 This weekend, we're talking money and cryptocurrencies with our in-studio guest. Peter Sainange is a professor of economics at Fonja University in Taiwan, and he earned his PhD at George Mason University. He's also a former Mises Institute summer fellow, and he blogs and offers a free Austrian investing newsletter at his site, ProfitsOfChaos.com. Peter wrote a brief but interesting Mises Daily article last week dealing with the thorny question of regression theorem as it applies to cryptocurrencies. So we'll dive deeper and ask Peter some of the fundamental questions about money in this electronic age. What do Manger and Mises tell us about the origins of money? Where does money come from? How do we define it? What's the difference between money and a medium of exchange? And was Hayek right about degrees of money-ness? Stay tuned for a great Austrian discussion about the one thing everyone wants more of, money. Ladies and gentlemen, welcome once again to Mises Weekends. I'm your host, Jeff Deist, joined today in studio by our guest, Peter Sainange. Peter, how are you today? Thank you, Jeff. It's great to be here. Peter, you wrote a great little article for us last week entitled Cryptocurrencies and a Wider Regression Theorem. Now, I like this article because it seems to take a middle point between two extreme arguments. Which is that Bitcoin or cryptocurrencies fail to satisfy Mises regression theorem and therefore they simply can't be money under any scenario. Or the second extreme, Bitcoin and cryptocurrencies unquestionably are money and if they don't comport with regression theorem, then we ought to discard and throw away Mises regression theorem altogether. Yeah. Well, the approach that I sort of view Bitcoin is that it is a good like any other. So like any other good, it gives us certain benefits. And if it does those benefits well, then people will demand it. And the fact that it actually exists in the market, it's had value now for a couple of years. So that suggests in a way we know the answer to the puzzle from the beginning because we can see this thing living in the wild having a relatively stable value. It doesn't fluctuate between one penny and a million dollars. It's relatively stable. So we know that it is apparently a good with some durable demand. Or it must be offering some durable benefits and so then the trick is just to find what these are. So that's sort of the approach that I take to looking at something like Bitcoin is just take the sort of magic veil away and treat it just like any other good. Just like you would treat an iPad or a house or anything else. Peter, Manger of course famously provides us with an explanation of the origins of money as commodities. Should we be viewing cryptocurrencies as a form of commodity? It depends on what your definition of a commodity is. There are a number of different views so one sort of standard view of commodities is that it has to be something concrete that you can drop on your foot. So in that sense of course it is not. But again, if we look at it basically from a praxeological point of view then a commodity would be anything that offers some kind of benefit. It doesn't necessarily have to drop it on your foot. It doesn't have to be concrete. It doesn't necessarily have to be limited in value or scarce. There are many goods that are not scarce like air, the air we breathe and so on. Depending on your definition of commodity it would or it would not. But I think that praxeologically the key question is is Bitcoin a good? Meaning does it offer to some people in a better way than the other things like fiat money? Peter, your article discusses the antecedent value requirement for money under the regression theorem. Let me give you a quote from the theory of money and credit. Mises states, it follows that an object cannot be used as money unless at the moment when it's used as money begins it already possesses an objective exchange value based on some other use. Now taken literally does this require a non-monetary antecedent use for money? Right. And that's sort of what I aimed at in the article is that I think that you can read Mises in two different ways and he makes this distinction throughout human action. One question is what's the praxeological function that he's discussing? And then another sense is what is the history of some process? And the history and the praxeology often conflict. And I think that this is one of the cases where they do. So within human action when you read the surrounding text where he discussed the regression theorem it seems quite clear that he's saying that any true money must have been metal. He seems to clearly think that it must have been some commodity with a non-money value. So something pretty or whatever uses gold and silver for example head. And I think that the trick there is that you can look at that as kind of a failure of imagination. So in other words had Mises known about Bitcoin in 1912 then I imagine that he would have written that passage differently. What he was doing instead was looking back through whatever 5,000 years of human history he observed that the only durable commodities that have developed into free market money are metals. So I think that Mises there is mostly describing history. There had never been anything like Bitcoin before. It is 1912 so I don't fault him too much on failure of imagination. I couldn't imagine Bitcoin three years ago. Now we oftentimes hear the term medium of exchange. Can you talk about the difference between money and a medium of exchange? I think that medium of exchange I kind of like that term to start with because it describes what's happening here. So money fundamentally has two benefits which are enabling transactions and enabling savings. So medium of exchange I think captures what money is doing. Savings when you say that money is enabling savings really of course the only reason it's doing that is because it can be used to enable transactions. So the reason why you would want your savings to be held in one thing over another is because fundamentally at some point in the future you can transform those savings into some kind of exchange and does some purchase. So I think the functions of money sort of boil down to enabling transactions. And so I like sort of starting with medium of exchange because it describes praxeologically what money does. And then the next question the sort of broader term of money I think has a number of different definitions sort of carries a lot of baggage. I use the term of course because it's a common term but I think that it's less precise. So among the burdens that are placed on money are for example being either universally accepted or nearly universally accepted across a given geographic region being a common unit of account for example. So there's sort of extra burdens placed on money. And I think that the distinction is a little bit that between praxeology and history where to call something a money you start to import all of these historical traits of money. Where do we stop with that? So do we require that money has presidents faces on it? Things like that. So there's sort of historical descriptions of money. But I think that when we go back to the praxeological core that the true function of money the reason why it is a distinct phenomenon the reason why we would study it is because fundamentally the ax is a medium of exchange meaning that it enables transactions and as a derivative function of that enabling of transaction it's also used for savings. So those are kind of the two core values. And when we're discussing something like Bitcoin or cryptocurrencies in general because they have only existed for a couple of years if we're going to apply any sort of historical trait of money to them we're not going to get very far. We're starting with our conclusion if we start saying that anything that's going to be a true money has to resemble historical money in some way or another. So I don't think we get very far with that. We may as well just cut out the middleman and say okay fine Bitcoin doesn't look like traditional money and we're done. So I think it's much more fruitful right if we're going to ask whether Bitcoin is a future it's much more fruitful to start with the praxeological definition in which case I like using medium of exchange I think it makes it really clear what money is doing. How does this process occur? How does the transformation from a medium of exchange to outright money occur? Is this simply an empirical question? A couple of moving parts in that process one of them is that there are gains to scale right so there's sort of a network effect. So once some things is used as money in a particular area then because it's their lower transaction costs on using it the winners keep on winning. So you've got a network effect where there's a tendency for one single money to dominate in a geographical area it doesn't have to be a country right it can be a region or such. And then the other I think moving part in that transformation from you know medium of exchange to sort of money with a capital M sort of a dominant form of money I think the other moving part there is that governments often try to get involved in this they try to privilege or burden different media of exchange typically of course the media of exchange that they most try to privilege is the pieces of paper that either they print or that their friends print on licenses right also known as fiat currency. I think that when we look at the transformation from medium of exchange to money those two right the network effects and the government burdens to me anyway are the most interesting. So in the denationalization of money Hayek talks about in effect degrees of moneyness by which he mostly means degrees of liquidity. So is he right? Are there degrees of moneyness or is money binary something either is or is not money. Rothbard talks about that as well of course much later in man economy and state chapter 11 where he talks about quasi money right so you know he's specifically interested in things that pick up a lot of moneyness right in the Hayek sense but the idea is that any particular good is going to have a certain amount of demand based on what the good does for you. So you know if it's a pack of cigarettes in a prison then you know cigarettes have a certain value for certain people but then once they pick up this exchange function then you get this additional layer of demand that stacks on top of that and so that's going to tend to increase the price right. But what's interesting there in Hayek's conception is that what it implies is that essentially everything in the world has some degree of exchange related demand right so we were talking yesterday Jeff about Lamborghinis use Lamborghinis right so a used Lamborghini mostly has value for what it does for you right you can transport the groceries you can impress your friends but there's a certain amount of probably a very slight amount of value that's piled on top of that which is that in a pinch right you can trade that Lamborghini for money. Now if there were draconian laws against selling Lamborghinis so that you could only keep that Lamborghini for yourself and you could never use it as a unit of exchange well then it would lose some value right probably not that much but it would lose some value. Now of course on the flip side if you were to take say you know US dollars the vast majority of their value of course comes from their exchange use they have very few purposes beyond that although people in Weimar Germany did use them as wallpaper apparently right currency is fairly durable for that so right so on the other hand if you were unable to exchange dollars then they would lose almost all their value right so you can sort of mentally imagine if it were illegal to exchange some particular good how much would its value drop by and that's going to give you a rough estimate of how much of its original values coming out of exchange as opposed to use. Peter shifting gears slightly here let's imagine a scenario where tomorrow Ron Paul's famous competing currencies bill passes both houses of congress and it's signed by the president and the next day Americans are allowed to use whatever mediums of exchange or money they care to use within the confines of these 50 United States. What would that look like over the coming days the coming months the coming years what would competition and currencies look like. Short term I don't think that there would be that much of an impact and the main reason is that in the grand scheme of central bankers ours are not particularly bad central bankers of course all evil but the problem is that the main competition to the US dollar today is the Canadian dollar the euro the Japanese yen right these are in practice the main competition and those central banks are really not much better than ours exchange rates have been fairly stable so my guess is that what will happen over time is that demand for US dollars in order you know to use them to buy things right that would decline some of that would be picked up by foreign currencies so for example in you know southern California or main prices might start showing up more in Mexican pesos and such I suspect that that wouldn't happen a whole lot the main function would be that it would be a little bit more of a control on our own central bank so it would sort of be a threat hanging over their head that look if you guys do behave more irresponsibly than the neighbors then at that point you can start getting a snowballing effect where demand could bleed away for the US dollar so just sort of the paint out a specific scenario if the Canadian central bank was relatively conservative in the US central bank started going wild in that scenario if you were permitted to use Canadian dollars for transactions then you would expect a large amount of demand to bleed off the Canadian dollars this is what happens in a lot of countries today right if they have relatively incompetent or uninvolved police then you know countries will start transacting in foreign currencies in Mexico or Argentina places like this people use US dollars for a large amount of their transactions these are typically it's typically illegal to do this but the countries don't really do anything about it of course historically Mises talked quite a bit about gold and silver Austrians have generally favored hard currencies precious metal backed currencies in a free currency environment do you think Westerners would today use gold and silver for exchange and payments frankly imagine that some enthusiasts would do it just like some people like to be paid in Bitcoin today but frankly again because the value of the US dollar is relatively stable we all know a lot about money and where we're kind of interested in it we you know pay attention to the economic effects and such for the average person walking down the street a dollar is good enough right you know if it's losing two three percent of its value once you include productivity gains is probably actually losing about six or eight percent of its value a year but for most people they don't really care you know you know for transaction demand which is what you keep in your wallet it wouldn't even matter for us right I mean we all you know carry some Federal Reserve notes as well even for savings demand two three percent nominal inflation in other words erosion of the money just doesn't seem to bother people that much so I don't think in the short term it would change a whole lot again it would mostly come into play if the Fed got significantly more irresponsible but having said that even today of course right we were talking at the top of the program that the government can't repeal the market so even today I mean there are a significant number of people who carry Canadian dollars or you can carry foreign currency it's relatively easy to smuggle there are people who transact in gold and silver there are people who hold their savings in gold and silver right so even with the various tax burdens or various use burdens for example that the government puts on competing media still there is a very healthy gray market you know for both metals and for foreign currency and to the degree that the Federal Reserve got more irresponsible even if the laws weren't changed we would expect that market to grow tremendously in closing Peter thank you so much for joining us today in studio and thank you for an interesting interview ladies gentlemen if you'd like to follow Peter find him at his site profitsofchaos.com that's profits like profits and losses profitsofchaos.com once again thanks for joining us and have a great weekend