Kokomo Tribune; Kokomo, Indiana

July 21, 2013

MICHAEL HICKS: Gold, bitcoin and kissi pennies

Today, we hear interesting assertions about currency.

Kokomo Tribune

---- — On a recent trip, I was fortunate to visit with my parents and rid their basement of the detritus of my youth. Among the old uniforms and school projects was a small bundle of a pseudocurrency called kissi pennies, wrapped in leather twine. These items were acquired in Liberia almost 40 years ago, whilst your columnist was an exchange student. They were offered in a symbolic adoption by my host family. These kissi pennies were used in West Africa well into the 20th century for small trades when government-backed currency was unavailable. These artifacts brought to mind much of the news of today's money matters: namely gold and bitcoin.

Kissi pennies and many other pseudocurrencies of the past actually represent a pretty sophisticated understanding of the uses of money. History is flooded with such endeavors from places where governance touched lightly. So, be it shells sewn into a wampum belt, or a Spanish doubloon cut into eight bits (giving us the one-eighth stock market pricing until 2000), the need for money has long been fulfilled by private innovation. You see, all money ever needs to do is act as a store of value, a unit of account and (most importantly) a medium of exchange. Money, then, is whatever we all agree it to be.

Today, we hear from seemingly sophisticated folks some interesting assertions, one being that we should return to the gold standard, and so ensure long-run stability and remove those unseemly humans from decisions about money. This argument ignores two clear axioms. The first of these is that we humans seem to enjoy evolutionary pressures to better control our world. We cannot stop the urge and the means to circumvent rules, so instead we had better instead craft flexible checks and balances. The second of these is that gold is not necessarily more stable (unless, of course, you can be convinced that gold was stable over the past couple months while everything else in the world grew in value by 10 percent).

The second great monetary fiasco is something called bitcoin, the computer-generated Internet currency that has captured popular imagination. Bitcoins are currently made available in a fairly constant stream using an encryption technique that replicates some of the inconvenience of mining gold. This has enthusiasts gushing over bitcoin’s apparent invincibility to devaluation. There are just a couple problems, though.

First, bitcoin is no more stable than other currencies, because its value ultimately rests on public trust and its relation to other currencies. Second, a significant portion of its transactions involve illegal goods. So, bitcoin is great for buying anything over the Internet that might land you in jail if transacted on your credit card; think gambling, child pornography or tax fraud. For this reason alone, governments might restrict its use, thus demonstrating its susceptibility to devaluation. So, as one thoughtful analyst in my office noted, “Bitcoin is a schadenfreude-generating machine fueled by libertarian tears and child pornography.”

Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and an associate professor of economics at Ball State University. Contact him at mhicks@bsu.edu.