Tag: Milton Friedman

Bitcoin Excitement

Interest in bitcoin is growing. Its promotors are generally good guys wanting to provide the world a better payment system. Its users are often bad guys happy to move their ill gotten money pseudo anonymously (though the Feds tracked down and recovered some of the ransomware paid in bitcoin by Colonial Pipeline). 

Ezra Fieser reports in Bloomberg on a fascinating effort in the El Salvadorian village of El Zonte to expand the use of Bitcoin for making payments.  [“World’s biggest bitcoin experiment is a surf town in El Salvador”]  On June 9th, El Salvador approved President Nayib Bukele’s proposal to add Bitcoin to the U.S. dollar as legal tender in the country (El Salvador does not have its own currency).  El Zonte has no bank, thus storing money and making payments of it from a smart phone wallet would be very attractive.

Michael Peterson is the acknowledged father of efforts to establish bitcoin in El Zonte. The requirements for its use are apps for acquiring, storing, and paying bitcoin on smart phones and the proliferation of people and merchants with such apps willing and able to deal in bitcoin. Peterson “used Wallet of Satoshi, one of the many existing smartphone apps created for small transactions using Bitcoin, which is notoriously impractical—expensive and slow—for everyday purchases.  As more stores began asking how they could accept Bitcoin, Peterson decided El Zonte needed its own app. The Bitcoin Beach Wallet, which launched in September, similarly uses technology that allows for small transactions.” [Bloomberg, ibid]

Bitcoin ownership and transactions are recorded on blockchains that are replicated thousands of times around the world and publicly accessible. Blockchain is a slow and expensive approach to record keeping, but avoids the so called “trusted third party” of, say, a bank account ledger. Thus, work arounds have been developed for small payments that can be spent without the slow and cumbersome mining that prevents double spending for digital currencies on distributed ledgers (e.g., blockchain).  Despite the touted attraction of avoiding a “trusted third party”, most bitcoin users hold them with exchanges such as CoinDesk. These exchanges also facilitate finding sellers for those wishing to buy bitcoin and buyers for those wishing to sell them. Bitcoin traders no longer gather in park meetings that brought buyers and sellers together. [“The future of bitcoin exchanges”]

But the value of bitcoin has been highly unstable. On April 15 Bitcoin traded at $64,829.14, rising unevenly from virtually nothing starting in July 2010. On May 23, it traded for $31,248.42 and as I write this it is trading at $34,616.24, not exactly a stable value.

Thus, bitcoin has not been used to fulfill one of the key functions of money, i.e., to set prices. Though a growing (but still relatively small) number of establishments in El Zonte will accept bitcoin, they all price their goods and services in U.S. dollars. Thus, before bitcoin can be used for payment, an exchange rate (bitcoin equivalent of the required dollar amount) must be agreed. 

To succeed and be widely accepted and used as a currency, the value of bitcoin will need to become much more stable. In fact, to be competitive with the dollar or other sovereign currencies, bitcoin will need to become more stable than its competitors. Improving payment technology can be used for the dollar or any other currency, so the issue is the currency itself rather than the technology for paying it.  See the very successful example of M-Pesa in Kenya. That technology is very unlikely to rely on the clunky blockchain. Even Facebook’s Libra (now called Diem) only pretended to use blockchain, stating that it intended to switch to blockchain in the future. [“Bitcoin, cybercurrencies, and blockchain”]

As explained in my first article on bitcoin written over seven years ago [“Cryptocurrencies-the bitcoin phenomena”] the value of bitcoin or any other currency results from the matching of its supply with its demand at a particular value. Achieving that equilibrium requires either an adjustment in its supply or in its value. Widespread use of bitcoin for payments (rather than just speculative investments) will create demand to hold it for future payments. Bitcoin’s supply is totally predictable. It is growing gradually to a maximum of 21 million units by the year 2040. The supply is currently 18.74 million. Thus, its value depends on what happens to its demand for payments.

While the demand for money (dollars or whatever) tends to be relatively stable in relation to income over moderate periods of time, it is subject to seasonal and other temporary short-term fluctuations.  In the search for a rule based monetary policy, Milton Friedman proposed that the money supply should grow at a constant rate (e.g., 3 to 5%) over time to match the increase in the demand for money as income grows.  But short-term (even day to day) fluctuations in money demand would have resulted in very volatile interest rates in order to keep money demand in line with the steadily increasing supply. Central banks around the world have generally targeted interest rates instead to allow short run adjustments in supply to short-run changes in demand. But setting and adjusting the policy interest rate can be tricky as well.

The ideal monetary regime is to fix the value of currency to something (such as gold, or a basket of currency as in the case of the IMF’s SDRs, or a small basket of widely traded commodities) and then allow the public to adjust the supply to match its changing demand for that fixed value. Such a system follows currency board rules. The central bank passively supplies or redeems its currency in response to the public’s demand at the fixed price. Such a system has been adopted by several countries as is described in detail in my book on the creation of the Central Bank of Bosnia and Herzegovina.  [“One Currency for Bosnia-Creating the Central Bank of Bosnia and Herzegovina”]

Even under the most favorable conditions of widespread use for payments, bitcoin would suffer the weakness of the Friedman rule. With no elasticity to its supply, a holder of bitcoin wanting to sell some would have to offer a price that another holder would be willing to accept and visa versa. Its value would remain volatile (though less so). It is hard to imagine bitcoin ever succeeding as a widely used currency. https://www.economist.com/finance-and-economics/2021/06/10/cryptocoins-are-proliferating-wildly-what-are-they-all-for?frsc=dg%7Ce

All Volunteer Military

In May 1967, The New Guard magazine published an article by Milton Friedman on “The Case for a Voluntary Army.”  It was a compelling case and was adopted when the U.S. suspended its military draft in January 1972. But was it correct? “45 years later Nixon-Gates commission”

In the 1960s, the drafting of 18 year old’s to fight in Vietnam was avoided by those able to go to college. This was rightly challenged as discriminatory against the poor and college deferments were replaced with a lottery system that started in 1970, which picked the birthdates at random that would then be first in line to be drafted each year. I was granted the last of the college deferments.  “Draft lottery (1969)”

While a student of Friedman’s at the University of Chicago from 1965-70, I joined with several other libertarian classmates to form the Council for a Volunteer Military to promote Friedman’s call for an end to the draft. The Directors of the Council were: James Powell, National Director; Henry Regnery, Treasurer; myself, Executive Secretary; Danny Boggs, national Filed Secretary; and David Levy, Publications Editor. Our sponsors were: Yale Brozen, Bruce K. Chapman, Richard C. Cornuelle, James Farmer, David Franke, Milton Friedman, Sanford Gottlieb, Eugene Groves, Karl Hess, and Norman Thomas: an impressively diverse group.

In 1969 President Richard Nixon establish the Gates Commission to advise him on established an all-volunteer military and appointed Friedman to the commission.  Based on the Commission’s recommendations, President Nixon signed a law in 1971 that ended the draft in January 1973.

A Rand Corporation report on the All-Volunteer Force (AVF) by Bernard D. Rostker stated that: “Although the country had conscripted its armed forces for only 35 of its 228 years — nearly all in the 20th century — the American people were generally willing to accept this practice when service was perceived as universal. However, in the 1960s, that acceptance began to erode. There were five major reasons:

  • Demographics. The size of the eligible population of young men reaching draft age each year was so large and the needs of the military so small in comparison that, in practice, the draft was no longer universal.
  • Cost. Obtaining enough volunteers was possible at acceptable budget levels.
  • Moral and economic rationale. Conservatives and libertarians argued that the state had no right to impose military service on young men without their consent. Liberals asserted that the draft placed unfair burdens on the underprivileged members of society, who were less likely to get deferments.
  • Opposition to the war in Vietnam. The growing unpopularity of the Vietnam war meant the country was ripe for a change to a volunteer force.
  • The U.S. Army’s desire for change. The Army had lost confidence in the draft as discipline problems among draftees mounted in Vietnam.”

At the time Crawford H. Greenewalt, another member of the Commission, wrote to Gates that “while there is a reasonable possibility that a peacetime armed force could be entirely voluntary, I am certain that an armed force involved in a major conflict could not be voluntary.”

“Rand research briefs”

The AVF matched or exceeding the high expectations for it. The professionalism of our Army improved. We fought 13 wars with our volunteer force: Lebanon (1982-4), Grenada (1983), Panama (1089-90), Gulf War (Iraq, Kuwait, Saudi Arabia and Israel 1990-91), Somalia (1992-5), Bosnian War (1992-95), Haiti (1994-5), Kosovo War (1998-99), Afghanistan War (2001-21), Iraq War (2003-11, 2014-2020), Somali Civil War (2007-21), Libya intervention (2011, 2015-20), and Syria (2014-present). Each was limited enough not to exhaust the supply of volunteers needed.

But a different criticism of our all-volunteer force was raised that gave me pause. Our costly and futile war in Vietnam from 1955-75 was finally ended (without admitting the defeat it surely was) in response to the growing protests in the U.S.  No such protests were raised for our imperial adventures since then. Some observers began to point their fingers at the absence of a draft and thus a military/industrial complex better sheltered from public criticism. When we campaigned for the end of the draft and an all-volunteer military, we assumed that we needed to maintain an Army for our defense. Instead, our military was deployed all over the planet (800 bases around the world) with sufficient restraint (generally) to avoid strong public push back.  “National defense”  If the average middle class family’s children were not being drafted to fight unnecessary wars in far off places, they were not as likely to complain about the billions of their taxpayer’s money being pumped into the military/industrial complex.  This was an unanticipated side effect of ending the draft that we had not anticipated.

Both former President Trump and President Biden expressed their intentions to end our forever wars and, at least in the case of Biden, to strengthen our capacity to deal with the world with diplomacy. We should wish him well. And we should urge Congress to reinstate the Weinberger Doctrine, which limited the use of U.S. forces to when vital U.S. interests were at stake, and only as a last resort. “A Biden doctrine starts to take shape”

You can read my experiences in Iraq in my book: “My travels to Baghdad” and my experiences in Afghanistan in my book: “My travels to Afghanistan”.

PS. Some how I forgot that I had written on this before with a somewhat different proposal: https://wcoats.blog/2015/01/23/the-all-volunteer-military-unintended-consequences-and-a-modest-proposal/