Tuesday, February 21, 2012

Bristol Pounds and Bitcoin...

Quite late on the scene, please accept my apologies, we're looking at money these coming two weeks in classes, and different money systems - not necessarily in different countries either. Usually we think about different money in different countries - dollars in the US, pounds in the UK, euros in the eurozone and yen in Japan, for example. However, currencies (monies) needn't be attached to some geographical area, and Bitcoin is one example of this - it's an online currency primarily, used for online trades. The Bristol pounds that we've seen before, these are geographically limited though - just to the Bristol area.

Essentially, what we try to do as economists is analyse economic objects such as this (and the objects we look at needn't be economic either, it's worth pointing out). We boil any kind of money down to what it is, at the end of the day - some good that for whatever reason is used as money. Why do people use some goods as money? We have the three properties discussed in the lectures - medium of exchange, unit of account and store of value. If some good satisfies all three it may be used as money. Hence the example of cigarette money in WWII. It satisfied the properties required of money and hence was used in that way. It remained a good that could be consumed, but of course smoking those cigarettes meant you could no longer use them as money.

So, to what extent do our two candidate currencies satisfy these characteristics? With the Bristol pounds, it's not clear yet whether people will start using them - if they do, they will have to have begun to view them as a medium of exchange. Will Bristol folk, and Bristol enterprises, start taking up these things? There's no compulsion upon them since their alternative is to use standard, universally accepted Pounds Sterling (which, by the way, bears no reference to the Scottish town, it seems). This fact of course doesn't rule them out as becoming of great use, but provides one sceptical note on their potential uptake. There's little doubt that since the Bristol Credit Union will be backing these Bristol pounds at 1:1 with Pounds Sterling, that provided the Bristol Credit Union remains solvent both the unit of account and store of value will remain - provided also that the pound doesn't dramatically lose value in the comings weeks, months and years.

So, can you perform the same thought process for Bitcoin in your assignments?