Recently, there has been a rising wave of interest in a new Internet-based currency called bitcoins. In one sense, bitcoins are the latest attempt to improve capitalism through monetary reform. But unlike other monetary reform schemes, bitcoins are very 21st century, based as they are on modern computer technology and the Internet.

According to Wikipedia: “Bitcoin (BTC) is a cryptocurrency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.”

A short history of monetary reform before the Internet

One monetary reform that was popular among small farmers and small businesspeople in the late 19th-century U.S. was bimetallism. The bimetallists proposed that the U.S. dollar be defined in terms not only of gold but also of silver, at a fixed ratio of 16 to 1. Under this proposed reform, the silver dollar coin would weigh 16 times as much as the gold dollar coin.

The supporters of bimetallism argued that this would, by sharply increasing the money supply, increase demand and thereby raise the prices of agricultural commodities. The increased demand would, the supporters of bimetallism argued, put unemployed workers back to work. In this way, the bimetallists hoped to unite the interests of workers, small farmers and small businesspeople against the rising power of the Wall Street banks.

A basic flaw in this proposal was that while at one time the ratio of 16 to 1 more or less reflected the actual relative labor values of gold and silver bullion, by the late 19th century the value of silver was falling sharply relative to the value of gold. Given a choice of using either silver or gold coins at this ratio, people would have chosen to pay off their debts in cheap silver—which is why bimetallism was so popular among highly indebted small farmers and businesspeople—while using the cheap silver dollars to purchase and hoard the more valuable gold dollars. This effect is known as “Gresham’s Law,” named after the early British economist Sir Thomas Gresham (1519-1579).

Under Gresham’s Law, cheap silver dollars would have driven gold dollars out of circulation, leaving the silver dollar as the standard dollar. This would have had the effect of devaluing the U.S. dollar from the value of the gold dollar down to the value of the silver dollar. Fearing that supporters of bimetallism would win the upper hand in the U.S. government during the 1890s, foreign capitalist investors began to cash in their U.S. dollars for gold, leading to a series of runs on the U.S. Treasury’s gold reserve as well as the gold reserves of U.S. commercial banks.

A wave of bank runs and an associated stock market crash that occurred in the northern hemisphere spring of 1893 has gone down in history as the “panic of 1893.” This panic was followed by a prolonged period of depression, mass unemployment and plunging commodity prices. This was the exact opposite of what supporters of bimetallism desired.

A much more radical monetary reform proposal, called labor money, was popular among some socialist critics of capitalism in mid-19th century Europe. (1) The proposed reform was to replace gold and silver commodity money with money that would represent labor value directly rather than indirectly as is the case with a money commodity. Under this proposal, workers would perform a certain amount of work and then exchange the product of their labor at a “labor bank” for a certificate that would state that they had performed X hours of labor. The certificate would then be “cashed in” at the labor bank for other products that represented exactly the same quantity of labor. The advocates of labor money claimed that it would abolish capitalist exploitation while retaining a market economy.

These pre-Marxist socialist advocates of labor money believed, in contrast to Marx, that capitalist exploitation was based on unequal exchange. That is, they believed the only reason that a class of non-workers living off rent, interest or profit could exist was that Ricardo’s law of the exchange of equal quantities of labor was being violated in practice. (2) These monetary reformers believed that if labor money was adopted, Ricardo’s law of the exchange of equal quantities of labor would be put into effect rendering the existence of an exploiting class of non-workers impossible.

This last point was rendered moot when Karl Marx demonstrated starting in the late 1850s that surplus value arises on the basis of exchange of equal quantities of labor, and not through the violation of the Ricardian law of equal exchange as earlier socialists believed. Marx did this through his distinction between labor power—the ability to work—and labor itself.

Workers sell their labor power to the capitalists at its value. The capitalists then consume the labor power they have purchased from the workers by forcing the workers to perform more labor measured in terms of time than it took to produce the workers’ ability to work. The difference between the quantity of labor that the workers have to perform for the capitalists and the hours of labor that are necessary to produce their ability to work Marx called surplus value. (For a more detailed explanation of the origin of surplus value, see this post).

Marx also explained that the proposed system of labor money was unworkable in practice. The reason is that labor money would destroy the only mechanism that exists in a market economy for determining whether a given product actually meets a social need. By making every commodity salable, labor money would not bring full employment like the advocates of labor money hoped. Instead, social production would disintegrate into chaos, because there would be no mechanism to ensure that the proper proportions of production were maintained.

Keynes and monetary reform

The most well-known monetary reformer of the 20th century was the famous British economist John Maynard Keynes (1883-1946). Keynes advocated the replacement of the gold standard with what he called a “managed” paper currency. Keynes believed that getting rid of the gold standard was the key to eliminating the problem of inadequate monetarily effective demand and the resulting mass unemployment. Under the gold standard, Keynes argued, governments and central banks could not follow “full employment” policies because they had to maintain the convertibility of their currencies into gold at a fixed rate. Any attempt to follow a “full employment” policy, he believed, would come into conflict with the gold standard.

Under the gold standard, central banks often had to raise interest rates and thus contract the money supply, not due to inflationary “full employment” but because they faced a drain of their gold reserves that threatened to end the convertibility of their currencies to gold at a fixed rate. Keynes therefore believed that abolishing the gold standard would free up governments and central banks to follow “full employment” policies that would end unemployment and periodic crises and the depressions they breed, without abolishing capitalism.

Keynes believed that if the “full employment” policies that he believed would be made possible through the abolition of the gold standard were implemented by capitalist governments, the increasingly explosive conflicts between the capitalists and working classes would fade away. He also argued that wars among the capitalist nations for markets would be eliminated because these nations would no longer suffer from a shortage of markets. As we know, Keynes’s monetary reform was fully put into effect by 1971, but as today’s mass unemployment crisis shows, this has not led to the promised “full employment” or abolition of crises and depressions.

Keynes was hardly the first reformer to advocate replacing gold (or silver) with paper money as the key to establishing permanent capitalist prosperity and full employment. In the late 19th-century United States, there was even a political party, the “Greenback Labor Party,” that advocated paper money in order to raise farm prices and eliminate mass unemployment. The only real difference between Keynes and these 19th-century monetary reformers is that Keynes based his argument for paper money on the mathematical arguments of the 20th-century professional economists. I have written extensively on Keynes and his economic theories elsewhere in this blog. (See, for example, the series of posts beginning with this one.)

As was the case with the earlier monetary reform proposals, Keynes’s proposals are also utopian for the same reason that the far more radical idea of labor money is. Commodity money cannot be abolished without abolishing commodity production. If all commodities are salable—ensuring full employment—there would be no mechanism within a market economy—capitalism—to determine if commodities have been produced in the proper proportions, and social production would disintegrate entirely. (3)

Right-wing monetary reformers of the 20th century

While most earlier monetary reformers were on the left, or, like Keynes, at least on the reformist side of the political spectrum, during the 20th century a series of right-wing monetary reformers emerged. Many of these reformers were actually counter-reformers aimed at undoing the “Keynesian” managed paper currency reform, which they accused—not without reason—of being inflationary. Let’s examine some of the monetary reforms proposed by pro-capitalist critics of Keynesian polices.

Milton Friedman as a monetary reformer

The best-known monetary reformer on the right was Milton Friedman (1912-2006), who can be considered the founder of modern “neo-liberalism.” Friedman agreed with Keynes on the question of paper money as opposed to a gold standard but disagreed with Keynes’s “managed-currency” polices. He favored a different “managed-currency” policy.

Unlike Keynes, Friedman believed that the capitalist economy was inherently stable. He conceded that changes in the rate of growth of the labor force and the productivity of labor, shifting consumer tastes, and so on could produce minor economic fluctuations in output and employment. But according to Friedman, the only major source of instability in a capitalist economy—major inflations, booms, and deep crises and depressions—are changes in the rate of growth of the quantity of money. If, Friedman held, the rate of growth of the quantity of money were stabilized, fluctuations in output and employment would be largely eliminated and the inherent stability of the capitalist economy would become evident.

Friedman therefore advocated that the Federal Reserve System set a fixed rate of growth of the total money supply that would never vary.

Earlier in his career, when he was still far from the centers of power, Friedman had advocated a more radical version of his monetary reform, which may well have influenced “Nakamoto” when he, she or they designed the Bitcoin system. (4)

Friedman urged that the Federal Reserve System be abolished and with it the fractional reserve banking system, which results in periodic contractions in the quantity of credit money and thus the total money supply. According to the younger Friedman, if credit money was replaced by token money a central monetary authority—presumably an agency of the central government—would be able to strictly control the quantity of money and thus ensure economic stability.

Checks might, under the young Friedman’s proposals, still be written against bank accounts, but the banks would be required to hold a “paper dollar” behind every deposit liability they incurred. Therefore, checks would simply represent existing token money created by the monetary authority, not credit money created by the commercial banking system. The great advantage of such a monetary reform, the young Friedman claimed, is that it would enable the monetary authority to determine exactly what the money supply was, something which is not possible if the anarchic, profit-driven banking system is allowed to create credit money.

Austrian economists as monetary reformers

Austrian critics of Friedman, who fully share Friedman’s reactionary neo-liberal politics, have pointed out a contradiction in Friedman’s ideas. Friedman—like the Austrian economists—dogmatically opposed anything that smacked of government “central planning” when it came to production, but when it came to the quantity of money, he advocated the strictest government central planning. Therefore, these Austrian critics complain that in respect to money, Friedman was an advocate of “socialist” central planning!

The Austrian economists are themselves divided on the monetary question. The followers of Frederick von Hayek (1899-1992) advocated that people should have “freedom of choice” when it comes to what they use as money, just like they should have in all other areas of economic life. (5) Von Hayek, like the young Friedman, advocated that central banks be abolished, but he went further and held that governments should get out of the business of issuing money altogether. Anything less than that is “socialism.”

According to von Hayek, people would then be free to use gold, silver, commercial bank-issued banknotes, or anything else that they choose as money. Free competition, von Hayek claimed, would then show what is the best money, just like free competition determines what is the best brand of coffee, toothpaste, shoes and so on.

Bitcoins and von Hayek

Many supporters, and perhaps the creators, of the Bitcoin system seem to be inspired by von Hayek’s views on money and monetary reform. They hope that over time the Bitcoin system, or some other similar system, will show its superiority to conventional central bank-issued currencies like the U.S. dollar, and gradually take their place. If he were alive, von Hayek would probably be very exited about the Bitcoin experiment.

Ludwig von Mises, the other main “Austrian economist” of the 20th century, however, believed that money should be based on gold alone. Presumably, he would take a dim view of the Bitcoin experiment.

Monetary reform in the Internet Age

With the rise of the Internet, it became inevitable that new ideas for monetary reform based on the Internet would arise. The Bitcoin system is the first to gain widespread attention, though other Internet currency schemes are reported to be in the works. Here I will examine the Bitcoin system.

Unlike many earlier schemes of monetary reform, Bitcoin advocates are putting their monetary reform into practice by actually establishing a new currency called bitcoins rather than merely advocating it. According to the Bitcoin official website, “Bitcoin is an Internet protocol and open-source software platform that enables a new, completely digital and decentralized currency called bitcoins (BTC).”

Translating this “geek talk” into English, a protocol is a computer interface that enables computers that run different types of central processors such as Intel or ARM processors and operating systems—the basic software that individual programs run on such as Microsoft Windows, Mac OS, BSD Unix, GNU/Linux, iOS, Android and so on—to “talk” with each other. (6) The system is run by an “open source” software program with a MIT license. Under the MIT license, it is possible to obtain the source code and modify and use it to establish a rival Internet-based monetary system if you wish. In this sense, the Bitcoin system is very “von Hayekian.”

Open source, free software, libertarianism and bitcoins

In part, the Bitcoin idea seems to be an outgrowth of the free software movement that was founded by computer programmer and activist Richard Stallman in 1983. Stallman strongly opposes all proprietary software where the workings of the software—the instructions that the computer carries out—is kept secret and/or otherwise treated as private property by developers. Instead, Stallman believes all computer users who wish to do so should be free to study the workings of and modify—or if they lack the technical skills, hire those who have these skills—the workings of the software they use to meet their needs. (7)

In the 1980s, Stallman set out to “clone”—that is, to reproduce its functionality but with different code—the proprietary Unix operating system. Amazingly, considering the complexity of that operating system, with the help of other programmers who agreed to join the project, Stallman succeeded and called the new operating system the “GNU is Not Unix” operating system, or GNU for short.

I am writing this on a computer that is running the Trisquel “distribution” of the GNU/Linux operating system, which combines the GNU operating system with the Linux kernel written by the Finnish-American computer programmer Linus Torvalds. There are many other distributions of GNU/Linux that you can download on the Internet. Trisquel is unusual among GNU/Linux versions because it contains no proprietary code whatsoever and is thus among a handful of GNU/Linux distributions that are recommended by Stallman’s Free Software Foundation.

I recently transitioned my work computer from the Ubuntu GNU/Linux distribution to Trisquel and found that the computer works fine without the proprietary code that is included in the standard Ubuntu distribution—though under Trisquel it needs an adapter to replace the Wifi card that came with the computer, which like most Wifi cards found on the market today requires some proprietary code to run.

Stallman was attacked by the corporate developers of proprietary software, such as the Microsoft Corporation, for being a “communist.” In fact, Stallman is a “communist” in only one sense: He believes that human knowledge—a software program is ultimately a form of human knowledge—should not have any owners and be equally accessible to all. Stallman is strongly opposed to treating human knowledge as a commodity. Stallman points out that equal access to knowledge by all human beings is vital if science—and art, for that matter—is to develop to its full potential.

In theory, communism in human knowledge can co-exist with capitalism. Capitalism requires private ownership of the means of production, including the existence of a working class that is free—and forced due to its separation from the means of production—to sell its ability to work—labor power—to capitalist buyers, but it does not require the private ownership of ideas. (For a fuller explanation of Stallman’s views, go to the website of the Free Software Foundation.)

Capitalists, however, have attempted to keep their production methods and even the content of their commodities secret. For example, there is Coca Cola’s “secret formula.” Today, however, the “empire of mega-corporations,” as Stallman calls it—what Marxists call monopoly capitalism and imperialism—is taking the concept of treating human knowledge—such as but by no means limited to software programs—as a commodity to levels never before seen in the history of capitalism.

When a program is proprietary, its source code—the instructions to the computer written in human readable form—is a secret known only to its owners such as Microsoft, Adobe, Apple and so forth. When you purchase a proprietary program for your computer—such as Microsoft Windows—you are not purchasing the program but a license to use the program, sometimes with very significant restrictions.

Among other things, the treating of human knowledge as a privately owned commodity involves national oppression: Oppressed nations are denied human knowledge that is necessary for them to overcome their “underdevelopment,” because the knowledge is monopolized by the oppressor countries. In addition, monopolies of human knowledge impose economic exploitation through monopoly pricing, which hits the oppressed countries hardest.

The U.S. government, and other governments that among other things enforce laws that are designed to prevent people from understanding how modern computers systems actually work, are guilty of giving insufficient support to education—a kind of “negative” crime. They are also guilty of a “positive crime” by passing laws and spending money to enforce them that actually impose ignorance! Needless to say, all socialists and indeed all democrats should oppose and struggle to get rid of these laws.

Stallman, however, does not oppose the private ownership of the means of production and commodities, and therefore he is not a communist. Instead, Stallman describes his politics as a mixture of New Dealism and anarchism. Unlike many other computer “geeks,” Stallman is not a “libertarian,” which is an extreme form of neo-liberalism. Unlike many libertarians, Stallman takes progressive stands on many—though not all—political issues. For a sample of Stallman’s political views, visit his personal website.

Open-source versus free software movements

In the 1990s, the “free software movement” that Stallman founded split, with a “right wing” breaking away and declaring itself the “open-source” movement. The open-source movement believes that by allowing users to know and modify the workings of the software on their computer devices, better and more powerful software will be produced with fewer bugs. Increasingly, large corporations are finding out that the open-source advocates are right on this point and that under certain circumstances open-source software can be highly profitable for them.

Therefore, growing numbers of computer programmers have been hired by large corporations to write open-source software. The Google corporation—the search monopoly—in particular has realized the many advantages of open source. For example, Google is the corporation that owns the open-source Android operating system—which by guiding users to the Google search engine has done much to further increase the profits of this already highly profitable corporation.

Unlike Stallman, open-source advocates believe that open-source and proprietary programs both have a place. Many corporations that use open source or what Stallman would call free or “libre” programs also publish proprietary “closed-source” programs for profit.

Not surprisingly, since as Marx said, “being determines consciousness,” many open-source programmers, who are often highly paid—partially in stocks—by corporations they work for, hold strong pro-corporate right-wing reactionary libertarian views.

I personally believe in the free software movement view that all ideas should be common knowledge, including but not limited to computer software. In these matters, I support Stallman. I believe that the modern socialist movement needs to incorporate Stallman’s views on free software as a part of its program. However, in contrast to Stallman, I also believe that “software freedom” will only be secure when private property in the means of production is abolished.

Until then, we should fight against proprietary software, which itself is only a part of the ever-growing attempt to keep secret expanding areas of human knowledge in the guise of “commercial secrets” or “national security” in order to enrich the capitalist owners of the “mega-corporations.” This, in my opinion, is itself only a part of the much broader struggle to win the “battle for democracy,” which can only end, as the “Communist Manifesto” put it, with the conquest of political power by the working class.

Bitcoins and Marxist value and monetary theory

The creators of the Bitcoin system describe it as “de-centralized.” Like the “new left” of the 1960s, libertarians—and I strongly suspect that the creators of the Bitcoin system hold libertarian views, though I could be wrong on this—oppose any kind of centralism and champion “de-centralization.” By “decentralized,” the creators of the Bitcoin system refer to the technical fact that the system does not use a central server computer but instead uses a network of computers that communicate with each other “peer-to-peer.” In fact, the Bitcoin system is highly centralized in the sense that only the Bitcoin system can create bitcoins. If it was not, bitcoins would rapidly lose all their value as the world became flooded with them.

In fact, the Bitcoin system is controlled by a single, if open-source, central computer program. This is centralism with a vengeance! The fact that the machine code of the computer program that controls the Bitcoin system resides on many individual computers rather than a centralized server makes absolutely no difference here.

I don’t know whether the advocates of the Bitcoin system believe that as—they hope—it gradually replaces the current currency system, it will eliminate crises and unemployment, though I suspect at least some do. What they clearly do hope to achieve is to break the power of the banks and with it the centralizing power of modern bank capital. By liberating capitalism from the centralizing tyranny of bank capital, as they see it, the supporters of Bitcoin hope to achieve a healthier more de-centralized competitive global economy that will bring out all the advantages of decentralized competitive capitalism.

How Bitcoin is attempting to break the power of the banks

Today in the imperialist countries, where the “mega-corporations” are headquartered, even the most trivial payments make use of credit money created by commercial banks. Traditionally, such payments were made by writing checks, but today’s bank-issued debit cards, credit cards and other methods of circulating credit money, such as the use of smart phones that rely on computer networks, are replacing traditional bank checks. Like modern bank-created credit money and some central bank token money as well, bitcoins are computer “objects”—that is, they are strings of ones and zeros stored on computer storage devices.

If X owns a bitcoin, s(he) can send it over a secure computer network to Y, the owner of a commodity in exchange for the ownership title previously held by Y. This, of course, assumes that Y is willing to accept bitcoins as a means of purchase or payment. Bitcoins are not “legal tender” in any country at the present time and cannot be used to pay taxes.

The beauty of bitcoins, according to the system’s advocates, is that the role of banks in settling payments is completely eliminated and with it bank-created credit money. Bitcoins are not deposited in banks but rather in so-called “wallets”—computer files—that exist only on computers. The hope is that the Bitcoin system by ending the role of the banks in making payments will lead to the gradual withering away of the banking system and its system of credit money.

Physical bitcoins

Since bitcoins are numbers, some entrepreneurs have copied the numbers that represent bitcoins onto pieces of paper and put them into gold or silver colored seals—which invoke gold and silver coins that were of old used as hand-to-hand currency. The idea is that this will make it possible for bitcoins to circulate without having to use a computer device such as a laptop or smart phone with every transaction. If the owner of a physical bitcoin breaks the seal, the number can be typed into a computer—assuming that the computer is linked to the Bitcoin network through an appropriate website—and the bitcoin then returns to its original form as a purely digital computer “object.”

How do you obtain bitcoins?

There are three ways to obtain bitcoins. The simplest way is to buy them with any ordinary currency such as dollars on an appropriate website. Two, you can sell a commodity or accept a payment due you in bitcoins over the Internet. The final way is to use your computer to “mine” for new bitcoins—though the “mined” new bitcoins are created as opposed to merely being transferred from person to person. More on bitcoin mining below.

Bitcoins and the three forms of money

We have seen that money—defined by Marx as a relationship of production—takes three forms.

The most basic form of money—commodity money—is simply the generalization of what Marx calls the equivalent form of value, whereby the value of one commodity is measured in terms of the use value of another commodity.

There are two other derivative forms of money, token and credit money, which pre-suppose the existence of commodity money. While commodity money can exist without token and credit money, neither token nor credit money can exist without commodity money. Marx, therefore, sometimes called commodity money “real money,” since only it can perform all the functions of money, the most important of which is to measure the values of commodities in terms of its own use value.

Token money historically has been made of base metals and later paper and ink. Today it often exists as an electronic entry—stored in the form of a string of ones and zeros, just like bitcoins. However, unlike the case with the Bitcoin system, the owner of token money can always ask the issuer of the token money—a central bank—to convert the ones and zeros into a physical token made of either base metal, paper and ink or other similar material that can be used to pay taxes and is generally declared “legal tender for all debts public and private” within the country where it is issued.

The quantity of the token money, whether it takes the form of paper money, coins made of base metals, or strings of ones and zeros stored in computers systems, is like the case with bitcoins centrally controlled. For example, the quantity of token U.S. dollars is under the control of the Federal Reserve Open Market Committee. With token money, there must be a mechanism not only to increase the quantity of the tokens but to reduce their quantity as well. In practice, the central authority that controls the quantity of monetary tokens must be either a part of or very closely bound up with the state power.

The other derivative form, credit money, is based on money’s role as a means of payment. Credit money is an IOU that can be transferred from person to person that is payable to the bearer on demand in either commodity money—gold—or token money, usually some state-issued legal-tender token money.

Historically, credit money is the last form of money to develop. Many monetary reforms—including those advocated by the young Milton Friedman and the Austrian economists—aim at abolishing this last form of money.

Banks and credit money

While commodity money such as full-weight gold coins and token money can exist without banks, credit money is linked to the rise of the modern bank-centered credit system. Today, all but the most trivial payments—leaving aside the world of illegal transactions such as the international narcotics trade—depend on banks.

Credit money can be issued in either a centralized way like the banknotes issued by the central banks in the days of the pre-1914 international gold standard that were convertible into a given quantity of gold coin of a legally defined weight, or they can be issued in a decentralized way by the commercial banking system. In the latter case, if an excessive amount of credit money is issued, a banking and credit crisis will occur. This in the long run prevents credit money from being issued in excessive quantities.

Remember, if additional commodity money is produced through a process of industrial production, like the mining and refining of gold bullion—all other things remaining equal—interest rates drop and the market sooner or later expands. In contrast, if too much token money is created, the result is the depreciation of the token currency against the money commodity—a rise in the price of gold, assuming gold is the money commodity, which leads sooner or later to inflation. This is why the issuance of token money, unlike commodity or credit money, must be strictly centralized. If in contrast too much credit money is created, the result is a banking and credit crisis that destroys a portion of the credit money. We saw just such a process unfold on the island country of Cyprus earlier this year (2013).

What form of money are bitcoins?

Can we fit bitcoins into any of these categories? Are they a form of commodity money, or are they a form of token money, or are bitcoins actually a form of credit money? Or are they an altogether new form of money? Or are bitcoins really money at all?

Bitcoins are not credit money

Bitcoins, unlike other electronic payment systems, are not convertible into any other form of currency or gold at a fixed rate. Instead, they are traded for traditional currencies at ever fluctuating exchange rates on an open market. Therefore, in contrast to “electronic” money denominated in U.S. dollars, bitcoins cannot be converted into old-fashioned paper and ink green dollars on the demand of the owner at a fixed rate of exchange. Bitcoins are therefore not a form of credit money.

Are Bitcoins a form of commodity money?

According to the official Bitcoins site: “Bitcoin miners perform a function that is analogous to gold mining, but very different. While gold miners deal with rocks, Bitcoin miners deal with data.” If bitcoins are analogous to gold mining, perhaps they are a form of commodity money, but if they are “very different,” then bitcoins are something quite different than gold—commodity—money.

In fact, the biggest difference as far as economics is concerned—economics is a social science that studies relationships between people engaged in production and exchange—is not that gold miners deal with rocks while bitcoin “miners” deal with data. Rather, the main economic difference is that gold miners are human beings engaged in the production of gold bullion while bitcoin “miners” are machines—specifically computers. Marx explained that the value represented by commodities—whether ordinary commodities or the money commodity—while it appears to be a relationship between things is actually a relationship between people engaged in production. Material wealth in the form of use values can be produced by either machines or nature. Machines are ultimately the products of human labor, unlike the richness of nature—produced entirely independently of human beings.

Machines, including computers, can create additional use values and can pass on the value they contain to the other commodities as well, but they cannot produce new value because value by definition is a relationship between people—not machines—engaged in production and exchange. In theory, a computer could pass on a portion of its value to a bitcoin, but since a bitcoin is simply a string of ones and zeros, its value would be trivial—indeed much less than the labor value of a U.S. dollar bill made of paper and ink.

Bitcoins in reality don’t have value like a gold coin that is made of gold bullion; they have an exchange value or price like U.S. dollar bills or paper currencies. A dollar bill represents a certain quantity of gold bullion in circulation. Under the present system of paper money, the quantity of gold bullion that a dollar represents is not fixed but varies day to day on the open market. The quantity of gold bullion measured in terms of some unit of weight in turn represents a certain quantity of abstract human labor.

Bitcoins, too, are subject to variations in the amount of gold and other currencies they represent in an ever-fluctuating market. Therefore, bitcoins, if they are a form of money at all, are a form of token money. This is why the designers of bitcoins went to great lengths to make sure their system was highly centralized in the sense that only the Bitcoin system can issue bitcoins. If it were otherwise, bitcoins would quickly become worthless in terms of gold, traditional currencies and commodities.

The creation of additional bitcoins

If you own a computer, you can “mine” bitcoins. But the whole “mining” process is controlled by the central computer program, much like a computer game that you play over the Internet. The central computer program controls the quantity of bitcoins that are created at any given point in time.

Wikipedia explains: “The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins.”

Early in the history of bitcoins, many bitcoins were being created by the program that controls the system. If you connected your computer—even if your computer was a modest PC—early in the history of the Bitcoin system, you had a good chance of “mining” a significant quantity of the “coins.”

But now you need a supercomputer to have any realistic chance of mining a single bitcoin. In the future, unless you use an ever-more-powerful supercomputer, your chances will continue to decline. Once the system has created the total quantity of bitcoins it is programmed to create, which is 21 million in the year 2140, even the most powerful supercomputer that exists in that year—many times more powerful than any that exist today—will not be able to “mine” a single bitcoin.

The ‘deflationary’ nature of the Bitcoin system

Critics of bitcoins point out that the Bitcoin system is highly deflationary due to its programmed falling rate of growth of the quantity of bitcoins. If we treat bitcoins as token money, they should, over time, climb in value against both conventional central bank-issued currencies and gold, unless the depletion of the solar system’s gold mines causes gold production to drop to zero by the year 2140. (8)

This implies a falling price level in terms of bitcoins. A currency works best when it is more or less stable in value against both gold and other commodities—though gold as a commodity inevitably does vary against all other commodities due to the uneven growth of the productivity of labor between gold mining and refining and all other branches of production.

If a token currency like the U.S. dollar gains in value against real money—gold—the capitalists will be tempted to hold on to it rather than transform it into productive capital. It is the declining rate of growth of bitcoins against gold, currencies and commodities that makes bitcoins an alluring object of speculation and hoarding, but for the same reason it does not make them a good currency. On the contrary. In recent months, the U.S. dollar has been gaining value against gold. This trend has been accompanied by falling primary commodity prices, and there are even signs that prices at the retail level are beginning to weaken.

This tendency toward falling prices certainly is advantageous to inflation-weary consumers, and if it continues—and I wouldn’t bet on it—it will help raise real wages. However, it is also being accompanied by signs of falling industrial production, especially in Europe but also in the U.S. where the Federal Reserve’s index of industrial production has fallen in the last two months.

If the dollar continues to gain purchasing power against commodities, industrial and commercial capitalists will put off purchases waiting for still lower prices. The effect on the economy of such a situation is highly recessionary.

The rise in the U.S. dollar is being fueled by speculation that the Federal Reserve System will finally end its “quantitative easing” program that it has followed since the panic that hit in September 2008 or at least “taper off” on its money-printing/bond-buying operation as the current recovery strengthens. If the quantity of token dollars continues to grow at the rate that it has been growing since 2008, it will be only a matter of time before severe inflation develops.

However, the growing belief in the market that the rate of growth in the dollar-denominated monetary base will soon slow is threatening to create a deflationary recession—or at least postpone the transition from the current post-crisis depression phase of the industrial cycle to average prosperity leading to the next cyclical boom. If the dollar continues to be “strong” against gold, and the U.S. and world economies enter into a renewed recession, the Federal Reserve always has the option of simply continuing and if necessary even increasing the rate of growth of the U.S. dollar monetary base, though at the risk of a grave inflationary crisis later on.

If a gold standard were in effect, the Federal Reserve would not have this problem. The Fed would buy all the gold offered to it at a fixed price that would define the dollar in terms of a given weight of gold. It would also be obliged to cash in U.S. dollars in gold at a fixed rate, whether in the form of bullion—gold bars—or gold coins of a given weight. The Fed would aim as the world’s de facto central bank to get as much of the world’s hoarded gold bullion into its vaults as possible.

The advantage of a credible (9) gold standard is that the capitalists know exactly how much the currency will be worth well into the future in terms of real money. As long as they trust the gold standard, capitalists have no reason to actually hoard gold—which yields its owners no interest—surplus value. In this way, the global gold hoard is centralized in the central bank and in a crisis can be wielded in a centralized way.

Fear of deflation and the gold standard

A gold standard therefore eliminates the danger of an economic crisis caused by speculation that the currency will gain value against gold and therefore commodities, leading to a hoarding of currency and a highly recessionary postponement of purchases. It also eliminates the danger of a falling currency leading to inflation and soaring interest rates, which can worsen crises.

If all currencies are fixed in terms of gold exchange rates, they are also stabilized since they will always represent a given quantity of gold. World trade is encouraged because exchange rate risks are eliminated. Indeed, experience shows that the best rates of growth of world trade and industrial production have occurred when a gold standard in some form has been in effect. Since governments are eager to raise today’s lackluster rates of growth, why don’t they consider a return to some form of gold standard?

Why the economists oppose a new gold standard

With relatively few exceptions, most bourgeois economists today reject the idea of returning to a gold standard and strongly advise governments not to do this. They argue that it would take away many of the tools that the governments and capitalist central banks now have to combat cyclical crises.

For example, a gold standard in any form would indeed be incompatible, at least in the long run, with “inflation targeting,” where the central bank attempts to established a fixed rate of inflation of around 2 percent. Instead, there would inevitably be periodic deflations where prices would actually fall. (For an explanation, see my posts on the phases of the industrial cycle.) After all, didn’t Keynes advocate the elimination of the gold standard as a “monetary reform” so governments could follow so-called countercyclical polices in the first place?

Bitcoins and the Bank Act of 1844

But a gold standard is far more flexible than the Bitcoin system. Even the 19th-century British currency system established by the Bank Act of 1844, which strictly tied the quantity of banknotes to the quantity of gold bullion in the Bank of England’s vaults, was a model of flexibility compared to the Bitcoin system. First, over time due to the mining of new gold, the quantity of gold in the vaults of the Bank of England grew. When the rate of growth of the world’s gold production slowed down, the world economy tended to fall into prolonged periods of depression, but these depressions in turn stimulated new waves of accelerated production of gold bullion—since that production was now more profitable—and sooner or later accelerated economic growth.

In addition, the Bank Act of 1844 contained an escape clause that allowed the limit on the quantity of banknotes the Bank of England could issue beyond its gold reserve to be suspended in a crisis. When an extraordinary demand for banknotes developed in a crisis—which happened on three occasions 1847, 1857 and 1866—the run on banknotes and with it the crisis was broken simply by suspending the Bank Act. On two of the three occasions, in 1847 and 1866, there was no actual need to expand the banknotes. The mere knowledge that the quantity of banknotes could be increased was in itself sufficient to break the crisis.

At least as it is now programmed, the Bitcoin system contains no such escape clause. If we imagined a world in which bitcoins were the main means of payment, a sudden demand for them as a means of payment would lead to economic paralysis and result in almost unbelievable levels of unemployment, since there is no provision whatsoever to produce an additional supply of bitcoins. The lack of such a mechanism is a major flaw in the Bitcoin system.

The supporters of the Bitcoin system might answer this objection by saying that since their system would eventually abolish banks and the capitalist credit system as it has evolved since the end of the Middle Ages, this objection is invalid. But this points us to main defect in the Bitcoin system.

Under the fractional reserve banking system, the vast majority of payments payable in legal-tender cash are balanced off by the commercial banks through clearing houses—generally run by the central banks. Actual token money, including electronic token money, is only necessary to make those payments that do not balance off each other. The vast majority of cash payments that balance each other out dramatically reduce the need for token money in any form—whether physical or electronic—and therefore the need for gold that is necessary to maintain the value of the token money.

The Bitcoin system, however, aims to abolish the banking system and its central bank along with credit money. If we were to replace bank-created credit money with token money bitcoins, we would have to issue a dollar’s worth of bitcoins for each dollar of credit money that would have to be replaced or face a massive shortage of currency. A shortage of currency would lead to a collapse in monetarily effective demand, with all the consequences in terms of collapsing production, world trade and employment.

Suppose we modify the Bitcoin program so that it would in a one-time operation replace all of today’s credit money with bitcoin token money. The problem would then be that there would not be enough gold in the world to support the existing value of the bitcoins. The bitcoins would dramatically fall in value against gold. Once they stabilized at their new lower value, there would not be enough monetarily effective demand to maintain anything like the current levels of industrial and agricultural production. The world economy and indeed the human population would collapse to a much lower level as unbelievable levels of unemployment and mass starvation swept across the planet.

Though bitcoins are based on the most modern technology, the creators of this system are—like libertarians do, if this is indeed their ideology—actually looking back to the world of the Middle Ages when production was highly de-centralized and carried out only on a small scale and banks scarcely existed. Before the modern capitalist credit system arose, credit was dominated by individual money lenders who charged rates of interest far beyond the levels that have prevailed under capitalism. If we were to replace the modern capitalist credit system with bitcoins, we would return to that situation.

To fix the flaws in the Bitcoin system, we would have to give it all the characteristics of a central bank. It would have to maintain a reserve of gold and have a mechanism not only to assure the growth of the quantity of bitcoins to meet the needs of expanded capitalist reproduction. It would also have to have a mechanism to temporarily increase the quantity of bitcoins to meet any sudden surge in demand for them as a means of payment, and to reduce their quantity if they should face sudden depreciation against the money commodity—gold. In other words, the Bitcoin system would have to become a central bank. But then nothing would be gained. We would merely change the name of the U.S. dollar to bitcoin.

As it stands today, the bitcoin is a highly speculative investment that has fluctuated wildly in value. You may get very rich speculating in bitcoins or lose all you have. Bitcoins are not really a currency but a kind of digital version of what capitalist investors call “collectibles.” Examples of collectibles are original paintings by Picasso, Rembrandt and other famous masters. No amount of human labor can create a single new original Picasso or Rembrandt, just like no amount of human labor will according to the Bitcoin system be able to create a single new bitcoin after 2140. True copies of Picasso or Rembrandt are easy to produce, but unlike the original they have relatively little exchange value no matter how much use value they might have.

As a rule, original Picassos, Rembrandts or other collectibles do not serve as currency, though there is nothing to prevent individuals who own them from swapping them for valuable commodities or money. If the Bitcoin system continues to function well—nobody succeeds in “cracking” the system and flooding the world with “counterfeit” bitcoins—bitcoins may hold and even gain value. They may be a good “investment,” especially in times of crisis and currency devaluation—though this site does not offer investment advice—but they will not make a good currency and have no realistic chance of replacing the current bank-centered monetary and credit system. This system, after all, is the inevitable result of the evolution and laws of motion of the capitalist mode of production.

The point is we cannot change the nature of capitalism through any reform of the monetary system, not even in the age of high tech and the Internet. Only the working class gaining political power can change the mode of production by recognizing the socialized nature of modern production and ending the private appropriation of the product of socialized labor. Without that, no monetary reform can end the periodic overproduction crises and depressions they breed, mass unemployment, centralization of wealth in a few hands, and the class struggles and wars that are the inevitable result of the contradiction-ridden capitalist system.

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1 In the mid-19th century, the term “socialist” was used to describe all critiques of capitalism. Therefore, socialists of those days did not necessarily advocate the abolition of private ownership of the means of production. The proposal to abolish private ownership of the means of production—called communism—was considered only one tendency within socialism. Therefore, many 19th-century socialists were actually strong supporters of a market economy.

2 Marx pointed out that the British classical economist David Ricardo (1772-1823) in developing his version of the law of the labor value of commodities was describing the operations of the capitalist economy, and not a socialist alternative to capitalism.

3 Markets are much older than capitalism, so it is possible to have a partial market economy that is not capitalist. During the transition period between capitalism and socialism, we would expect various combinations of both planned and market economy to co-exist depending on the specific economic and political conditions that prevail. However, a full market economy means that labor power itself becomes a commodity. Under these conditions, the workers are forced to sell their ability to work to those who monopolize the means of production, the capitalist class.

Between the 1950s and 1980s in the Soviet Union and Eastern Europe, the idea that an economy dominated by the market means capitalism came under wide attack by a so-called reform movement including many professional economists in those countries. Various reforms were proposed to combine socialism with a generalized market economy, sometimes called market socialism. These reforms ended with the full restoration of capitalism with all its evils.

4 Friedman’s proposal to end fractional reserve banking—shared with the Austrian economists—was completely utopian in practice. As Friedman moved closer to the center of power later in his career, he dropped his utopian proposals to abolish fractional reserve banking along with the Federal Reserve System. A problem that the “mature” Friedman faced was that his own empirical research showed that the relationship between the monetary base made up of hand-to-hand currency and coin, and liabilities of the Federal Reserve System payable in cash and coin on one side and the quantity of commercial bank-created credit money on the other was highly elastic.

During an upswing in the industrial cycle, the “multiplier” of credit money created by the commercial banks relative to the monetary base rises greatly but then contracts sharply in the downward phase of the industrial cycle. We have just seen such a fall in this multiplier beginning with the panic of 2008. Despite massive evidence to the contrary, Friedman argued that the relationship between the monetary base of cash and coin, whose quantity is controlled by the central bank under a token monetary system, and the quantity of credit created by the commercial banks was stable.

5 Fredrick von Hayek was, along with Ludwig von Mises (1881-1973), the main leader of “Austrian” economists of the 20th century. Von Hayek is most well known to non-economists for his book “The Road to Serfdom,” first published in 1944. In this book, he argued that even the mild social reforms such as those advocated by Keynes would inevitably lead to central planning, which would lead in turn to a totalitarian state and a new serfdom. The “Road to Serfdom” has become a kind of bible for libertarians.

6 The Unix operating system was first developed by Bell Labs computer programmer Ken Thompson in 1969. Today, Unix and Unix-like operating systems, as they are called, dominate the computer world, with the exception of Microsoft Windows. Mac OS 10 is actually a version of the Unix operating system, while GNU/Linux and Android, which also uses the Linux kernel, are examples of Unix-like operating systems.

Most of the world’s most powerful supercomputers, as well as the humble laptop that I am using to write these lines, run on GNU/Linux—a Unix-like operating system. The operating system kernel Linux—written by the Finnish-American computer programmer Linus Torvalds around 1990—is the part of the operating system that directly interfaces with the computer hardware proper. Today, the Linux kernel is used in not only the GNU/Linux operating system but many other operating systems as well, including the Android operating system used in most smart phones and an increasing number of tablet computers. If you have an Android smart phone or tablet, you are running Linux.

7 This shows that Stallman is assuming a capitalist system where those with a sufficient quantity of money can hire people to perform work for them—something that was considered a form of slavery in the ancient world. This illustrates the fact that the free software movement is not as such anti-capitalist. In theory, software can be “free” in Stallman’s sense of the word under either a capitalist or a socialist system.

8 The idea of capitalism, let alone the Bitcoin system, lasting to the year 2140 is a rather science fictional idea in my opinion. But these are indeed the assumptions of the creators of the Bitcoin system. Today, some speculative capitalists are forming companies to mine asteroids for precious metals, including gold. The biggest economic problem that these schemes confront is that costs of transportation from an asteroid to the Earth’s surface is rather high given present technology. But who knows what the transportation costs will be in the year 2140?

9 By credible, I mean the capitalists would have to believe that the new gold standard would continue indefinitely. After decades of a paper money system and repeated currency devaluations, that would not be easy to achieve.