criteria set by the market are in place (plus one only recently observed: money is antibiotic... newly discovered metals that are antibiotic end up being made into coins (platinum, rhodium, palladium), metals not antibiotic do not end up thus... it is a curious phenomena.

Goat for pig, barter; goat for 1/4 ounce of gold, medium of exchange transaction; goat for bitcoin...  i'd say barter with accounting system, but if someone wants to argue it is a fiat currency transaction, ok...whatever, but it ain't a money action, there is no medium of exchange, no object.

If one argues bitcoins is just a private mockery of our fiat system, I have no problem with that.  But it is not money.***

P: Barter has to be disparate goods exchanged for other disparate goods, or else it loses all meaning.

***d'Accord. Since bitcoins are usuable only within the tiny milieu of the bitcoin nation, the universe of goods and services are rather limited.***

P: And even if we accept the notion of emerging from a "commodity", how you demonstrate that the emergence of bitcoins in the process being used is not a commodity?

*** a commodity is universally accepted:  rice is a commodity, sushi is not.  Bitcoins are far too rare, intangible, and are near universally unacceptable for barter, (nothwithstanding that I think their miniscule use is as barter).***

P: It's easier to say that it IS a commodity.

***I disagree, walk into a market with 100 pounds of rice, and 10 bitcoins, see which gets you a deal...***

P: And so, I deeply appreciate what you've suggested, because it has elicited from  me all of these counter-thoughts, which I hope you find stimulating and perhaps persuasive.

***I've read you for years and I would not have challenged you if I did not think you were more than my match...  I come from a family of academics, and I am the black sheep who went into commerce.  You've forgotten more on these topics than I've ever learned...  but as to money, I've been fixated on the topic for 40 years, and as an importer have been able to discuss it worldwide (have you read spooner on how the precise correct amount of coin is kept in circulation? http://lysanderspooner.org/node/49).***

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Definition of Money

A business associate of mine and I were debating the meaning of money, and the curious phenomenon of the modern field dealing with money, economics, has no agreed upon definition of money.

There is a traditional definition of money, as in medium of exchange and (relative) store of value, and then empirical examples of what has served as money, but today, the word as used in modern economics is essentially meaningless, when used in modern economic discussions.

I insist on using the word in a strictly traditional sense, so what I may say might make sense (Socrates said first, define terms.)

He countered meanings change, and so it is with the word money.  Very true, for example I heard John Wayne say in a movie from the fifties "I feel gay" which today means only one thing, but back then always meant felicitous.  Sometime around 1968 the term began to shift from felicitous to homosexual. The change is complete, contemporary use of the word causes no confusion.

But as to the word money, there is the traditional definition, still being used sometimes, and then legion other definitions, leading to endless confusions.  The new application of the word is too compromised to be useful, and the classic definition is still accepted if stipulated.  (Stipulating you mean felicitous when using the word gay would be a gag line today.)

So money retains its original definition, although stipulation may be needed...  here I use it in its traditional sense, and you can search my blog for the term and find my comments.

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Fraude - The Video

From Spain comes an excellent video on the 2008 crash, the cause and effect.  Take an hour and watch it.  It is bilingual, and there are Portuguese and Italian versions.

Here are some study notes:

This was produced in Spanish, where no doubt the question is urgent, and so I am viewing a translation.  Nonetheless, the narrators first sentence includes a definition of wealth which implies an emphasis on money, narrowly defined, and as the solution to the necessity of double coincidence of wants.

Truly money is a solution to the problem of needing a double coincidence of wants.

But the far more widespread solution to this was credit.  Credit among traders and people is far more prevalent among people and in history than the use of gold and silver or other media of exchange, something on the order of 80% of transactions, if not more.

The quick proof of this is to consider the amount of transactions in history, and the amount of coins to be found, What we see in overwhelming records is tallies or records of credit, not pots of gold.  The amounts of gold and silver mentioned in ancient records, even if aggrandized, is not enough to support  the markets given the population in each instance.

As Prof. Jere Bachrach, a numismatic maven notes, the gold and silver comes in demand as the end nears.

Credit in history is between two actors, you and me.  Who had what credit was based on the estimation of everyone else.  Why, it was anarchy!

8:30    “in exchange for interest” savers interested in something more than just depositing their money allow the bank to lend their savings to investors it considers appropriate.   this intermediary role is key to the success of any  economy.”

For most of economic history usury has been forbidden, so this cannot be necessary, nor sufficient. Banks are not the only way to aggregate money for investment. indeed, the banks began to sever all links with reality WHEN people began devising other ways to raise capital.

Bu to be sure,   “exhcange for interest”” it is key to the success of THIS economy, in all of its wretched excesses and destruction. .  in a free market no doubt there would be banks dong the above, and no doubt charging interest.  People do not change simply because an economy is free.  Just because prostitution is legal in Nevada does not mean everyone becomes a whore.  If there is no state to write the regulations to benefit the few, then betters and wider options emerge, and the destructively limited options available to people wither on the vine.  If the state stopped terrorizing children in its schools, taxing families and regulating marriage, no doubt out of less existential fear and more felicity in relations , prostitution would wither on the vine.

10 :  00 Steve baker says, “banks lend money into existence...  if it is lent into existence, it is not money.

10,000 euros becomes 500,000 euros through fractional reserve banking.  

They may become euros, but they do not become money.  They are an ever shrinking unit of measurement.

In its intermediary role, the bank is providing the service of keeping track of all of the tallies, who is obligated to whom for what. they take a nice fee for this.

The reason govts take so much control and give banks such support is at once they are in command of the economy, such as it is, and can know all and tax all.

Mismatched maturities are a real monkey wrench in the works.  the problem there is banks are borrowing short where interest rates are low and lending long where the interests are high, and arbitraging the difference. yes, often the bankers get the suppl and demand wrong, because there are way too few bankers estimating (guessing betting?) what the rest of the world will do.  (or, who cares, the state will always bail us out, moral hazard.)

In a free market lending is so granular, and the deal so transparent, “the run” on the bank, is unlikely.

The problem is not that the banks hijacked money, that is the lesser of the problem because fewer transactions were conducted in money.  What happened is the banks hijacked credit.  Then began creating their own by marrying fractional reserve banking of money to fractional reserve of credit  then in 1982, they began creating credit with not reserves of any sort.  (RMA)

We went from money defined and usury outlawed, to money and fractional reserve, in which the non reserve portion of the fraction is credit, and then usury on credit.

Businesses would write checks to make payments. (bills of exchange) and soon enough a receiver had no idea if what the check represented was money or credit.  Nor did a depositor quite understand that legally he did not own the money he had deposited, no, he had lent it to a bank.

Everything is so foggy that no one quite understands the situation, except the bankers.

http://en.wikipedia.org/wiki/Negotiable_instrument#Bill_of_exchange

usury makes perfect sense under PVT and natural rate of interest, and if it is set in a voluntary agreement between to econ actors.

What makes usury wrong is that it is the means to aggregate power.  it creates an idolatrous illusion of wealth, an that is the idol Gates/Slim Lopez image of an amazing collection of warrants and claims and indeed, money, legally credited to an individual.

But hat is not wealth, that is a collection of tallies, dead but powerful, like a zombie.

The definition of wealth, as is experienced, is an ever widening access to an an ever widening array goods and services to an ever widening population by means of falling prices.  Division of labor and competition sees to this, it cannot be commanded centrally.

Instead of weal, commonweal, we get an idolatrous version that one and all worship, an idol that religiously forbids the free market and its benefits to mankind.

Austrian economics are not prescriptive, they are descriptive.   They say what happens, under these circumstances.   I am always surprised at how the Cantonese express matters in terms of Austrian economics, although the field of study is largely unknown in South China.  There is nothing new in Austrian economics.

And there they know during the boom to invest the funny money in owning overpriced goods, because the nominal value of the asset drops but the agreed payments remain the same.  Countless Americans lost viable businesses because the service debt on loans for machinery, equipment, and realization of facilities cannot be covered by the lower revenues and tighter margins that visit a bear market.

This brings to mind the story of two hikers on a path in dense woods and finding they are in between a she bear and a cub.  One hiker immediately drops and begins to change his hiking boots for a pair of Nikes.  The other hiker says derisively, “You can’t outrun a bear!”  To which the now Nike-shod fellow replies, “I know, I only have to outrun you.”

what they have to say about the effects of interest is quite accurate.  the descriptions of the arts are correct.  But  if an Austrian were to pontificate on the ethicality of interest, they would be stepping outside of economics into morality.  Economists call their field and value-free scientific system.

it is important to understand micro and macro economics in theory, but to also know as Sean Corrigan points out so often,  mantra that there are no macro-economic issues which can be solved other than by micro-economic means.  This means no solution can be centrally planned.

22 .30  the boom: when the damage is done...

for me the problem started with the Lehman crisis or words to that effect...

I think he means the unravelling at which point the decision as to who pays for the previous damage done (during the boom) was begun as a process.

Here is another take on the problem, the more explanations the better you understand.

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Anarchy, Money & Definitions

Read this sentence aloud:

"There are only 10 kinds of people...."

You said "There are only ten kinds of people..."

Now I'll finish the sentence...

"those who think binary and those who don't."

Now, reread that first sentence and second part together.  If the second time you said out loud

"There are only two kinds of people, those who think binary and those who don't."

then you have an esoteric knowledge.  You are familiar with a numbering system few people use or understand, let alone read.  (It's the system our computers use.)

And you use specialized information correctly.  To the vast majority of people, they would not know what you were talking about, if you had a conversation with them.  In fact, if the definitions mattered to the conversation, you'd have to 01010110 them from the conversation just so you could make some progress.  Before they could join the conversation, they'd have to learn the definitions.

One term rarely used correctly is money.  Over 100011111100 years ago, Aristotle identified 0101 essential attributes that are necessary for a money:  It has to be durable, divisible, convenient, consistent, and have value in itself. 

Based on that definition there are some elements that may support any given item emerging as money.  If an element makes the candidate more durable, then it is more likely to emerge as money.  If a certain item is easily divisible, then it will recommend itself.  But often that which is durable is not easily divisible.  So these facets tend to be contradictory.  Water has value in itself, indeed, it is the second most important thing in life, next to air, but there is too much of it to be used as money.  And water has too many versions to be consistent, but nothing is more easily divisible.  What is there that best holds these contradictory elements together at once?

Notice what Aristotle did not say in defining money: gold.  But then he did not need to because few materials in life have all of those aspects, and gold is prime, so it tends to be used as money in all times and places.  Silver works well too.  In history we see conch shells and Marlboro cigarettes as money too, but only because, of all that was available in that time and place, it was that odd item that was closest to that which serves as money.  (update 2016: this is an error, those were used as tallies, not money). Gold was not available.

And if something has more attributes, rather unseen, then all the better.  For example, gold and silver are antibiotic.  That is to say when merchants make a payment, the medium they use, when the trade from hand to hand, is antibiotic.  This suppresses the spread of disease.  Silver does this as well, and copper and nickel to a much lesser degree.  And curiously, as atomic scientists have discovered more elements over the last two centuries, those that have antibiotic properties end up being offered as coins, such as rhodium and platinum, those elements that have no antibiotic properties for some reason never make it into the form of coin such as tantulum and iridium (except in novelty quantities).

As an aside, if money was properly defined, it might instance epidemiologists to track the bubonic plague as paper money replaced gold in trade in the middle ages.  Where and when did paper currency show up? 

One reason we cannot get our way out of this economic mess is we cannot begin to have a useful discussion when our terms are defined at once incorrectly and variably.  Talking past each other is inevitable.

One argument about money is the proper amount for an economy.  My head aches when I hear such questions.

1. There is an internal contradiction in the question. If it emerged as money, that presupposes it is the right amount of money to supply the needs.

2. Anyone posing such a question is no longer talking about money, but about derivatives, like warehouse receipts for money.  (If it is a warehouse receipt, it is not money.)  What they are talking about is currency, and warehouse receipts as currency.  Once, Federal reserve notes were warehouse receipts for gold in Fort Knox.  They no longer are.  But we commonly called Federal Reserve notes "money" and although they stopped being warehouse receipts, they are still called money.  When they stopped being warehouse receipts, they were simply fiat currency.  Fiat means faith, or credit.  So federal reserve notes today, are not money, there are not warehouse receipts for money, they are notes on credit used as currency in business.

Now,  notes on credit used as currency in business is nothing new in history or commerce and not a problem in its own right.  The only problem is if the state gets involved, or worse, claims a monopoly on the practice.  As a matter of course the state, if it engages in credit, must declare a monopoly, for no one in their right mind would ever trust a state to do the right thing.  Why businesses can trade in notes on credit used as currency is at that level the business is checking the credit and if wrong suffers any consequences directly and limited to its own decisions.

You head will ache to if you review what wikipedia has to say about money supply, a term inherently wrong, but universally used.

http://en.wikipedia.org/wiki/Money

Money is any object or record that is generally accepted as payment for goods and services and repayment ofdebts in a given socio-economic context or country.^[1][2][3] The main functions of money are distinguished as: amedium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment.^[4][5] Any kind of object or secure verifiable record that fulfills these functions can serve as money.

Now, with this misdefined term, the discussion continues, what is the optimum money supply?  Arrrggghhh...

http://en.wikipedia.org/wiki/Money_supply

Money supply:  In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time.^[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions)

Wrong, and wrong. Given their outlines of the discussion, we can see that wikipedia cannot enter into the discussion, since it does not define the terms properly to begin with.  Follow wiki and you stray into ignorance, at least in the discussions above.

If it is money, as defined by Aristotle, or more succinctly "a medium of exchange (and a store of value)" then there is no need to discuss the right money supply.  The amount available is the right amount.  How do we know?  Because the market has made it money.

And the market precisely regulates how much money is in circulation.  Since money is often gold and silver, let's use that as an example.  As Spooner noted, as gold comes out of the ground, it is put into the form of coins (in history this was a private business.)  As the coin is spent into commerce, if the buying power gold commands drops because of excess supply, then jewelers begin to convert the coins into jewelry, decoration and plate, taking the coins out of circulation.  There is a signal where jewelers will get more for jewelry than for coin.  When there is too little in coin available, then the price goes up and

jewelry, decoration and plate get melted down and converted to coins (we are there right now.)

But what if a massive gold mine was discovered?  It has to be brought up.  The owners will bring it up as is financially sensible.  That is Russia today.  OK, what if a solid gold asteroid hit earth and there was trillions in gold immediately available?  Aside from that not happening, everything would simply be repriced given the new amount of gold.  No change.

From history we have a better example.  Spain was flooded with New World gold, stolen in violation of property rights.  This flood of gold so distorted Spain's economy, 400 years later they have not recovered.  Portugal was even more avaricious, but an earthquake in 1755 levelled their capital and destroyed their ability to be imperialistic.  Portugal was spared much by being destroyed.  

If there is any event in which anarchy is most proven as a benefit and a discipline it is the event in which money emerges.  Anarchy literally means no + king, and alternatively defined as spontaneous order out of chaos.  Money emerges as a medium of exchange (and since it emerges from a commodity that is already serving as a store of value, more or less, it retains its other nature as a store of value) out of the chaos of nothing yet serving as money.  Money brings spontaneous order out of chaos, and it is a purely market function.  

If we first define money properly (a huge "if") then we realize there can be no state participation in anything to do with money.  Money and the state are necessarily mutually exclusive events.  The only way the state can seem to have any relevancy is if something not money is misdefined as money.

Anarchists are the only ones who define money properly.  They are the only ones who can have a substantive conversation on the topic.  As such, they are the only ones likely to come up with a solution that matters or will work.  As sure as 01 + 01 = 10.

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