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Why Bitcoins Are No Threat to the Federal Reserve System

Written by Gary North on December 6, 2013

In 1958, Leonard E Read wrote an essay, “I, Pencil.” He did not know it at the time, but this article soon became the most important description of the division of labor that has ever been written. It is not as famous as Adam Smith’s description of the pin makers, but analytically, it is far superior. It is also a lot more fun to read.

The article begins with the narrative of a pencil. The pencil tells of his origin. He makes the crucial point that nobody knows how to make a pencil. This seems fantastic. Yet, as the narrative continues, it becomes obvious that the statement is true. There is so much that goes into a pencil. There is wood, carbon, rubber, metal, and paint. There is also all of the equipment to make these items into a single pencil.

But this just is the beginning. How is the metal made? How is the tree harvested? What about the chainsaws that cut down the tree? This goes on, and on, and on. That is the whole point of the article.

Read makes this point: all this is done without central planning. All of this is done by means of the division of labor.

But what Read doesn’t mention, which is the heart of the matter, is the monetary system. It is only through a system of prices, meaning monetary prices, that all of this can be coordinated by the market process. It is the miracle of the market, as Read called it, but this miracle depends completely on one thing: a monetary system. Without a monetary system, the division of labor simply collapses.


Now let’s talk about Bitcoins. Bitcoins exist as a means of payment only because there is yet money in the general economy. Bitcoins is a spinoff of the fiat money systems of the world. Bitcoins could not exist if there were not an integrated system of digital currency.

You have to have digital currency in order to buy Bitcoins. This digital currency leaves a record. Every purchase you make with the digital currency leaves a record. You are then told that you can make purchases with Bitcoins. These will not leave a record. As long as you never have to reenter the monetary economy of the government’s fiat money systems, there is no further trace of your purchases with respect to digital entries.

But this creates a problem for the person selling you something. If the item that he sells you is manufactured, then he has to rely on the division of labor. He has to reenter the world of fiat money currencies, meaning government run and central bank run fiat money currencies. He must convert his Bitcoins to real money. That is because he must buy real goods.

Bitcoins are virtual money. Problem: virtual money buys very few real goods. For virtual money to buy anything, the virtual money must be converted back into real money, which is digital money, which is money that is an entry in a bank account. At this point, all of the supposed privacy of Bitcoins disappears. Now the government can trace whatever happens.

(For the rest of my article, click the link.)

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9 thoughts on “Why Bitcoins Are No Threat to the Federal Reserve System

  1. Yep …. just like musical chairs, as long as you find a place to plant your happy butt … all is well in the world, but eventually the chairs get down to one left. Think Dirty Harry: "Do I feel lucky ?? … Well do ya punk ??"

  2. Richard Holmes says:

    This; What ever you want to call it; monetary system in place in any country today is based on IOUs. It is ALL phantom money.
    All this non-existing currency is easily manipulated and is very unstable. ie. If one holder of non-money (IOU) wants to get real money for his IOUs and the one owing the IOU can't give real cash and can't borrow more IOUs, it all collapses. The whole world is really broke.

  3. If bitcoins are so good why does the creator, the bitcoin god, sell bitcoins for fiat currency? Why not only gold or silver? See my blog at http://cranky-conservative.blogspot.com

  4. This post makes no sense whatsoever.

  5. Oliver Cantebury says:

    It is simply not true that Bitcoin exists as a means of payment only because there is an existing money system. Two people without any money can both earn Bitcoin and then use it as money without ever having touched fiat currency. Bitcoin can therefore be used as a money without fiat currency being involved at all. Bitcoin is not a spinoff of the fiat money systems of the world, it is a currency additional to them, and it is independent from them, and does not rely upon their existence for its utility or existence.

    It is not true that you have to have digital currency in order to buy Bitcoins. As I say above, you can earn them without ever touching another currency. The division of labour problem is not broken by Bitcoin, because in theory all participants in the division of labour could theoretically accept Bitcoin in payment. You have created a very subtle Straw Man argument here Gary. The fact that Bitcoin buys very few real goods now is not relevant to the theoretical proposition that Bitcoin can be used as money, nor does it imply that it will not be used as such in the near future. While we are at it, what is the difference between what you call "digital currency" and Bitcoin, which is… digital currency? I feel you are somewhat confused as to the meaning of the word 'Digital'.

    If you say that digital money is money that is an entry in a bank account, Bitcoin is no different to digital money, save that each Bitcoin is an entry in a global public ledger and not a private ledger in a bank. Once again, it is clear that you do not understand how Bitcoin works, or what it is. No one claims that Bitcoin transactions are private; in fact the exact opposite is true, where every transaction is open to public inspection on the Blockchain.

    It is simply not true that re-entry into the world of government fiat money causes privacy to disappear. Exchanges of Bitcoin for goods and money are done everyday in complete privacy, between individuals globally. This can be done person to person or person to business. You are not thinking like an entrepreneur Gary, and your research into Bitcoin is threadbare.

    There is in fact an extension from the existing price system to the new price system using Bitcoins; the exchanges are setting the price of Bitcoin every day, minute by minute. Even so, if Bitcoin is only used as a means of moving money from place to place, it will spread everywhere and make the people building services on it Billionaires. You need to think deeply about the impact of the core utility of Bitcoin before coming to any conclusions about it, and you must also remember that all the possible services that can be built on it have not yet come to market.

    There is no problem for the "defenders of Bitcoin" all they need to do is design services and profit. There is a comprehensive system of prices, and when you say, "we need" we know we can take you literally, since you accept Bitcoin in return for your books yourself.

    Saying that the system of prices must be autonomous from the fiat pricing system is absurd; Bitcoin is no different to the other fiat currencies in terms of its nature as a money. What you are claiming in effect, is that there can be no more new fiat currencies, and only the ones that exist are possible, because they already exist. If this were true, the Euro launch could never have been successful. Since it was, we can assume that the use of Bitcoin can grow to at least a similar size as the Euro, since it is global in scope.

    It is not true that Bitcoin must apply to every product everywhere. Different jurisdictions all produce goods priced in their own currencies, and these goods can have their values translated into any other currency on earth, including Bitcoin. The division of labour does not have to be integrated by a single currency system, and every good that is manufactured out of parts that come from different countries on earth is proof of that fact. —– CONTINUED BELOW

  6. Oliver Cantebury says:


    In order to make a pencil, graphite is priced in terms of money from South America: paint in money from Germany, wood in money from Brazil, carbon in money from China, rubber in money from the Congo, metal in money from Ukraine, and whatever country on earth that has a company that produces goods at a competitive price, all priced in local currency, which can be sent and received in Bitcoin.

    Bitcoin is a payment network. It is not a replacement for courts, arbitration or things that are not to do with moving money. All the laws of contract still apply if you agree to take payment in Bitcoin. This is a classic False Dilemma fallacy that you are using here Gary.

    One thing that Bitcoin does do however, is make it impossible to reverse a payment. It also makes payment fraud impossible. All the problems with bank transfers and credit card purchases disappear when you use Bitcoin to pay for manufactured goods in China or wherever you buy your goods from.

    Bitcoin has nothing whatsoever to do with faith. If you had any understanding of mathematics you would understand this. 2 + 2 = 4; this is true, and is not an article of faith. This attack is nothing more than a base, childish Ad Hominem.

    You say ours is not a world governed mainly by bits and bytes and algorithms. You do realize Gary, that you are posting this article on the internet, wrote it on a computer and that everyone reading it is also reading it on a computer? If they have printed it out to read it, they used a computer to do so. The world is now almost completely governed and mediated by bytes algorithms. Only the people who do not understand what a computer is do not realize this.

    You say there are no property rights in bits, but you sell your books as PDFs and claim copyright in the bits that make up the books. How can you claim copyright on bits, but Bitcoin owner cannot claim property rights in the Bitcoin made of bits that they own? Once again, you show that you have litte understanding of the world we live in, no understanding of computer science, and the tools that make everything possible today, including the very tools you use to do almost everything you do.

    When two people agree to exchange goods for Bitcoin, that is taking place inside a social framework. It is a moral intellectual and legal framework. I am astonished that a man of your calibre is making an argument like this; it is clear that when you yourself receive Bitcoin for your books your agreements with Mises are not rendered moot; why do you imagine that it is different for anyone else to accept Bitcoin in exchange for their goods as you yourself do?

    Bitcoin is not a utopian proposal; it is a real network and service that exists and that is being used now. Bitcoin rests on a rigid, unbreakable enforcement of private property rights, by design. It also rests on explicit fulfillment of promise and contracts; when you own Bitcoin on the network, having either received it from someone or mined it yourself, the contract that allocates those Bitcoins to your account, by virtue of the explicit contract expressed by the software, is unbreakable and absolute. The idea that Bitcoin denies courts is simply absurd. Bitcoin has no bearing on your contractual obligations under the law. Bitcoin also does not implicitly deny face to face resolution of disputes. Bargaining on a face to face basis is done everyday by people trading Bitcoin in person or using it to buy goods in person. Your assertions are demonstrably baseless ignorant nonsense. Bitcoin is a wonderful addition and enforcer of everything that exists in the free market society, because it denies the State access to the transfer of money from point to point. Bitcoin is going to cause the free market to operate with less friction, on a global basis. Anyone who is against this is not a Libertarian, and is furthermore, completely delusional.

    It is clear from this latest anti-Bitcoin screed Gary, that you have completely lost the plot on this subject. Your shrill responses are emotional, bordering on the hysterical, they are not factual, they are irrational, and you have shown again that you have absolutely no idea how computers or Bitcoin works. You seem to not even understand that you are posting your articles on the internet. Astonishing.

    You end your essay with, "include me out". Put your money where your mouth is Gary. Command the Mises Institute Bookstore to cease and desist from selling your titles for Bitcoin. Then at least these essays will be believable as genuine opinion and not just a shabby means of attracting attention to yourself.

  7. 1baronrichsnot1 says:

    We don't want and can't use bit coin or any other currency that isn't a threat to the federal reserve system! Central banks print and give to the fractionals, they borrow up to 9 times their handout, the federal reserve puts it on americas balance sheet, we pay interest, and the american people are on the hook for the printed amount and yearly interest! when you get it, the buck,it says federal reserve note, that's debt, owed to you by the taxpayer! When you spend it, you have passed accts..recievable from the tax payers to the next guy! They call that a debters economy, the opposite without the federal reserve system is a cash economy.. The amount of debt notes in circulation= tax money, acceleration of transactions=tax money! The federal gov't makes about 45% each transaction, the federal reserve gets interest on the fiat(out of thin air) currency! You pay it! It has been past due for oh, about the last 39 years!

  8. John Hannan says:

    Time for the people to take back the monetary system, eliminate the fed and print interest free greenbacks It can be done at least one state is doing it now.

  9. The only ones that don't like them is the IRS. When they start taxing them, then they will be real.