Summary of this article:
We talk about the history of currencies similar to bitcoin, which were all flops eventually, but in some cases lasted almost 20 years before dying.
We also explain why bitcoin has never been used as a medium of exchange, not even once, despite the existence of mtgox and all the other bitcoin hangouts.
And now, on with the show:
In part one, we explained how Mises, in a brilliant analysis, proved that bitcoin could never have its first use as a medium of exchange. We ended with a cliffhanger, with our imaginary pal Devil’s Advocate pointing out that bitcoin has already been used as a medium of exchange many times. Thus, he claimed, bitcoin has disproven empirically Mises’ Theorem. We promised to reply to him in this article.
1. So let’s get right to it in a roundabout way and tell a little story about the Ithaca Hour. The Ithaca Hour is a funny name for pieces of paper that say “One Ithaca Hour” on them. They were apparently used as money on a very small time basis. You will remember that in part one we claimed that the first use of a piece of paper with no intrinsic value will never actually happen, by Mises Regression Theorem. Certainly that useless paper will not be able to buy $10 worth of stuff.
And yet from 1991 until 2009, it was used as money for some transactions. Then, with no warning at all, in 2011, it collapsed. Your Ithaca Hour is now worthless. What happened was that there was a guy there who tirelessly pumped Ithaca Hours, and he left town. As soon as he did, death stuck the Hour:
When Glover left town, the alternative currency has gradually lost momentum. Ithaca Hours were especially hard hit when paper currency took a back seat to electronic banking. As the once abundant directory weaned, those businesses that still accepted Hours couldn’t sustain a healthy flow. They received far more than they could distribute, so they accumulated backlogs until, as Greenstar Finance manager Asha Sanaker described it, they were “drowning in Hours.”
Of course the problem existed before then as well:
In past years, Glover played the role of troubleshooter. “I knew where the money had gotten piled up, and I would go to those businesses, and sit down with them and review the ways they could spend Hours,” he said.
And this collapse has happened, without exception, to every currency with no intrinsic value. There are BerkShares, where we have a quote from someone who learned the hard way:
“The promise of this program is for it to be a completed circle,” said Matt Rubiner, owner of Rubiner’s cheese shop and Rubi’s cafe. Some local farmers who supply him accept BerkShares, but he pays most of his bills in dollars.
“The circle isn’t quite completed yet in most cases, and someone has to take the hit,” Rubiner said, referring to the 10 percent discount. “The person who takes the hit is the merchant, it’s me.”
One naive person speaks freely, and thus provides us the answer to the question “What Were They Thinking”:
That’s why Allentown resident Paul Marin, who works in the financial industry, is among those interested in forming a local currency. He said a local currency provides a safety net for those who lose their jobs and for everyone if the U.S. dollar becomes devalued.
”At the very least, this is worth exploring,” Marin said. ”If money is based on trust and confidence, why not look at it on a local level?”
Sorry, Mr Marin. Money is based on intrinsic value, not trust and confidence.
Nor is this merely a twentieth century phenomenon:
”There was a bank at Seventh and Hamilton in Allentown called the Northampton Bank, and from 1814 to 1843, they issued their own bank notes,” Whelan said.
The bank went bust, its notes became worthless and a mob chased bank owner John Rice out of town.
Of course, the bitcoin creator learned from this sad tale, and insists on anonymity.
Here are a few more tales of woe:
Not everyone sees the point of made-up money in the modern world. Local currencies have closed or gone dormant in California, Florida and Kansas in recent years. Forty miles away from Burlington, in Montpelier, Vt., supporters of Green Mountain Hours couldn’t sign on enough businesses to make the program work…
In progressive but cynical Brooklyn, N.Y., Brooklyn Greenbacks circulated for five years before petering out in 2001.
What is the point of all these sad stories of monies, that just like bitcoin, were based on nothing? That there is a sucker born every minute. A good con man can keep his phony money alive for almost twenty years, if he can go door to door on his bicycle pushing it.
Do all these tales of fools and swindlers refute the regression theorem? Of course not. Con men and their dupes are just noise that are irrelevant to the discussion. Eventually the fools wise up, learning the hard way. The longest lasting scam, one that required tireless daily efforts by the scammer to keep it going, was the Ithaca Hour. It lasted 18 years. When it was over, the idiots who believed in the Hour were left “drowning” in them.
Although 3 short years ago, the Hour was still thriving, nowadays people are ashamed to mention it. It’s like mass amnesia hit the place. Gentlemen, I give you the future of bitcoins.
Now people have argued that bitcoin is different from all those benighted currencies, it is so hip and modern and cool, James Bond would love it etc. Guys, you have to dig deeper. Bitcoin has a feature in common with all those monies, no intrinsic value. Mises claims that no intrinsic value = doom. All the other currencies died pretty quickly [yes, 18 years is quick when we talk about money], just as Mises predicted. Makes you think twice about bitcoin’s chances of making it long term, no?
2. Oh, and one last thing, and a very important one. All the buying and selling of bitcoins for dollars or pesos or other currencies over at mtgox.com and other places are not, repeat not, transactions where bitcoins are media of exchange. Only instances where a person sells his apples in exchange for a bitcoin, and then buys oranges with the bitcoins, count as bitcoin being a medium of exchange. [Look this up if you don't believe me].
I will take an educated guess and say that those events are extremely rare. I will go so far as to say they never happen. I think that everyone who sold something and accepted bitcoin in payment then went right ahead and redeemed them for dollars.
If you look at the online catalogue of things for sale with bitcoin an acceptable payment, they are mostly useless knick knacks that the seller was unable to unload for dollars, so he figured maybe someone is stuck with a few bitcoins and the seller will be able to palm it off on him. The useless being traded for the useless. But as soon as the seller gets those bitcoins, he is going to cash out. He is not going to wait around until he needs somebody elses useless garbage on sale for bitcoins.
In fact, now I think about it, I am positive that nobody ever got up in the morning and said, “I have some apples to sell, and I want to trade them for oranges and and beer and diapers for my little tyke. What’s the most convenient way to do that? I know, I will look around for someone who will give bitcoins for my apples. Then I will look around for someone who will trade in my new bitcoins in exchange for apples, someone else who will give me beer, and a third person who will give me diapers.”
I can say with utmost confidence that such a thing never happened. But people say that every single day with dollars. That’s why dollars satisfy the definition of medium of exchange, and bitcoins do not.
Afterword: When I linked to this at reddit, someone said he sold weed for bitcoin, and used the bitcoin to buy seeds to plant more weed. I don’t know how true this is. Why can’t he use the seeds from his own plantings? But hey, let’s give it the benefit of the doubt, and say it did happen. The catch is, most things traded on the Silk Road website are priced in dollars. If the price of bitcoin changes with respect to dollars, the trade is done with a different amount of bitcoins. This hsows that the real trade is in dollars, with bitcoin only serving as an envelope, as it were, for the real money, dollars. So once again, bitcoin has yet to be used, even once, as a medium of exchange.
Even if we grant that bitcoin has been used as a medium of exchange a handful of times, it changes nothing. Those handful of deals are still not enough to give it the title Medium of Exchange, even if it was used technically a few times in a few isolated transactions.
It is still not a medium of exchange even for the drug dealer, because he still cannot and does not use it for 99% of his interactions. Even drug dealers eat real food, and cannot pay for it in bitcoin. Even drug dealers pay the rent, and do not do it in bitcoin.
Let’s remember, the Ithaca Hour and all those other phony moneys were media of exchange for a little while, until they collapsed to zero.