Talks With Authors: Better Money: Gold, Fiat, Or Bitcoin?

[Music]

 

Chayila Kleist:  Hello and welcome to this FedSoc Forum webinar call. Today, February 27, 2024, we’re delighted to host a “Talk with Authors” on Better Money: Gold, Fiat, Or Bitcoin? My name is Chayila Kleist, and I’m an Assistant Director of Practice Groups here at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s program as The Federalist Society takes no position on particular legal or public policy issues. Now, in the interest of time, we’ll keep the introduction of our guests today brief, but if you’d like to know more about any of our speakers, you can access their impressive full bios at fedsoc.org.

 

Today, we are fortunate to have with us as our moderator, Alex Pollock, who’s a Senior Fellow at the Mises Institute. His work includes cycles of booms and busts, financial crises with their political responses, housing finance, government-sponsored enterprises, risk and uncertainty, central banking, banking and financial regulation, corporate governance, retirement finance, student loans, and the politics of finance. Mr. Pollack previously served as the Principal Deputy Director of the Office of Financial Research in the U.S. Treasury Department from 2019 to 2021.

 

He was a Distinguished Senior Fellow with the R Street Institute from 2015 to 2019 and in 2021 and a resident fellow at the American Enterprise Institute. He was also President and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004. There he invented the Mortgage Partnership Finance program, which successfully created front-end mortgage credit risk sharing, beginning in 1997. He has authored several books as well as numerous articles and has done several instances of Congressional testimony. And I will leave it there. And I’ll leave it to him to introduce our star panel.

 

As a last note, before I go off your screens, if you have any questions throughout the webinar, please submit them by the Question & Answer feature that’s found at the bottom of your Zoom screen, so they’ll be accessible when we get to that portion of today’s webinar. With that, thank you all for joining us today. Mr. Pollock, the floor is yours.

 

Alex J. Pollack:  Thank you, Chayila. And let me add my welcome to our distinguished author and discussants and to all of you who are participating with us today. The mystique of money, how monetary systems function, who gets the chance to create money, who gets to manipulate it, who wins and who loses, who gets to decide what kind of money the people will use or have imposed on them, all these are fascinating and contestable questions.

 

We’re very pleased to have with us today, Larry White, professor of economics at George Mason University and a leading scholar of private and government monetary and banking systems. Larry will present his new book, Better Money: Gold, Fiat, Or Bitcoin? Here’s the book. And in my view, a most interesting book it is. Better Money compares and contrasts these three different possible forms of money or currency, clarifies the historical and current debates about them very helpfully.

 

Following Larry’s presentation, our discussants will be Alexandra Gaiser and Bert Ely. Alexandra is General Counsel of Strive, and Bert, the Principal of Ely & Company. Both are active members of The Federalist Society Working Group on cryptocurrencies. After their remarks, we’ll move to a general discussion, and you can send in your questions for the panel, as Chayila explained. We will adjourn promptly at 3:00. Another member of our Working Group, Howard Adler, has contributed a thoughtful review of Better Money, which you can read on The Federalist Society website. Thank you, Howard.

 

As we work to increase our understanding of the great — and we might say eternal — money questions, we realize that all monetary systems, being human constructs, are imperfect. By way of introduction, I’d like to share three thoughts from the book, which I particularly enjoyed. First, Larry tells us that a French bishop in the year 1355, despite -- quoting, “despite the considerable personal risk that came from calling the monarch a criminal fraudster wrote that to take or augment profit by alteration of the coinage is fraudulent, tyrannical, and unjust.” Great line. And what would the bishop have thought of the Federal Reserve’s constant depreciation of our currency? In 1355 and now, monetary questions are matters of politics and of the power of the government of political economics, not only economics.

 

Second quote is that after the first World War, as we learn from the book, the Princeton economist, Edward [sic] W. Kemmerer, who, by the way, was known in his day, internationally, as the “Money Doctor,” led missions to Latin America to establish central banks on the grounds that central banks would help nations return to and stay on the gold standard. Well, in time, as we know, having central banks everywhere led to the opposite -- to having fiat currency regimes everywhere. Third, Larry considers the question, “Why put your economy at the mercy of supply and demand shocks for gold?” and suggests another question, “Why put your economy at the mercy of a central bank’s monetary policy committee?” As my friend Jim Grant calls it, that’s the PhD standard.

 

A third question might be why put your economy’s money in the hands of an anonymous group of computer programmers. Well, there are various advantages and disadvantages to all systems, and the book concludes with the Hayekian suggestion to let potential monies compete. Although, as Larry writes, “fiat standards currently rule the roost with the network advantages of encumbrance. Still, monetary regimes and their ruling ideas have changed before in history.” Better Money advances our understanding of how the different monetary regimes did, do, or might work. And Larry, welcome again. We’re delighted to have you, and we look forward to your presentation.

 

Prof. Lawrence H. White:  Thanks, Alex, a very generous introduction. Let me share my screen so I can show a few pictures. And here, I’m showing not just the front cover but also the back cover of the book. There we go. And I wanted to show the back cover because I’ve got a blurb from Zooko Wilcox, who is co-founder of Zcash cryptocurrency, and I got a blurb from Judy Shelton, the former Federal Reserve Board nominee, who has been known as a supporter of the gold standard. And part of the mission of the book is to explain the gold standard to people who understand cryptocurrency already and to explain cryptocurrency to people who understand the gold standard already. Too often, those communities are sniping at each other, at least on X, where in a -- in some senses, they ought to be allies.

 

So here’s the Table of Contents of the book. There’re just six chapters. In the first chapter, I talk about the history -- the early history of money and how markets and governments have competed for control of the monetary system. And the basic point I’m trying to make here is that a market-based monetary system is not a fantasy. It’s something we’ve actually had in many times and places, and it’s worked pretty well. And we need to understand how a free market monetary system works in order to understand what difference governments make when they become involved, just as we need to understand free trade if we want to understand the impact that tariffs have.

 

In the second chapter -- so what emerged historically, of course, were gold and silver standards -- so the second chapter is devoted to spelling out how a gold standard works, using fairly simple supply-and-demand diagrams. So it helps if you’ve had Econ 1 or 101, but if you haven’t and you don’t understand the diagrams, you can just read the captions. You have to take my word for it, though. I have a whole third chapter on common misconceptions about the gold standard because there are so many, and those are misconceptions not just by the critics of the gold standard but by some of its supporters. They make arguments that don’t really make sense or are not really waterproof. So I’m trying to help them make better arguments.

 

Fourth chapter, “How a fiat standard works,” and, of course, a fiat standard is our current monetary system. One of the delightful things about the rise of cryptocurrency is that there’s a whole new generation of people who know understand the term, “fiat money,” because when I was young, the only people who used the term, “fiat money,” were gold bugs. And now, there’s a whole -- another group that realizes that a fiat standard is an option, but it’s not the only option. In the fifth chapter, I talk about how a bitcoin standard works, and then, the real payoff is comparing and contrasting gold and bitcoin standards so that, if fiat standards failed and we had to go to a plan B, it would be a good idea to have thought about which would be a better monetary system: one based on gold or one based on bitcoin. There are, of course, other cryptocurrencies, and maybe, I’ll say a little about them later, but bitcoin is, of course, by far the leading cryptocurrency.

 

So the first chapter is largely a rehearsal and extension of a very long-standing debate between two groups in monetary economics -- a group you might call Mengerians, after Carl Menger, who wrote about the origins of money from market forces, how money emerges from a hypothetical barter economics through people first discovering that it’s helpful to trade what they produce for something that’s more readily saleable.  So if you come to market with asparagus and not too many people want to be paid in asparagus, you’re better off trading your asparagus for something that other people have more demand for, more other people will accept so maybe salt. And when people discover that other people are using that same strategy, then they converge on a common medium of exchange, and money, which is defined as a commonly accepted medium of exchange, emerges without there being any committee for social betterment or legislature needing to be involved.

 

And Menger’s view has been opposed over the years by Georg Friedrich Knapp, author of The State Theory of Money, and people who advance the state theory of money are sometimes called chartalists. But Knapp’s emphasis is on the role the state has had in modifying the monetary system, and some of the chartalists claim that the very emergence of money comes from the state. And I provide lots of evidence that that’s not true. Menger’s position is summarized by this fairly well-known statement by Menger.  “Money’s not the invention of the state; it’s not the product of a legislative act,” and so on.

 

And in the chapter, I extend that argument to not just the origin of money, not just the most primitive commodity monies but the further steps in the development of money: coinage, bank deposits that serve as money when they become transferrable, bank notes or paper currency, and so on. So we can think about a private monetary system being the basis of either a gold standard or being instantiated, either in a gold standard or in a bitcoin standard. Those are alternative private monetary standards. Of course, we have fiat money today, and the biggest problem with fiat money is instability in its value.

 

This chart is not my own. I’m borrowing it from a working paper by Rolnick and Weber, and what it shows is that, across many countries, commodity money systems, either gold or silver standards — and those are the black bars — have had pretty close to zero inflation on average. Whereas, fiat money systems, and those are the lighter striped bars, have had much higher inflation rates. And in this version of their paper, Rolnick and Weber say the average inflation rate under gold or silver was one percent. Under fiat, it was thirteen percent, and that’s even excluding the one case of hyperinflation in their sample, which was Germany in the 1920s.

 

So what they did was look for lots of countries that had had both a commodity standard and a fiat standard and asked under which standard did they have less inflation. So turns out, every country has had higher inflation under fiat money. And that, of course, is because gold standard constrains the quantity of money through the economics of gold mining. It only pays to produce a certain amount of gold. It’s unprofitable to dig too deeply or exploit the source of gold too rapidly. Whereas, in a fiat standard, a central bank can print as much money as they like. So there’s no tangible constraint on the quantity of money. How do we get a constraint on the quantity of money, and therefore, how do we constrain inflationary, monetary expansion?

 

There traditionally have been two approaches. First as exemplified by a famous article by Kydland and Prescott for -- which was cited by the Nobel Prize committee when they gave Kydland and Prescott a Nobel Prize in economics -- is to devise rules to constrain the production of money by central banks. They’re a little agnostic about what kind of rule, but some kind of formula that limits the amount of money the central bank is allowed to create.

 

A second approach has been to think about competition from alternative standards putting a market-based constraint on central banks. So if they have to worry about losing their customers, should they mess up and inflate too much, then that will, the hope is, constrain their propensity to inflate. And that approach is -- was revived by Friedrich Hayek in his short book, The Denationalization of Money, and that was a big inspiration to me early in my career, and in a way, The Denationalization of Money has become a lot more relevant since the introduction of cryptocurrencies because now we have nonpolitical private monies in the marketplace. You can go out and buy them this afternoon. It turns out, though, that the cryptocurrency is not the kind of money Hayek expected. Hayek expected private money to take the form of promises to maintain stable purchasing power, and that’s not how bitcoin works.

 

Now, I kind of innocently got involved in debates with people who are leading candidates to be Satoshi Nakamoto, the inventor of bitcoin. Of course, Nakamoto is a pseudonym. We don’t know really who it was, but two leading candidates are Hal Finney and Nick Szabo. And I was involved in discussions with Hal Finney and Nick Szabo back in the ‘90s — the picture on the right shows an example of that — just because I was one of the few economists who was thinking about privately produced currency. But in my work, my assumption was it would be based on redeemability for gold, and they started thinking about something else, about an internet native currency that would emulate a gold standard in some ways but not have any of the physical inconvenience of a gold standard where you need vaults, and you need armored cars and that sort of thing to transfer money from person to person. Okay.

 

So the economics profession has, of course, been alerted to the possibility of cryptocurrency, and they haven’t always understood it completely. So John Cochrane, who’s a well-known economist at the Hoover Institution, who writes a lot of great things, blogged about bitcoin. And I think this is a kind of misstatement where he says bitcoin is an electronic version of gold because bitcoin and gold may be alternative investments, if you want an inflation hedge, but they’re very different as potential monetary standards because their supply mechanisms are very different. And let me be a little more explicit about that.

 

So here are some of the supply-and-demand diagrams for which I forgive -- sorry -- I apologize -- forgive me. The supply curve for gold is the upward sloping curve. It’s not perfectly vertical because with an increase in the purchasing power of gold, you will get some recycling of gold. People will melt down their old jewelry or their candlesticks or their picture frames that are made with gold, so you get a little bit of supply response. But still, if there’s a big increase in the demand for gold — so I’ve got the demand curve shifting to the right — you will get a higher purchasing power of gold in the short run. You think of the purchasing power of gold as how many bundles of goods you can get for an ounce of gold, so it’s the inverse of the price level.

 

But when the purchasing power of gold goes up, that upsets equilibrium in the flow market for gold production. If you own a gold mine, it now pays to produce more because you’re getting more purchasing power for each ounce you produce, so now, it pays to dig a little deeper. And so, the existing mines will start producing more ounces per year. And in the long run, it pays to send out more prospectors, and eventually, more gold sources will be discovered. And so, the long-run supply curve will be even flatter than the short-run supply curve. The growth in output of existing mines will push the supply curve to the right — that’s the dotted line — and it’ll keep increasing it as long as the purchasing power of gold is above the marginal cost of gold production, and that -- it won’t come back to equilibrium until we’re back to the original purchasing power of gold, assuming that the supply curve hasn’t — in the flow market — hasn’t changed.

 

So this is the self-stabilizing aspect of a gold standard that’s always been emphasized by its advocates. The purchasing power of gold is very stable in the long run. If you connect the initial equilibrium and the final equilibrium and call that a long-run supply curve, as Milton Friedman did, there’s a very flat long-run supply curve. And that means when the economy grows faster and people demand to hold more money, that will be satisfied by production of more money rather than by an increase in the value of each unit of existing money. So the system has a built-in stabilization property, whereas bitcoin has a very different supply mechanism. The supply curve is vertical, if you want to think of it in graphic terms.

 

This chart shows the planned expansion of the quantity of bitcoin. It’s currently in a phase where it’s growing at a little less than two percent. In a couple of -- well, in less than a year, there’ll be a cut in the expansion rate by half, and it’ll start growing at a little less than one percent a year. And that is programmed in the source code to go on until, finally, in 2140, the growth rate will be set to zero, and so, a maximum number of units will be ever produced -- 21 million units. But the important thing is that the supply of bitcoin, the quantity and circulation, is completely unresponsive to the demand. It doesn’t go up in response to higher demand for bitcoin, and therefore, the higher demand is only reflected in a higher price.

 

And that means, compared to gold, the price of bitcoin is very volatile. So here’s a chart showing how much -- by how much percent does the price of bitcoin change in a rolling 30 -- sorry -- 60-day window. And you can see the percentage variation is much higher for gold than it is -- sorry -- much higher for bitcoin than it is for gold, three or four times higher. Gold is slightly higher than the exchange rate of the dollar with the Euro, but it’s much more stable than the price of bitcoin. Because of the volatility of bitcoin, even people who used to use bitcoin to buy and sell other cryptocurrencies are now using stablecoins, that is, dollar-denominated cryptocurrencies, and you can see the volume of payments in bitcoin has declined since 2022, and the volume of stablecoin payments has replaced it. Sorry.

 

And this idea that bitcoin is poorly designed to be a stable unit of account was addressed years ago by Vitalik Buterin, the developer of Ethereum. Of course, Ethereum’s not meant so much to be a medium of exchange, but that was the promise of bitcoin. It’s going to be the world’s currency. And I’m saying, “That’s unlikely,” because its volatility of purchasing power. It’s very risky to hold your rent money in bitcoin because it could fall ten percent tomorrow.

 

I got one more slide. So if fiat monies fail, that is, I don’t expect people to abandon the dollar as long as inflation is low and stable. But if inflation gets into double digits with little prospect of coming back down -- well, we’ve seen what happens under those conditions in Latin American countries. People will switch to a better country -- sorry -- will switch to a better currency. When Venezuela hyperinflated, people started switching to bitcoin and to gold.

 

So what would be more popular? What would be our plan B? I think gold has a better chance, one, because it’s less volatile in purchasing power, even while it’s demonetized. But secondly, it’s actually got a larger installed base than bitcoin does. The amount of gold above ground is worth more than the amount of bitcoin in circulation. Stablecoins are not going to help us because they’re pegged to fiat currencies, so if fiat currencies fail, so do stablecoins.

 

There is one other possibility that’s -- I barely mention in the book because it’s just emerging now, and that’s the idea of a cryptocurrency that has a stable purchasing power, as Hayek imagined private currency would. The rubric for these kind of coins is flat coins, and two examples I know about are SPOT, which is available now, and PraSaga, which — disclaimer — is a project that I’m a consultant to, and the idea in PraSaga is to have an elastic supply, much like the classical gold standard had an elastic supply of gold, so that the quantity will respond to changes in the purchasing power in order to stabilize the purchasing power over the long run. So if we’re going to replace our money from the bottom up spontaneously, one, I don’t think expect it to happen unless we have a break down in fiat monies, but two, I would expect gold to be more popular than bitcoin, unless one of these other cryptocurrencies that is designed to have a stable purchasing power succeeds. We’ll have to wait and see. So that’s the short version of the book, and I await questions.

 

Alex J. Pollack:  Thank you very much, Larry, and a long version of the book is equally interesting to those very interesting comments you just made. As you pointed out, we do have real-world examples. You have countries whose currency becomes unstable and unattractive enough, you get -- switches to other currencies, so your dollarized sectors or even whole economies or --

 

Prof. Lawrence H. White:  Right.

 

Alex J. Pollack:  -- who are bitcoin, as you say, so those are interesting to think about, as you suggest. Let’s go to Alexandra for comments. Alexandra, your turn.

 

Alexandra Gaiser:  Great. So first, Larry, really enjoyed the book. I think it’s a great read, highly recommend it to anyone in the audience, and while I am the General Counsel of Strive Asset Management now, previously I was over at a bitcoin-only company called River, so my role on this panel, among maybe others, is to be the bitcoin optimist here. So I would agree with you that right now, certainly in the U.S., bitcoin is not used as currency except for, I would say, sort of in small instances among real bitcoin enthusiasts and hardliners, and it’s for all the reasons you mentioned so short-terms volatility, lack of a stable store value, but also because of government prohibitions so being taxed as a capital gain. Anytime you go and transact is expensive, and people who like bitcoin tend to be a little wiggy about taxes, in general, and they tend to be optimizing for growth and for overall worth. And so, I think that that can be a little bit self-selecting.

 

So I would sort of say I see maybe -- call it three big buckets that lead me to still be optimistic that perhaps bitcoin will be the currency of choice, although I agree with you that optimism might not be the right term here because certainly something else would have else would have gone very, very wrong. So first would be bitcoin is still new. So depending on your exact timeline, 2008 or 2009 is when most people view the start of it. And so, compared to gold, it is a little blip on the overall time horizon, and as such, I think it’s also in a fairly unusual position in that it truly is an experiment to see, “Will this catch on,” until you address some sort of concentrated efforts to use bitcoin and to get it to be adopted as a currency. So the first bitcoin exchange for $45-worth of Papa John’s pizza is kind of the go-to example of the, gee, what an expensive dinner that was. And yet, we all sort of intuitively understand that if somebody hadn’t spent an astronomical amount of bitcoin on something like pizza, nobody would have spent any bitcoin on anything. So I think those sorts of kind of on purpose, inorganic pushes by private actors to use it as currency really do make a difference.

 

You also talk about the Lightning Network, which is a layer 2 payment solution on top of the blockchain. When you look at the transaction fees that we all get charged by Visa and Mastercard, etc., to eliminate those would have tremendous savings overall. Now, it’s going to have some surprising winners and losers. You take out -- we all win and lose a little bit on the ACH settlement times. Lightning allows you to settle much more quickly, certainly more quickly than settling something on the blockchain. So there are lots of things that I think are still being worked through, and certainly, a concentrated effort by bitcoin enthusiasts, that might move something forward.

 

Piece number two, I think if the dollar fails, you would probably see the government forces against bitcoin recede tremendously. Right? Again, this is the sort of disastrous social contagion nightmare scenario, but you’d expect capital gains taxes to really be sort of the least of your worries in that scenario, and I think bitcoin’s digitally native presence is -- really lends itself to something in the 21st century. Certainly, you can digitize gold, but I think, again, there are -- you can be oversubscribed to digital gold and not realize it and have a difficult time proving that, whereas bitcoin is on an open ledger.

 

So the downside of that is some privacy trade-offs where it is less anonymous than cash. It’s pseudonymous, not anonymous. But the upside is it is traceable, and certainly, I think, if you were going to say bitcoin is optimized for two things, it’s, one, to control inflation and make inflation basically impossible and, two, to work in kind of that way where everything is traceable. You can see the transactions add up. You know you’re never double spending a bitcoin.

 

And so, my third piece for optimism would be that -- you point out in the book gold’s volatility is probably overestimated because it’s not used as a currency right now, and I sort of tend to think that the same is true for bitcoin, that it’s demand would likely even out quite a bit, if it were -- if we found ourselves in a situation where bitcoin became a much more enticing currency option. So that is the end of my five minutes, so I’ll turn it back to you, Alex.

 

Alex J. Pollack:  Thank you, Alexandra. Bert.

 

Bert Ely:  Okay. Can we get my slides up? Okay. I hope you can see -- can you see the slides?

 

Alex J. Pollack:  Yes.

 

Prof. Lawrence H. White:  Yeah.

 

Bert Ely:  Oh, good. Okay. Well, first of all, I appreciate the opportunity to be with you today, and let me start looking, clicking down the slides. No. Can someone --

 

Alex J. Pollack:  I think, Chayila, you have to move this for Bert. There, we go.

 

Bert Ely:  Okay. Good. All right. All right. Thank you. First of all, I want to make three important points. Number one, while money facilitates many transactions, credit plays a much more important role in the economy because credit is what really is at the core of facilitating buying and selling. But credit also finances asset ownership such as houses and offices and factories, and what credit does is gives buyers of assets the ability to pay a higher price than they have in terms of money on hand. Key to the availability of credit is the interest rate. That is what the borrower pays to the credit provider, and therefore, in a market economy, which is such as we have in most of the world, the interest rate the borrower pays to the seller is what the borrower pays to the seller or to a third party, such as a bank. And therefore, in a market economy, the price of credit, the interest rate, plays a central role in the function of the entire economy, specifically in facilitating buying and selling.

 

Cryptocurrencies, importantly, do not function well as a source of credit and probably never will because they have no claim -- no legal claim on anything of substance. And sad to say, gold’s days of -- as a viable monetary instrument has long since passed. And finally, legal tender laws may potentially limit the inflationary potential of a fiat currency. If I can go to the next one.

 

Now, number two, interest rates, which is the cost of credit, play an absolutely essential role in balancing the credit demand and supply. Interest rates not only give individuals and businesses the incentive to accumulate capital, but interest rates are, therefore, the basis for allocating credit and, therefore, other scarce economic resources to the highest and best use. Interest rates also provide the wherewithal to lenders, such as banks and finance companies, to absorb credit losses, which is an inevitable aspect of the credit process, and still earn a satisfactory return on their capital that they have put at risk. Importantly, a sufficiently high nominal or stated interest rate will also compensate the credit supplier for the negative effect of inflation on the capital they have committed. Bottom line, market-determined nominal interest rates are absolutely essential to the efficient functioning of the economy. Can we go to the next slide?

 

Number three, markets, and not central banks bureaucrats, should vary the nominal rate of interest as economics -- as economic conditions change. This is my crucial point. Markets should determine interest rates, not central bankers. Credit’s a critical economic raw material. No market economy can function without adequate supply of properly priced credit. The interest rate paid by a borrower to a credit supplier is the cost of credit.

 

Interest rates must, therefore, vary sufficiently in a timely manner to balance the demand for credit with a supply of credit. Interest rates also must reflect changing economic conditions, notably increases or decreases in credit risk, i.e. that the lender will lose some money. Competitive markets are much more efficient in democratic suppliers of credit than government entities, such as central banks, regardless of how well-intentioned the government employees -- bureaucrats are. Central bank employees, as I mentioned, are government bureaucrats. Therefore, they should play absolutely no role in determining interest rates or the quantity of credit in the economy. And with that, I want to thank you for your time and attention. And I welcome comments and questions.

 

Alex J. Pollack:  Thank you, Bert. I’ll point out that these government bureaucrats that you -- in the central bank -- that you refer to automatically count, if you have a state fiat currency system. And one of the amusing points in Larry’s book is saying do economists have a conflict of interest in discussing monetary systems because, if they wish to be one of the 500, or so, Federal Reserve PhD employees, they’ll naturally favor a fiat currency. That was --

 

Bert Ely:  Well, that --

 

Alex J. Pollack:  -- probably a little favorite section of mine, Larry.

 

Bert Ely:  But that’s a very important point. There is a self-interest there, and that will be the case as long as we have central banks being principal interest manipulators within the economy.

 

Alex J. Pollack:  Thank you. All right. I want to give Larry a chance -- maybe three or four minutes, Larry, to respond to anything that Alexandra or Bert said or anything else you want to take up at this point.

 

Prof. Lawrence H. White:  Sure. I don’t really have any disagreements with Bert; although, we have to think of what would revive, if fiat money falls apart. So to talk about the disadvantages that crypto and gold have under present circumstances doesn’t really answer that question; although, I agree neither one is going to -- people aren’t going to put themselves on a new monetary standard absent some failing in the current system as we see in dollarizing countries.

 

So Alexandra’s optimism about the future of bitcoin, I think, there is a chance. I don’t think it’s impossible for bitcoin to become the world’s currency. It could get into a positive -- a virtuous circle -- a positive feedback loop — I guess, that’s a negative feedback loop — where the volatility begins to shrink, and then, people start holding it more as a payment medium, and that’ll reduce the volatility of demand and, therefore, the volatility of price. It’s just hard to imagine that happening. It’s kind of a chicken-and-egg problem. It’s not advantageous to use it as a payment medium now when all your income and obligations are denominated in some other currency, so it’s not in anybody’s interest to go first adopting a new currency, unless the incumbent currency gets pretty bad.

 

I didn’t talk today about the technical problems of processing payments because I think Lightning Network and things like it can solve those problems. So I don’t think the congestion that we’ve had in past years is necessarily an obstacle going forward, so I put the emphasis on the volatility of price. I hope Alexandra’s right that legal obstacles will diminish. So I’m a big fan of the bitcoin experiment. I just -- and I think it’s very good at what it does, and maybe I could have said more about what it does today is serve as a censorship-resistant means of payment, so there is a niche use of bitcoin, if you want to make payments that wouldn’t go through if you tried to make them in dollars.

 

So if you want to send money to a dissident group in Belarus, you can’t send them dollars. The government won’t let them have a bank account. It won’t let that payment go through. But you can send them bitcoin, and they can use it by selling it in local markets. So there is that kind of niche use for bitcoin.

 

There are some circumstances, even for ordinary purchases. If you’re buying something from overseas, bitcoin can be the cheapest method of paying the seller, still pretty limited demand, and the challenge, of course, is getting it to grow beyond that. And the reduction in the volatility of demand for bitcoin is going to await people having a reason to use it as a transaction medium because the way it was designed with a fixed supply or an inelastic supply is very good for attracting speculators because you get a lot of price action. And of course, over the years, the number has mostly gone up, so it’s been a good investment for those who got in before, say, two years ago. It’s been just pretty volatile in the last two years without a lot of upward momentum.

 

Alexandra Gaiser:  So can I push back on that a little bit because I would argue bitcoin has a much more stable cyclical nature than a lot of other financial assets that we see in that, because of the mining mechanism and the halving events that — like Leap Year and presidential elections — are happening this year and won’t again for another four, you do tend to see your bull runs in maybe the roughly six months leading up to a halving and for roughly about a year afterward, and then, after that, you tend to be in a bear market that takes the majority of that four-year cycle. So on the chart you showed about stablecoins outpacing bitcoin for -- as payment mechanisms, it dropped off in 2021 and 2022, which is exactly when we’d expect to see the bear market hit, which is exactly when you’d say, “I’m better off holding this bitcoin for another two to three years than spending it now because it’s purchasing power is going to go up.” And so, I tend to think that as you asymptotically approach the twenty-one million bitcoin that will ever be mined, it is maybe possible that that demand steadies out because your four-year cycle gets less and less interesting.

 

Alex J. Pollack:  Thanks, Alexandra. Larry.

 

Prof. Lawrence H. White:  Yeah, just one comment on that. I’m enough of a believer in efficient financial markets to think that there are no predicable trends in the price of bitcoin. If there were, they would be arbitraged away. And so, I don’t see any reason to think that the price of bitcoin is going to be predicably higher in the future. It could be higher. It could be lower. Today’s price is the best predictor, unless we get some news that makes us optimistic about the future of bitcoin as a payment medium. Then, you could have a sustained increase in the price people are willing to pay for it, but I don’t -- there’s no inevitability to that.

 

Bert Ely:  Yeah, I’d like to --

 

Alex J. Pollack:  Thank you. Thank you very -- hold -- hang on, Bert. I want to -- it would be fun to talk among ourselves, but I want to give our audience a chance to get in here because they are sending in things. And when we talk about anonymity, like cash, or pseudonymity, like bitcoin, if not controlled otherwise by the government, we get around to a topic which I think -- or an anonymity, like gold coins, or not anonymity, like bank accounts denominated in gold coins. But that takes us around to a topic which I think is very important, which is the CBCD, or central bank digital currencies. And Jerry Lowsure (sp) asks, “Does Professor White’s analysis affect the desirability of a central bank digital currency,” or how does the central bank digital currency pay into this whole set of ideas, Larry?

 

Prof. Lawrence H. White:  Well, I do have opinions about central bank digital currency, namely that it would be a bad idea no matter what monetary standard we were on.

 

Bert Ely:  Amen. Amen.

 

[CROSSTALK]

 

Alex J. Pollack:  That’s an opinion, I’m sure. We can all agree on that.

 

Prof. Lawrence H. White:  I think it’s kind of --

 

[CROSSTALK]

 

Alexandra Gaiser:  [Inaudible 00:45:08] anonymity.

 

Prof. Lawrence H. White:  It’s independent of which monetary standard we should have.

 

Alex J. Pollack:  [Inaudible 00:45:15].

 

Prof. Lawrence H. White:  But it’s a privacy surveillance nightmare, and it doesn’t provide anything to consumers that private producers of retail payments can’t provide. So there’s no prospect that it’s going to be any better than Venmo. There’s no reason to trust the government to produce efficient retail payments. They have no experience at doing that. There’s reason to think they have a cost advantage of doing that.

 

Alex J. Pollack:  I think you got unanimity on the panel on that one.

 

Bert Ely:  Yes.

 

Alex J. Pollack:  Let me come to a question from Steve Dewey, asking you, Larry, “Judy Shelton’s proposed implementing gold-backed long-term treasury bonds,” or I -- we’d say reintroducing gold-backed long-term treasury bonds, “as a way to gradually return to a gold-based monetary system.” Do you have comments on that?

 

Prof. Lawrence H. White:  Well, we have indexed bonds, right, Consumer Price Indexed bonds. And this is a similar concept, except it’s indexed to something else. I don’t see -- Judy’s a friend. I don’t see that this would put a lot of political pressure on the Fed to clean up its act any more than inflation index bonds do. Those already give us a measure of the market’s expectation of inflation. And they embarrass the Fed when they -- the inflation expectations rise, so I think they’re already doing the job.

 

Alex J. Pollack:  There’s one problem there. The Fed itself became a big buyer of inflation index bonds and drove up their price.

 

Prof. Lawrence H. White:  Yeah.

 

Alex J. Pollack:  But when the Fed is a big bid in the inflation index bond market, I guess, I feel like you can’t take the result too seriously. You agree with that?

 

Prof. Lawrence H. White:  That would contaminate the expectation measures, yes.

 

Bert Ely:  That’s when the Fed is a rate manipulator.

 

Alex J. Pollack:  Yeah, as it is always. Larry, comments on the gold-backed bonds?

 

Prof. Lawrence H. White:  I’d be happy to see private parties issue them and have them be enforceable. If you want payment in gold, courts should specifically enforce payment in gold.

 

Alex J. Pollack:  That brings us to a very important comment, I think, which is that if we do -- if we would like, Larry, as you suggest, along the lines of the famous Hayek proposal, a competition among currencies, let’s say, among bitcoin or other cryptocurrencies or dollars or other fiat currencies or gold -- gold-backed instruments, what steps would -- should one take if one favored such competition, which obviously governments won’t favor it, but suppose you wanted to, what would you do?

 

Prof. Lawrence H. White:  Well, as Alexandra alluded to, there are tax disadvantages that are imposed on gold and bitcoin that are not imposed on holding an account in Euro or Swiss francs. There are capital gains taxes, and there are burdensome tracking requirements that can be mostly automated by software, but still, it’s an annoyance. So we should have a level playing field where these are treated as money assets and not as commodities.

 

Alex J. Pollack:  Thank you. Bert or Alexandra, any other comments on that one?

 

Alexandra Gaiser:  Yeah, I’d just distinguish that people certainly can and do invest in cryptocurrencies with no plans to spend them, and so, I think it would be a fair distinction to look at whether you sold bitcoin or whether you exchanged it for a good or service. That does not strike me as a particularly taxing inquiry. And I would just add, in addition to foreign currency, we use non-dollars, nonlegal tender to pay for things all the time. That’s what credit card points and airline miles and some gift cards or reward programs are, and those also are not treated as capital gains. So I think in kind of every other area, we really easily distinguish between whether something is a purchase or whether something is an investment, and it’s befuddling to me why we can’t do it for crypto or gold.

 

Alex J. Pollack:  Okay. Now, we have a question from Kevin Greene (sp), who writes, “Ethereum serves as a foundation for many variations of cryptocurrencies with different duties.” Larry, how does SPOT or how does your own flexible, I gather, constant purchasing power currency do these things in Ethereum, or anybody else doesn’t? What would -- I guess if you --

 

[CROSSTALK]

 

Prof. Lawrence H. White:  Well --

 

Alex J. Pollack:  -- it’s just the attempt to have a constant purchasing power, which --

 

Prof. Lawrence H. White:  So Ethereum serves as a platform for people to launch tokens that are not themselves layer 1 solutions, don’t have their own blockchain behind it. So it’s a cheaper, lighter way to -- and somebody could -- I’m not aware of any current projects, but somebody could launch some kind of indexed currency with redemption in constant dollars instead of in nominal dollars. Now, they’d have to have assets that maintain their value in constant dollars, and that’s the problem. I guess they could hold TIPS bonds. But I’m not aware of any projects to do that. That would be a pretty small spread enterprise.

 

But with any kind of currency based on redemption, you need to do your diligence and find out what their assets look like because they’re promising to buy back the currency, that -- they better have the wherewithal to buy it back. Currently, we don’t have restrictions on stablecoin issuers, which is fine with me. I think people do their diligence to see which ones they trust. But I’m fearful of a day when the FCC or somebody declares that these are banks and have to be regulated as banks, have to get bank licenses, which they will not be allowed to get.

 

Alex J. Pollack:  That was the proposal of the FSOC, Financial Stability Oversight Council, that all stablecoins be treated as banks, and, I think, they even suggested have their liabilities guaranteed by deposit insurance.

 

Prof. Lawrence H. White:  Oh, so we want them to have moral hazard too?

 

Alex J. Pollack:  Who’s this we, Kemosabe?

 

Prof. Lawrence H. White:  Yeah, exactly -- well, FSOC. FSOC, apparently.

 

Alex J. Pollack:  Any comment? I have a question -- another question. Does anyone know what the experience of El Salvador, to date, as having declared bitcoin the legal tender in its country? Any lessons so far?

 

Prof. Lawrence H. White:  Well, I think it’s an interesting illustration of how bitcoin is not ready for prime time as a medium of exchange. So the government tried to launch bitcoin as a common medium of exchange by giving anybody who wanted it a wallet with $30 worth of bitcoin in it, hoping that they would start buying and selling in bitcoin. And the first thing everybody did was to go to the kiosk and try to redeem their bitcoin for dollars because El Salvador’s currently on a dollar standard. So the launch didn’t work. At one point, El Salvador was way down on their bitcoin investments because the government bought some bitcoin in order to be able to process payments. Right now, they’re looking good, and maybe the default risk premium on their sovereign bonds has gone down. But it was way up at one point.

 

Alexandra Gaiser:  So I --

 

Alex J. Pollack:  Maybe their March market is better than the Fed’s March market on its investments.  Alexandra --

 

Prof. Lawrence H. White:  Well, the Fed is insolvent, you know.

 

Alex J. Pollack:  Yeah, I do know. [Inaudible 00:53:31]

 

Alexandra Gaiser:  I have a little bit more of a -- again, an optimistic or rosy take. I’d say, A, you do see a lot of bitcoiners who go to El Salvador to sort of experience paying for things in bitcoin, so your McDonald’s and Starbucks accept bitcoin. And Chivo is the national wallet. It facilitates payments through the Lightning Network so pretty fast and easy. I’ve not been. But I do think from a kind of national sovereignty point, I would point to two things on the adoption piece.

 

So first is the move to bitcoin, in addition to dollarization, was pretty early in Bukele’s tenure, and so, I think it would be perfectly rational to be pretty skeptical of that at that point in time. I tend to think that he’s been very successful in reducing the crime rate, attracting foreign investment, and other things, and so, if it were to roll out today, it might have a different sort of salient effect than it did at the time. The second piece is on the investment piece, which is as compared to the Fed, which has just been on an absolute printing spree for the last few years, purchasing bitcoin low and holding it as you’re heading into a bull -- what’s -- what I anticipate will be a bull market, looks like a genius move at this point. Right? And so, from that standpoint, I tend to think they are an interesting piece for sort of a dual framework. It’s really the main place where we see any currencies competing with each other, and it’s unique in that the government of El Salvador doesn’t control either. Right?

 

Milei in Argentina has also moved to permit bitcoin to be accepted, I think, as payment for taxes, which, to me, signals that the underlying principles of bitcoin — so a freedom to transact, a decent sort of censorship-resistant or privacy-use case — those ideas are alive in the global West and in the Americas but, perhaps counterintuitively, seem to most alive in Latin America, not in North America. So to me, that’s something to watch.

 

Alex J. Pollack:  Alexandra --

 

Bert Ely:  Yeah.

 

Alex J. Pollack:  I have to close there for a minute because we’re getting down on time. Thank you. I’m going to take that as your closing comment and a very interesting one. And there’s only one thing you needed to add at the end of the price discussion you so interestingly gave, and that is past performance does not guarantee future performance. Bert, one or two minutes for you to wrap up any final comments --

 

Bert Ely:  Okay, just --

 

Alex J. Pollack:  -- and Larry, a minute, and then, we’ll be done.

 

Bert Ely:  Just two quick comments. First of all, the more that cryptocurrency is seen as something to speculate in, the less efficiently they can serve as a medium of exchange. My final point goes back to -- the comment was made earlier about a failing fiat system. I would suggest a failing fiat system is more -- much more likely to exist where the rule of law is not very effective, but if you have a strong rule of law, contracts being enforced and so forth, then I think a fiat system can function, particularly in terms of delivering a relatively low inflation rate.

 

Alex J. Pollack:  Thank you, Bert. Larry, a parting shot for him.

 

Prof. Lawrence H. White:  Well, a fiat system can deliver a low inflation rate, and there are some examples. It just hasn’t, on average, delivered as low an inflation rate as one would like or as the classical gold standard did deliver. Now, I’m not pie in the sky about the possibility of restoring a gold standard through legislation, but in the event that fiat monies break down, it is there on the shelf for bottom-up adoption, the way we’ve seen bottom-up adoption of the dollar in countries with high inflation in their own local currency. I guess the last thing I want to mention is that the book is available at Amazon for anybody who wants to read the fascinating details.

 

Alex J. Pollack:  And thank you very much for your most enlightening discussion of your book, Better Money: Gold, Fiat, Or Bitcoin?

 

Prof. Lawrence H. White:  Thank you, Alex.

 

Alex J. Pollack:  Thank you, Larry. Thank you, Bert and Alexandra, for excellent comments, and thank you to The Federalist Society for sponsoring this event. And over to you, Chayila.

 

Bert Ely:  Bye.

 

Chayila Kleist:  Sounds good. I was just going to say --

 

Alex J. Pollack:  Don’t say, “Bye,” yet.

 

Chayila Kleist:  -- thanks. Really appreciate you all joining us today and lending us your valuable time and expertise in taking this chunk out of your afternoons. I thank you also, to our audience, for joining and participating. We welcome listener feedback by email at [email protected]. And as always, keep an eye on our website and your emails for announcements about other upcoming virtual events. With that, thank you all for joining us today. We are adjourned.

 

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