Where the value of money comes from

October 29, 2015 § 29 Comments

[18] But Jesus knowing their wickedness, said: Why do you tempt me, ye hypocrites? [19] Shew me the coin of the tribute. And they offered him a penny.[20] And Jesus saith to them: Whose image and inscription is this?

[21] They say to him: Caesar’ s. Then he saith to them: Render therefore to Caesar the things that are Caesar’ s; and to God, the things that are God’ s.

Matthew 22:18-21

All paper or electronic currencies (other than bitcoin and the like) have intrinsic value, because they are all options which entitle the bearer/owner to something else – something other than the currency itself – which is (that something else) of value. Fiat currency entitles the bearer to settlement of tax liabilities. Bank deposits entitle the owner to on-demand access to fiat currency, backed by the balance sheet of the bank. Gold-backed sovereign currency entitles the bearer to settlement of tax liabilities and, at least notionally, a quantity of gold.  Stock (often used as currency) entitles the owner to profits from a business and liquidation value of any excess over liabilities. Stock options entitle the owner to the purchase of stock at a particular price. Etc, etc.

Bitcoins entitle the owner to nothing at all.  Their ‘value’ actually is purely conventional, based on the deluded notions that people trading in them have about money.  They have approximately the same intrinsic value as a photograph of someone doing something stupid.

Note: I am sure there are old posts here, which I leave in place for the record, where I accepted the fairly conventional view that money is ‘nothing in itself’: that it was simply based on a vaporous ‘full faith and credit, so use it dammit’ assertion by the sovereign.  I was never especially comfortable with that view, and in recent years I’ve come to better understand why.

§ 29 Responses to Where the value of money comes from

  • I’ve not followed the recent series of posts very carefully, so I apologize if I’m missing the point.

    So currencies have intrinsic value because they entitle the bearer to settlement of tax liabilities. But Bitcoin doesn’t, because it entitles the bearer to nothing.

    If the sovereign government of Lezgistan begins to accept taxes paid in BTC, does Bitcoin gain intrinsic value? Only for the people of Lezgistan? What if the government of Lezgistan has questionable legitimacy, or is expected to topple next year?

    What if, instead, a large American corporation, more stable and trusted than the government of Lezgistan, declared it would forevermore accept BTC in exchange for its products and services at a rate pegged to the dollar? Would BTC gain intrinsic value then?

  • Zippy says:

    Ioannes Barbarus:

    If the sovereign government of Lezgistan begins to accept taxes paid in BTC, does Bitcoin gain intrinsic value?

    If Lezgistan passes a law adopting bitcoin as its official tax voucher then bitcoin is no longer bitcoin. It becomes legal title to something other than itself – the settlement of tax liabilities with Lezgistan – just as Caesar printing his tax vouchers on official gold coins makes those official gold coins into something more than just raw gold (title to settlement of tax liabilities with Caesar).

    Only for the people of Lezgistan?

    No, it is valuable to others as well because it can be traded to the people of Lezgistan. That ‘universal value’ will of course depend on the extent of the economic power of the government of Lezgistan, specifically its tax power.

  • Zippy says:

    I missed this:

    What if, instead, a large American corporation, more stable and trusted than the government of Lezgistan, declared it would forevermore accept BTC in exchange for its products and services at a rate pegged to the dollar? Would BTC gain intrinsic value then?

    If a company securitizes bitcoins – enters into a legally binding agreement to accept bitcoins as title to some specified rights terminating in its balance sheet – then yes, bitcoins are no longer merely a photograph of someone doing something idiotic but become a security for that company.

    However, this mental exercise demonstrates the foolishness, market-entangling distortion, and lack of transparency inherent to (e.g.) gold backed currencies versus pure fiat currencies: in effect the company has empowered external parties to issue securities against its balance sheet. It is as if Google had granted third parties an unrestricted right to generate or ‘mine’ newly issued Google stock by wasted computation, while giving the company nothing in return.

  • Zippy says:

    This by the way is why the countries which joined the Euro simply gave up their financial sovereignty, in so doing. Anything other than fiat currency is abdication of financial sovereignty.

    This in my view is why libertarians and the like are so tempted by things like gold backed currency, even though they tend to be financial imbeciles who don’t understand the first thing about property (not to mention their self-contradictory tyrannical stupidity when it comes to politics). They grasp at least inchoately that taking away the power to issue securities (currency) from the government is to take away the government’s sovereignty, and they just naturally, because they are so cussedly stubbornly stupid, go for anything that they think cripples sovereign authority, not understanding that this simply leads to even greater monolithic concentration of political power.

  • […] property is just to issue title to some sort claim against that property.  That is where every kind of currency gets any real value that it actually has: currencies entitle the bearer/owner to something other than the currency itself, and the value of […]

  • vetdoctor says:

    [8] But Jesus knowing their wickedness, said: Why do you tempt me, ye hypocrites? [19] Shew me the coin of the tribute. And they offered him a penny.[20] And Jesus saith to them: Whose image and inscription is this?

    [21] They say to him: Caesar’ s. Then he saith to them: Render therefore to Caesar the things that are Caesar’ s; and to God, the things that are God’ s.

    As I read this on a Sunday I find myself using the idea of Caesar’s fiat currency as a launching point to meditate on what God’s fiat currency might be.

  • Zippy says:

    vetdoctor:
    Perhaps it’s nature can be discerned in the Sermon on the Mount:

    [19] Lay not up to yourselves treasures on earth: where the rust, and moth consume, and where thieves break through and steal. [20] But lay up to yourselves treasures in heaven: where neither the rust nor moth doth consume, and where thieves do not break through, nor steal.

  • Josh says:

    Gold as money also entitles you to nothing except itself. I agree that gold is objectively more valuable than bitcoins, but the price of gold as money, even if it were not used to settle tax liabilities, might be much higher than its price were it a mere industrial comodity. In this case would you say that people are mostly valuing nothing? Would an alternative be that “money” is ontologically real and valuable such that when an object becomes “monetized” (granted this tends to happen to certain kinds of goods with intrinsic values) that this objective value “vests” in that good. Perhaps the intrinsic value of a Bitcoin is that it has all of the properties of a good money (except for non-monetary usefulness).

  • Zippy says:

    Josh:
    It confuses things to use the same terminology to refer to commodities used in barter and securities used in barter, if you will. Commodities just are themselves; securities entitle the bearer/owner to something else.

    Bitcoins are neither commodity nor security: they are merely an authenticated digital record of wasted computation.

  • […] financial security, generically speaking, is a contract or bundle of rights which entitles the bearer/owner to something else other than the paper it is written on or the computer memory in which it is recorded.  Financial […]

  • Andrew E. says:

    Zippy,

    What gives value to a fiat currency to those not of the realm? Why should one nation accept the fiat currency of another nation, not being subject to its taxes?

  • Zippy says:

    Andrew E:

    What gives value to a fiat currency to those not of the realm?

    The same thing that gives insulin value to those who are not diabetic: it can be traded to people who need it.

  • Andrew E. says:

    Then what of the situation of chronic trade deficits? For example, all trading partners with America get with our currency is more of our currency. And has been the case for many decades.

  • Zippy says:

    Andrew E:

    Then what of the situation of chronic trade deficits?

    I haven’t analyzed it closely, and don’t even have the conceptual tools to analyze it closely without doing a lot more work; but a relevant consideration – as I mentioned to Mike T in a different thread – is that when one sovereign nation stores up or otherwise creates economic dependencies upon sovereign securities issued by a different sovereign nation, it makes itself dependent upon the good will of that other nation. There is of course self interest involved with both parties too — similar to Apple accumulating Google stock or what have you. Google isn’t going to deliberately devalue its own stock just to hurt Apple though, etc.

    Again despite the fact that – like a corporation – the sovereign has theoretically plenary power to issue his own securities against his own balance sheet or equivalent (which at present is a black box that even he does not understand), that is only theoretical. In reality there are doubtless practical limits and definitely moral limits, though also-again these are not well understood by anyone, as far as I can tell — precisely because anti-realism is pervasive in all modern economic schools of thought.

  • Zippy says:

    One critical difference from the Google-Apple analogy is that there is no court to which the parties can appeal.

    So suppose theoretically, just to illustrate the situation conceptually, that the US decided to do a currency ‘cram down’. US citizens can turn in their dollars for newdollars one-to-one; non-citizens can turn in their dollars for newdollars fifty-to-one. Only newdollars will be accepted to settle tax liabilities.

    What can other countries do about that? Well, they can take their own steps to damage US economic interests – steps rooted in their own economies and sovereignty. And in the end they can go to war. But they cannot appeal to a court for a judicial remedy.

  • Andrew E. says:

    Typically international viability is handled through bilateral trade agreements and/or having the issuing authority place some kind of reserve behind the currency that is in some sense “harder” than the currency itself. The reserve’s job being to absorb excess domestic currency in trade.

  • Zippy says:

    Andrew E:

    Typically international viability is handled through bilateral trade agreements and/or having the issuing authority place some kind of reserve behind the currency that is in some sense “harder” than the currency itself. The reserve’s job being to absorb excess domestic currency in trade.

    Right, but again, those are ultimately only as good as the good faith behind them and the constancy of conditions which gave rise to the agreement in the first place. As in the case of a company, refinancing is sometimes made necessary by conditions and while that may piss off current stakeholders there really isn’t anything they can (or, often, should be able to) do about it.

    Morally the sovereign is constrained to honor his agreements, within limits. But there is no enforcer in place to make him do so, and in any event his duties are often the subject of controversy and should naturally be biased toward those in his care.

  • Zippy says:

    IOW unless a reserve of raw materials valuable enough to be financially relevant in the case of a dispute between sovereign nations is held inert and unproductive in the hands of a third party escrow agent, sovereign in his own right, nothing really changes. And even if you have a sovereign escrow agent in the unlikely situation that two contracting nations can put up raw materials with aggregate value that is even financially material in relation to the size of their economies, which will never happen for a whole variety of obvious and less obvious reasons, you then put yourself in the position of trusting the sovereign escrow agent — who by the way is holding all of the valuable raw materials, presumably with enough security in place to keep either party from just walking in and taking it whenever they feel that they are entitled to it.

  • Andrew E. says:

    Not if you have a reserve that can float in price as needed to be financially relevant at the nation state level without affecting the general price level. (see the ECB) And I’ll say no more about that.

    But the world is instead mired in a system that uses another currency to back all currencies in international trade. Itself backed by layers and layers of derivatives to maintain viability for as long as more layers can be added before it collapses.

  • […] the drive for ‘hard currencies‘ – for economic value which can be controlled by private individuals and groups on a […]

  • Andrew E. says:

    Currency reserves and currencies are two different things. And the former does not preclude monetary authorities from creating as much or as little of the latter as it sees fit to. I am not, in any way, talking about “hard” currencies.

  • Zippy says:

    Andrew E:
    If by “currency reserves” you mean the balance sheet or equivalent in which the currency qua security entitles claims, then you are just begging the question.

  • Andrew E. says:

    Currency does not entitle one to currency reserves. Reserves are used by monetary authorities to manage the value of the currency. Accumulate reserves to put more currency into circulation, dishoard reserves to take currency out of circulation.

  • Zippy says:

    Absent question begging in favor of some specific model with which I have not agreed and likely don’t agree, the label ‘currency reserves’ refers to an element of the ‘balance sheet or equivalent’ to which I refer. The capital structure of claims against that balance sheet I have not specified, nor its contents. If the price of currency depends on [label] then [label] is either a part of the balance sheet equivalent or an external market factor.

  • Andrew E. says:

    As an example, here is a recent consolidated financial statement for the European Central Bank. With lines 1 and 2 on the asset side of the balance sheet being the currency reserves available to the ECB to manage/defend its currency. What is your interpretation of this structure?

    https://www.ecb.europa.eu/press/pr/wfs/2015/html/fs151007.en.html

  • Zippy says:

    Andrew E:

    Also FWIW my posts aren’t really ‘about’ you, though I appreciate you engaging the discussion. My latest post for example is addressing the commonplace in the reactosphere that gold, or ‘hard currency’, or other proposals besides fiat dollars would improve transparency and just generally be a good thing. It is my view that fiat currency is actually quite a bit more inherently transparent and less abstract than alternatives, although significant conceptual work has to be done to ‘get there’ if you will. But we’ll never ‘get there’ if we chase squirrels, and reactionary diatribes against fiat currency are in my view a squirrel chase.

    Whether all that makes me a lunatic on the street corner with a sign, a genius, or just some guy who happened to be standing in the right place to see what caused the train wreck, I’ll leave up to others to determine.

  • Zippy says:

    Andrew E:
    My interpretation of the ECB balance sheet is that it has no connection to the underlying reality of the economic powers, rights, and securities it proposes to represent: it is based on an entirely false model of reality.

  • […] But short of the Zombie Apocalypse, securities have value because under the laws of the sovereign they entitle you – the owner or bearer of the security – to something other than the security […]

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