Bitcoin: an attempt at a new way of creating money

Bitcoin, an attempt to establish a new “peer-to-peer” virtual currency is described in an article in The Economist of June 16, 2011.

One can accept the need to search for new ways of creating money. I believe the recent financial crisis was in part a failure in the way in which our economy currently creates money. (Money is created when bankers make loans, subject to a multiplier effect from the requirement to maintain reserves. When a whole lot of loans went bad this decreased the money supply, again with a multiplier effect. With a suddenly decreased money supply, the economy went for a loop.)

One of the problems with the bitcoin system is the quantity of money available is strictly controlled according to a formula.

I have always liked the quantity theory of money which states that MV=PQ where M is the money supply, V is the velocity at which it changes hands, P is the price or price index and Q is the quantity of goods and services produced.. Therefore as Q goes up (or down) there also need to be changes in at least one of the others. If we want prices to remain constant, then we need a way of creating money such that the supply can easily be varied according to the quantity of goods and service produced.

2 Responses

  1. I made a site to help newcomers get started. Check out How to mine bitcoins

  2. Bit coins still not stable a poor store of value. Few companies accept bit coins. Still seem quite fringe with exessive speculation. I supose could have some hidden tranasaction benefits

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