"If No One Spends Bitcoin, How Can It Have Value?"
Last Bitcoin piece for the day.
From Elaine's Idle Mind, October 9:
Medieval mint, engraving by Leonard Beck (1516).
It’s hard to imagine a world without penny candy and nickel
newsreels, but for most of human history, petty transactions were a pain
in the ass.
Prior to the Industrial Revolution, coinage was a labor-intensive
process. Metal had to be melted, refined, hammered, and cut. Because it
took just as much effort to hammer out a small coin as it did a big one,
mintmasters were inclined to create only the largest denomination
coins.
If it weren’t for taxation and church collections, the state would
have had no reason to issue small denominations at all. To encourage the
creation of small change, medieval states authorized seigniorage —
mints reduced the relative quantity of silver in small denominations to
offset production costs.
Production costs of coinage (brassage).
Debasement! Where legal tender laws are enforced, bad money drives out good.
Creditors complained that debts were being repaid in shittier coins
than what was lent out. In states without legal tender, the
large-denomination coins became the unit of account, and smaller coins
had a floating exchange rate depending on their level of debasement.
The more the small denominations were debased, the worse the exchange
rate got. Seeing small denominations as a poor store of value, people
melted them for the commodity silver, exacerbating the small-change
shortage. Small coins provided liquidity, but the liquidity service was
not valuable enough to counteract debasement.
The biggest transaction cost is trust.
The title question is backwards. Value does not come from the ability
to spend; the ability to spend comes from value. The full-bodied large
coins were more valuable than liquidity-providing small coins because
the gold and silver content securely constrained their supply.
There are plenty of cheap solutions for illiquidity. When small coins were scarce, retailers and craftsmen issued lead and copper tokens
as a substitute for change. The tokens had no commodity value, but
customers accepted them because they trusted their local businesses....MORE
