A lot has been written of late about crypto-currency. Given that the subject matter claims to be currency, it would seem appropriate for the discussion about crypto-currency to include an economist or two. To date, very few peer reviewed papers on the subject have been written by economists but it is not difficult to imagine what they would say.
If you had stayed awake in my Economics class when I lectured about currency, you might have made a note about Gresham’s Law. It provides what is probably the best argument why crypto-currency might actually supplant modern fiat currency.

Simply stated, Gresham’s Law says that

“bad money will drive out good money”.

It is credited to economist H. D. Macleod in 1858, who named it after Sir Thomas Gresham, a Tudor era financier. Most scholars agree that the law or at least the observation at its core has been around since the ancient Greeks.

“Bad money drives out good money” refers to a time when money was “coined” and the coins were either gold or silver. Gold was considered to be superior and when both were in circulation at the same time at a fixed rate of exchange people would hoard the gold coins and spend the silver.

I witnessed Gresham’s Law at work in the mid-1960s when the US Government started circulating silver quarters that were only 40% silver. The older quarters which were 90% silver soon disappeared. People would roll them up and sell them for their silver content value effectively taking them out of circulation.

Fiat currency (paper money) has no intrinsic value. One of my Economics Department colleagues used to suggest that gold should have no particular value either and only has value because people in antiquity found it to be shiny, malleable and rare. Value, he would say, is in the eyes of the beholder. Gold has value only by popular acceptance.

The argument can certainly be made that is true of the US dollar and other fiat currencies. Fiat currency works because it is accepted. Over the centuries, there have been specific times when the fiat currencies have become significantly devalued, e.g. the Weimar Republic, because the government itself became devalued.

The US dollar is legal tender for all debts, public and private in the US. It is backed by the full faith and credit of the US Government and all of the assets that the US Government holds. Those assets include a fair amount of gold and a lot of valuable land. So I think that the argument can be made that US currency is superior to any crypto-currency, none of which have any of these attributes or backing. This should be good news for crypto-currency advocates because Gresham’s Law would suggest that their inferior currency will ultimately prevail as the standard medium of exchange.

I did find one article that argued that Gresham’s Law would be the end of crypto-currency because crypto-currency was the superior currency. I do not agree that assumption but at least it was a cogent, academic argument. If the crypto-currency world needs anything it is a healthy dose of rigorous academic discussion.

Any currency must be an accepted medium of exchange. Up until this point in time very few retail establishments have accepted crypto-currency as an exchange for goods. Japan has led the way in this regard and the jury is still out as to whether the current experiment in crypto-currency will be continue to be acceptable to the retail merchants.

Any currency must also be a stable store of value. One of the most common and popular crypto-currencies, bitcoins, has seen its price decline by 10% or more in a single day at least a dozen times in the last 12 months only to see it bounce back quickly. This volatility has to give pause to any merchant who would accept bitcoins in exchange for merchandise. Merchants will not be willing to accept the loss if the customer returns the goods 30 days after purchase and the price of a bitcoin they tendered and now want returned has gone up 10% or more.

A great many people approach crypto-currency from a technological perspective and favor it for no other reason than it is based upon block chain technology. Their goal is to utilize crypto-currency as part of a new global system of payments and settlements that will replace banks. They believe that block chain technology will enable them to build a system that is faster, better and less expensive.Blockchain or distributed ledger technology (DLT) involves a distributed database maintained over a network of computers connected on a peer-to-peer basis. The network participants can share and retain identical, cryptographically secured records in a decentralized manner. In a decentralized system there is no real governing body.
In the current system I can make a long distance purchase and put it on my credit card. If I am not happy when the goods arrive I can notify the credit card company and get the charge removed. There are no credit cards or middlemen in a DLT system.

If I put my money in a bank and a bank employee steals it by moving the money out of my account, I get my money back because the employee is bonded. If the bank goes belly-up, the US government will guarantee my deposits. Not so in a DLT system.

In the last 50 years of the 19th Century in the US alone several thousand banks failed. Depositors lost their money overnight and the trickle-down effect of businesses losing their funds caused a great many companies to fail and people to be put out of work. Banks operated in a relatively decentralized, unregulated environment.

Over time the Federal Reserve, the FDIC and a lot of regulations were put into place to keep the bankers honest and the banking industry stable. The regulations did not always keep the bankers honest but fewer and fewer banks actually failed and the people’s trust in them increased. Given this history is seems questionable that a new, decentralized and relatively unregulated system would be better.

Bitcoin’s inventor set a limit on the number of bitcoins that can be created stating that there would only ever be 21 million bitcoins in total. If you assume that Gresham’s Law does operate as advertised and bitcoins replace all US currency or all global currency in circulation it should be obvious that more will be needed. How many more and who decides?

If you just take off the cap and allow bitcoins to be created ad infinitum you are likely going to have either too few or too many depending upon other market conditions. The amount of crypto-currency in circulation will then either be inflationary or deflationary. If you set up a governing board to determine the supply of bitcoins in circulation then you are performing the function of a central bank and on a slippery slope to other regulations.
I do not think that there is much of a question but that the existing banking system could absorb and apply block chain technology if it is truly more efficient. But I do not think that we also need crypto-currency, if, at the end of the day, it probably going to require a system that is not too different from the one that we already have.

Irwin Stein / 40-Year Experienced Corporate, Securities & RE Attorney


  1. I’ve asked the following questions in a lot of cryptocurrency advocate forums, and never gotten answers. Can you help me out here, Irwin Stein?
    Let me ask you some serious questions that I never get a rational answer for:

    –in every cryptocurrency exchange cited online and elsewhere, the valuation is always in actual money like Dollars, Yuan, and Euros. (We’ll call those ‘Legacy” for ease of terms.)

    If, as all of you claim, crypto will replace the undesirable Legacy making it worthless or nearly so – why is it denominated in Legacy? Why can you only buy into it using Legacy, since you are saying that Legacy is becoming worthless? Why would anyone accept Legacy for payment for what you say is something far superior – especially when that Legacy is supposed to soon be worthless as you all claim?

    –Most companies are staffed by reasonably smart people, some of whom are paid to spot trends and take advantage of them. Why is it that you therefore cannot pay your cable, utility and all other expenses using crypto? If you disagree, show us those utilities and ISPs who do accept it with links so we can see for ourselves.

    –Insurance companies are staffed by some really smart people who are tasked with having to determine the value of things in order to schedule a premium – everything from art and jewels to a life[insurance] to a building. They even insure bank accounts filled with that soon-to-useless Legacy! (Don’t believe me? What does the “I” in FDIC stand for, again?) Why does no insurance firm do the same for crypto, since if it is as you all claim it would be a slam-dunk for them? For that matter, please show any insurance company that accepts crypto as payment for premiums. Post the links here, so we can check for ourselves.

    –Last (and most important in my eyes), there are a lot of pundits on the web and elsewhere giving talks and seminars about crypto. Have you ever asked how they are paid on a day-to-day basis for those talks and seminars? Care to bet it’s in Legacy? Wonder why that is?

  2. Mr. Lewis: You are certainly correct in all you say. Crypto is denominated in legacy currencies and will continue to be so designated until governments accept cryptos for all debts. That is unlikely to happen. Many people who favor crypto-currency do so because they do not trust governments or banks without realizing that people have not trusted governments or banks for centuries and both are still here. The most galling thing to me about many of the crypto-experts is that they have no expertise. Irwin Stein


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