August 17, 2018
This is my third comment on bitcoin. The first one was put at SR-CboeBZX-2018-040 on 08/13/2018, and the second one at SR-NYSEArca-2017-139 on 08/16/2018.
A question may arise out of my statement in the second one: nothing can be a universal money without recognition of its intrinsic value, before considering its money-hood. The question that may arise is: How did the Federal Reserve Note obtain its intrinsic value before becoming a legal tender?
Federal Reserve Note itself was issued as money, so it is not easy to answer this question by looking at it alone. But we can answer it by reviewing Federal Reserve Note and its ancestors together.
The first money-like note was Demand Note of 1861. It was issued interest-free, together with many other notes bearing interests. All the notes issued then were government debts, so every note issued then had its intrinsic value almost identical to its face amount. I said almost because the government notes could sell in the market for various prices depending on market interest rates of the day and the location.
One year later, the US government issued the first paper money, which was called the Greenback. It was much like the Demand Note of the previous year, but not the same. The Demand Note was a warehouse certificate, but the Greenback was a note money just like the Federal Reserve Note of today. The Greenback was not as valuable as our money today, because there was no guarantee that the Union would win the war. A note money is dependent upon the stability of its issuer. Then, the issuer was the Union government. Accordingly, its intrinsic value could be best recognized for its capacity to pay income tax (but not tariff) to the Union.
In 1900, by Gold Standard Act of 1900, the Greenback became a warehouse certificate money, just like Demand Note of 1861. With this event, we learn retrospectively that Demand Note of 1861 was not just a warehouse certificate but a money, a warehouse certificate money. The Greenback was replaced in 1913 by Federal Reserve Note, which was then a warehouse certificate money but became a note money again in 1971.
The above can be summarized as follows:
1861 Demand Note, a warehouse certificate money.
1862 Greenback, a note money.
1900 Greenback, a warehouse certificate money.
1913 Federal Reserve Note, a warehouse certificate money.
1971 Federal Reserve Note, a note money.
While USD was a warehouse certificate money, its intrinsic value depended upon the ratio of gold reserve and money issued. Gold reserve was not always enough to support all the money issued. While USD was a note money, its intrinsic value depended upon the stability of US government. US government was not always stable. If the US government is very stable, the intrinsic value of USD is its face value. Through the genealogy from 1861 Demand Note to todays Federal Reserve Note, a US paper money always had intrinsic value which was almost the same as its face value. But never perfect, whether it was a warehouse certificate money or a note money.
Now we can answer the question raised in the second paragraph above. When we look at Federal Reserve Note alone, we can clearly recognize its intrinsic value. When we look at its genealogy, we find that the family had intrinsic value before becoming money.
Bitcoin was created with the strong belief that USD had no intrinsic value. With this belief, the creator(s) of bitcoin thought that something without intrinsic value could become a universal money. Contrarily to their thoughts, USD became the most important money because US government has been the most stable in the world. Bitcoins money-hood will stay in a small community like a religious sect.