Excerpted from Dmytri Kleiner (with whom I agree on this issue):
“I want to write a bit about the public function of money, especially as compared to the market function of money, in light of some of the recent discussion about Bitcoin.
Bitcoin is already a very useful technology due to the fact that it allows transactions to take place without any central authority. This alone is significant. The technology behind it is also perhaps applicable in other areas, such as the Namecoin project to replace the centralized Domain Name system.
Does Bitcoin have the potential to replace Government fiat money? No. It doesn’t. It only has the potential to be one commodity form within the money economy.
Countless books and papers have described money, money is a very complex thing which serves many functions. Keith Hart has written about the “Two Sides of the Coin,” heads on one side, tails on the other. One way to interpret this might be to contrast between the public function and the market function of money.
The origin of money is tribute. The source of money is the public, in whatever form, whether empire or democracy or something else, money is spent on public expenditure and demanded back as tribute. Whatever its commodity value, whether minted on gold, printed on paper or electrified as bits in a database, this sort of money has value because it can be used to fulfill tributary obligations, for example, it can be used to pay taxes. As the entire source of this money is government spending, the amount of this money is determined by the amount we want to provide on behalf of all as a society. This is the “Heads” side.
Not all economic activity is done for money. Much of it takes, and has historically taken, gift and kin-communal forms, where work and wealth is shared without specific prices for specific commodities, but rather on a basis of social trust and reciprocation. Markets emerge as economic activity extends beyond communal and neighbourly forms, markets extends the social to beyond the kin-communal, and along with such social distance come more transient relationships that can not rest on trust and reciprocation, and thus must be encompassed by spot transactions, and as a result specific prices for specific commodities and specific price relationships between commodities. With these transient relationships comes money. But this sort of money is different.
Commodities can also be traded directly, even if their relative worth is counted in “Heads” money, and trade can also be done on-account, by credit. The amount of which is not limited to the physical amount of “Heads” money in circulation. In the wider economy, money is endogenous, the amount of money circulating in the economy is not a function of any monetary base, but rather is a function of the amount of things we want to make and do for each other. More specifically, the amount we want to make and do for each other for money. This is the “Tails” side.
This is vertical money and horizontal money. Vertical money is created and destroyed by the public, horizontal money expands and contracts as a result of the economic activity of private individuals and their incorporated forms.
Money that has a commodity base, i.e. Gold, is not completely rooted in a particular public form, since it’s value can cross international borders.
This is where Bitcoin, a digital specie essentially, emerges as a new and rather unique form of money. It’s built-in cryptographic limits on supply make it essentially a virtual commodity form of money, fixed and “hard”, like Gold, yet digital and transferable electronically across global telecommunications networks. As such, it has attractive features as both means of exchange and store of value. Yet, while it certainly is useful on the “Tails” side of money, as one of the various kinds of assets circulating in the global market economy, it does not serve public function well. There is a reason that modern public forms of money are not commodities, why modern economies use “fiat” money, money that is not based in or guaranteed by conversion to any sort of commodity.
If the public restricts itself to commodity-money for public expenditure, this means that what it spends must be limited to what it taxes plus what it borrows, since commodities have a fixed available supply. And though many ignorant or simply disingenuous commentators, such as promoters of austerity, present this to be the case even now, in a modern monetary economy based upon fiat money issued by the public for public purpose, this is factually not the case.
The thing about public money is that we can have as much of it as we want to have. How much we spend relative to how much we tax is a public policy choice, and the right-wing dogma that the appropriate choice is for the budget to be balanced, for taxes to be equal to spending, is universally understood to be false, even among the most celebrated right-wing economists. In his 1948 article “A Monetary and Fiscal Framework for Economic Stability”, “Chicago Boys” patriarch Milton Friedman proposed a counter-cyclical policy, where government spending would be increased beyond taxation during economic downturns, similar to Abba Lerner’s “Functional Finance” which is often referred to as “Keynesian” economic policy. Whatever their ideological stripes, there is little disagreement among economists that to the degree that public budgets need to be balanced, they must be balanced relative to economic cycles and sectoral balances and not merely between annual public spending and taxation.
The balance between spending and taxes is simply the balance of the public “Heads” side of the coin, always in counter-balance with the private “Tails” side of the coin, as expressed by the activity of private interests in the global market.
It is no secret that the national State form is unsatisfactory. Not only is it burdened by its aristocratic roots, and not only is it corrupted by the fact that its modern form is largely captured by the international corporate elite, but the State is clearly unsatisfactory for modern publics as a result of the fact that static territorial forms are increasingly ineffective and inappropriate structures to serve global, distributed communities.
The public form has to evolve from the state form to the networked form, but for that to happen, new, networked public forms will need to emerge that are able to take over the socially necessary public functions. Including the management of forms of public money.
The critical feature required of public money is that we can socially determine how much of it there is, and how much of we want to apply to public purpose. We need ways to create and destroy public money so that we can can have a counter-balance to private activity, to manage cycles, to counter-balance economic sectors, and to socially pursue public objectives, such as health, education, and justice.
Thus, Bitcoin’s innovation in terms of creating a networked form of commodity money is not useful in creating networked forms of public money, and as a result it does not create a way for networked public forms to replace the current State forms.”