A previous blog speaks of the confusion among new entrants to Bitcoin in regard to what [Bitcoin] constitutes. The same blog also draws attention to ‘influencers’ willing to shed welcoming light on this burgeoning industry.

The flip side to the enquiry — and purpose of this blog — is to ask what is money itself? Where does it come from, how is it created, managed and hold value?

This opens up the area of macro-economics and begins to delve into a subject matter not always extant in Bitcoin’s real life context.

The Nature of Money

Frances Coppola is a monetary economist who gives a succinct overview in her blog The Nature of Money. Her comment “that people seem very confused about money”, echoes John Nash who said “we become irrational (thinking about money) and fail to reason about it as we would a technology.”

Coppola uses the standard economic understanding of money — that it is a medium of exchange in transactions and that there is more than one type of money in circulation; and what we think of as money is actually currency, which itself consists in more than one form ie cash in terms of banknotes and coins — or non-physical currency denominated bank balances.

The blog was written in 2012 at the time e-currencies were beginning to make themselves known. Coppola talks about these — including Bitcoin — after placing the role of Central Banks into context and their more restricted types [of reserves money].

Specifically, Coppola provides the insight that “National control of electronic money that is not denominated in national currency is simply impossible”. This then leads into:

More radically, it is also questionable whether interest rate management, which has been the central plank of monetary policy in Western economies for the last thirty years, would be the best way of managing national economies in a world of international currencies.

The plum in the pudding then comes in the form of Coppola’s observation that the new e-money can likely act as international currency anchors (as the gold standard did) and that it may be time for a new (virtual) Bretton Woods.

Extract from The Nature of Money, by Frances Coppola

The Bitcoin Standard — A Critical Review by Frances Coppola

‘The Bitcoin Standard: The Decentralised Alternative to Central Banking’ is a book by Saifedean Ammous, which has become popular amongst ‘Bitcoin Maximalists’. Coppola’s review of the book can be found here.

In the interests of context, it should be noted there is a circa 6 year difference between Coppola’s writings in The Nature of Money and the Ammous review.

During this time, Frances has lost her earlier belief expressed that Bitcoin could potentially replace gold as an international monetary standard. I will conjecture reasons for this, later in the blog. However this should not detract from the erudite richness of Coppola’s writings on monetary history and economics in general.

And neither should it detract from the forthright demolition of Saifedean’s economics, which Frances contends would wither in the face of proper peer review. A flea is certainly left in the Ammous ear with the salvo that [Saifedean] “…is not writing for an informed audience. His book is polemic, not scholarly…”. And so on:

Extract from Frances Coppola’s review of ‘The Bitcoin Standard’

Coppola finishes the blog with this broadside:

Until the Bitcoin community ditches the cranks and adopts a sensible monetary policy that properly recognises both the need for savings to be intermediated into productive investment and the need for money to flow, Bitcoin cannot possibly operate as the anchor of the cryptocurrency ecosystem. And in part because of Bitcoin’s failure, the ecosystem itself is hyperinflating. Sound money? I don’t see much of that.

Coppola’s review coincides with this from another writer (Jal) who admits to near perfectly agreeing [with Coppola]. Where Saifedean can’t deal with Keynes (at one point in the book, he intimates him a child molester comparable to Hitler), Jal points out Bitcoin is similar to the Keynes bancor proposal:

Keynes created a proposal for an international settlement unit he called the “bancor” which was meant to serve exactly the same purpose that bitcoin will serve as it rises to fulfil its predefined destiny.

Coppola in Knots

A twitter spat around the time of the Saifedean reviews developed between Frances and Jal — which is documented here — goes some way to illuminating why Frances perhaps u-turned her earlier conviction in Bitcoin’s potential as a virtual Bretton Woods (or de facto gold type) standard.

This goes to the heart of why the bancor proposal was never taken up: it was a ‘pleas’ to the superpowers of the world (at that time) to adopt out of cooperative altruism. Instead, the United States rejected (the proposal) as the dollar pegged to gold and everyone else pegged to the dollar.

Jal often talks of John Nash and Ideal Money (a theoretical international value standard) which can easily become misconstrued as Bitcoin [being] an ideal money. It is not — and modern money managers will never agree to this. As Jal cites in his Saifedean review:

In mainstream economics, and from a national or central banking point of view, money must have an elastic supply, and “ideal” happens when the manger(s) of the currency properly match(es) the supply of the currency such that a certain goal is achieved. Since bitcoin’s supply is not elastic, mainstream economists will generally hold the opinion that bitcoin is not very good money.

Moreover the point with Ideal Money is that Bitcoin can serve as a basis for it. The limitations of the gold standard were that technological advances or geopolitical issues meant its supply was not completely reliable or stable — and additionally, it became too much of a responsibility for the United States to bear (thus the Nixon Shock).

The intention of Nash’s Ideal Money standard is to be an apolitical measure of money in the way a meter or kilogram is a universally accepted unit of distance or weight — and in a way that can’t be corrupted or be susceptible to over reliance on trust.

The Louche Characteristics of Analogue Trends

The benefit of an ideal money is for it to be stable: to augment our social institutions in their robustness and ability to rassembler. A cornerstone to this is predictability [in the money]. The start of the blog asks where does money come from and how does it hold its value?

In today’s world commercial (or private banks) create it ex nihilo and Central Banks manage it through a trend ascertained from a Consumer Price Index (CPI) — which Coppola called for a ‘radical rethink’ of, in The Nature of Money — also known as inflation targeting.

The problem with a CPI is its constituents: who gets to decide what’s in the index and the frequency of re-weighting? This means it’s political in nature and analogue: open to variance; and means the language used to interpret such a trend is analogous — a thing seen as comparable to another.

This possibly explains Coppola’s u-turn: she is conditioned in an analogue working environment, writing about a digital trend. She would be more or less alone in advocating the radical departure for macro-monetary management she mentioned in The Nature of Money. It would simply be too much a weight to carry in a professional capacity and probably make a pariah of her in the circles she moves: much easier to write in rakish appeal — in the same way Saifedean does to Austrian economics — about the more sordid elements surrounding Bitcoin and justify a view that was never intended by Bitcoin’s creator (who was, in all likelihood, John Nash).

This is the crux of the problem: Bitcoin fulfils an apolitical trend through its adjustment algorithm. It is digital, not analogue. It involves all the counters. So when it comes to a stable monetary zeitgeist, we can optimise trust through a network of computers using the same components and which share a single memory field (the blockchain) working to a pre-programmed rate of issuance. Central Banks don’t just have to observe an analogue CPI trend.

Silence of the Bankers

Where Keynes relied on the goodwill of the superpowers to adopt the bancor, John Nash would have known that an Ideal Money scenario could only become reality through self-interested agents acting ‘optimally’. This plays out through Nash Equilibrium.

Which becomes relevant when we realise speaking to Central Bankers or ‘Saifedean inspired’ Bitcoiners (or big blockers, for that matter) can become a stonewall type experience. It goes beyond their interpretations and understanding of what Bitcoin is or could be. In this aspect, a column recently appeared in The Times called Why world’s central bankers should learn to bite their tongues :

The problem of Central Banks ‘over-communicating’

The article is behind a paywall but talks of ‘excess transparency’ by Central Banks and a ‘monkey in the mirror’ problem where the monkey reacts to its reflection. The author ends by saying [Central Banks] “providing context is useful, but only if markets use that information to think for themselves”.

So we can draw a conclusion from this: analogue trends are not the thing markets optimise for, so they’ll eventually get optimised out. Through such [optimisation] we may even begin to understand money or monetary type networks as meditative epistemologies, if more normal definitions perhaps become dated by comparison.

If we look at the Bitcoin market over the longer time frames — and if we are looking for we a reason to believe why hyperbitcoinisation or a moon event will occur — we can see clearly an implicit translation being made through dollar preference: that analogue money is ill-suited to the digital world.