Innovation Isn't Dead, It's Buried In Meaningless Money

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On March 9, 1933, President Franklin Roosevelt signed into law the Emergency Banking Relief Act (EBRA). While Executive Order 6102 remains entrenched in the monetary consciousness for being the instrument for confiscating the public's holdings of gold money, the authorization for 6102 was forged in the EBRA:

"Whenever in the judgment of the Secretary of the Treasury such action is necessary to protect the currency system of the United States, the Secretary of the Treasury, in his discretion, may require any or all individuals, partnerships, associations and corporations to pay and deliver to the Treasurer of the United States any or all gold coin, gold bullion, and gold certificates owned by such individuals, partnerships, associations and corporations. Upon receipt of such gold coin, gold bullion or gold certificates, the Secretary of the Treasury shall pay therefor an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States."

That meant that 6102 was properly authorized by both Congress and the Executive, meaning that it was not an "imperial" power grab by one branch in opposition to another, but as the entire official and federal government over the monetary affairs of private citizens and businesses. Republics are not free from the arbitrary exercise of power.

It was the EBRA, expanding on provisions of the Trading With the Enemy Act of 1917, that authorized FDR to declare a national emergency, providing the legal framework from which Treasury Secretary Henry Morgenthau could enforce the intentions of 6102. However, that was not the full extent of its provisions.

All banks in the United States were to become wards of regulation under the authority of the Treasury, in the form of the Comptroller of the Currency, regardless of standing regulatory regimes. The combined efforts of the EBRA and Executive Order 6102 were to give the public a single, unambiguous monetary framework, to remove the "currency provided by the Congress" from any but Congress' delegated authority. There was no legal competition for Federal Reserve Notes after these decrees.

Ostensibly the government intended to gain control over currency "hoarding", referring to that phenomena frequently in the bills and orders themselves. What it meant for all practical purposes was that the people were judged by their legal representatives to be (and remain) ill-suited to control the supply of currency. By implementing these lawfully constructed measures (and a few more that would follow, including the Gold Reserve Act of 1934 that devalued the dollar) the government of the United States would be imposing a durable legal monopoly over monetary affairs, including currency.

Without much notice, on October 31, 2008, Bitcoin's design paper was published at On January 3, 2009, the Genesis block of Bitcoin was established and Bitcoin 0.1 software was released a few days later. In other words, a private currency was established in a virtual setting based on cryptography and open sourcing. Because the currency works on the principles of network acceptance, Bitcoin is also dispersed with no central agency or "bank" to manage it. The supply of Bitcoins is governed by an algorithm along a predetermined path - the supply is both constant and known in advance.

The key to advancement into Bitcoin was solving the "double counting" problem. Under the post-1933 US dollar currency standard, double counting is largely the domain of counterfeiters alone. If you use a physical dollar bill to purchase any item, there is no double counting problem since the dollar bill is relinquished upon purchase and physically relocated into the seller's possession. Once that happens the buyer has been deprived of the ability to use that physical dollar bill more than once.

In the case of modern ledger money, advanced first through checkwriting, the Federal Reserve System counteracts the double counting problem through clearing services. The banking system, acting itself through a network, actively manages and accounts for ledger balances of both its deposit base and its own accounts. It is fairly uncontroversial in the practical sense since depositors are rarely troubled with mistaken balances or the ability to double use checks. Law enforcement takes care of those who try to double spend with either bad checks or fraudulent plastic cards.

For all intents and purposes, double usage of currency is not a pre-eminent concern of modern currencies, at least amongst the non-bank public. Bitcoin, in a flash of innovation, has brought the same kind of security to its virtual network. First, use of a Bitcoin is non-recourse; the same as currency, checks or debit cards. Once you spend it, it's gone. Essentially Bitcoin's are chains of "blocks" that contain incremental data (the hash) while maintaining the whole record of the block. To counterfeit a block or to try to double spend would require far too many computational resources to make it economically feasible (this oversimplifies this process, but the technical nature of Bitcoins is beyond the scope of this article).

The crucial innovation here is to make the Bitcoin "money" meaningful in the sense it is not arbitrary. To obtain a Bitcoin, even through Bitcoin "mining", requires effort. The rather elegant solution to the double spending problem thus means that parting with a Bitcoin is meaningful in that it cannot be replaced except through additional effort (either mining for the computationally inclined, or by the exchange of some other currency). Indeed, that is the meaning that money itself is supposed to convey between possessor and the inclination toward "spending".

In this strict sense, true money supplies a restraint or limiting factor upon the system into which it functions. Conveyance of money is also the conveyance of meaningful effort. If you part with a Bitcoin or dollar bill in the course of spending on some good, you fully realize that it will require some kind of exertion (either labor or the sale of some other asset) to replace the expended currency.

In this way, the capitalist method, money is the very measure or symbol of successful economy. It is the meritocracy by which effort is rewarded, where the greater the advancement of the desire for monetary success, the greater the achievement of the entire system. Since you can't double spend existing currency, acquiring more of it requires more effort (either in terms of time or "value" of the effort required). As that meaningful relationship holds throughout the economic system, the entire system benefits since the object is for everyone the same - productive endeavor. It is the vital link between the creation of "capital" and the process of innovation since everyone is trying to maximize the monetary value of positive effort.

Where money is conveyed in a non-arbitrary fashion, meaning the limiting factor is reduced or removed, it follows that a similar reduction in productivity and meaningful effort would be evident. Conferring money without meaningful effort is the same as double spending. If you could use the same dollar bill for every possible human need, you would not spend much time working to acquire more dollar bills. For money to convey the limiting factor, it must be constrained itself. To that end, what is true for the individual must be true for the intermediary.

In addition to work, replacing a spent currency unit can be accomplished through borrowing from another possessor. The meaningful effort in this case of credit replacement is the repayment with interest. But even in this case, true money then confers limitations upon the lender intermediating the currency replacement. The intermediary can only lend as much currency as it has; or in the fractional reserve system as much as it thinks it can without upsetting depositors (the true owners of currency in banks).

The more the system of intermediation tends toward fractional lending, the looser the constraint of true money becomes in the economic system. This is particularly true where the intermediary fails to perform the function of intermediation well. If the lender lacks the ability or incentive to perform "good" analysis of the likelihood for repayment, the potential for currency losses increases the likelihood of depositor dissatisfaction leading to "hoarding". In a true money system, hoarding of a limited supply of true money is the extinguishing factor in intermediation. Thus, even in intermediation, meaningful effort is required to maintain and use currency. The circulation of currency, in the case of meaningful effort, conforms to the positive economic system since the banking element performs the same function of meaningful effort - banks should not be allowed to "double spend" either.

Again, that is only possible where money supplies a limiting factor upon its users. In the modern case of currency elasticity, the limiting factor is reduced or removed entirely, particularly in combination with a high degree of fractionalization. In their place arose a centralized limiting factor in the assumed beneficence and learned estimations of the Federal Reserve governors (in the case of the US).

For the most part since 1980, the limiting factor on the supply of money has absurdly been the CPI. The ability of the central authority to produce "money" or restrain banks from producing credit money in the course of monetary aims (not capitalist aims since this circumvents the link between capital and meaningful money) has only been constrained by the academic calculation of "inflation", including the academic exercises of imputations and hedonics within that calculation. As long as the official CPI remained tame, with the interpretation of "tame" being solely concerned with the second derivative of "general price level" changes, the Federal Reserve exercised(s) free reign over arbitrary monetary creation. The most intrusive of these exercises was the adoption of interest rate targeting and the incorporation of rational expectation theory. These have led directly to the age of unending ZIRP and QE - the inevitable extension of arbitrary money to an extreme.

Asset bubbles themselves were the unavoidable result of money applied through increasingly arbitrary methods. Further, it cannot be successfully argued the massive and existential monetary imbalances that populate the historical record of the Great "Moderation" were unlucky coincidences. Not only does that apply to the massive upward explosion of debt usage in both the private and public sectors, but the massive and seemingly structural current account problems that plagued and plague the United States and so many other countries. All of these symptoms of imbalance are essentially the credit/currency replacement in the double spending problem replicated durably across time and different scales. The central monetary authorities are forced to maintain these imbalances lest the entire system fails because so much of it has been created and "nurtured" by the arbitrary flow of non-money money. It is a positive feedback loop.

The exponential increase of financialization essentially allowed a growing imbalance of arbitrary substitution of a credit dollar for a real dollar. In the breakdown of true intermediation that accompanied that process, there was no meaningful effort (or at least there was a significant reductive spiral of meaningful effort) taken in the replacement process. In the case of governments, that meant easily replacing a taxed dollar with a borrowed dollar allowing for arbitrary operation and attainment of levels of government activity (and since economic statistics are calculated in a way that counts this as a net positive, it was good for GDP, thus hiding the true costs of the growing arbitrariness of currency and the related monetary imbalances). Had true currency been allowed to exert the limiting factor upon the whole mess, the imbalance of deficit replacement would have been short-lived.

The purpose of money and currency is more than just the three commonly-accepted functions. Money must also exhibit a limiting factor that enforces a ubiquitous, internal process of monetary self-correction. Absent that fourth factor we have achieved nothing but a system of worthless tokens or charta. How can an economic system advance when money is nothing but an endless stream, a torrent of digital ledgers created at the whims of academics with limited attachment to the wider society in which they hold hostage?

The generation that actually lived the Great Depression understood the idea of meaningful effort attached to money. They well earned a generalized reputation for frugality that belied the political angling of their own age, the very seeds of arbitrary money that we see today. In the process of "hoarding" currency, they knew that they had the democratic option of opting out of the banking system entirely - they were acting out the very mechanism of self-correction on a financial system imbalanced by the first real modern strains of monetary engineering in the 1920's.

They may not have fully internalized, at least at the time, where this all would ultimately lead - to a public that has increasingly lost or ignored the combination of effort and money (the dot-com/entitlement culture that still lives on now in the pervasive desire for "easy money"). In their own exercise of free rights over the monetary system they inadvertently saw to it that they would be the last able to do so. There is no current opt-out of the tokens of the modern financial economy, as we are all hostage to the currency designs of the arbitrary managers. Individual sovereignty has no place in a tokenized system.

In some places it has become fashionable to see the innovation of the past century as some spent historical or demographic process, as inevitably ending waves of productive activity that drew in vast forces of social and economic change. Perhaps that explains the dearth of true disruptive innovation of the past few decades, and the lack of robust, organic growth that would accompany such disruption and change. After all, we have not seen the type of revolutionary economic upheaval since the advent of the Internet, and the underpinnings of that technology was innovated decades before. I cannot, however, see the same historical record without incorporating the financial history of that period.

It cannot, in my opinion, simply be a historical accident of pure coincidence that such massive and productive innovation seemed to have diminished or disappeared during the exact same period where meaning in money was so highly diminished by monetary "innovation". The less meaning contained in modern currency, the greater the incentive to chase the easy buck rather than face the double spending problem through hard and innovative work that pays off in economic advancement. I have said many times that there has to be a hefty opportunity cost for a generation of day-traders and house-flippers, the accumulation of so much talent and intellectual capacity for exclusive use in and on Wall Street. Were money to again hold meaning, Wall Street and governmental economics would be curiosities, a side show distraction to the new giants of industry and innovation. Innovation is not dead, it is simply buried in a tsunami of meaningless tokens, and I fear the opportunity cost of delaying its arrival grows exponentially.

It would be easy to simply blame the CPI, but I have high hopes for Bitcoins.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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