Rebutting Frances Coppola’s Misrepresentation of Gresham’s Law and the Nature of Money and Value
A strange article to read from Frances Coppola on the nature of the value proposition of bitcoin and its relation to Gresham’s law. There are agreeable points made, however, the way in which the author views fiat is at best not the most significant and relevant point of observation. The viewpoint from which Coppola expresses fiat ambiguates our understanding of the value and nature of money with respect to Gresham’s law. Here I disambiguate the confusion by inquiring into the significant meaning of fiat and its relation to good and bad money with respect to Gresham’s law.
“Let it Become”
It’s unclear here what thought experiment Frances means to convey:
My description of a satoshi as a new coin is every bit as accurate as theirs declaring satoshi to be a subdivision of bitcoin. It is merely a matter of perception.
She seems to refer to a completely different crypto-currency which carries its own meaning to the crypto-currency industry. On the other hand she perfectly describes the naming system used for a certain “denomination” of bitcoin:
Satoshi himself did not call the smaller coin “satoshi” — that name was established later in his honour.
What this refers to is bitcoin’s divisibility and the smallest unit available given its current 8 decimal place limitation:
1 Satoshi = 0.00000001 ฿
Frances seems to think this declaration by a community member is an example of fiat (even though in nearly the same paragraph she gives Satoshi credit):
Surely a coin whose value is set by a god-like (but human) figure is the ultimate fiat currency?
What Is The Significant Definition Of Fiat?
Words can be given different definitions and sometimes this can be reasonable and sometimes it can be argued to be unreasonable. I don’t really need to argue that her example of “fiat” is unreasonable because I would rather argue that it's not significant.
The significant observation in regard to fiat is that it refers to a statewide declaration of a value for a unit and medium of exchange which exceeds the market value of the medium of exchange.
This happens when a government declares a paper money to be worth a certain amount of gold.
When someone “declares” (fiat is latin for ‘let it become’) it IS a declaration but that in itself doesn’t not tend to the economic observation of fiat:
State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
Intrinsically valueless money used as money because of government decree.
This paragraph comes to a difficult to understand but somewhat reasonable conclusion:
The difference between these two examples concerns the nature of the relationship. There is no intrinsic relationship between gold, silver and copper: they are different metals. The value relationship is therefore set by fiat. In contrast, the relationship between a smaller and a larger quantity of gold is simply a matter of measure. But I have already pointed out that there can be no “intrinsic” relationship of this kind between a satoshi and a bitcoin. If there were, then everything on every computer everywhere in the world could be regarded as bitcoin. So the relationship between satoshi and bitcoin must be set by fiat.
Again it seems Coppola is conflating declaration with declared value and I THINK she means to argue that when the markets or a community decides the value of something then it is a declaration of fiat (ie a social contract). Nonetheless we can for sure observe that there is no state declaration that another coin or a denomination of bitcoin carries a value that is proportionally higher than a comparison to a full bitcoin or bitcoin as a currency network.
Understanding Gresham’s Law in Regard to Fiat
The problem of misappropriating fiat here is that it leads Coppola to misapply Gresham’s law especially in regard to bitcoin and I feel this mistake stems from not having a (theoretically) stable metric for value for thought experiment purposes.
Here we see a problem understanding the nature of value:
If a satoshi can be subdivided, it can be revalued. Indeed, we could say that if a subdivision becomes necessary, the satoshi will by definition be revalued, and will gradually go out of use just as bitcoin will.
It’s convoluted to make the point she makes. A satoshi could get changed. It could be that there are decimal places added. It could be that a Satoshi gets renamed. This has been discussed since as the market valuation of bitcoin increases it might not be convenient represent its value and prices the way it is now.
But in regard to a theoretically stable metric of value there is no argument put forth in Coppola’s writing (nor can their be such a founded and reasonable argument) that a given amount of bitcoin will decrease in value because of the decimal point change. It’s not value inflation in the same sense as debasing a coin of its metal which is what she is effectively implying.
And this is where Gresham’s law is relevant and interestingly we have George Selgin to help us understand the phenomenon Gresham’s Law was named after as observed by a financial advisor to queen Elizabeth in the 1500's:
According to the economist George Selgin in his paper “Gresham’s Law”:
As for Gresham himself, he observed “that good and bad coin cannot circulate together” in a letter written to Queen Elizabeth on the occasion of her accession in 1558. The statement was part of Gresham’s explanation for the “unexampled state of badness” England’s coinage had been left in following the “Great Debasements” of Henry VIII and Edward VI, which reduced the metallic value of English silver coins to a small fraction of what it had been at the time of Henry VII. It was owing to these debasements, Gresham observed to the Queen, that “all your fine gold was conveyed out of this your realm.”
The phenomenon of fiat creates two types of value observation. You have the stated or declared value of a debased coinage which is declared to be comparable to some other market valued coinage or commodity. So for those that follow the declaration of fiat the debased coinage is supposed to be comparable but the problem is that the valuation beyond the queen’s powers (ie borders) of the otherwise debased fiat money does not hold. Moreover any commodity money that holds its market value for non-fiat reasons (such as gold) is going to appear to increase in value (especially from a foreign valuation) compared to the debased currency.
As the inflation expectation continues to grow people begin to hoard and sell off (to foreign lands) the commodity based money and they tend to circulate the fiat. The fiat’s velocity increases while the commodity counterparts lose velocity in relation.
Gresham’s observation was that “good money” (ie commodity money) was leaving as it was favored as a holder of wealth, and only the queen’s money stayed local-thus her wealth fled her borders.
The Significance of the Introduction of a Deflationary Coinage
Coppola’s conclusion, much like many economists’ who try to comment on bitcoin, does not really fit with her preceding arguments. She attributes her described phenomenon and its relation to Gresham’s law as a symptom of bitcoin’s deflationary nature:
This is because of the deflationary nature of Bitcoin.
Another strange observation, this time in regard to seigniorage, and I feel like it's a mistake to suggest the issuer loses “money” (rather it should be said they lose some form of value or control they lose rather than actual money):
Along with this goes debasement of the intrinsic nature of the coinage, because when the face value of the coins slips below the price of the metal needed to make them, the issuer loses money (seigniorage).
Lastly she gives a counterpoint to her conclusion noting multiple valuable inflation hedges that are not highly transaction but certainly hold their value nonetheless:
Those who want to store value tend to exchange coins for other assets, such as bars of gold, artwork, fine wines and property — and future claims on other people’s assets, of course.
And the odd conclusion that something can be so valued that it ceases to be valued:
But in a deflationary currency, Gresham’s Law applies — and the ultimate end of Gresham’s Law is that “good” currency disappears from circulation, because it is hoarded to the point of complete illiquidity. Once you can’t sell an asset, it becomes worthless.
The last sentence has an implication that is not true. That bitcoin is deflationary suggests that its limited nature will cause it to be valued more and more, especially as bitcoins are lost forever but (eventually) no more are ever minted. The deflationary nature causes bitcoin to act as an inflation hedge, like gold has sometimes historically been viewed, and this will cause people to hold it ever more dearly.
There is nothing in Gresham’s observations that would suggest such an inflation hedge would necessarily be so valuable it would become valueless.
I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”.
There can be Keynesians Neo-Keynesians New-Keynesians Post-Keynesians. Even the Post-Keynesians are still Keynesians~Lecture, Ideal Money
~John Nash Ideal Money
Gresham’s law, in this sense, would be more accurately represented if we suggested that people would rather circulate and spend an inflationary currency and hoard a deflationary currency. In other words people will hoard bitcoin like gold and circulate their respective state issued currencies.
Frances is implying (somehow) that the former would eventually lose its value and the later would increase in value.
What she has done is used her own subjective valuation and suggested that a highly transactable currency is good and therefore valuable, and that a currency that is hoarded with a lower velocity is not valuable. Her subjective definition of valuable in this sense though is not a market valuation. Obviously a commodity or a money that is hoarded is valuable.
The argument of those that don’t quite seem to understand the purpose and nature of bitcoin seems to be that the higher velocity of a currency the higher its value. This is exactly what John Nash cautioned us about when he said even post Keynesians are Keynesians and that Keynesians sell a policy that good money is bad money and bad money is good money.
Money that moves with a high velocity can certainly be said to be a highly transacted currency. If your definition of good money is ‘a money with a high velocity’ then that could be good money and often an inflationary currency, although declining in value, would meet this definition of good.
However, a deflationary currency that is hoarded and comparably not often spent, might be bad in regard to velocity and transactability, but this is NOT bad in the Gresham sense. Gresham’s observations are in regard to an objective market valuation in comparison (for example) to a theoretically or conceptually stable metric for value.