The quote:
fiat currencies have underlying value because men with guns say they do.
Don’t peek at the answer, which is below the fold.
Hint 1: You may have read the essay by following a link from Marginal Revolution (but I came across the essay earlier from a different link).
Hint 2: I find much to agree with in the essay.
The writer is not otherwise known for libertarian dog-whistling.
Even I agree with his politics, I sometimes wish he stayed more in the economics lane because he is a greater writer of it. And this article is a great example although I think he is underestimating the value of these currencies:
1) I think the big movement to Bitcoin was Chinese users so there is more interest in big financial transaction without the government knowledge (or better yet it adds a couple steps for the governments to find.) I think the West is most Ayn Rand fantastics but there is more incentive in China, Russia, Middle East, Africa or South America. And a lot of Bitcoin money is the Get Outta Dodge money for well off people in case the worst happens.
2) Look at the Manafort trial. Many of Manafort money laundering crimes are stuff that libertarians don’t agree with crimes. They want to stick to the man with these currencies. Or look at Dennis Hashert. Large cash transactions are getting harder to make and not get possibly caught.
3) In terms of the banks and large financial institutions, how many of them avoid large cash transaction to any extent. In this case, these institutions are doing the government’s work in controlling crime.
4) Judging by the Manafort trial, the government really does not like to prosecute these cases. (And just if Trump lost I bet Manafort is not on trial.)
(Note I think a lot of this move away from cash is one reason crime has diminished so much the last generation. It is simply not profitable as it once was as how many people carry more than a $20?)
PK has a point. The relevant question, however, is why today our systems of payments rely heavily on debit orders to our demand deposits. How do you think people will react if tomorrow the government dictates that demand deposits are no longer converted into currency? Do you remember El Corralito (in Argentina, December 2001)?
EB:
To answer the first question in your comment, I’m pretty sure that, in the hypothetical case you propose, by the day-after-tomorrow the “people” of the U.S. would get themselves a brand-spanking shiny new government.
This isn’t Argentina, much to the dismay of folks like Krugman and his ilk. As to his reference to “…men with guns …”, he’s essentially correct. But I’m pretty sure Argentina doesn’t have a 2nd Amendment. And the “government” is not the only armed OR empowered entity here. Again, probably much to the dismay of folks like Krugman.
That essay is one of the better pro-crypto pieces I have read recently.
To be a little less smarmy I will say why: the author tried to ask why one would use crypto, but he actually asked why one would use USD. His answer is that you should USD because is a medium of state control. He goes on to say that in foreign places serious criminals use it without hinderence.
I expect more from the pro-fiat crowd.
The concern about cryptocurrencies being used by criminals is a red herring. Criminal activity didn’t start the day Bitcoin began….criminals have used several paper currencies over the years, and the most popular is…..$…yes US paper money. No one says that we should stop using dollars because hundreds of billions of dollars worth of transactions happen illegally each year. Yet, this is always trotted out by people criticizing cryptos.
I don’t buy it for a second.
A second bit criticism is that cryptocurrencies are not an improvement on the US dollar. Well…take a look at where they are principally used: during monetary crises in many countries abroad…such as Cyprus, China, Venezuela to name some. But the biggest use of Bitcoin, for instance, is Japan, where over half of all usage resides.
Right at the moment, people have no reason to worry while using dollars. But over the last 10 years, there have been plenty of instances where local currencies have been in serious trouble (look at contemporary Turkey). That is where Bitcoin will thrive…until Bitcoin usage surpasses 1 to 5 trillion dollars and then you will see widespread usage.
One more thing. People criticize the 10 or so minute delay in the settling of the cryptocurrency transactions. Plus the costs of transactions.
No one mentions that credit card usage involves substantial (1% – 3%) costs for merchants. And they are perfectly willing, if not happy, to wait as much as three to four days to get their money and settlements. (I ran a retail business with my wife for 22 years – I know what the costs and delays are.)
Bitcoin is a huge improvement over credit cards…which make up the vast majority of retail transactions today. No discussion should neglect the mention of credit cards.
Before I looked I guessed an MMTer like Simon Wren-Lewis. I agree with Paul Krugman that this is not a problem but I think competitive private currencies would be more stable. The problem that I see is people in developed countries trust Government currency to much and so horde it in a down turn exacerbating the problem, making it so when one bank fails rather than strengthening competing banks it weakens them.
I also think the USA and the EU are too big to each have a single currency. That is because mismanagement buy a single central bank, like in 2008 can significantly hurt the world economy too much.
Thieves target the weakest point of entry, no matter the type of currency, in this cryptocurrency theft case by the infamous “Florida Man,” the phone SIM card.
https://krebsonsecurity.com/2018/08/florida-man-arrested-in-sim-swap-conspiracy/
I’m not sure I agree with that specific part of the essay. (I agree with most of the points on cryptocurrencies, though.)
But pretty much everything Krugman says about dollars (can be used to pay tax liabilities, men with guns) applies to the Venezuela bolivar. And yet the bolivars value was a bubble that collapsed when people lose faith, despite the insistence of value by men with guns.
This exact thought immediately sprang into my head when I read the men with guns line.
I suppose one might respond by saying that Venezuela’s problem is that there are no real underlying economic resources for the men with guns to seize. But, then again, by the time men with guns seizing taxes becomes explicit rather than tacit, you will probably cease to have an economic base worth seizing.
My hunch is crypto-currency will fail. Perhaps on itw own, perhaps due to governments shutting it down. But, it also wouldn’t shock me if becomes successful.
To be fair – Paul Krugman has been saying that for years.
I can’t believe PK mentioned some uses of Bitcoin (even if they are overstated) and then said Bitcoin have no tethering to the real economy.
That said, he’s totally right about the transaction costs. The moment we have a cryptocurrency that can have 1) easy and anonymous way of getting it 2) microtransactions in seconds. That moment we will have a real winner. That’s solving an actual problem.
I think the article is definitely correct that cryptocurrency was oversold as a new medium for doing transactions.
It seems to have little opportunity for making headway in that area, especially in the developed world.
However, blockchain looks like it still has intriguing possibilities in other domains, especially governance.
It seems that there could be a lot of potential for untapped forms of social organization that could never take place because the administrative infrastructure wasn’t there to support it.
But given the way things are going, it looks like it will take a long time for these changes to materialize, similar to how it took electricity 50-60 years to make its way into the energy grid, or the internet 30-40 years to make its way into everyday commercial use.
Sounds like a paraphrase of Uriel Weinreich. Weinreich gave a lecture once discussing (among other things) whether Yiddish was a “language” or a “dialect”, and what the difference is. A man came up to Weinreich after the lecture and offered to give him a precise and concise definition: “A language is a dialect with an army and a navy”.
To answer his question – two things, trust and anonymity.
Who do you trust more, your central bank (government) or the algorithm embedded it the cryptocurrency? For many in the world it is not the central bank.
Second, where do you have the best chance of remaining anonymous when engaging in transactions? Increasingly it is not by using fiat currency.
So yes, there is a need for alternatives to fiat currency.