The Best Argument Made In Favor Of Bitcoin: The $1 Trillion Coin

January 23, 2013 5:37 am

We have heard many arguments favoring Bitcoins – a limited money (coin) supply, no central money control authority, no single point of failure (it is peer-to-peer), and many more. But the best argument in favor of Bitcoins yet has arrived in disguise – the $1 Trillion coin argument to handle the debt ceiling issue. We had provided a programming analogy to the $1 Trillion coin option. The summary of the “mint the coin” option is this:

The Government needs money. Generally the mechanism is this: The Treasury issues debt. The Fed buys that debt and sends money to the Treasury. The government can then spend that money. The catch is, when that happens, debt goes up. and everyone hates that.

So how can the Government get money from the Fed without issuing debt? A legal loophole allows the Treasury to mine coins (meant to enable it to issue commemorative coins) to issue two $1 trillion platinum coins, and then deposit them with the Federal Reserve. The Fed could then deposit funds with the Treasury in return. Debt does not go up, Government got the money, and everybody is happy. (okay, obviously not everyone is happy, but you get the idea)

The fact that this possibility exists, even on paper, is the strongest argument one could make in favor of Bitcoins. But why do we say that?

The simplest possible way of looking at money is to see it as an accounting mechanism. No single entity ‘creates’ money – it is basically a mechanism used to keep an account of the amount of work you have done, or simply to keep an account of how lucky you have been in life, or to keep an account of how successful you have been in negotiating, or a sum of all these things, and much more. But the key is this: it is an accounting mechanism, and if you bring in a player into this game who can just ‘create’ money – this whole mechanism becomes meaningless.

The one thing that we should all thrive for, given the irony that we do not completely understand the money creation process, is this: A fair way to ‘account’ for stuff. There are inequalities everywhere – but at the very minimum, we need to measure these inequalities without a ‘creation bias’. The $1 Trillion coin possibility highlights this single most dangerous flaw of the fiat currency system, more directly than ever.

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