D.L. White

The standard story about money runs roughly like this: people already want to trade, barter is inconvenient, some commodity becomes widely accepted because it makes exchange easier, and eventually we get money. Markets come first. Money improves them.

I think that gets the direction of causation badly wrong.

Money is a whip.

Start with ordinary value-for-value exchange. I have eggs, you have firewood, we trade, and the transaction is complete. Neither of us necessarily needs anything left over from the exchange. I wanted firewood, you wanted eggs, and the reason for trading has been extinguished.

Money introduces a different structure. I can produce something today and exchange it for units that I do not intend to use today. In fact, I may deliberately produce substantially more value than I presently want to consume because I know I will need those units later. Once some authority, creditor, landlord, institution, or other claimant can say that I owe a certain number of units at some future date, I have a reason to acquire an excess.

That changes the market itself.

Once enough people need excess units, the market starts to look less like the thing that created money and more like one of the ways people solve the problem money created for them. I need units, so I sell labor. You need units, so you sell wheat. Someone else builds a business and organizes the labor of fifty people because doing so allows him to accumulate more units. Another person accumulates enough units to lend them and acquires claims on future production.

Nobody needs to tell each participant exactly what to produce or where to work. The obligation does much of the organizing indirectly. A state does not need to order me to grow wheat if it can impose an obligation payable in a unit that I can reliably acquire by participating in a wider productive economy. It does not need to assign me a trade, direct my output, or decide who should buy from me. I can choose all of that myself.

This is why free markets and monetary coercion are not necessarily opposites. A mature monetary order can give people enormous freedom over how they acquire units while making nonparticipation extremely difficult. Work for someone, start a company, farm, trade, invest, make music, repair cars, organize other people’s labor, speculate, save, borrow, invent something nobody knew they wanted. The range of choices can be extraordinary.

Now try going without.

Stop acquiring the units altogether and see how much of ordinary life remains available to you. You still need food, shelter, energy, transportation, and some way of dealing with taxes, rents, debts, fees, or other claims denominated in the unit. You can move toward the margins of the system, rely on family or charity, barter, produce more directly for yourself, or find places where the state mostly ignores you. But that is not the same thing as the monetary order being optional.

The freedom is mostly over how you satisfy the demand, not whether the demand exists. That is the sense in which money is a whip. It does not have to tell you what to do. It only has to make acquiring the unit sufficiently consequential that you organize yourself.

This is also where I think the fixed-supply story around Bitcoin becomes much stranger than it is usually presented.

Suppose a state actually makes bitcoin monetary in the strong sense. Taxes are payable in bitcoin. Important debts are denominated in bitcoin. Wages, rents, contracts, and accounting begin orienting around bitcoin. Now people genuinely need the units whether they happen to want more bitcoin or not.

Fine.

The state is also receiving bitcoin.

If the state persistently demands units from the population and retains more than it returns, its share of the fixed stock keeps rising. There is no monetary magic that gets around this. With an absolutely fixed supply, a state that continuously taxes in the unit while running a net surplus eventually accumulates the thing everyone else needs in order to satisfy the next round of obligations.

Taken to the limit, the state eventually holds all the units.

Obviously it can spend them back out. But now notice what has happened. Fixed supply has not eliminated monetary management. It has merely moved the problem. Instead of managing how many units exist, the fiscal authority has to manage how the fixed stock circulates so that the population continues to have access to the units the state itself is demanding.

Permanent loss makes the constraint tighter because the economically available stock is not merely fixed. It is shrinking.

There is another problem if the state does not create that compulsory demand.

Suppose taxes, wages, debts, and ordinary prices remain denominated in dollars while bitcoin continues appreciating against them because economic production expands while the bitcoin supply does not. Why would I spend the bitcoin first?

If I can buy groceries with dollars whose purchasing power is expected to decline and bitcoin whose purchasing power is expected to rise, I spend the dollars. If I can borrow in dollars and save in bitcoin, I do that. If my employer pays me dollars while I accumulate bitcoin, that can be perfectly rational too.

The appreciating asset becomes the thing I want to get rid of last.

That is close to the behavioral logic usually associated with Gresham’s Law, even if it is not Gresham’s Law in the strict historical sense. The weaker money circulates while the stronger one is retained.

And if bitcoin really does appreciate indefinitely against goods and labor, the denomination itself never settles down. Cars cost fewer bitcoin over time. Houses cost fewer bitcoin. Wages fall in bitcoin terms. Fixed nominal debts become increasingly expensive in real terms. Divisibility solves the arithmetic, but it does not solve the fact that the unit itself carries a persistent directional bet.

That is a very odd property for the thing supposedly meant to become boring enough to denominate ordinary life.

So fixed supply creates a difficult fork.

If the state demands bitcoin, it creates the monetary pressure necessary to organize people around acquiring it, but then the state has to continuously recycle the finite stock it is collecting or eventually starve the very system of the units needed to satisfy its demands.

If the state does not demand bitcoin, while some other unit continues to settle taxes, wages, debts, rents, and ordinary obligations, then the appreciating bitcoin has a strong tendency to be hoarded while the inferior unit circulates. Either way, the supposedly decisive virtue of absolute scarcity making money “sound” starts looking much less decisive.

Bitcoin already does something extraordinary. It gives an individual unusually strong exclusionary control over valuable property and allows that property to be transferred with very little regard for ordinary institutional permission.

That is not some disappointing halfway house on the road to becoming money.

It may be the thing Bitcoin is actually best at.

And the fixed supply that makes it such compelling property may be the same feature that makes it much harder to turn into the monetary whip that organizes an economy.