What Bitcoin’s Development Reveals About the State of The Money Medium
The savages of Cuba regarded gold as a fetish of the Spaniards. They celebrated a feast in its honor, sang in a circle around it and then threw it into the sea.(Marx, 1975/1842, MECW pp. 262-263)
Under the title “Bits and Barbarism,” Paul Krugman, mentioned here many times before (most recently in The End of The Game), in his New York Times column of December 22, 2013, tells a fable of three kinds of money creation, two of which represented monetary regression owed to the strange decision of many people to turn back the clock on centuries of progress.
The Porgera gold mine in Papua New Guinea, currently one of the largest gold producers with a terrible reputation for both its human rights violations and the environmental destruction it causes, is cited as an example of the first type of monetary creation. But because the price of gold, despite its collapse since its last peak, is still three times what it was a decade earlier, the digging must continue.
Krugman cites the “Bitcoin mine” in Reykjanesbaer, Iceland, as a paradigmatic site for the second, much stranger type of money creation. Bitcoin is a cryptocurrency (see appendix). Why it has value is hard to say, he says, but its value is based first on the fact that people are willing to buy it because they believe other people are willing to do the same. It is a kind of virtual gold: Bitcoins can be mined, i.e., new Bitcoins can be created, by solving very complex mathematical problems, which, however, require high computer performance and a large amount of electrical energy to operate the computers. And because electricity is cheap in Iceland and there is enough cold air to cool the hot-running computers, it is the ideal place to mine Bitcoins.
Krugman contrasts these two, in his view, regressive ways of creating money with a reasonable third, supposedly hypothetical way, which is Keynes’s 1936 advice that governments in crisis spend money they don’t have. Then, as now, there were political reservations about this suggestion, he said, which is why Keynes ironically recommended as an alternative that the government bury money in bottles and then have private investors dig it up again. He also said that completely nonsensical government spending would stimulate the economy. Finally, he said, gold mining was not far removed from this kind of senseless activity: there, gold was taken out of the ground in one place to be reburied elsewhere as the central banks’ gold hoard. The gold standard, Keynes said, was a “barbaric relic.” And – now Krugman again – Bitcoin adds to the nonsense by burning resources to create “virtual gold” consisting of nothing but electronic strings.
Apparently, not only neoclassical economists but also Keynesians like Krugman face the problem that economic agents behave differently than envisioned by their respective theories. At least Krugman still recognizes this discrepancy, but can only explain it with the tendency of many people toward regression and irrationality. It remains unclear where this tendency is supposed to come from.
Seen from the outside, that is, from a purely material point of view, it is striking that the whole debate bears traits of insanity. The “barbarism” in question here is rooted in a social relationship that demands completely nonsensical or even socially harmful activities from people so that they can survive the next few days or weeks. As is well known, this is one of the lesser evils of the ruling mode of production, which, of course, is not limited to the creation of money, but pervades labor relations in declining capitalism: from the (Keynesian recommendations) scrappage premium to the preventive administration of antibiotics in factory farming to the devastation of entire swaths of land for the last drops of oil, to name just a few of the rather harmless examples.
And what is barbaric about gold is not the metal, but the fact that it is made into a fetish, which, however, would not be possible without the underlying fetish of commodities and money, as shown by the “savages of Cuba” Marx tells us about: Without money as a social relation, gold can be dealt with quite loosely.
Finally, bitcoin mining, while also crazy in this context, is comparatively harmless; it is the farce that history repeats itself as, in Marx’s words, here the story of the gold fetish. Bitcoins can be created from nothing like book money. Nevertheless, in order to simulate value, a gold costume is put on them. As with gold, a certain amount of work and resources must first be expended before the Bitcoins appear. But this is mere pretense, because this effort is completely unnecessary; the Bitcoins could be created without it. It’s different with gold, because the labor (including the exploitation and environmental destruction associated with it) is actually necessary to get it out of the ground.
Ultimately, bitcoin is counterfeit money that doesn’t even bother to look like “real” money. If it can nevertheless make a career for itself, if it can be turned into dollars or euros without any problems, then money issued by central banks can’t be all that bad either. In fact, cryptocurrencies are only pushing a development that has been going on for decades to the extreme. Since the end of the Bretton Woods system and thus the gold backing of the dollar in 1972, central bank money has also had less and less to do with real wealth. In the last thirty years, for example, global monetary and fixed assets have grown twentyfold without, of course, being backed by corresponding real assets. This is a consequence of the credit-financed economic stimulus program made possible by the neoliberal deregulation of the financial markets, with which the real economy has been kept going for almost forty years, entirely in the sense of Keynes, except that private financiers have taken the place of governments and there is no sign of a self-sustaining upswing.
The huge amounts of money circling in financial heaven, looking for investment opportunities, lead to inflation in all markets to which they turn, such as stock, real estate and commodity markets. For example, the Dow Jones Index, a measure of the stock market’s valuation of U.S. public companies, rose by a factor of seven between 1982 and 2000, adjusted for inflation, at a time when the U.S. real economy was stagnating. For stock owners, such “asset inflation” is quite welcome, because they can sell their shares at a higher value. The fact that seven times the financial assets represent the same company value is irrelevant.
Bitcoin was able to generate an even bigger bubble in the first eleven months of 2013, as its exchange rate against the dollar increased by a factor of 93.5 (see Appendix) without representing even the slightest real value. Ironically, the ideological justifications for cryptocurrencies include talk of the loss of trust in financial markets and central banks, which are contrasted with “reputable” currencies that cannot be manipulated. But behind the backs of the players, the instrument then unexpectedly becomes another object of speculation. After all, some of them get rich in the process.
However, the distrust of central bank money in view of its lack of backing by real values is quite appropriate and also explains the flight into gold as a means of storing value. It remains to be seen whether gold is really a suitable means for this purpose; after all, a bubble has formed here, too, which, like all bubbles, can burst.
In the capitalist sense, money is productive only where surplus value is generated through the valorization of labor. Apparently, there are no longer sufficient investment opportunities for the money available, so that more and more money is merely multiplied fictitiously or simply hoarded, for example as precious metals. Even if Keynesians cannot or do not like to imagine it, this development points to the fact that money as a social relationship has become obsolete in the forty years since the end of the Bretton Woods system.
Appendix: Bitcoin & Co.
Traded since 2009, Bitcoin is the first, most prominent, and weightiest of the so-called cryptocurrencies, nearly a hundred of which now populate the Internet’s marketplaces. A list of the most important ones can be found together with their common characteristics under the Wikipedia entry “cryptocurrency”.
Bitcoins can be exchanged for dollars or euros on the Internet. If one has acquired any, they form an account on one’s own hard drive, integrated into a peer-to-peer network and protected by cryptographic procedures. All Bitcoin transactions are public in this network, but the owners of the Bitcoin accounts remain anonymous. According to the idea, digital currencies are money without banks and without the state. However, apart from its potential use for money laundering, drug trafficking and other covert activities, the utility value of Bitcoins as a means of payment is modest. The few companies that accept Bitcoins (see, for example, http://go-bitcoin.com, also on the grotesque overestimation of the scene) also accept cash and other of the usual payment methods, of course, and paying with them is considerably easier.
Indeed, for electronic payments to be possible without banks, a fixed exchange rate between bitcoin and dollars would be adequate. In fact, this exchange rate is left to the market, and this makes Bitcoins an object of speculation. The vast majority of Bitcoins are not used for purchases, but for currency speculation. Those who hoarded Bitcoins in 2013 could get rich: Between January 1 and November 30, the Bitcoin price rose by a factor of 93.5 from $13 to $1216. It then plummeted by 50 percent before recovering. In January 2014, the price fluctuated between $770 and $900. The high volatility calls bitcoin into question as a means of payment: no one spends bitcoins when they are expected to be 15 percent more valuable in the next week, and no one accepts them when a price collapse is imminent.
Another market is opening up in connection with “bitcoin mining,” the “mining” of new bitcoins. Those who want to produce them and channel them to their account have to solve complex computational tasks in competition with others. In the early days of Bitcoin, a normal PC was enough to do this, but now computing machines are needed whose waste heat could heat an entire house and whose purchase price is that of a mid-range car. And despite this effort, success is not certain because the competition is fierce and the number of new Bitcoins is limited by the underlying algorithm. In the end, as with gold, it is not the prospectors who profit, but those who sell them the prospecting tools.
The maximum amount of Bitcoins is set at 21 million; at the end of January 2014, there were 12.3 million worth a total of about $10 billion. But that can change again quickly.
Originally published in Konkret in 03/2014