Agree with the title's premise, but there is no interesting conclusion here, which is regulators and economists like fiat money (I'm being somewhat reductionist, but it still isn't a particularly groundbreaking assertion).
The author doesn't go on say bitcoin has no value, or no place in the broader financial system. The author makes clear bitcoin won't usurp banks. Which is a very believable point to accept.
Ultimately, banks and fractional lending have the upper hand because we collectively believe the outcome is better: higher growth, stable employment, etc. If regulators egregiously fail to deliver these benefits in the future, there's a potential successor waiting in standby. And 10 to 15 years ago, we didn't have that.
Overall, crypto is good in ensuring existing actors fulfill the functions they've promised and are obligated to do.
“ Banks create money out of nothing.
Where does the real wealth in the economy lie?
It’s easiest to see when people get it badly wrong
Weimar Germany and Zimbabwe had created far too much money compared to the goods and services available within the economy causing hyper-inflation.
States can just create money, and the last thing you want is too much of the damn stuff in your economy.
They had made so much money it lost nearly all its value, and they needed wheelbarrows of the stuff to buy anything.
States can create money out of nothing as well.
You need the right amount of money in the economy for the goods and services available within that economy.
The real wealth lies in the good and services available with the economy and is measured by GDP.
Central bankers actually look at the money supply, and expect it to rise in line with the new goods and services in the economy, as it grows.
More goods and services in the economy require more money in the economy.
This is the problem with gold and Bitcoin, they are not really flexible enough.”
Gold and Bitcoin might not be flexible enough, but you could consider them to be more just. When somebody can determine the value of money for everyone else, then that leaves the door open for corruption. It can erode people's faith in money. Fiat money requires that people have faith in the money for it to be worth much. Look at currencies from poor countries with rampant corruption. You can frequently pay in dollars/euros for goods and services, because people trust those currencies above the local one.
I won't agree or disagree with this as it pertains to today. That said, I would like to point out that the American industrial revolution happened during a period without central banks and their "flexibility."
That particular economic revolution makes anything in the 20th century or beyond look quaint in comparison. >4% a year real GDP growth for a century, CPI deflation. A dollar in 1900 bought more than it did in 1800.
The institutional arrangements of the American System were initially formulated by first Secretary of the Treasury, Alexander Hamilton, who proposed the creation of a government-sponsored bank and increased tariffs to encourage industrial development
Jefferson did not change Hamilton's basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20-year charter.
...which expired. And then we had the greatest boom in global history.
I'm aware of the intermittent nature of the banks (as well as all the central banks that failed under the Articles of Confederation). The point is we had a situation where the money supply was basically fixed under a very imperfect gold standard. People say "deflation is bad", but can't explain basically a century under the most amazing economic growth of history.
>the American industrial revolution happened during a period without central banks and their "flexibility.
Before the great depression and the federal reserve, weren't there financial crises/panics over and over? I'm not real familiar with 19th century history, but obviously there was a reason we set up all those institutions and laws in the 30s, because the way things worked had become untenable.
Edit:
"Between 1863 and 1913, eight banking panics occurred in the money center of Manhattan. The panics in 1884, 1890, 1899, 1901, and 1908 were confined to New York and nearby cities and states. The panics in 1873, 1893, and 1907 spread throughout the nation. Regional panics also struck the midwestern states of Illinois, Minnesota, and Wisconsin in 1896; the mid-Atlantic states of Pennsylvania and Maryland in 1903; and Chicago in 1905."
"The Panic of 1873 was blamed for setting off the economic depression that lasted from 1873 to 1879. This period was called the Great Depression, until the even greater depression of 1893 received that label, which it held until the even greater contraction in the 1930s -- now known as the Great Depression."
> Before the great depression and the federal reserve, weren't there financial crises/panics over and over?
They were tiny, and they were mild by comparison.
Even with the Fed, not exercising "flexibility" has been a better option. In 1920, the Dow dropped 47%, deflation hit with prices dropping 20%, wholesale prices dropped 37%, and unemployment went over 10%. Neither the Federal Reserve nor the federal government did anything.
You have never heard of this intense deflationary depression because it didn't last for 11 years. It lasted for 18 months.
Edit: > but obviously there was a reason we set up all those institutions and laws in the 30s, because the way things worked had become untenable.
There does not. Poorly run institutions are a staple of the Modern Era. The reason the Fed was set up was because it aligned with the philosophy of central control within the progressive movement. Until Wilson, no presidency had ever been called an "administration." (For an unbelievably sad look at that former president, look at his favorite book called Philip Dru: Administrator.)
>They were tiny, and they were mild by comparison.
As I quoted in my other comment, there was a "great depression" and then another, and then the third, which is what we now know by that name. That seems to be the establishment view of history.
> I would like to point out that the American industrial revolution happened during a period without central banks and their "flexibility."
The Second Industrial Revolution (which wasn’t specifically American, though America participated) did not occur before central banking existed in areas overlapping those where it happened, though it was neither universal nor associated with either the economic policy mandates of modern central banks or the key tools modern central banks use. But that started changing not too far into the Second Industrial Revolution, in part because of the Long Depression which it led head-first into.
The division between the Industrial Revolution and the Second Industrial Revolution is a silly one in my opinion. The late 19th century is what I'm referring to, and it's the one with the most substantial economic growth.
We had 70+ years with no central bank whatsoever (and over 120 with a weakened bank on the gold standard). From that point until 1913, we saw the telegraph, telephones, railroads, mass industrial manufacturing, electricity, radio, airplanes, and cars. Most of these innovations were adopted most aggressively in the U.S., despite not all being invented in the U.S.. Even with railroad booms and busts and routine recessions, nothing remotely close to the Great Depression happened.
Once again, there was 4% compounded growth a year for a century, and without the advantage of "leapfrogging" legacy technology.
> The division between the Industrial Revolution and the Second Industrial Revolution is a silly one in my opinion. The late 19th century is what I'm referring to, and it's the one with the most substantial economic growth.
The late 19th Century one was the Second Industrial Revolution, which led directly and fairly immediately into the late 19th Century Long Depression; the First Industrial Revolution was late 18th to early 19th Century (usually timed from about 1760), and since you are clearly specifically talking about the Second and not the First, it's odd that you say that you find the distinction silly.
> We had 70+ years with no central bank whatsoever
1870 (the generally accepted date for the start of the Second Industrial Revolution) to 1913 is only 43 years, and about half of those were the Long Depression.
The mining curve obviously makes BTC not just, as it enormously promotes early adopters. BTC has made a lot of people tremendously wealthy by doing nothing other than early adopting BTC. This is even worse than capitalism, IMO. Wealth isn't tied to productivity in general , but a very very specifically time boxed productivity that doesn't lead to any improvement in the state of the world except that BTC is promoted.
If you live in a democracy, you've got some say in the financial policy and the nature of the financial system. With BTC, it is controlled 100% by the core devs and the miners. Mining is "democratic" in the sense that anybody can do it but it takes money to mine. This is worse than what we see in many democratic nations where wealth creates political power. At least I have a tiny amount of political power rather than literally zero.
>The mining curve obviously makes BTC not just, as it enormously promotes early adopters.
You know the rules beforehand though. Nobody comes in later and changes them, whereas with fiat money this happens all the time.
>If you live in a democracy, you've got some say in the financial policy and the nature of the financial system. With BTC, it is controlled 100% by the core devs and the miners. Mining is "democratic" in the sense that anybody can do it but it takes money to mine. This is worse than what we see in many democratic nations where wealth creates political power. At least I have a tiny amount of political power rather than literally zero.
But it's not literally zero. The same political power that you have over your country's government is the same political power you would have (or perhaps slightly less) over BTC or some equivalent. The government can always regulate something like BTC. It would make the situation more like fiat money, but the possibility is there.
People learn the wrong lesson from Germany and Zimbabwe. In both cases economic disruption was the problem -- war reparations in the case of Germany, agricultural collapse in the case of Zimbabwe. Hyperinflation was the response of the government, trying to inflate its way out of debts.
It didn't work, but it wouldn't have helped to end the policy, either. The fundamental cause of the economic collapse would still have meant that the supply was weak and demand was inelastic. The zeroes in the currency are just there to make it look scary, but the real problem was much scarier.
The amount of money is largely immaterial. You can go out and add three zeroes to every dollar in every pocket and nothing changes. Governments can do it selectively to nudge the economy one way or the other, and it works pretty well. That's really just the same as borrowing money, and nobody blinks an eye at fractional reserve banking, even though it also causes inflation in exactly the same way.
Hyper-inflation is a permanent boogeyman, but it's not the real problem and people keep taking the wrong lessons. The lesson is to keep people producing, which governments can help by selectively boosting parts of the economy with monetary policy. Learning the right kind of policy is far more involved, but far more useful, than just repeating "Oh no Weimar and Zimbabwe".
This is true! But there are quite a few other projects in the “defi” space (defi meaning decentralized finance, although I’m not convinced that it needs to stay fully decentralized to be useful). Perhaps the invention of smart contracts will be as revolutionary as the introduction of double entry bookkeeping in Italy, the maturation of insurance markets in London, or the invention of the modern corporation in the Netherlands.
20 comments
[ 2.5 ms ] story [ 62.9 ms ] threadThe author doesn't go on say bitcoin has no value, or no place in the broader financial system. The author makes clear bitcoin won't usurp banks. Which is a very believable point to accept.
Ultimately, banks and fractional lending have the upper hand because we collectively believe the outcome is better: higher growth, stable employment, etc. If regulators egregiously fail to deliver these benefits in the future, there's a potential successor waiting in standby. And 10 to 15 years ago, we didn't have that.
Overall, crypto is good in ensuring existing actors fulfill the functions they've promised and are obligated to do.
“ Banks create money out of nothing. Where does the real wealth in the economy lie?
It’s easiest to see when people get it badly wrong Weimar Germany and Zimbabwe had created far too much money compared to the goods and services available within the economy causing hyper-inflation. States can just create money, and the last thing you want is too much of the damn stuff in your economy. They had made so much money it lost nearly all its value, and they needed wheelbarrows of the stuff to buy anything.
States can create money out of nothing as well. You need the right amount of money in the economy for the goods and services available within that economy. The real wealth lies in the good and services available with the economy and is measured by GDP.
Central bankers actually look at the money supply, and expect it to rise in line with the new goods and services in the economy, as it grows. More goods and services in the economy require more money in the economy. This is the problem with gold and Bitcoin, they are not really flexible enough.”
I won't agree or disagree with this as it pertains to today. That said, I would like to point out that the American industrial revolution happened during a period without central banks and their "flexibility."
That particular economic revolution makes anything in the 20th century or beyond look quaint in comparison. >4% a year real GDP growth for a century, CPI deflation. A dollar in 1900 bought more than it did in 1800.
https://en.m.wikipedia.org/wiki/First_Bank_of_the_United_Sta...
Jefferson did not change Hamilton's basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20-year charter.
https://en.m.wikipedia.org/wiki/Second_Bank_of_the_United_St...
...which expired. And then we had the greatest boom in global history.
I'm aware of the intermittent nature of the banks (as well as all the central banks that failed under the Articles of Confederation). The point is we had a situation where the money supply was basically fixed under a very imperfect gold standard. People say "deflation is bad", but can't explain basically a century under the most amazing economic growth of history.
Before the great depression and the federal reserve, weren't there financial crises/panics over and over? I'm not real familiar with 19th century history, but obviously there was a reason we set up all those institutions and laws in the 30s, because the way things worked had become untenable.
Edit: "Between 1863 and 1913, eight banking panics occurred in the money center of Manhattan. The panics in 1884, 1890, 1899, 1901, and 1908 were confined to New York and nearby cities and states. The panics in 1873, 1893, and 1907 spread throughout the nation. Regional panics also struck the midwestern states of Illinois, Minnesota, and Wisconsin in 1896; the mid-Atlantic states of Pennsylvania and Maryland in 1903; and Chicago in 1905."
https://www.federalreservehistory.org/essays/banking-panics-...
They were tiny, and they were mild by comparison.
Even with the Fed, not exercising "flexibility" has been a better option. In 1920, the Dow dropped 47%, deflation hit with prices dropping 20%, wholesale prices dropped 37%, and unemployment went over 10%. Neither the Federal Reserve nor the federal government did anything.
You have never heard of this intense deflationary depression because it didn't last for 11 years. It lasted for 18 months.
Edit: > but obviously there was a reason we set up all those institutions and laws in the 30s, because the way things worked had become untenable.
There does not. Poorly run institutions are a staple of the Modern Era. The reason the Fed was set up was because it aligned with the philosophy of central control within the progressive movement. Until Wilson, no presidency had ever been called an "administration." (For an unbelievably sad look at that former president, look at his favorite book called Philip Dru: Administrator.)
As I quoted in my other comment, there was a "great depression" and then another, and then the third, which is what we now know by that name. That seems to be the establishment view of history.
The Second Industrial Revolution (which wasn’t specifically American, though America participated) did not occur before central banking existed in areas overlapping those where it happened, though it was neither universal nor associated with either the economic policy mandates of modern central banks or the key tools modern central banks use. But that started changing not too far into the Second Industrial Revolution, in part because of the Long Depression which it led head-first into.
We had 70+ years with no central bank whatsoever (and over 120 with a weakened bank on the gold standard). From that point until 1913, we saw the telegraph, telephones, railroads, mass industrial manufacturing, electricity, radio, airplanes, and cars. Most of these innovations were adopted most aggressively in the U.S., despite not all being invented in the U.S.. Even with railroad booms and busts and routine recessions, nothing remotely close to the Great Depression happened.
Once again, there was 4% compounded growth a year for a century, and without the advantage of "leapfrogging" legacy technology.
The late 19th Century one was the Second Industrial Revolution, which led directly and fairly immediately into the late 19th Century Long Depression; the First Industrial Revolution was late 18th to early 19th Century (usually timed from about 1760), and since you are clearly specifically talking about the Second and not the First, it's odd that you say that you find the distinction silly.
> We had 70+ years with no central bank whatsoever
1870 (the generally accepted date for the start of the Second Industrial Revolution) to 1913 is only 43 years, and about half of those were the Long Depression.
The mining curve obviously makes BTC not just, as it enormously promotes early adopters. BTC has made a lot of people tremendously wealthy by doing nothing other than early adopting BTC. This is even worse than capitalism, IMO. Wealth isn't tied to productivity in general , but a very very specifically time boxed productivity that doesn't lead to any improvement in the state of the world except that BTC is promoted.
If you live in a democracy, you've got some say in the financial policy and the nature of the financial system. With BTC, it is controlled 100% by the core devs and the miners. Mining is "democratic" in the sense that anybody can do it but it takes money to mine. This is worse than what we see in many democratic nations where wealth creates political power. At least I have a tiny amount of political power rather than literally zero.
You know the rules beforehand though. Nobody comes in later and changes them, whereas with fiat money this happens all the time.
>If you live in a democracy, you've got some say in the financial policy and the nature of the financial system. With BTC, it is controlled 100% by the core devs and the miners. Mining is "democratic" in the sense that anybody can do it but it takes money to mine. This is worse than what we see in many democratic nations where wealth creates political power. At least I have a tiny amount of political power rather than literally zero.
But it's not literally zero. The same political power that you have over your country's government is the same political power you would have (or perhaps slightly less) over BTC or some equivalent. The government can always regulate something like BTC. It would make the situation more like fiat money, but the possibility is there.
It didn't work, but it wouldn't have helped to end the policy, either. The fundamental cause of the economic collapse would still have meant that the supply was weak and demand was inelastic. The zeroes in the currency are just there to make it look scary, but the real problem was much scarier.
The amount of money is largely immaterial. You can go out and add three zeroes to every dollar in every pocket and nothing changes. Governments can do it selectively to nudge the economy one way or the other, and it works pretty well. That's really just the same as borrowing money, and nobody blinks an eye at fractional reserve banking, even though it also causes inflation in exactly the same way.
Hyper-inflation is a permanent boogeyman, but it's not the real problem and people keep taking the wrong lessons. The lesson is to keep people producing, which governments can help by selectively boosting parts of the economy with monetary policy. Learning the right kind of policy is far more involved, but far more useful, than just repeating "Oh no Weimar and Zimbabwe".