It’s No Bubble: Why We Should All Give Bitcoin a Chance

By Larry Kotlikoff and Rob Shavell

Our Social Security columnist Larry Kotlikoff and Rob Shavell make an economic argument for Bitcoin. Photo courtesy of Flickr user Rene Walter.

Most Mondays on Making Sense, we turn to Larry Kotlikoff for Social Security advice. But besides penning a weekly Social Security Q+A for us, Larry occasionally opines on this page on other political and economic matters, delivering alternative policy prescriptions — most recently on health care. Here, he and Rob Shavell, co-founder of, wade into the debate over Bitcoin. (Check out Making Sense’s exploration of the rise of Bitcoin at the bottom of this post.)

Larry Kotlikoff and Rob Shavell: Bitcoins have received a bad rap from many economists and journalists. Andrew Ross Sorkin of The New York Times says that Bitcoin is, at best, a second-rate version of gold that only people from Mars and presumably other extraterrestrial abodes would take seriously. He also points to the proliferation of Bitcoin alternatives, asking if we can “imagine a world in which we all transact with dozens of different currencies every day with different rules?”

Students of monetary history can certainly imagine such a world. The U.S. “greenback” didn’t make its appearance until the Civil War. Before that, all manor of currencies circulated on a routine basis in our young country.

Prominent personages, for example, printed up their own currencies, called bills of exchange. These were I.O.U.s that promised to exchange a certain amount of gold when the bill was redeemed. Bills of exchange could be endorsed over to others and used in commerce. As long as they weren’t redeemed, the original issuer was home free — having printed pieces of paper, which he was able to use to acquire real goods and service. Bills of exchange were common in the early years of the republic. So were bank notes issued by banks and states, silver and gold coins, minted in Spain and other foreign countries, as well as U.S. government-minted Golden Eagles and other coins.

And the practice of rolling one’s own currency continued into modern times. During the Great Depression, some 3,000 currencies were produced by various localities, some of which were printed on tree bark and some on pieces of car tires. California, the world’s ninth largest economy, periodically gets close to going broke and when it does, it pays its employees in state-printed I.O.U.s, which then circulate, if not very well, as currency.

In large parts of Africa, cell phone minutes are used as currency. In the U.S., airplane miles and credit card points are, in some ways, a type of currency. So, yes, we can imagine a world in which we all transact with different currencies. After all, before the Euro, Europeans were routinely holding and transacting in multiple currencies.

But Bitcoin shouldn’t lead one to consider a world with even more currencies, but rather a world in which we all transact in a single currency — one whose supply is fixed by mathematics, not by the random discovery of gold or silver mines or the penchant of governments to print money.
The media has predictably focused on the two sexiest storylines: Bitcoin as speculative investment and Bitcoin as anonymous currency used by the illegal underworld. However, the debate that should and apparently does interest global policymakers from Fed chairman Ben Bernanke to Zhou Xiaochuan, the governor of China’s central bank, is this: is the timeliness, need for and technological feasibility of a more efficient, more transparent, global currency close upon us?

The singular advantage of such a world is the inability of governments to surreptitiously tax their citizens via the printing press, buy real goods and services, and watch prices rise — forcing those holding money, government bonds or other nominal securities to suffer a loss in real wealth and, thus, hold the bag.

Anyone familiar with current U.S. monetary policy might well wonder whether our country wouldn’t be better served with bitcoins replacing the dollar. For the past six years, the Federal Reserve has printed vast sums of dollars to help pay Uncle Sam’s bills, more than quadrupling the monetary base. This unprecedented reliance on the printing press to finance government expenditures has been dubbed quantitative easing. But what’s really being eased is the obligation of Congress and President Barack Obama’s administration to practice reasonable fiscal prudence.

Today, 29 cents of every dollar of federal spending is being printed out of thin air by the Federal Reserve. Yes, the Fed feels it can withdraw all this money from the private sector whenever it likes. But doing so will require getting the politicians to do something they don’t like, namely raising taxes to pay for what they spend.

The great profusion of money creation is not limited to the U.S. The U.K., the Eurozone and Japan are all printing money like mad. They say this is meant to “stimulate their economies,” but each of these governments or regions is thoroughly broke if one looks out beyond the nose of short-term budget horizons. That’s why they are printing money and will continue to do so until inflation, if not hyperinflation, starts rearing its ugly head.

The use of bitcoins would hasten the day when the printing presses are turned off and prudent fiscal management is turned on.

Bitcoins could facilitate money laundering, but we don’t ban the use of regular cash to prevent this activity. Bitcoins are simply electronic cash. Some countries might ban bitcoins because they wouldn’t be able to make money by making money. But if enough global businesses were to start using bitcoins, it would be tough for any country to declare their use illegal.

Another economic knock on bitcoins is that they effectively produce a single currency. Hence, if prices and wages get out of line in one country, devaluation can’t fix the problem. The U.S. has lived with what has essentially been a single currency for a long time. Somehow we’ve learned that adjusting prices and wages to remain competitive is part and parcel of doing business in a big country/region. The Eurozone members are slowly catching on to this proposition as well.

A final concern is that countries won’t be able to print money to bail out their banks in the midst of a financial crisis. This seems all for the good because this ability to paper over our financial system’s problems has prevented addressing the two key problems plaguing the system — opacity and leverage. Having a global currency, whose supply is limited, fully transparent and independent of any government’s control, could usher in real financial reform. Limited Purpose Banking, which transforms banks and other financial corporations into equity-financed mutual funds, whose holdings are disclosed on a real-time basis, is precisely what is needed.

The long sweep of financial history tells us that many extremely valuable innovations were initially viewed with suspicion. But without them, we’d still be bartering. Bitcoins may well be one of the truly major financial innovations that brings the world together and forces long-needed fiscal and financial reform. Let’s give it a chance.

Paul Solman explored the rise of Bitcoin’s mainstream appeal in October.

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.