I’ve just now seen that Paul Krugman has written about Bitcoins, and he has come to the conclusion that they represent a grim development. This is not a regular payment system in which the units are fixed definitions of existing money; their value floats based on all existing monies, making them more like an alternative currency. Good insight here, and more intelligent that many writings on this topic.

He goes on to explain why, nonetheless, he is actually opposed to Bitcoin. “What we want from a monetary system isn’t to make people holding money rich,” he writes. “We want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.”

He is speaking as a dedicated Keynesian who sees no social benefit to money that is not circulating. This is precisely the same criticism he (and all Keynesians) have of the gold standard, and why this point of view favors inflation that drives people to get rid of their money as soon as possible. And this is why he doesn’t like Bitcoin: it is too much like the gold standard, in his view. Indeed it is.

This is by design. The whole currency was created to recreate in a virtual world the monetary experience of the purest form of gold standard (no central bank, decentralized discovery, gradual innovation in payment systems, completely open source, totally transparent).

Krugman underscores the point:

So to the extent that the experiment tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.

Intriguing!

Fortunately, no one is asking for Krugman’s permission to mine, hold, or use Bitcoin. He is not in charge of designing this emerging alternative money. As for making society rich, a main reason why Bitcoin is taking off is because people want to flee government paper money or at least have some hedge against government money and all that it brings with it. Bitcoin might someday save the economy from being destroyed by government and its economic advisers.