Over at the mises.org forum, there is a lot of confusion concerning bitcoin, Mises Regression Theorem, and the numbers involved in these topics.

First question. What is a medium of exchange. If Mr A and Mr B use playing cards as their money, meaning that they buy and sell things to each other and accept payment in playing cards [which they don't intend to play card games with, but to use as money at a later date with each other], but nobody else does, does that make playing cards a medium of exchange?

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange for in those transactions in which it was not used.

Why is this important? Because when people talk about something being a medium of exchange, they don’t mean it was used once. They mean it is used often. You’ll find some bitcoiners saying that bitcoin is a medium of exchange because it was used once. Some go so far as to say it is a money because it was used once. Don’t let them fool you.

OK, so far so good. Now let’s take a look at Mises’ Regression Theorem. He writes:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

1. This is a very important quote. I would like to deduce something very important about the regression theorem from it. There are those who claim that the Regression Theorem is talking about a barter economy that changes into a money economy. Only for the first money in a barter economy does it apply, they think. But once we are in a money economy, where barter is a thing of the past, then the regression theorem no longer applies, and a second money does not have to start off having intrinsic value to ever make it as a money.

This is clearly absurd, because how will these people answer Mises’ question about the circular reasoning involving demand for money and value of money, each one requiring it’s mate to precede it? But in addition, the text we just quoted shows he was not confining himself to a barter economy transitioning into a money economy. Let’s quote in bold the part that shows these people wrong:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

He’s talking about a particular good, as the emphasized phrases show. Not about how any good becomes a medium of exchange in a barter economy. In other words, he’s not asking how did money begin, but how did a particular good become money. That question can be asked even in an economy which already uses, say, silver as money, and then gold becomes money, too. He is asking how did the gold become money.

2. Mises writes very clearly, and of course there is no other possibility [proof: find one], that the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object. After all, there is no monetary demand right now. Nobody has ever used it as a money before. Just like everything else in the world, the price of something is determined by supply and demand. Since non monetary demand is the only thing that exists at this stage, at the very first time a bitcoin or a gold coin is about to be used as a medium of exchange, there has to be enough non monetary demand for the thing to be worth something. Maybe the demand will make it be worth a penny, maybe a tenth of a penny, but it has to be something. Because if the demand is so lame that nobody is willing to pay anything for gold or for a bitcoin, then it will not be accepted as money that very first time, will it?

OK, on to Economics 101. This is the kind of thing you have to know before dipping your toes in the deep waters of bitcoin theory. What determines the demand for something? What makes demand so great that it makes the market price of the thing demanded rise up from zero?

The answer, of course, is that it depends on how many people find the thing useful. If very few people have a use for it, then the demand will be lame and the market price will be zero. Thus Timothy Terrel was merely stating the obvious when he wrote that in order for something to be used as a medium of exchange the very first time, it must have a large non monetary demand:

money must arise from a commodity already in general [non- monetary] use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange.

OK, on to bitcoin. What non- monetary use is there for a bitcoin? None. What can I do with the fact that my computer has stored deep in its innards the assertion that I am the proud possessor of a bitcoin if I cannot spend that bitcoin? Nothing.

OK, Watson, from here it’s easy. It has no use, therefore it has no demand, therefore the price people will pay for ownership of it, considering only its non monetary use, is zero. Ergo, it cannot be a medium of exchange the first time. Therefore there will never be a first time. Therefore it will never be a medium of exchange, and certainly never a money, at all.

At this point Devil’s Advocate jumps out of his seat. We give him the floor.

DA: Smiling Dave, that sounds very nice on paper, but the reality is that bitcoin has been used many thousands of times as a medium of exchange. So many beers, so many pizzas, so many trinkets of marginal use have been bought with it, that the first time is by now in the way distant past. How can you say there never will be a first time, when we are already in the thousandth time?

SD: Advocate, what would this humble blog do without you? You ask a deep question here, but the hour is getting late. Keep your eyes peeled for the next humble article, which will answer thy questions.

DA: Yeah, right.

SD: Ha! Here it is:

https://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game-part-2-in-which-we-shew-that-bitcoin-has-never-not-even-once-been-used-as-a-medium-of-exchange/

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