Bitcoin and the nature of money

I’ve quoted Alan Watts before on the nature of money, and written on the topic in more detail.

What wasn’t understood then, and still isn’t really understood today, is that the reality of money is of the same type as the reality of centimeters, grams, hours, or lines of longitude. Money is a way measuring wealth but is not wealth in itself. A chest of gold coins or a fat wallet of bills is of no use whatsoever to a wrecked sailor alone on a raft. He needs real wealth, in the form of a fish rod, a compass, an outboard motor with gas, and a female companion.

And I thought of it again whilst thinking about bit coin. Bitcoin is a ‘digital currency’ that is in the news at the moment due to its wild fluctuations. In fact, whether we can call it a ‘currency’ or not is part of its problem. There’s been loads written about it recently, some of which is quick to claim that it’s not a currency at all.

I quite like the Washington Post’s take on it. It deals with what is for me the most interesting thing about bit coin – it is forcing people to think about what money is.

…money has almost nothing to do with physical form. It also doesn’t have much to do with who creates it: The dollar bills were issued by the Federal Reserve, the checking account created by my neighborhood bank, the money market fund was created by a mutual fund manager, the gold was mined out of the ground, and the refrigerator was made by General Electric.

Rather, what makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can’t, it isn’t. Money is memory, said Narayana Kocherlakota in an important 1996 paper (he is now president of the Minneapolis Fed). It is the way we as a society record how much capacity to buy stuff each of us possess.

They also reference an Onion article entitled “U.S. Economy Grinds to Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.” to help make their point.

This is inline with Watts talk of money as measurement. Bitcoin idealists I guess use this to legitimise themselves; it is just another, radically different (in its lack of centralisation) measurement tool. The Post, however, posit some retorts – one of which is that currency like the Dollar is not just ‘socially’ accepted as currency, it is effectively enforced by the most powerful entity on Earth – the U.S. government. And both the Post and the Guardian bemoan it’s like of liquidity and central control to keep it liquid.

Still, it’s nice to see this debate being played out. Watts was keen to get us to remember that money is not wealth. Bitcoin helps us remember this, I think. Interesting times ahead.

See also: Money and Wealth