Why Gary North Is Wrong About Bitcoin (Part 2)

bitcoin threatI guess Gary North and I have a public disagreement underway. I respect the man’s work, so I’ll try to avoid this becoming personal.

Gary’s new piece is entitled Bitcoins: The Road to Investment Hell Is Paved With Good Intentions. In it, his primary argument is that Bitcoin doesn’t pass muster as “money,” according to Austrian economic theory.

Here We Go…

I’ll start by responding to a few of Gary’s assertions, and then I’ll delve into the economic arguments. Again I’ll quote Gary in italics and respond in a plain font.

I can say this: nothing in his defense of Bitcoins [sic] as money is even remotely Austrian. It ignores the market.

Bitcoin is nothing BUT market. There are no legal tender laws enforcing its use, there is no 5000 year tradition behind it. Without the market, Bitcoin would be inert computer code.

What I am waiting for is a detailed defense of Bitcoins [sic] from an Austrian school economist or economic historian. I want to see how the Bitcoins [sic] market corresponds with the Austrian school’s thesis of the regression theorem: money as a market product that has come in response to the transition of a widely used commodity into money.

See below.

Here it is, in no uncertain terms. The Menger-Mises regression theorem was good for its day, but we live in a New World Order, a world of digits. Now we must abandon the old Menger-Mises theorem.

I did not say that Menger or Mises should be abandoned. I think that would be foolish. But we are dealing with a new type of currency, and it needs to be judged against the real world.

But, perhaps I wasn’t clear enough. One point for Gary.

He says that “Bitcoin is nothing but the operation of market forces – there is zero coercion involved.” True. But it is not money.

“Bitcoin is utterly decentralized – there is no center at all.” True, but it is not money.

“Bitcoin is utterly unplanned – it involves a million people, all doing their own thing.” True, but it is not money.

The argument here is over the definition of “money,” and it has nothing to do with how Bitcoin is used in real life. Again, more below.

[Bitcoin] is in the midst of a mania – the desire to hold digits, in order to make money in dollars. Digits are the asset. The dollar is money. It is not the other way around.

Not to be rude, but when an advocate of sound money holds up the dollar as real money, it’s time for that person to take stock of him or herself.

Is Bitcoin a mania? I don’t see it that way; but honest observers may disagree. There have been several “crashes,” and very few bitcoiners panicked. The reason, as I see it, is that they want to use the currency. It’s simply better money.

It is clearly an investment. It is in a mania stage. He can close his eyes, clap his hands, and say “Tinkerbell is not an investment,” but she is.

Tinkerbell aside, Bitcoin is not an investment in any proper sense. (It doesn’t produce, has no income, expenses, etc.) If people treat it as one, as some must be doing, that’s their problem.

Mr. Rosenberg calls himself a cryptohippie. He runs a cryptography service called Cryptohippie (www.cryptohippie.com). My assessment: its name targets a narrow audience: hippies who are interested in crytography and privacy. This is not the average Joe.

Our customers do value privacy, but they come from all across the spectrum, including many investors and even a surprising number of grandmothers.

This is Austrian school monetary theory. Accept no substitutes!

I like the Austrian School too well to treat it as an idol.

The crucial economic issue is the imputation of value by investors and owners of Bitcoins [sic]. What motivates them? A fast buck! A lot of fast bucks! Bucks are money. Bitcoins [sic] aren’t.

The people I see in Bitcoin (and I suspect that I see more of them than Gary does) are in it for the long term. They USE Bitcoin. When they find that their bitcoins buy more goods than before, they spend some of their Bitcoin on those things but continue to accept it as payment from others. They USE it.

And none of this proves anything about Satoshi’s intent.

Bitcoins [sic] did not go from a price of $50 for 10,000 in 2009 to the price of an ounce of gold in late November 2013 based on what the mysterious Mr. Nakamoto thought he was doing.

Precisely! The market did that. No coercion was involved. Tradition wasn’t involved. People had to WANT Bitcoin, and they had to overcome plenty of intimidation along the way.

Economic Analysis

Gary writes:

To the cryptographers who want to be Austrian school economists, I say this: begin with Menger and Mises on the origin of money. Do not begin with Mr. Nakamoto.

That is a very good point. Let’s look at that for a moment.

  • The Menger-Mises Regression Theorem is first and foremost an observation of how money came into being historically, without coercion.
  • It should also be noted that there’s a big difference between what people treat as money and what should be money from an Austrian perspective. Confusing those two is to go from an is to an ought.
  • There are two components to valuing something as money. One is through its perceived usefulness as a commodity; the other is the perceived usefulness as a medium of exchange.
  • It could be argued that Bitcoin lacks any perceived usefulness as a commodity (which might be misguided) while at the same time increasing in perceived usefulness as a medium of exchange, which increases the price. This is true of other “monies” as well – the USD, EUR, and specifically for the Chinese currency, where we can see a spread and price increase because of it is increasing usefulness.
  • It isn’t suitable to fall back on the regression theorem. It would be of value in a coercionless world, but that is not where we live. We live in a world where currencies are used as money and are backed by coercion.
  • The real game changer is that Bitcoin is useful as a medium of exchange without coercive protection.
  • As some people come only for the price increases, two price components are created: perceived usefulness as a monetary instrument, and speculating for price increases.
  • Speculation may be a misguided approach, but as Austrians, we assume that the market will find a price that satisfies the market.
  • Speculative price increases create problems for Bitcoin’s use as a monetary instrument, but these problems are symmetric, very much like they are in deflationary periods of currencies. When the Swiss franc rises due to EUR or USD issues, it does not become less ‘money.’
  • Price adaption for products sold for bitcoins is the reaction. Prices in Bitcoin fall more dramatically than the price of Bitcoin increases, because the speculative view of Bitcoin holders can also be found in Bitcoin seekers.
  • At some point, we will have a price overstep and a correction. That’s exactly what we see everywhere else. The difference is that the Bitcoin market is still small, and that uncertainties (regulation, etc.) are still looming.
  • From a “properties of money” perspective, Bitcoin qualifies in more ways than the dollar. And it is more useful than gold in the current environment, at least in the West.

One more question: Did the dollar stop being money when the gold window was closed and it escaped the Austrian regression theorem?

I’ll close by repeating my primary point in this discussion:

What’s important about Bitcoin is NOT the price but that it bypasses coercion.

Bitcoin is Freedom Money.

Paul Rosenberg

Why Gary North Is Wrong About Bitcoin

gary north bitcoinI like Gary North. I appreciate his work and I spent a very pleasant hour hanging out with him at FreedomFest a few years back. We have mutual friends. I saw the headline for his anti-Bitcoin article but didn’t take time to read it until we got several emails asking about it.

So, with respect that is due, here’s why Gary is wrong, point by point:

Ponzi Economics

I’ll quote Gary in italics, then respond in a plain font. The section titles are his.

… someone who no one has ever heard of before announces that he has discovered a way to make money. In the case of Bitcoins [sic], the claim is literal.

First, whether we’ve heard of him or not is meaningless, and here Gary sets a negative, suspicious tone.

Second, Satoshi didn’t say he could “make money,” he created a program that would verify cryptocurrency. That’s not really the same.

He made this money out of digits. He made it out of nothing. Think “Federal Reserve wanna-be.”

Money out of digits isn’t true at all. Bitcoin is money made with cryptography – with mathematics. And as much as I like Gary’s preferred gold and silver, mathematics is eternal, built into the very nature of the universe. That’s hardly a soft foundation. Those who don’t understand mathematics may jump to the conclusion that Bitcoin is “unbacked,” but that position is simply ignorant.

Likewise, to call Bitcoin a Fed wannabe is opposite to the truth. Bitcoin is the Anti-Fed.

The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in… The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits.

And Gary knows this how? (Suspicion is not a proof.) If fact, he can’t know it, and that’s one of the beauties of the currency – there are no names attached.

And how was the money “siphoned off”? Someone, we don’t know who, started mining bitcoins, a fairly difficult process. In other words, they worked to get it, just like people work to get gold out of the ground. Gold miners and early Bitcoin miners – in identical fashion – made big initial finds. Shall we despise and accuse them for it?

Lastly, Satoshi did NOT “tell his story” or “create demand.” Satoshi disappeared. Gary can guess that Satoshi is working under some other name now, but he has no way of knowing that.

The coins will never be the money of the future. This is my main argument.

“I know what will happen in the future” is very poor logic and is very far from compelling.

The Austrian Theory of Money’s Origins

Gary begins by quoting old definitions of money. There is nothing particularly wrong with those definitions, but are they supposed to negate progress for all time? To freeze the world in place? Should they make any new adaptation evil? I hardly think that was their intent.

Here is the central fact of money. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services.

Bitcoin is nothing but the operation of market forces – there is zero coercion involved.

Bitcoin is utterly decentralized – there is no center at all.

Bitcoin is utterly unplanned – it involves a million people, all doing their own thing.

As for speed, the Bitcoin idea was created in the 1990s and has been implemented for almost five years. How slow is slow enough?

No one says, “I think I’ll invent a new form of money.”

Yes, they do! That’s precisely what the first person to use gold did!

Bitcoins Are Not Money

Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time.

Honestly, this reads like an appeal to envy.

As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it… [like] late investors in Charles Ponzi’s scheme thought they were buying into the arbitrage potential of foreign postage stamps.

I’m sure some people will think of Bitcoin as an investment (which it is not) or that it is an arbitrage vehicle (which it is not) and will do stupid things. Some people always do stupid things. So what?

I and many others have been saying that Bitcoin is a cryptocurrency, not an investment. We’ve also warned incessantly that it is new and has enemies. In a How to Use Bitcoin report we issued just last week, we said “This is not a place for the timid,” and, “There are no guarantees.”

Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money.

Here we see something sad and ironic: a man who hates the Fed, trying to ruin the one tool that can actually slay the Fed.

Bitcoin is not important because its price is rising – it’s important because it takes the control of money away from the cartel.

Concern with the dollar equivalent is a fetish, a distraction. The purpose of Bitcoin – the intent of Satoshi – is not to play price games, but to dis-empower the fiat cartel.

Just Say No

In order for Bitcoins [sic] to become an alternative currency, there will have to be millions of users of the currency.

Umm… there are, or at least soon will be. Everything new starts from zero.

They will have to develop in a market on their merit as money.

Perhaps Gary is unaware, but tens of thousands of people are using Bitcoin precisely because it is better money. Consider sending money to your cousin in Manila via a bank wire or Western Union; then compare that to sending Bitcoin.

What Goes Up, Comes Down

… the market will unravel. It will unravel for the same reason that all Ponzi schemes have unraveled: not enough new buyers. When the new buyers do not show up in great numbers, the holders will start to dump them.

There have been several “crashes” already, and the majority of Bitcoin holders sat firm – because they actually USE the currency and want to continue using it.

Furthermore, “buyers” is mostly a misnomer, applying only to the most ignorant Bitcoin holders.

This mania is going to be the stuff of best-selling books. This is going to be this stuff of Ph.D. dissertations in economics and psychology. This is going to be the equivalent of Mackay’s book, Extraordinary Popular Delusions and the Madness of Crowds.

Translation: “People will make fun of you!”


Anytime that anybody tries to sell you an investment, you have to look at it on this basis: “What are the future benefits that this investment will give final consumers?”

Again, Bitcoin is NOT an investment. And the benefit it gives is obvious: it’s better currency.

There is no economic justification of buying Bitcoins [sic] as an alternative currency.

A million of us have learned differently. All you have to do is try: Send a hundred dollars by Western Union, then send them by Bitcoin. Compare.

it was impossible as an economic concept from the beginning. The Austrian theory of money shows why.

I know Austrians who disagree.

I do not invest in capital that has no economic justification other than the greater fool theory.

So, Bitcoin users are “fools”? Hardly a charitable position to take.

My Conclusion

It’s a tragic thing: Precious metals people have been complaining about the Fed and the fiat currency cartel for decades. Then comes a tool that empowers them to both ruin the cartel and to free their precious metals… and they do their very best to destroy it.

I find the arguments in Gary’s piece to be misleading and wholly unconvincing, and I hope my reasoning is fairly clear.

But, all that said, take a look at both and make up your own mind.

Paul Rosenberg