net.wars: Bits of the realm
by Wendy M Grossman | posted on 26 June 2011
Money is a collective hallucination. Or, more correctly, money is an abstraction that allows us to exchange - for example – writing words for food, heat, or a place to live. Money means the owner of the local grocery store doesn't have to decide how many pounds of flour and Serrano ham 1,000 words are worth, and I don't have to argue copyright terms while paying my mortgage.
But, as I was reading lately in The Coming Collapse of the Dollar and How to Profit From It by James Turk, the owner of GoldMoney, that's all today's currencies are: abstractions. Fiat currencies. The real thing disappeared when we left the gold standard in 1972. Accordingly none of the currencies I regularly deal with – pounds, dollars, euros – are backed by anything more than their respective governments' "full faith and credit". Is this like Tinker Bell? If I stop believing will they cease to exist? Certainly some people think so, and that's why, as James Surowiecki wrote in The New Yorker in 2004, some people believe that gold is the One True Currency.
"I've never bought gold," my father said in the late 1970s. "When it's low, it's too expensive. When it's high, I wish I'd bought it when it was low." Gold was then working its way up to its 1980 high of $850 an ounce. Until 2004 it did nothing but decline. Yesterday, it closed at $1518.
That's if you view the world from the vantage point of the dollar. If gold is your sun and other currencies revolve around it like imaginary moths, nothing's happened. An ounce just buys a lot more dollars now than it did and someday will be tradable for wagonloads of massively devalued fiat currencies. You don't buy gold; you convert your worthless promises into real stored value.
Personally, I've never seen the point of gold. It has relatively few real-world uses. You can't eat it, wear it, or burn it for heat and light. But it does have the useful quality of being a real thing, and when you could swap dollars for gold held in the US government's vault, dollars, too, were real things.
The difficulty with Bitcoins is that they have neither physical reality nor a long history (even if that history is one of increasing abstraction). Using them requires people to make the jump from the national currency they know straight into bits of code backed by a bunch of mathematics they don't understand.
Alternative currencies have been growing for some time now – probably the first was Ithaca Hours, which are accepted by many downtown merchants in my old home town of Ithaca, NY. What gives Ithaca Hours their value is that you trade them with people you know and can trust to support the local economy. Bitcoins up-end that: you trade them with strangers who can't find out who you are. The big advantage, as Bitcoin Consultancy co-founder Amir Taaki explains on Slashdot, is that their transaction costs are very, very low.
The idea of cryptographic cash is not new, though the peer-to-peer implementation is. Anonymous digital cash was first mooted by David Chaum in the 1980s; his company Digicash, began life in 1990 and by 1993 had launched ecash. At the time, it was widely believed that electronic money was an inevitable development. And so it likely is, especially if you believe e-money specialist Dave Birch, who would like nothing more than to see physical cash die a painful death
But the successful electronic transaction systems are those that build on existing currencies and structures. Paypal, founded in 1998, achieved its success by enabling online use of existing bank accounts and credit cards. M-pesa and other world-changing mobile phone schemes are enabling safe and instant transactions to the developing world. Meanwhile, Digicash went bankrupt in 1999 and every other digital cash attempt of the 1990s also failed.
For comparison, ten-year-old GoldMoney's latest report says it's holding $1.9 billion in precious metals and currencies for its customers – still tiny by global standards. The most interesting thing about GoldMoney, however, is not the gold bug aspect but its reinvention of gold as electronic currency: you can pay other GoldMoney customers in electronic shavings of gold (minimum one-tenth of a gram) at a fraction of international banking costs.
"Humans will trade anything," writes Danny O'Brien in his excellent discussion of Bitcoins. Sure: we trade favors, baseball cards, frequent flyer miles, and information. But Birch is not optimistic about Bitcoin's long-term chances, and neither am I, though for different reasons. I believe that people are very conservative about what they will take in trade for the money they've worked hard to earn. Warren Buffett and his mentor, Benjamin Graham, typically offer this advice about investing: don't buy things you don't understand. By that rule, Bitcoins fail. Geeks are falling on them like any exciting, new start-up, but I'll guess that most people would rather bet on horses than take Bitcoins. There's a limit to how abstract we like our money to be.
Wendy M. Grossman’s Web site has an extensive archive of her books, articles, and music, and an archive of all the earlier columns in this series. Readers are welcome to post here, at net.wars home, follow on Twitter or send email to netwars(at) skeptic.demon.co.uk (but please turn off HTML).