Traditionally, hard money has the two main qualities of self-reliance and correlated repayment, but bitcoin has the former without the latter.
This is an opinion piece by Rowdy Yates, a former Marine and practicing lawyer.
What is it supported by?
One of the most common criticisms of nocoiners remains: “But bitcoin is not backed by anything.” This review targets bitcoin’s lack of a quality I call “correlated redeemability”. The most common response to this criticism is, “Your US dollar isn’t backed by anything either.” The problem with this factually correct answer is that it misses a deeper point. The deeper point is that while bitcoin lacks a traditional quality of hard money (correlated redeemability), it does possess the main but less visible quality of hard money: autonomy. This article aims to explore the scope of autonomy, how it has been eclipsed by the possibility of correlated repayment, and the relative value of these qualities historically in tandem with hard currencies.
A story of two qualities
Traditional hard money had two qualities: the possibility of correlated repayment and autonomy. The first is easier to understand. Conceptually, correlated redemption is the quality of a currency that facilitates prompt redemption for a stable amount of (traditionally tangible) commodity. Precious metal currency exemplifies the ease with which this quality can be understood. If someone pays for your labor with a gold coin, you exchange your unit of labor for a rare metal that you can hold in your hand. Paper notes backed by precious metals are slightly more abstract, but due to historical exchange practices, they have had concrete manifestations. Consider the U.S. government’s money certificates, issued well into the 1960s, which allowed ordinary plebs to exchange paper notes for real money. The physical nature of the correlated repayment opportunity helps make it cognitively accessible to the general public.
On the other hand, the autonomy of a currency is much more abstract. Conceptually, monetary autonomy is a quality that exists on a spectrum and reduces a sovereign’s ability to materially manipulate currency – think inflation and debasement. Concretely, we can think of autonomy as the aggregation of barriers – small or large, physical or psychological – that put a damper on money manipulation schemes.
The specter of autonomy
As with any abstract idea, a parabola can be a useful means of visualization. Imagine three rulers: Nayib, ruler of a country that only uses bitcoin; Ike, ruler of a country that uses only gold currency; and Dick, ruler of a country using pure fiat currency.
Nayib might want to increase spending beyond tax revenue. However, it cannot increase the bitcoin supply beyond what is written in the code. Moreover, Nayib does not automatically benefit from an expansion of the money supply unless he engages in successful, capital-intensive, proof-of-work mining. The net result: If Nayib tries to buy a G3 jet with deficit spending, the Gulfstream Corporation will have to accept an IOU instead of bitcoin. Nayib currency has high autonomy and only attenuated and uncorrelated repayment capacity.
Ike wants to be a spendthrift spendthrift, but is forced. If Ike’s spending exceeds his tax revenue, he has options, but none of them can be cavalierly pursued. First, Ike can cut coins; as his administration comes into contact with coins, they can physically cut the edges and use the remains to toss more coins. The advantage is that this option is not very labor intensive. The downside is that even blind people in Ike’s country can detect the scheme. Second option: Ike can degrade the metal of the parts. To do this, Ike must aggregate the gold coins, put them in a furnace, mix the gold with cheaper metals, and mint newly degraded coins. This option is much more labor intensive and, by involving more accomplices, the plot is more and more likely to be detected. Regardless of the option, Ike also has a psychological barrier, namely that he knows he is breaking the law governing his own currency. A third option is to mine more gold ore to mint new coins. This third option has no psychological barrier, but it is the most laborious of the three options. Ike’s currency has intermediate autonomy and immediate, correlated redemption – the qualities of traditional hard money.
Dick is also a spendthrift spendthrift, but as we all know he’s not coerced. Dick’s country uses fiat currency, so of course Dick just needs his treasurer to hit the print money button, and the deficit is solved (at least in the short term). Plus, as is the nature of fiat currencies, Dick’s actions are perfectly legal, so he doesn’t even face psychological stigma for his actions. Ultimately, there is no significant short-term cost to what Dick did, and because of this low cost, the temptation for Dick to press “CTRL P” remains quite high in perpetuity. Dick’s currency has de minimis autonomy and attenuated, uncorrelated redeemability.
This is the specter of monetary autonomy: bitcoin > gold coins > fiat.
Why is the possibility of redemption an elusive concept?
Prior to European voyages to Australia, a European would be forgiven if he believed that all mammals (animal species with nursing mothers) gave birth to live young. At the time, all mammals known to Europeans gave birth to live young. After the Australian fauna became widely known, the platypus threw a wrench in the paradigms of European biologists because the platypus is a species with nursing mothers, but the mothers laid eggs instead of live births. Once a real-world counterexample became available, it was relatively easy for biologists to disentangle the traditionally tandem qualities of lactation and live birth, and then clearly identify the appropriate distinguishing characteristic of mammals namely: breastfeeding mothers.
Before bitcoin, you would also be forgiven if you thought that all hard money had to have a correlated redemption possibility. At the time, all the traditional hard currencies had the quality, eg gold coins, Yap stones, shells. After bitcoin, a wrench was thrown into the hard money paradigm because bitcoin had self-reliance with no correlated redemption possibility. With this real-world counterexample, we can now disentangle the traditionally tandem qualities of self-reliance and correlated redeemability and clearly identify the appropriate distinguishing characteristic of hard money namely: self-reliance.
This story sheds light on why discussions of hard money have overlooked autonomy and focused on the possibility of correlated repayment. Historically, currency holders associated hard currency with its most obvious characteristics: the tactile and visible characteristics of the correlated commodity. Autonomy, on the other hand, has remained in the shadows, quietly verifying currency manipulation schemes. To the extent that autonomy was contemplated at all, it was probably seen by the rulers only as an embarrassment to their plans for debasement.
The endogenous value of autonomy
There is an inherent problem with assessing correlated repayment capacity because this value lies downstream from the integrity of the underlying monetary system. For example, if Ike depreciates his country’s currency, a shop owner who is owed a single piece of gold has his correlated redemption capacity reduced in direct proportion to Ike’s depreciation. If the store owner receives a coin with 50% less gold, the store owner’s correlated exchange opportunity for that valuable commodity has been reduced by 50%. Consequently, the correlated repayment capacity has no endogenous value; commodity holders can always depreciate the commodities they hold.
On the other hand, the value of autonomy is endogenous. All other things being equal, the harder it is for a schemer to degrade currency, the less the system will degrade, so autonomy tends to reinforce monetary integrity and that’s the value of autonomy, that’s that is to say that autonomy is upstream of monetary integrity. In the case of bitcoin, the autonomy of the currency avoids the debasement of schemers and ensures integrity over time. In the case of gold currency, currency autonomy can strengthen monetary integrity and strengthen correlated depreciation, but the reverse is not true.
Be specific in your speech
Marduk, the ancient god of Babylon, derived his mythical powers from the ability to see clearly and speak magic words. The importance of identifying, naming and analyzing the qualities of hard money cannot be underestimated. This process is essential not only because it clarifies our understanding of hard money (seeing clearly), but also because it sharpens our verbal toolkit in the process (speaking clearly). Without a rhetorical means to decouple hard money correlated repayment, “What is it backed on?” remains an elusive criticism to refute, however hollow it may be.
Bitcoiners intuitively understand the value proposition of autonomy, but this understanding is usually implicit. An explicit understanding of monetary autonomy accelerates Bitcoiners’ ability to educate and persuade nocoiners on the merits of bitcoin – the hardest money there is. Experience makes this point evident; Think about how many times you had remarkable thoughts, but lacked the words to articulate those thoughts until a meme, movie, or wordsmith came along and broke the rhetorical barrier for you. A prime example of this rhetorical power is the “pill” language of the creators of “The Matrix.” Terms like “red pill”, “blue pill” and of course, “orange pill” allow to describe a very heavy and abstract notion in a clear and precise way. Even if someone has never seen “The Matrix”, you can guide the newbie through the storylines and still make your point. The cumbersome notions that underlie hard currency pose similar difficulties. Through the use of anecdotes, a sharp verbal toolkit, and a clear understanding of hard money, Bitcoiners can shift the focus from correlated exchange to monetary autonomy and advance the dialogue.
This is a guest post by Rowdy Yates. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.