Ep. 151 Krugman Is a Crypto-Skeptic, and for Lousy Reasons

11 August 2018     |     Tom Woods     |     21

Krugman advances two main arguments against cryptocurrency. One of them, it turns out, applies equally well to the U.S. dollar, a point Krugman fails to acknowledge. Neither argument carries much sting, and in fact cryptocurrencies can parry Krugman’s criticisms without breaking a sweat.

Krugman Column

Transaction Costs and Tethers: Why I’m a Crypto Skeptic” (July 31, 2018)

Contra Column

Dear Krugman, Here are 7 Problems That Cryptocurrencies Solve,” by Mark E. Jeftovic

Book Mentioned

Understanding Bitcoin, by Bob Murphy and Silas Barta

Related Article

Let There Be Money,” by Bob Murphy

The Contra Cruise!

Join Bob, Tom, and special guests for the third Contra Cruise — the best liberty week of the year!

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  • https://2vnews.com 2VNews

    Paying taxes in dollars does provide a floor, the floor is zero.

  • https://2vnews.com 2VNews

    Does bookkeeping count as a commodity?

  • ProfessorBernardoDeLaPaz

    Tom loves Mises to pieces.

  • LP

    So, taxes collected and tracked in a particular currency pretty strongly depresses the value of the currency. After all, direct exchange is nearly impossible to track, which makes it nearly impossible to tax.

  • Danan

    As much as it pains me to say this, I believe Krugman is right, and Bob is wrong when it comes to the taxation argument for money. I don’t come from a pro-gold perspective, just a theoretical economics one.

    Bob says that hyperinflation episodes show that just because there is taxation, we can’t be sure of the value of a currency, or that it has a real “floor.” But there’s a reason for the hyper(-price-)inflation: the amount of currency in circulation increased. That’s a choice variable for the central bank/government.

    If I issue one billion Krugman-coins as a fiat currency and require each of my one million citizens to pay me back at least 100 on day X the next year, it’s going to have a substantial exchange value, as everyone tries to secure some.

    Put differently: Depending on the taxation scheme (head tax, sales tax, income tax,…) and the amount of currency issued, there’s going to be a certain baseline demand for currency to be able to pay the tax. Of course we can’t say with certainty what that price will be, just as we can’t say what the non-monetary demand for gold will be in the future precisely. Requiring people to use something they can get through exchange will create demand for it. Of course, price is dependent on demand as well as supply, and the government can choose to change the latter, too. That doesn’t really defeat the argument.

    Ironically, hyperinflation kinda proves the point. No matter how hard incompetent governments managed to mess up their currency, people still used them. They still were taxed in those terms. Why did Germans pay kids to carry bills around in wheelbarrows instead of using silver coins? Maybe to some extent because the government wanted Reichsmark, not silver.

    • Clayton Soultz

      To defend Bob a bit, he was a bit more nuanced in his liberty classroom lecture on Mises and the value of money. There Bob conceded that taxes may keep money’s value from going to zero, so you could maybe say that taxes are sufficient to give money value greater than zero, but there is nothing about taxes that give dollars a meaningful non-zero floor.

      Gold’s value as money will always be *at least* its relative value as a commodity relative to supply and demand, just like any other good. It would take an almost unfathomable change in our physical condition to make a pound of gold worth less than a loaf of bread, and even if it did, we could explain why it was based on “real” forces.

      There is no such limitation to fiat currency – it is incredibly feasible that $1,000,000 would be insufficient to buy a loaf of bread by 2100. Taxes may keep the value of money from being literally zero, but mathematically it’s an asymptote, with a limit of zero as money supply approaches infinity. You can see how this is a pretty weak case to make, and why the “man-on-the street” would not care about limits and asymptotes when his money is *essentially* worthless.

      • Tyler Folger

        Also, in the long-run, taxes don’t prevent the value of money from being literally zero. Currencies that undergo hyper-inflation are often destroyed and have to be replaced. The threat of imprisonment is a risk with a certain probability that participants in the market weigh against the gains of defying the law. Black markets and exchange in other terms besides money do become ubiquitous during hyper-inflation.

        And part of the process of hyper-inflation….that is the part that really makes it “hyper”….is precisely the fact that the government loses control of the value of the currency. It isn’t a choice variable for them. Consumer confidence begins to send the value of the currency into free-fall independent of whatever the government / central bank tries to do from that point on.

        The attempt to tie the value of money to taxation in tautological pure economic terms is akin to a physicist saying that the rotation of a car’s wheel is related to the rotation of its steering wheel, by definition, instead of indirectly by successful manipulation of the real fundamental cause. The difference is subtle but it becomes relevant when car designers start talking and making engineering decisions as though the wheels can never come off or just behave independent of the steering. At that point, somebody needs to step in and tell them that they’re being absurd.

      • Danan

        Well, obviously supply and demand are based on subjective valuations by people, so both can vary wildly. Gold has properties that make it harder to increase the supply by obscene amounts in a short time frame. With fiat currency, it’s of course possilbe to hyperinflate, but to their credit (and again, I hate writing this) central banks have become much better at understanding this isn’t a smart move. M2 and the rate of price inflation are both incredibly predictable, year by year.

        Gold can lose value rapidly if either: A) the supply side, if we find massive new deposits, or even more rapidly if we learn how to cheaply synthesize elements; or B) the demand side, if people simply stop using it as trinkets, culturally, and find alternatives for commercial uses. And the importation of South American gold did create massive inflation in Europe, as did the King of Mali’s hajj throughout Arabia.

        Both gold and fiat money have various sources for their demand. They can both theoretically see their price collapse all the way down to almost zero. You can argue that gold prices prove historically more stable against other goods, and fair enough, that’s true. But either way, taxation mandated in a curency does produce a baseline (“non-monetary,” if you will) cause for its demand, the same way alternative uses for gold do. The supply side is more of a policy choice variable. You could imagine a fiat currency run by a Friedmanite computer algorithm that is more stable than gold.

        TL;DR: My point is that mandatory taxation is a valid reason to demand a currency. Obviously, knowing a single use case is not sufficient information to determine a thing’s market price. If that was the case, we could run the economy by a bunch of Marxists. Given that, I fail to see Bob’s argument here.

  • martinbrock

    Credit money is not backed by a bank’s “fractional reserve” of a standard of value like gold. It’s backed by collateral securing the bank’s extensions of credit, like mortgaged houses. Gold in the bank’s vault only serves to provide liquidity, to meet immediate demands for gold by the bank’s depositors.

    Most depositors don’t deposit gold. When a bank issues notes accounting for an extension of credit for the purchase of my house, I (the seller of the house) don’t deposit gold in the bank. I deposit the notes. The value of gold in the bank does not back the notes I deposit. The value of the house I sold backs the notes.

    The bank has enough gold, over time, to redeem notes for gold, because many buyers of valuable houses (or holders of other valuable collateral) provide this gold to the bank’s depositors, over time. The bank never has, and need not have, all of this gold in a vault at one time. If it did, it wouldn’t be extending credit.

  • Bob_Robert

    Competition in currency. No wonder Krugman balks.

  • Greg Strebel

    Ha ha. Paraphrasing: “Fiat currency has reliable value because it’s imposed by government men with guns.” I guess Krugman hasn’t noticed that Venezuela’s Maduro has plenty of men with guns.

    • Bogart

      And the government there has made plenty of currency.

  • NoMoreFed

    This was a really interesting column by Krugman, particularly the part on tethering. On this section, I actually mostly agree with Krugman. He actually helps to make a case for gold as a form of money, and I believe he is correct that this is the major problem with cryptocurrencies.

    The biggest gem is that Krugman says, “fiat currencies have underlying value because men with guns say they do.” Aside from being sexist for not including women, Krugman is explicitly stating that government is backed by violence.

    While I don’t think the acceptance of US dollars for tax money is the only thing that gives the dollar value, I do believe this is a big part of it. When Bob was trying to counter this argument, I wish he had addressed the legal tender laws. The fact that there are legal tender laws and taxation on capital gains for gold and silver do play a major part in making dollars acceptable as a form of money, as the government effectively outlaws competition.

  • Joe Cushing

    The US dollar is a commodity backed currency and it has been so ever since Nixon, in the early 70s, made the deal with Saudi Arabia to offer “protection” in exchange for the country only selling oil in US dollars and investing surpluses in US debt. This was cemented further as every other country in the region fell in line over a 2 year period after that.

    Now, if you are a company in Spain, and you want oil, you must first get dollars. You can sell things to people in the US or trade Euros with other people who have. Then you can get access to the oil in the middle east. There is a reserve of the oil just as there could be a reserve of gold. What’s different from gold is that oil is used up but its rate of extraction determines supply.

    It’s an interesting note that any middle eastern country that has tried to sell oil for Euros or gold since this petrodollar deal has been made, has had a leader with a lost head or a major embargo preventing the country from trading with the rest of the world. In this sense, the US government has taken control of all of the oil reserves in the middle east. All that war debt is the cost of maintaining the dollar. Keeping middle eastern countries fighting each other weakens them and makes them easier to dominate.

    Iraq was selling oil for Euros between the gulf wars. They were getting a premium for it. They really needed the money. The first thing the Americans did after the invasion of Iraq War II, was to put them back on the petrodollar causing them to lose their premium.

    Petrodollar: histories largest and deadliest protection racket.

  • http://www.economicsofbitcoin.com/ Peter Šurda

    Bob, I think that instead of analysing the economic foundation of the fiat/commodity money dichotomy, you’re using linguistics and historical examples, and are mistaken.

    If you try to produce fiat money without government’s permission, you will go to jail. They will call it “counterfeit” or “violation of banking regulations”. It applies even to foreign fiat (which is an indication of international collusion to maintain the fiat money system in place). This is what defines its economic characteristics, that privileged people can reap the seignorage. This is what allows the government to conduct monetary policy at all. I don’t have the exact quote now, I believe I have it in one of my papers, but Mises said something like “If a state is on a commodity money standard, the only act of monetary policy it can perform is to go over to another kind of money. It is different with credit and fiat money where it can influence the quantity of money”.

    If this legal force didn’t exist, dollar bills and deposits would be produced until the market price dropped to the production costs. Assuming they would still be accepted as money, it would be commodity money. This is what happened with the Somali Shilling.

    The rules regarding what constitutes a dollar, e.g. what percentage of the bill still counts as legit, are to maintain the seignorage privilege. if you specify that at least 51% of the bill needs to be intact, that means that the quantiy of money cannot be legally increased by tinkerers, for example (it is impossible to create more than one dollar out of one dollar bill under these rules). These rules aren’t completely arbitrary.

    Therefore, using the ability to conduct monetary policy to distinguish between commodity and fiat money makes both economic sense, as well as is in line with Mises’ thought. Since such capability is absent with Bitcoin, Bitcoin isn’t fiat money and also the reason why Keynesians criticise it. Furthermore, as there are limited types of demand for goods (direct utility, indirect utility, medium of exchange), if you claimed that Bitcoin isn’t a commodity, you would be left without a way to explain demand for Bitcoin during the time when it wasn’t a medium of exchange. You would have something what Mises calls an acatallactic monetary doctrine.

    • http://www.economicsofbitcoin.com/ Peter Šurda

      Here it is, from Theory of Money and Credit (quoted by Hülsmann here https://mises.org/library/value-money-0 )

      “If a country has a metallic standard, then the only measure of currency policy that it can carry out by itself is to go over to another kind of money. It is otherwise with credit money and fiat money.”

  • fergish

    I think you both miss a very plain point: Bitcoin IS a commodity, without question. The fact that it is intangible is aside from the point, though this fact makes it harder to categorize till you look at its actual properties.

    It is a commodity because it can be owned and traded. It was owned and traded a lot, as a commodity, in its formative stages before it became money with the purchase of two pizzas for 10,000 bitcoin. After that it has been in the process of making its place in the pantheon of different monies.

    These definitions of commodity from wordnik.com illustrate the point.



    Something useful that can be turned to commercial or other advantage:


    An article of trade or commerce, especially an agricultural or mining product that can be processed and resold.”

    Shells were a commodity prior to being used as money, as were pieces of gold, silver, etc. Economists seem to make this all much more complicated than they need to. Value is an opinion. Period. Money is a token people use communicate about their value-opinions, in order to facilitate creating and exchanging stuff they value value between themselves and others.

    The features offered by bitcoin are far more than its ability to function as money, much more that gold being able to function as jewelry. Whether from the perspective of its use as money or for other uses (such as proof of title, etc.) its key feature is that it allows full ownership of the asset. In its most basic use, if you own it, only you can spend it. You can send it to whomever you want and no one can directly stop you. Can’t be levied, etc. Just as gold, it can be used as a reserve. As a reserve, it is visible to all that it is there, where it is supposed to be. It can’t become bitcoin-plated-tungsten. When it is time to be transferred, no armored cars are needed. Etc., etc.

    Bitcoin, at its most basic, IS A COMMODITY generated by a mostly uncontrollable aggregation of parties with diverse interests, purposes, etc. It remains in existence as long as it is economical to keep creating (mining) and using it, like gold and silver. As long as people want these properties, it will continue to be maintained, which is probably as long as modern civilization lasts.

    Erudite economics has simply not accepted the most simple and basic definition of money, and so make things more complicated and opinionated than they need to be.

  • George Autry

    There is no problem classifying bitcoin as a commodity money. If you are going to use the common dictionary definition of “fiat” to reject that classification for BTC, then why not use the common definition of “commodity”, viz “something that is bought and sold” or “something that is useful or valued”?

  • Lysander Spooner

    Perhaps the solution to the dilemma about classifying Bitcoin (fiat vs commodity) is to say that it is not, in fact, money.

    (Ducks for cover as BTC enthusiasts start hurling digital insults)

  • Ludwig van El

    Bitcoin wastes less energy than fiat, because fiat is needed to fund intercontinental massacres (glorious wars, to defend democracy). One single F-15 obviously guzzles more energy than a batch of PC’s connected to the internet, never mind about a squadron of F-15s, support aircraft (AWACS, in-air-refuelling, transportation to bits on the globe that pose no credible threat to the USA), tanks on the ground…
    (I already posted this in the thread of ep 119, my bad, I wasn’t paying attention)

  • Ludwig van El

    Krugy shows his true colors here (he’s a politician, not an an economist): he pretends that taxation justifies fiat currency, and that fiat currency justifies government. While it’s my position that government is unjustifiable, and does not deserve to exist (a.o. by stirring counter-terrorism, putting the people at risk for no reason – definitely not for their protection! government
    waives its right of existence)