Austrian economists have long been interested in the study of money and the processes of monetization. The latest global financial value, which was developed primarily by market forces, gold, occurred before the Austrians performed their work on the subject. The advent of the digital currency network known as Bitcoin gives Austrians an extremely rare opportunity to observe the reorganization of global economic life as an emerging money aims to kill existing fiat structures.
As with any other subject analysis, it is important to understand and apply the basic principles of the Austrian economy in order to make informed decisions about the monetization process of Bitcoin. A study of the effect of the minimum wage law cannot be believed without a strong understanding of the law of demand; Similarly, a study of El Salvador’s recent law on making bitcoin legal tenders requires proper enforcement of Gresham’s law.
In recent times Mrs. Wire, Christopher Mousten Hansen applied Gresham’s law to the legal tender status of Bitcoin in El Salvador and predicted that the project would be counterproductive for Bitcoin and the citizens of the country. While it remains to be seen how all of this works, we can largely dismiss Hansen’s decision because he has a misconception about Gresham’s law. His analysis has two serious flaws, the first is obvious and the second is inherent:
- The summer law can be applied to any law, including dual legal tenders, regardless of the structure of the scheme.
- Economic interaction between Bitcoin and the US dollar will occur in El Salvador’s void without interaction with global markets.
Hansen does a good job of defining and interpreting Gresham’s law, which concludes that “bad money carries good money.” It is important to briefly examine why this occurs.
With a fixed exchange rate between the two legal tenders, people will be encouraged to hold on to better money and sell their bad money. However, those who take note of this legal tender law will be encouraged to transfer good money wherever they enjoy a good exchange rate, except in terms of money and fixed exchange rates, because the chances of an arbitrator will almost certainly exist. As a result, as long as the legal tender law does not apply, the better the money, the better.
There are some mistakes here: El Salvador is clearly not fixing the exchange rate between the dollar and bitcoin, something that Hansen actually admits. How does this affect our analysis? In his book, The Ethics of Money Making, J জrg Guido Halsmann writes:
“Legal tender laws will be a mere complication of the exchange if it is not for an additional condition that is virtually always met with. Indeed, legal tender laws generally establish a legal or ‘fiat’ parity between privileged money (certificate of privileged money) and other money and certificates of money.
How can we apply Gresham’s law in a situation where there is no fixed exchange rate? Hansen tried to do this, saying, “However, even though there is no fixed exchange rate, you still have two currencies that are equally effective in eliminating liabilities. This fiat equivalent means their legal powers, if only due to state intervention, are the same.”
If we follow the link to Hansen’s article, we find another work by Hullsman, who explained the concept of “fiat equivalence”:
“It is in the nature of legal tender law that they establish an imposed equivalence (fiat equivalence) between the convenient means of exchange – legal tender – and other means of exchange.14 The legislature wants to impose the use of its pet exchange medium, but assumes that it determines the rates that market participants must accept. For example, if so far most of the agreements are marked between silver and copper, where our legislator wants to impose his own paper slip, he must determine the rate of parity between these slips and the specific weight of silver and copper.
Holmes further explains the concept in footnote 14:
The expression “fiat equivalence” may seem a bit awkward, but it is more precise than ‘introduction price control’, as it allows us to cover cases where prices are not in the first place. For example, the introduction of U.S. greenbacks in 1862 was not based on price control, because greenbacks had not yet been circulated, so there was no price that could be controlled. Instead, the U.S. government ordered creditors to accept paper slips called ‘dollars’ in the same denomination of coins and notes bearing the same name. Thus, a fiat equivalent of Greenback and Specky existed, but there was no price control.
Simply put, the Fiat equivalent is the work that the government does to select the monetary value of certain means of exchange that is different from the monetary value that the market will give it. Hansen defines Halsman as the legal requirement to accept both Bitcoin and Dollar as a payment and their exchange rate (as opposed to Hansen’s own point when defining Halsman).
What can we expect in light of this understanding of both the law of Gresham and the legal tender law of El Salvador? “What has our government done?” Murray Rothbird said it was an intervention by government orders through price controls that prevented bad money from being driven out of the market. If price control does not exist, holders of good money, in this case Bitcoin, will not be encouraged to trade their Bitcoin in exchange for dollars outside of El Salvador. Instead, they will try their best to store their bitcoins when they need to spend money while using dollars, if they have any money.
Their choice to keep Bitcoin can even be a premium for accepting dollars as payment. This raises the price of Bitcoin in dollar terms for El Salvador’s local exchange rate, which encourages people outside El Salvador to exchange dollars for Bitcoin at a better price. A pipeline of bitcoin in El Salvador and the expected result out of the dollar – the opposite result of Gresham’s law. This is commonly known as the Thiers Act, which states that good money brings out bad money when there is no application of a fixed exchange rate. Their law is less about explaining why an emergency money would replace the existing relatively bad money.
It would be interesting to see the law on making bitcoin legal tenders in El Salvador. Legal tender laws almost always come with a fixed exchange rate and force a bad money into circulation. It’s different. It goes without saying that in a healthy society and economy the legal tender laws are unethical and even unnecessary, but after potentially troublesome onboarding, will this law be obsolete because Bitcoin is the money that will ultimately be chosen by the people of El Salvador in a neutral market? Is it entirely a matter of government intervention in the market or are we seeing the government deal with the reality of money in the true sense? Austrians in general should be curious about El Salvador and Bitcoin because we are finally ready to test our theories on how money works and how new money emerges.
This is Rollo McFlug’s guest post. The views expressed do not fully reflect their own and BTC Inc.’s Bitcoin Magazine.