Jeffrey Tucker

“Thanks to Bitcoin, I am now living debt-free, just today managed to pay off all of my credit card debt!” — so reports a poster on Reddit, and the statement was echoed by many others. A currency that not only discourages debt, but earns enough money to pay off previous debt, plus encourages saving?

It seems unthinkable to people today. That’s because none of us in living memory has had experience with a currency that rises in value. The emergence of Bitcoin — a digital currency that has grown in purchasing power over time — has changed that experience dramatically. As a free-market currency, it does what currency should do, which is increase in value over time.

Conversely, government currencies usually fall in value. That’s the only kind of currency we’ve known throughout our lives. This reality affects our personal financial decisions in ways that we aren’t always aware of. We’ve come to assume that there is no inherent prize to be won by merely holding money.

With paper money, governments and central banks are in a position to punish holding money. Because it can be created without limit, discipline vanishes. Individuals, families, businesses, and government can ramp up spending without limit and avoid the consequences of their behavior. There’s no reason for them not to be profligate.

The dollar didn’t always behave this way. During the Second Industrial Revolution, after the Civil War in the so-called Gilded Age, we had a gold standard. Prices were generally declining for everything. Another way to look at it: The dollar was growing more valuable. It’s almost impossible for us to even conceive of a world that worked this way.

The dollar bought three times as much grain in 1894 as it did in 1867. It bought nearly twice as much cotton in 1877 as it did in 1872. Farmland became more affordable. In general, the dollar gained 2% in value through the whole period. Wages were falling nominally, but rising in real terms, simply because the dollar could buy more. You were getting raises even without begging the boss.

During the same period, population soared and output expanded at levels we’ve not seen anywhere in living memory. Today, we celebrate 2% and get on our knees in gratitude that production isn’t generally falling. But back between 1870-1890, we saw growth rates of 6% and more, and that became the new normal. Sound money was the basis of unprecedented prosperity.

The 20th-century experience flipped our expectations for what money should do. Especially in the postwar period, the falling value of the dollar punished savings and rewarded spending. This is exactly what the Keynesian economists hoped for. They wanted money always circulating and never “hoarded.” “Deflation” was to be avoided no matter what.

To be rewarded for savings, we needed interest that outstripped inflation. That worked for a while, but starting about 20 years ago, the central bank conspired to deny us even that. Today, there is no reward whatsoever. There’s no point to keeping paper around. We hold money only to prepare for future uncertainties, not as a way of investing.

How does this affect the culture? It has a profound effect. It means that people need to be constantly nudged to save. We anticipate losses in holding money, but expect gains by buying and holding stuff like homes. We spend what we can and live at the height of our earning power, which is to say slightly beyond our means. This is the pattern by which many generations have lived.

This tendency has dramatically depleted the capital stock. Again, Keynesians have celebrated this as a wonderful thing. Actually, it is a terrible thing, because it puts the entire economic structure on life support. We end up depending more and more on the central bank and less and less on our own personal wealth. Debt becomes the basis for life itself. If anything threatens to cut off the flow of relentless credit, everyone freaks out.

How does Bitcoin change this? It rewards holding money. It impresses upon the human mind that the cost of spending money is not just the money spent, but also the foregone gains that you would have otherwise realized by saving.

You can try this experiment at home. Let’s say you have a problem teenager who lives like everyone else, throwing around cash and seeing no point whatsoever in saving money. Send that kid a Bitcoin and see what happens, even without hectoring instructions.

To be sure, he could spend it right away on or somewhere else. But there would be hesitation before that happened. After all, on Jan. 1 of this year, Bitcoin was worth $15. As we write, Bitcoin is trading for $218 on the most popular exchange, Mt. Gox.

The thing has been increasing in value daily. Far from wanting to spend it, there would be every reason to hold it.

The kid would even become reluctant to spend on fripperies. Even the act of spending means a current and future loss.

To be sure, this value-increasing pattern of Bitcoin is taking place ridiculously fast, but the point remains: With sound money, there is merit to saving. It is not even something you have to teach. It is something that is built into the program. It changes all our incentives.

Bitcoin is based on the idea that the money supply can and should be fixed. There is an upward limit of 21 million Bitcoins that can be created, and none of us will be alive when that limit is reached. In the meantime, only one Bitcoin “block” is added to the existing stock every 10 minutes. You can’t create more by pyramiding loans on top of existing Bitcoins. A credit market can emerge, and they surely will be these markets, but they won’t actually cause new units of the currency to magically come into existence.

That’s why Bitcoin is often described as a “deflationary” currency. This is exactly why Paul Krugman hates it so much. He very astutely observed in 2011 that this currency means the end of the pattern of a full century, and this is why he hates it:

“In effect, Bitcoin has created its own private gold standard world, in which the money supply is fixed, rather than subject to increase via the printing press…

“What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin…

“And because of that, there has been an incentive to hoard the virtual currency, rather than spending it. The actual value of transactions in Bitcoins has fallen, rather than rising. In effect, real gross Bitcoin product has fallen sharply.”

Here’s what beautiful about this experience: It doesn’t matter in the slightest what Paul Krugman thinks. It doesn’t matter how many economic experts Paul Krugman lines up to oppose Bitcoin. It doesn’t matter how many Nobel Prize winners denounce it and oppose it. That’s because Bitcoin is not a “policy” invented by elite and privileged intellectuals. It is a market-based currency, one created by an entrepreneur and chosen by market players.

And this brings us to another lesson that Bitcoin has taught us. Money is like any other good in society in that it can be produced and managed entirely by the free market. This is the reverse of what scholarly opinion has said for more than 100 years.

Every expert will tell you that the state has to create and manage that money. If we do not do that, we’ll have chaos on our hands. Bitcoin proves the opposite, that a money can emerge from within the market itself, based purely on voluntary behavior, and needs no privileged elites to manage it.

That is an essential postulate of the free society. When government gets hold of the money, freedom is in peril. When the market makes and manages money, freedom has a built-in reinforcement in half of every transaction. In short, just based on our experience with Bitcoin so far, we see the conventional wisdom of a century completely turned on its head. Fantastic!

Should more and more of the world’s money supply be gradually converted to crypto-currency, we will see changes in the way people and businesses manage money. We could see our pattern of capital depletion reversed so that capital accumulation again becomes the norm. People have every reason to get out of debt and start saving again.

Even our teenagers will learn a thing or two about putting off currency consumption and sacrificing now for greater gain in the long term. It’s all so beautiful: the reassertion of the old verities within the most postmodern technology one can only imagine!

Most exciting of all, with money back in the hands of the market — made sound by the brilliance of well-written software — the prospects for freedom will become bright again.


Jeffrey Tucker

Original article posted on Laissez Faire Today

Jeffrey Tucker

I'm executive editor of Laissez Faire Books and the proprietor of the Laissez Faire Club. I'm the author of two books in the field of economics and one on early music. My main professional work between 1985 and 2011 was with the MIses Institute but I've also worked with the Acton Institute and Mackinac Institute, as well as written thousands of published articles. My personal twitter account @jeffreyatucker FB is @jeffrey.albert.tucker Plain old email is

Recent Articles

It’s Time to Buy Microcaps for Double-digit Gains

Greg Guenthner

Yup, small-caps are setting up for a comeback year. In fact, I believe they'll retake a leadership role in the markets in 2015. So now's your chance to set yourself up for potentially massive gains before these stocks start grabbing headlines again. Or... you can simply wait until some ex-purt on CNBC or Fox recommends them - and miss out on half the party. Your choice...

Can Money Printing Cause Deflation?

Marc Faber

"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...

How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”

Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...

The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.

Forget the Oil Crash – Crush the Market With Biotech Stocks

Greg Guenthner

The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.

How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.