Bitcoin, Madison Hours and Musical Banks – alternative currencies virtual, physical, and fictional

Bitcoin is the new hot thing (i.e. I just heard about it on Hacker News).  It’s a peer-to-peer virtual currency with a couple of wrinkles – the total number of bitcoins is strictly restricted, making it popular with those who worry about central banks debasing currencies, and you get about 50 bitcoins a year just for installing some software on your computer, making it popular with those who enjoy getting something for nothing.

Madison Hours is a 15-year old alternative currency used in Madison, WI, based on the principle that everyone’s labor should be worth exactly the same amount: $10/ hour.

At first glance, there’s not much in common between the global, decentralized, computerized Bitcoins and the local, cooperative-managed, paper Hours, but they actually have a lot of similarities.

First, that something for nothing thing.  It’s long been known that you can jump-start an economy by giving everyone a bit of cash, and both systems do this – Bitcoin gradually over time, and Hours when you sign up.  It’s the same principle as the $300 Bush tax cuts, though they’d both hate the comparison.

Second, both systems go against something that almost all economists believe.  For Hours, it’s that prices should be determined by supply and demand.  For Bitcoin, it’s that a central bank should regulate the money supply to help stabilize the economy.

And third, and most important, they’re both mostly useless.  Madison Hours can be used to buy “squares of seed-embedded paper” and can be used in part-payment for “dolls handmade from old clothes”, while Bitcoin offers “web marketing and web 2.0 solutions” and a “karaoke conversion tool”.  Not too surprising – if the financial system worked as badly for people as its detractors said it did, it would have collapsed long ago.  (Yes, I know it almost did – nobody likes a clever dick).

Perhaps the best way to understand this is to look at Samuel Butler’s novel Erewhon, describing a fictional country which has regular banks and “Musical Banks”, which offer a parallel currency, officially esteemed but practically worthless.

Of course every one knew that their commercial value was nil, but all those who wished to be considered respectable thought it incumbent upon them to retain a few coins in their possession, and to let them be seen from time to time in their hands and purses. …  I never could understand [..] why a single currency should not suffice them; it would seem to me as though their dealings would have been thus greatly simplified; but I was met with a look of horror if ever I dared to hint at it.  Even those who to my certain knowledge kept only just enough money at the Musical Banks to swear by, would call the other banks (where their securities really lay) cold, deadening, paralyzing, and the like.

Butler was satirizing how religion was officially honored, but ignored in practice, but he would be amused that his satire had actually been implemented in Bitcoin, and that people were taking it seriously.

Will Bitcoin be successful?  Well, it can certainly survive as a quasi-barter system for a few geeks and those who love them.  But buying a car, renting an apartment, getting anything significant from a major company?  Let’s just say that 3 Bitcoins and $4 will get you a Starbucks latte.

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17 Responses to “Bitcoin, Madison Hours and Musical Banks – alternative currencies virtual, physical, and fictional”

  1. grondilu Says:

    I stopped reading here:

    “a central bank should regulate the money supply to help stabilize the economy.”

    • erehweb Says:

      The post doesn’t exactly say that (although I believe it). What it does say is that most economists believe that a central bank is needed. I know you don’t think a central bank is needed, but do you think that most economists think one is necessary?

  2. grondilu Says:

    You’re right. Indeed you said that you most economists think a central bank is necessary. I just don’t care about what they think.

  3. Cathal Says:

    This piece is insufficiently researched.

    “making it popular with those who enjoy getting something for nothing.”

    For most people, the computational power contributed to the network will be more expensive than the bitcoins they receive.
    Only people with powerful GPUs or other efficiencies will find it worthwhile and it will be far from “money for nothing”, as they are powering the network. We’re still working on the “Chicks for free” algorithm.

    While many economists agree that economists should be hired to decide how economists can regulate commerce, many individuals will find value in a medium of exchange that is free.

    Your own link puts lie to the “mostly worthless” moniker.

    • erehweb Says:

      Thanks for your comment, Cathal. I’ll stand by my link as showing bitcoin to be mostly useless. What might change my mind? “buying a car, renting an apartment, getting anything significant from a major company”.

  4. Mark Hotels Says:

    Bitcoins are convertible into dollars, euros, etc…

    So it is as real and useful as any of these.

    I don’t quite get how this superbly OBVIOUS fact has escaped the blog author.

    • erehweb Says:

      Mark – it’s trivially useful in that sense. The real use comes from the dollars, euros etc., which can be exchanged for goods and services. If you have to go via a traditional currency to get goods and services, then the bitcoin isn’t adding anything – no reason to have it.

      As a thought experiment, suppose I issue a limited amount of erehwebBucks, and guarantee that I will buy or sell an erehwebBuck for 1 U.S. $. Are erehwebBucks useful? By your definition, yes. But it doesn’t seem to add anything to the $.

      • Doug Says:

        erehwebBucks are not counterfeit-proof. It is unlikely that you can come up with a scheme that will prevent me from conjuring up my own erehwebBucks that you will be able to detect as fake.

        You cannot transact with erehwebBucks irreversibly. If I have an erehwebBuck and pay it to someone else, how can you prevent me from keeping a copy of it and trying to double spend it?

        erehwebBucks are not divisible. How do I pay someone half an erehwebBuck?

        Bitcoin solves these problems. So erehwebBucks are not the same as bitcoin.

      • Steven Wagner Says:

        Additionally, erehwebBucks would require me to trust erehweb. US dollars require me to trust the government, and that they wont print money and devalue my assets. Bitcoins have no central authority, and they are backed by the most solid thing in there is – Math.

  5. Mark Hotels Says:

    I disagree strongly.

    Having limited use only among merchants who accept bitcoins made bitcoins _trivially_ useful.

    Being convertible to widely used currencies, on the other hand, finally makes bitcoins *practically* useful.

    • erehweb Says:

      We may have to agree to disagree here. Will you at least agree that you can only buy a very small set of goods and services directly using bitcoin, without going through another currency? I think that’s an important measure of usefulness, although you seem not to.

  6. Doug Says:

    Bitcoins seem to have gotten a quick and unfair brush-off here. Here’s one thing bitcoins are useful for that is difficult through “traditional” channels: privacy.

    Now, you may deride this as a playground for criminals, but there are legitimate reasons for wanting private transactions, too. Think protestors living under a brutal dictator.

    And bitcoins do privacy better than fiat currency. When I buy my starbucks with 4 dollar bills, once the transaction is over, it is difficult for anyone to prove that I was a party to that transaction. Bitcoin enables that kind of transaction to be performed electronically, between anyone anywhere in the world. I cannot conveniently and privately transfer currency to a friend in another country. With bitcoin I can, easily, privately and quickly. There are existing services that convert between currencies and bitcoin. So I can non-privately buy some bitcoin, but privately transact with whomever I want. The payee can then non-privately convert the bitcoin into their own currency.

    • erehweb Says:

      Thanks for your thoughtful comments, Doug. Is it possible to have the bitcoin method of private transaction without bitcoin? e.g. for USD? Or is there something about the system that means that only a new currency would work with it?

      • Doug B. Says:

        Well, sending plain cash is one way to preserve privacy, but it lacks other important qualities: is not fast (days or weeks to arrive), is not safe (people can open your mail), it is not verifiable (the addressee can claim they never received the money), and unless you are very careful, may not even be private (you could leave finger prints or bits of skin or hair that can identify you, US bills have serial numbers).

        As far as electronic currency, Bitcoin may not be the only way, but there are fundamental aspects to the problem that will make any electronic solution be a lot like bitcoin.

        Cash transactions need to be private, irreversible, peer-to-peer, and verifiable, among other things.

        I am no expert in the field, but my understanding is that many attempts have been made to create an electronic currency with the requisite properties, and failure is the rule. Digital cash is not an easy problem. To my (relatively uninformed) knowledge, bitcoin is the first to truly succeed.

        So, there is something about the system that means it needs to be “bitcoin-like” if not actually bitcoin. This is likely the answer you were looking for in your last question/sentence.

        But to answer a different interpretation of your question, it doesn’t mean only a new currency would work. There is nothing stopping the US gov’t from using the same approach/software as bitcoin to issue a new “official” electronic currency that is treated for all intents and purposes as equivalent to physical currency. The gov’t would define their bitcoin-like digital currency to be 1-to-1 exchangeable for US-dollars. Then we have bitcoin-like properties but with the “same” currency.

        I predict that this will happen in our lifetime, assuming no fundamental flaws are found in bitcoin (or whatever may replace it in the future). Bitcoin may continue to exist as a parallel currency, but once a large enough population of people come to trust electronic cash, it will only be a matter of time before there is a gov’t issued one.

  7. Editor (@dgcmagazine) Says:

    It’s a decent article you have written here. Not a positive one but it’s a bit like you are seeing the glass as half empty when clearly the glass is half full.:-) Several things you should note here, the value one Madison Hour is set at par with the approximate value of one hour of the local wage. Locally an hour of work goes for about $10 an hour and people mark one Madison Hour at the same level. An hour of a person’s time is NOT something for nothing, it should have a worth of about $10 for the purpose of commerce. There are a lot of people who will tell you their local currency has made a big difference in their lives, but for you, I would think not so much! The Bitcoin value for 1 BTC is not set or related to anything. BTC’s will be sold for whatever someone else is willing to pay. Lots of hype the price goes up, big selling it goes down. However, I will say that there is no “market” yet that has developed. 5-6 or even ten agents exchanging them is not a “market”. Markets function like this, one agent drops his bid, another agent is there to buy from the customer at a fraction below, the provides liquidity. In the BTC arena, there are not that many agents yet so one bid is pulled and the price drops out…that is NOT a “market”. 5-6 agents do not create a “market”. At the height of e-gold some years back there were 130-150 exchange agents and the cost of buying dropped to like 1% and sometimes I was paid to sell it back. Give BTC a few years and when we see 80-100 agents transacting in BTC then you can say if it’s overvalued. More agents will move the price lower, no doubt. A dollar a coin sounds about right. 6 months ago somebody sold a pizza for 10,000 BTC and what….today you want me to buy a BTC for $7? You you kidding? Buyers are now speculating on BTC as an “investment” it’s not a full blown currency yet because the value has NOT stabilized for a liquid market. BTC could one day make it big, we hope so and support it, just give it time before you tell us all the reasons it will fail. No one knows and I’m betting this new P2P style currency, no matter if it’s BTC or BTCII or something else….. has and will encourage a new way to pay for everything or a new way to collect taxes in years to come. Hours and BTC are Apples and Oranges, or not even that, Apples and Pepperoni -each serve a niche purpose and NEITHER can ever replace national currency. I created and published Community Currency Magazine, http://www.ccmag.net and currently publish http://www.DGCmagazine.com so I may be a bit bias 🙂

    • erehweb Says:

      Thanks for your comments and links. Interesting that you’ve worked with both types of alternative currency.

      In the something for nothing re Madison hours, I was referring to (IIRC) that you get a few hours at the start, just for signing up. But yes, after that initial bump you have to earn your hours.

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