Bitcoin the Future of Money or a Novelty?
Proponents hail bitcoin as the world’s first virtual currency, forgetting or unaware that 97% of today’s money is virtual.  Transacted without using physical cash, it is instead processed with bank money consisting of computer digits.
Adam Smith’s big mistake
One of capitalism’s founders, Scottish economist and philosopher Adam Smith, got much right. However, one of his great errors, still made today, was the theory that money replaced barter: “The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him, he purchases food. The old clothes which another bestows upon him he exchanges for other old clothes which suit him better, or for lodging, or for food, or for money, with which he can buy either food, clothes, or lodging, as he has occasion.” 
However, Dame Caroline Humphrey, Sigrid Rausing Professor of Collaborative Anthropology at Cambridge University, rebutted Smith in a 1985 paper: “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money. All available ethnography suggests that there has never been such a thing.’ 
David Graber, in his landmark book, Debt: The First 5000 Years, makes a similar argument regarding the lack of anthropological evidence of money replacing barter: ‘The problem is that history shows that without money, such vast barter systems do not occur. Even when economies “revert to barter,” as Europe was said to do in the Middle Ages, they don’t actually abandon the use of money. They just abandon the use of cash. In the Middle Ages, for instance, everyone continued to assess the value of tools and livestock in the old Roman currency, even if the coins themselves had ceased to circulate.’ 
In The Banking Law Journal of May 1913, A. Mitchell Innes pointed out the complete lack of proof of money replacing barter: ‘A moment’s reflection shows that a staple commodity could not be used as money, because, ex hypothesi, the medium of exchange is equally receivable by all members of the community. Thus if the fishers paid for their supplies in cod, the traders would equally have to pay for their cod in cod, an obvious absurdity. In both these instances in which Adam Smith believes that he has discovered a tangible currency, he has, in fact, merely found—credit.’ 
Yet the myth of barter remains central to capitalism.20,00
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Where, then, did money originate?
Money evolved from debt, not barter. Money is transferable debt. Moreover, it is capitalism’s ability to transfer debt, together with the capacity of private banks to create almost unlimited amounts of money, that helped create its enormous power.
Not all debt is money, though—only those debts that can be used to pay your tax bill. For example, if you borrow money from a friend and provide a written IOU, that document is not money. If you negotiate a home equity loan for $25,000, you can pay your taxes with that debt.
Read More: The U.S. Deficit and National Debt
Modern Monetary Theory (MMT)
The coronavirus-induced economic collapse has reinvigorated modern monetary theory or MMT. The idea is that a country like the United States that has its own currency has no limits to the amount of government spending because its central bank, in this case, the Federal Reserve, can create whatever money it needs to buy it.
The Committee for a Responsible Federal Budget (CRFB), a Washington-based watchdog group, projected the U.S. government’s deficit to reach \$3.8 trillion in 2020, much of it financed by the Federal Reserve through quantitative easing.
Proponents of MMT do not worry about debt. If printing all this money causes inflation, then you control it by raising taxes instead of interest rates.
Believers in bitcoin think that governments’ printing all this money makes a case for private currencies.
The free market myth
Economists cling to the myth of barter in part because if money did not evolve from barter, their other theory that markets do best with little involvement from government becomes suspect. Furthermore, without the myth of barter, a powerful state is required to fuel growth in capitalist economies. A strong state is needed to guarantee the bank-produced money and enforce debt contracts.
Problems arising today from those myths
Bitcoin evolved from this flawed theory. The euro also comes to mind. If money replaced barter and accelerated the transactions that could have happened through barter, creating a currency, the euro, that was not backed by a country might make sense. If, however, money evolved from debt, and it needs the support of a sovereign state to function, what country would do that for the euro? Which state would back another country’s bank-created money?
Deregulation of lending
Because they believe it just replaced bartering, most economists think money is not that important; thus, regulating its production makes little sense to them. Over the past thirty years, this theory gave the banks the space they needed to go on a massive money-producing binge through their loan-making processes. All that debt, though, now weighs on the world’s economies, leading to low-interest rates and low-growth rates.
Read More: The U.S. Is In a Precarious Situation
If bitcoin is not currency, then what is it?
Bitcoin is a novelty. Its value comes from a misplaced view of where the money comes from, together with its scarcity. (Bitcoin’s founder, Satoshi Nakamoto, limited the number of bitcoins to be mined.)
If the demand for bitcoin remains high, with a fixed supply, the bitcoin’s price could stay high. But if demand shrinks as investors move on to the next novelty, the bitcoin’s value could suffer a fate like that of many Internet stocks after the dot-com bubble burst.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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