One of our favorite japes is about the group of scientists who figure out the secret to life — a way to make a human being from nothing but dirt. When they’ve worked it all out, they are so excited they go directly to God to announce their discovery that He is no longer necessary. He appears a bit surprised, but they offer to demonstrate. He nods. One of the scientists bends down and scoops up a fistful of dirt.
“Oh, no,” God exclaims. “You’ve got to make your own dirt.”
This is how we feel about bitcoins. The idea that one can make money — specie — out of thin air just strikes us as illogical. The money is gold and silver. Bitcoins, as we comprehend the whole business, could be a form of currency. But money is a different matter. It’s not merely the scarcity of gold and silver that make them money. It’s their innate qualities, which have endured over millennia.
What put us in mind of this today is Newsweek’s scoop in tracking down the founder of bitcoins, Satoshi Nakamoto. It found him standing shoeless at the end of his “sunbaked driveway” looking “timorous” and “annoyed,” it says. It describes Mr. Nakamoto as “tacitly acknowledging his role in the Bitcoin project” by looking down and “staring at the pavement” as he “categorically refuses” to answer its questions. “I am no longer involved in that and I cannot discuss it,” Newsweek quotes him as saying.
If Newsweek asked him about gold, the story has no mention of it. Yet our own sense of bitcoins is that they are a commentary on — a phenomenon of — the age of fiat money. They are similar to the money being issued by the Federal Reserve, in that they are electronic files generated on and transmitted via computers. Federal Reserve notes are redeemable, as a matter of statute, in lawful money, meaning other electronic files or paper scrip or base metal slugs.
One of the big weaknesses of government money is that it is legal tender — that is, it must be accepted as payment for a debt, public or private. This is one of the features of government money that prevents the discovery of its value: One doesn’t actually have any idea of what would be the value of a government dollar were one not forced to accept it as a matter of law. Can anyone imagine that were a Federal Reserve Note to lose legal tender status it would go up in value?
In this one sense, bitcoins are at a relative advantage over Federal Reserve Money, or what Lawrence Parks of the Foundation for the Advancement of Monetary Education calls “irredeemable electronic paper ticket currency.” For the acceptance of Bitcoins is purely voluntary. They are not legal tender, and if someone tried to pay his taxes or mortgage with them, neither the government nor the bank would be required to accept.
Nor would they, incidentally, be required to accept gold or silver. This is one of the bizarre features of the fiat system. The irredeemable electronic paper ticket money is deemed superior under the law to the real thing, which is no longer legal tender. This, in a sense, is the one hope of bitcoins, that they, too, will emerge as superior to real money. It brings to mind the the Founders of the American constititutional system.
How humiliated they were by the financial fallout of the Revolution. It was paid for with the electronic paper ticket money of their day — the continental dollar. It soon became irredeemable (“not worth a continental”). This is why the Founders, when they first exercised the monetary powers the Constitution granted to Congress, insisted that the first Coinage Act define a dollar as a fixed amount of silver or gold.
Whatever else can be said about them, the Founders had enough wisdom — humility — to understand that they couldn’t create money any more than the group of scientists in the famous jape could create life. The bitcoin system may have, as it does, a process called “mining” in which coins are created. But using the word “mining” does not make it mining in the monetary sense. This may be — we can but speculate here — what accounts for Mr. Nakamoto’s silence.