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KOL085 | The History, Meaning, and Future of Legal Tender (Crypto-Currency Conference, Atlanta, 2013)

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Kinsella on Liberty Podcast, Episode 085

Op-ed - October 2013 Crypto-Currency Conference PreviewThis is the audio (from my iPhone) of my talk “The History, Meaning, and Future of Legal Tender,” from the Crypto-Currency Conference: Bitcoin and the Future of Money (Atlanta, Oct. 5, 2013). Slides below. Video/professional audio to be released later. Pix here and here.

Update: Video is available here (BAD LINK)

 

Transcript below.

Update: See also Bitcoin Magazine’s:

OCTOBER 2013 CRYPTO-CURRENCY CONFERENCE PREVIEW:

On October 4 through 5, Atlanta, Georgia will host the 2013 Crypto-currency Conference: Bitcoin and the Future of Money. Bitcoin Magazine is proud to serve as a sponsor alongside of Let’s Talk BitcoinThe Bitcoin FoundationStudents for LibertyFEE, and Atlanta Bitcoin of this conference spearheaded by Jeffrey Tucker, Executive Editor of Laissez Faire Club and Laissez Faire Books, Distinguished Fellow for the Foundation for Economic Education, and Research Fellow of the Action Institute.

The purpose of the conference will be to connect monetary economists, legal theorists, banking pundits, code-slinging visionaries, miners, and payment-systems analysts to shed light on the rise of Bitcoin. As Bitcoin is not just a currency but a movement towards greater economic freedom the 2013 Crypto-Conference will address the following questions:

  • What does the success of Bitcoin imply for the theory, practice, and future of money and payment systems?
  • How can we account for the sheer implausibility of Bitcoin’s rise?
  • What does its emergence imply for the prospects of nationalized systems of money and the future of human liberty and commerce?
  • Will Bitcoin go the way of most innovations and fall prey to government’s dead hand of regulation and strangulation?

The Conference team hopes to shed light on how Bitcoin, in contrast to most currencies, has in fact increased in value over time. Over the past 100 years, the value of money has fallen to carry only about 5 of its purchasing power. As a decentralized, digital currency, Bitcoin is not beholden to a central bank and has emerged as a solution to bypass fiat money. The speed and ease of transaction makes the crypto-standard stronger than the gold standards.

The Conference will open with a Friday night reception at the office of BitPay, Inc., one of the lead Bitcoin payment processing companies, where guests will hear from musician Tatiana Moroz who as a guitarist and songwriter sings about human liberty. On Saturday morning, Jeffrey Tucker will provide the keynote address, “A New Currency for the Digital Age,” at the The Twelve Hotel in Atlantic Station, a post-industrial hub of Atlanta. Panels will include discussions of Money and Freedom, Cryptography and Contracts, Merchantcraft, and Future Development.

Speakers include Tony Gallippi (CEO, BitPay) and Stephen Pair (CTO, BitPay), Stephen Kinsella (Executive Editor, Libertarian Papers), Doug French (Senior Editor, Laissez Faire Club), Michael Goldstein (Co-Founder, The Mises Circle), Peter Surda (Author, Economics of Bitcoin), Charlie Schrem (CEO, BitInstant), Charles Hoskinson (CEO, Invictus Innovations Incorporated), Daniel Larimer (CTO, Invictus Innovations Incorporated), Cathy Reisenwitz (Writer and Political Commentator, Reason Magazine), Adam B. Levine (Editor in Chief, Let’s Talk Bitcoin), Tuur Demeester (Author, MacroTrends), Daniel Krawisz (Libertarian Activist).

The evening will conclude with a cocktail reception featuring Austin Craig and Beccy Bingham’s story, “Life on Bitcoin.” Austin and Becky as newlyweds took the challenges of living for 90 days on Bitcoin alone and will share of their journey which is shortly coming to a close.

THE REST OF THE YEAR: BITCOIN CONVENTION ROUNDUP:

Crypto-Currency Conference – this conference will be more focused on philosophical issues than the others, with speakers like Laissez Faire Books’ Jeffrey Tucker, libertarian legal theorist Stephan Kinsella and the Mises Institute’s Doug French, as well as the Bitcoin economist Peter Surda, Adam Levine and BitPay’s Tony Gallippi. The conference will take place on October 5 in Atlanta.

***

Also: in the WSJ article Tax Plan May Hurt Bitcoin, the article notes that legal tender laws are, in fact, jeopardizing BTC. Bitcoins are now classified by the IRS as “property” “instead of” as legal tender money, meaning capital gains taxes are owed on transactions. I mentioned this danger in my talk; a similar problem afflicts the re-adoption of gold or silver as money.  But as I noted in the Q&A to my talk, I am not persuaded that bitcoins are ownable resources—things subject to property rights. The IRS here assumes that something is either money or property. This is one danger of BTC advocates using the language of property rights to describe bitcoins. I would argue that bitcoins are not legally owned and thus capital gains taxes are not applicable—or at least, this is one argument the target of a government tax evasion suit might want to use.

Update: Swiss Tax Authorities Confirm that Bitcoin is VAT-free in Switzerland:

Bitcoin Association Switzerland reports that, according to the Swiss Federal Tax Administration, no VAT applies to bitcoin in Switzerland. The transfer of bitcoin doesn’t constitute delivery of goods or services, and therefore it’s not subject to VAT.

Update:  for more on whether bitcoin is ownable property, see this Facebook thread. And see: Tokyo court says bitcoins are not ownable. See also:

FinCEN Rules Commodity-Backed Token Services are Money Transmitters

Also:

“in the WSJ article Tax Plan May Hurt Bitcoin, the article notes that legal tender laws are, in fact, jeopardizing BTC. Bitcoins are now classified by the IRS as “property” “instead of” as legal tender money, meaning capital gains taxes are owed on transactions. I mentioned this danger in my talk; a similar problem afflicts the re-adoption of gold or silver as money.  But as I noted in the Q&A to my talk, I am not persuaded that bitcoins are ownable resources—things subject to property rights. The IRS here assumes that something is either money or property. This is one danger of BTC advocates using the language of property rights to describe bitcoins. I would argue that bitcoins are not legally owned and thus capital gains taxes are not applicable—or at least, this is one argument the target of a government tax evasion suit might want to use.” KOL085 | The History, Meaning, and Future of Legal Tender ]

See also: Bitcoin Is Officially a Commodity, According to U.S. RegulatorKOL191 | The Economy with Albert Lu: Can You Own Bitcoin? (1/3)

Also: SEC: US Securities Laws ‘May Apply’ to Token Sales

 

TRANSCRIPT

00:00:10

DOUG FRENCH: Our next speaker has done nothing less than pathbreaking work in the area of intellectual property.  He probably could be considered the “Satoshi of IT” if you will.  He’s an American intellectual property lawyer, a libertarian legal theorist.  He’s created the website The Libertarian Standard.  He’s created the academic journal, the Libertarian Papers.  He’s written a number of books, including my favorite, Louisiana Civil Law Dictionary.  But probably he is best known for a book called – that really turned the libertarian world on its ear.  This argument continues on.  It rages on.  He continues to debate any and all comers online.  But he is – well, this is the perfect time in the cyber world to have a lawyer in the house.  And he is our lawyer in the house.  Please help me welcome Stephan Kinsella.

00:01:17

[clapping]

00:01:23

STEPHAN KINSELLA: Thanks very much Doug, and I’m really glad to be here.  I just flew in from Houston.  I would really like to thank Jeff for giving me the chance to speak on a non-IP topic, which I do enjoy.  So my topic today is on legal tender.  I’m going to explain briefly how I recently got interested in this topic and then go into some background.  When I was in law school, in 1989 or so, I was clerking at a firm in Baton Rouge.  I was asked by the partner to research the question of whether it was legal or illegal to refuse to take a payment of cash under legal tender law.

00:02:01

So if you owe someone a million dollars and you bring them a briefcase full of cash, can they say, “I refuse to accept that offer.  I want you to write me a check instead.  So I started researching what is legal tender.  If you look at your dollar bills, it will say this note is legal tender for all debts public and private.  It’s sort of a mysterious meaning.  What exactly does that mean?  How much money do you have to pay to satisfy a debt?

00:02:25

So I started getting interested in it.  A couple of years later, I was in graduate school in law in London, and I looked at the British pound notes and they have other language which says, Bank of England.  I promise to pay the bearer on demand the sum of 5 pounds or 10 pounds or whatever the note is.  So, like a smartass, I walk down to the Bank of England one day, in the middle of the financial district, with a backpack.  I was dressed like a student, and I walked in the front door and I asked.  I said, “Can I redeem this for five pounds of whatever it is it’s five pounds of?”  And they said, “Do you have an appointment?”  I said, “No”.  So they sent me out, and they said you have to have an appointment to come into the Bank of England.

00:03:06

So they said you might want to visit the Bank of England Museum around the corner.   So I walked around the corner.  I went to the Bank of England Museum.  I was the only guy there, and I started asking the curator these questions.  And he went to the back, and he brought me a mimeographed—I think that’s photocopy—a mimeographed sheet of typewritten papers explaining why that language doesn’t mean that they really have to give you five pounds of silver or whatever it meant.  They claimed it just means that if you have an old note that is out of circulation now, we’ll replace it.  So a five pound note, you get a new five pound note for it.  So that’s what that promise means. [See The Bank of England and Me]

00:03:39

So over the years, I have always been puzzled by this mysterious language which is omnipresent and yet nobody seems to understand what it means.  So as Bitcoin started heating up, I started thinking more and more about it, and so Jeff and I talked, and we thought this might be a good topic.  So to research this, I researched a good deal of things.  Probably three of the primary things I relied on, and if you find this talk of interest, you might want to look at some of these.

00:04:04

Guido Hülsmann has a fantastic lecture on the economics of legal tender laws at the last Mises University.  It is online.  And I will post these slides on my website later, so StephanKinsella.com.  So feel free to look it up there.  Hoppe has a great article, which I rely on heavily in this talk.  And also, I found a 1903 fantastic old treatise on Google Books on legal tender.

00:04:27

[See: Guido Hülsmann, The Economics of Legal Tender Laws, Mises University 2011 (YoutubeMises.org); and idem, The Ethics of Money Production (2008), chs. 10–11; Hans-Hermann Hoppe, “Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order,” in The Economics & Ethics of Private Property; S.P. Breckenridge, Legal Tender: A Study in English and American Monetary History (Chicago, 1903; Amazononline)]

00:04:29

Okay, so I’m going to back up for a second and try to put this legal tender issue in context before we get into the actual mechanics and issues of legal tender itself.  And this is drawing on the work of Hans-Hermann Hoppe and others like Franz Oppenheimer.  Franz Oppenheimer argued that there’s only two ways of creating wealth.  One is the political means, and one is the economic means.  One is cooperative and peaceful, and one is coercive and exploitative. [See The Nature of the State and Why Libertarians Hate It]  And this is what Hoppe argues as well.  He basically points out that there are only two ways to acquire wealth in the world that we live in.

00:05:01

One would be homesteading, production, and exchange.  So you find or you appropriate a resource that is unknown in the world.  You increase the sum total of the wealth of the world and your wealth.  Production means transforming these resources into more valuable configurations.  So that’s production.  That is also a way of increasing wealth.  And exchange is when two people exchange things that they own and they’re both better off after the transaction, so the sum total of wealth in the world increases that way as well.

00:05:26

And then the second way is expropriating producers, appropriator, and homesteaders and exchangers.  So the first method gives rise to productive enterprises like firms and corporations and businesses.  The second gives rise to governments and states.  Now if you think about private enterprise, private industry, productive enterprises, their growth is constrained by a couple of things.

00:05:49

Number one, they have to have consumer demand for what they’re making.  And there’s competition in the market.  So that’s a constraint on the growth of private firms.  But the growth of an exploiting firm, like the state, is constrained mostly by public opinion, and the reason is because by its nature it coerces people and creates victims.  And by its nature, it’s a small portion of society, so you have a small minority dominating the larger majority.  So the only they can get away with this is to somehow persuade the victims that the state is legitimate.

00:06:19

So what is the state’s goal?  The state is a wealth maximizer, just like we are.  It just doesn’t have any ethics.  So its goal is to – and by the way, I don’t know if this crowd is entirely libertarian, and that is fine, but you are listening to one.  And, in fact, I am of the anarchist variety that thinks the state should be totally abolished.

00:06:40

[clapping]

00:06:45

Libertarians here would know that already but just fair warning.  So the state’s goal is to maximize its wealth that it can exploit from its victims, and it tries to do this by engaging in activities to increase its public legitimacy, so that it gets away with it.  There are two main things the state does.  It engages in ideological propaganda to try and persuade us that the world is not the way it really is, that taxes are really voluntary, that we would have chaos in the street without the state, etc.

00:07:11

And then the second thing the state does is it engages in a variety of redistribution measures by which it seeks to corrupt the people that it redistributes money to into supporting the state.  Not just any redistribution will do.  There are certain targeted types of redistribution that tend to work well for the state.  Now, these include the monopolization of the production of law and security, police, defense, the courts, judicial system, also traffic and communication because the state can’t go around robbing people without control of the rivers, the roads, mail, telecommunications, the internet, also education, of course, which feeds back to the first purpose of ideological propaganda, so the state controls these things.  And also the state redistributes state power itself, especially in the modern sense, in democracy.  So the bureaucracy is open to anyone who wants to apply for a job.

00:08:02

So we’re potentially we’re all employees of the state.  And then by democracy, the state lets us believe that we are really the owners of the state.  The state really is us.  You will hear this nonsense promoted by the state all the time, or if you complain that the government just put your brother-in-law in jail for smoking marijuana, people say, “Well, don’t complain.  You are the government”.  Thanks.  Small consolation.  The final piece is the monopolization, the seizure of control of money in banking, and in a way, this is the most important for the state, and this is where we’re going to get to legal tender.  This is the easy way the state has to increase income.  The state doesn’t control money in banking.  It has to get loans.  It has to tax people, and that is difficult.

00:08:43

00:08:47

Okay, so what does the state want in terms of control of money in banking?  What it really wants is a pure fiat money, monopolistically controlled by the state so that all barriers to counterfeiting are removed so it can print as much money as it wants to.  But the problem the state faces is that money arises in the free market without the state as a commodity, like gold or silver.  And then counterfeiting of such money can be noticed by people.  It won’t work.  Even the state can’t get away with that.  So the state really has to destroy the gold system, the silver and gold commodity money system, so that obstacles to counterfeiting are overcome or removed.

00:09:25

So how does the state do this?  It systematically does this.  First, the minting of coins gets monopolized by the state.   And one thing this does psychologically is labels for money, like an ounce of gold or an ounce of silver, are replaced gradually with state labels like dollar, drachma, mark, whatever.  So people stop associating what money is with an amount of a commodity.  It’s a label that the state grants to money.  And then the state encourages the use of money substitutes like paper backed up by legal tender laws, which I will get to in more detail in a moment.

00:10:04

Then the state monopolizes or cartelizes the banking system as we see in America in the Federal Reserve.  Then it nationalizes gold as Roosevelt did in the ‘30s and then cuts the tie to gold as Nixon did, giving it unlimited counterfeiting power.  But it’s not completely unlimited because there is more than one country in the world, more than one nation state.  So all these countries have their own currencies and if any one state inflates too much, then there’s a flight to other currencies.

00:10:31

So the dominant state, namely the United States, has an interest in dominating and controlling the world’s international money system.  And over time it will try to institute either a single world currency that it controls or that the central bank controls or some kind of subtle-but-hidden system of interlocking agreements under the UN or various treaties that gives it control of the world’s monetary system, which we see now.  Hans-Hermann Hoppe has hypothesized that one day we will have a new UN currency dominated by the US called the Phoenix or something like that, so you can see this coming.

00:11:07

Okay, so now let’s go back to legal tender.  You see the role it plays in this process of the state control of society and exploitation.  So the word legal tender comes from the word tender which comes from the Latin tendere, meaning to stretch.  Think of the word – like your tendons in your body, stretch, or the English word extend.  So the word tender means to stretch out, to offer, to make an offer, like an offer to pay money.  So the legal tender idea is a government rule or law that specifies that a given contractual obligation can be satisfied by the offer of a certain amount of money that the government declares to be legal tender even if the contract specifies otherwise.

00:11:50

So if you have a contract to be paid in Swiss francs, then the debtor can still pay in US dollars, if US dollars are legal tender.  Now, the idea that you can pay a contractual obligation in money is not necessarily statist.  In fact, it makes a lot of sense for administrative purposes.  This was a better version of that.  Under the Roman law two thousand years ago, obligations were held to be satisfied by a certain sum of money.

00:12:24

The idea is that every service or every item on the market has a market price.  And even if you promise to give someone a goat or to sing at their kid’s birthday party, if you fail to live up to your obligations, then a certain sum of money could compensate the other party for that.  That’s not too controversial.  If they don’t you give the goat, then you can get enough money to go buy a goat, so it works out pretty well.  This is the idea of restitution.  Now, there are some exceptions to this: certain goods that are unique, like a piece of land.  The idea is that a piece of land, you have to – the courts will enforce that kind of contract.  They will make the land transfer to the guy that it was promised to because the land is unique in where it’s located, etc.

00:13:08

Okay, so there’s really not a big problem with the idea of paying off a debt in money.  But then the question is how much money?  And this is what legal tender laws almost always do.  They specify fixed exchange rates.  This is what the government is after.  If the government merely said you can pay off any contract in dollars, so if you have a contract in Swiss francs, well, you are paid in dollars, but you’re paid in enough dollars that’s equal to that current value of Swiss francs.  So you just buy the Swiss francs right after the deal is over.  It’s just a little inconvenience.  It’s not a big deal.  Of course, that’s not what the government wants.  The government wants to favor debtors, usually itself.  Usually, the government is a big debtor.

00:13:49

So what they want to do is specify an exchange rate that lets you pay off the debt at overvalued legal tender money, so it’s a way of robbing the creditors.  Now this gives rise to a phenomenon called Gresham’s law.  I’m not going to do too much economics here, but raise your hands if you have never heard of Gresham’s law.  Okay.  I’m not going to ask the rest if you understand it.  Gresham’s law is based upon the expression by, I think, Irving Fisher, an economist, who said, “Bad money drives out good money”.  Now, this is a little counterintuitive because usually on the free market, good products drive out bad products, right?  Like Blackberry is tanking now and the iPhone is doing well.  That’s maybe one example.

00:14:36

And even in money, gold and silver arise as money instead of shells or leaves or cigarettes because they’re superior.  They’re better money.  So really on the free market we could expect good products and good money to drive out bad products and bad money.  So really what Gresham’s law is – it’s really not that bad money drives out good money.  It’s that the legally overvalued money drives out the legally undervalued money.

00:14:58

Let me give you an example of this.  Imagine on the free market the ratio of silver and gold prices is 20 ounces of silver to 1 ounce of gold.  So they’re roughly equivalent on the market.  So if you’re offering to sell something for 20 ounces of silver, if the guy pays you an ounce of gold, you’ll take that because they’re roughly equivalent.  Now, the government comes in and established legal tender and says that one ounce of gold is equal to 40 ounces of silver.  So you can see that, in this case, what the government has done is they have made gold legally overvalued and silver legally undervalued.

00:15:30

So if I owe someone 20 ounces of silver, I can pay them 20 ounces of silver, which is worth an ounce of gold on the market, or I can take my ounce of gold and go take half of it and buy 20 ounces of silver and pay off the guy that way, so it lets me stiff the guy.  So what this results in is no one is going to use silver anymore because they’re going to be stiffed by this provision.  So it would drive out the good money which would be silver in this case.  Now, in this particular example what would happen is that you would have a system where previously silver is used for small change and gold is used for big purchases.

00:16:04

But now silver disappears.  You only have gold.  So what do people start doing for small purchases?  Well they start resorting to substitutes like tokens, coins, bank notes, etc.  See where this is going?  The government gets us used to paper money and things that don’t really have, I won’t say intrinsic value, but a commodity value of their own.  So that’s Gresham’s law.  This is one effect of legal tender laws.

00:16:26

Now, on the history of legal tender, let’s look at how it started being justified by the state, say, in England.  So the crown would say, listen, if you’re coming to the state’s courts to enforce a contract, you’re seeking justice from the king’s courts, then you have to submit to conditions we want to place on you.  So if we say, yeah, we’re going to help you enforce your contract, but we’re going to insist that you take payment in legal tender that we decree at a certain exchange ratio.  Now actually, if you think about it, this is selling justice.  The courts are using their – the government is using its courts to sell justice, to make a profit off of monopolizing the institution of justice and then selling this service, which actually is a violation of the Magna Carta from 1215.

00:17:12

In the Magna Carta, the crown agreed to the Magna Carta, which has a provision which says in Latin—I won’t read the Latin—but the translation is to no one will we sell; to no one will we refuse or delay right or justice.   So they’re not supposed to sell justice, but they do it anyway with these legal tender laws, which is one danger of the government controlling the courts and the law and the justice system.

00:17:39

Now let’s turn to the U.S. now.  In the colonies before the Revolution, coins were scarce.  They couldn’t bring a lot of coins on the ships over with them.  Maybe they didn’t have a lot of coins anyway.  So they started using substitutes, and these were declared legal tender by the various state – the colonies, the colony governments.  Some of you may have heard of wampum before.  I never knew what wampum was, but wampum is the shell bead money that Native Americans used.  Those were legal tender.  Black was worth something.  White was worth something else.  It was bizarre.

00:18:11

Other things have been used for money, legal tender: corn, bullets, although you could only give someone so many bullets, force them to take so many bullets, tobacco, pitch, tar, pork and even country produce.  You could pay your servants with country produce.  In the year 1715, up to seventeen commodities were legal tender to pay taxes in the colonies.  Now – I’ve got these a little bit out of order.  In 1775, right before the Revolutionary War, Congress was planning for war.  They knew war was coming.  They needed to raise money.  They knew that they didn’t have any credibility as a new government to raise money by loans.  And they didn’t have taxing power.  They couldn’t raise a lot of taxes anyway.

00:18:52

So what they did is they started issuing bills of credit, but they were declared to be payable by the states.  So they expected the states to go out and raise taxes on their citizens with their taxing power, or the colonies I should say.  Well, I guess they were states by then.  And pay off the bills that way.  But Massachusetts and other states refused to do this.  They started issuing their own bills of credit and making them legal tender.  And this language here is striking.  It shows you how seriously the government takes its monopoly over money and these legal tender laws.

00:19:25

They said that if anyone refuses to these notes in payment for a debt, or even if you demand a premium, in other words you think gold is better than a note that’s denominated in gold, but they really can’t be redeemed in gold if you demand a premium, like you say I’ll take that note for a 10% discount because there’s a risk, that’s illegal too.  And you would actually be deemed an enemy of the country.  And other states, like Virginia and New Hampshire, Rhode Island had similar laws.

00:19:49

Now in 1781, returning to my top bullet there – so the Articles of Confederation were finally ratified.  And it wasn’t clear that Congress was granted the power to define legal tender.  It remained with the states.   Turn forward a few years, after the war is over, the Constitution is ratified in 1789.  Everything flips.  The states are denied the power to coin money and Congress is granted the power to be the one in charge of legal tender, etc.  Well, this was settled in Supreme Court cases later, but it is pretty clear now.

00:20:21

So right after this, Congress passes an act in 1792.  All gold and silver coins which shall have been struck and issued from a mint shall be lawful tender in all payments, and then there’s a 1965 act which has similar provisions.  So that’s where we are now.  Now let’s turn to – I’ve already talked about this.  Let’s turn to the use of gold and gold clauses.  So how could the state, say the U.S., cut the tie to gold?  Well, one way they could do it is they could set the exchange rate that is not market, like using Gresham’s law, as we mentioned before, which is the state did for a while.  They keep changing the exchange rate of gold.  It used to be $1 was a twentieth of an ounce of gold.  Then it was 1/35th, and nowadays it’s a market rate.  So we’ll just quickly go through the history of gold and gold clauses.

00:21:08

In 1933, Franklin Roosevelt issues an executive order criminalizing the possession of gold in the U.S., monetary gold.  So gold was seized by the government and outlawed.  And right after that, the Congress, under Roosevelt, outlawed gold clauses.  A gold clause is a clause in a contract where, if you are afraid of inflation and the dollar, you could say you owe me a million dollars – well, you owe me whatever the current dollar amount of a hundred ounces of gold is in ten years or whatever the term of the deal is.  That way, if there is inflation, you can get paid in dollars in the current – pegged to the price of gold.  So they outlawed that, of course, because that’s one way to do an end run around the government’s legal tender system.

00:21:51

Now, in 1974, under President Ford, the ban on gold ownership was finally repealed.  In 1977, under Carter, gold clauses were re-legalized for contracts entered after October 1977.  And Nixon cut the tie to gold.  So in this time all three things happened.  The dollar is no longer redeemable in gold.  There is no ratio anymore.  So the question is do we still have legal tender in the U.S.?  In a way, I think we do not have legal tender because you can have a gold clause.  You can peg your contract in gold.  It’s not illegal.

00:22:30

You can own gold.  And the dollar doesn’t have any fixed ratio.  It just fluctuates.  So why isn’t it just a mere inconvenience now?  Well, in a way, it is.  So why hasn’t gold reemerged as money?  Well, there are various possible reasons why it hasn’t.  One might be that the dollar is not perceived by most people as being in a stage of hyperinflation, so there’s no big urgency to use gold clauses.

00:22:51

There is also Mises’ Regression Theorem which is the idea that money arises step by step and always has a history, so once something – it’s like a network effect, like Facebook is more popular than Google Plus right now, so it’s the same idea.  Once something is money, people keep using it unless something terrible happens.  Also, gold is subject to taxes, sales tax and other types of taxes, which money is not.  Taxes have to be paid in dollars, too.  That could be another reason.

00:23:16

And, finally, there could be fear of another state takeover.  Like if gold clauses ever had an effect, the state wouldn’t let us use them.  They only let us do things that don’t really threaten them.  Okay, now so getting to Bitcoin here.  What’s the implications for Bitcoin?  Okay, first, let’s step back and think what gold causes are, and there are two types of monetary transactions that you can think about that are of relevance to legal tender.

00:23:44

One is what’s called an executed, or maybe a contemporaneous transaction.  For example, I walk up to a merchant, and I say I’d like to buy that newspaper.  He says give me a dollar and I make the deal.  It’s done right there.  There are no future obligations on either party.  A second type is an executory contract, sometimes called executory contract.  That’s one where there is an obligation in the future.  So we have a contract now.  I want you to build a house for me.  And when you’re done building the house, I will pay you $500,000.  That is an executory contract.

00:24:19

If, at the end of the contract, the work done by the service provider, if he is not paid, he can sue in court to get the money he’s owed.  And legal tender law kicks in only there because the obligation to pay him can be satisfied in whatever money the government declares to be legal tender.  So legal tender laws never have much of an effect on contemporaneous transactions because if you walk up to some guy and he wants the artificial price for his goods, you just refuse to pay it and you walk away.  You don’t do the deal.  So legal tender laws only affect the second type of contract.

00:24:50

Now, as far as I’m aware, I think Bitcoin, from what I’ve seen, is used mostly for the first type of contract right now.  I’m not even aware of a lot of gold clause contracts much less than am I aware of the practice of people entering into long-term, significant contracts with Bitcoin clauses or denominated in Bitcoins.  So not even an employment contract but a longer-term contract, like let’s say a loan.  I loan you a thousand Bitcoins.  You need to repay me 1100 Bitcoins in a year, something like that.

00:25:21

For Bitcoin to emerge as a full-fledged money, it seems to me, it needs to start being used for the second type of monetary transaction as well, and I suspect that it will as it gains steam.  And when it does, the relevance of this legal tender discussion is that the state can do what it has done before with gold clauses.  It could outlaw Bitcoin clauses.  They would have to find a way to define it so that it covers Litecoin and others as well, any kind of electronic currency.  And they’d probably re-illegalize (outlaw) gold clauses while they’re at it.  And then the other way with it.

00:25:58

They could declare a fiat exchange rate.  They could say one dollar is equal to one Bitcoin.  They could do something like that.  They would legally overvalue the dollar; legally undervalue bitcoin.  So this is – I’ll conclude here.  This is the relevance of legal tender law.  This is where I think it could be heading.  And the Bitcoin community needs to be aware of this and try to keep an eye on the government.  Thank you very much.

00:26:23

[clapping]

00:26:31

M: Can you take a couple questions?

00:26:34

STEPHAN KINSELLA: I’d be happy to.

00:26:37

00:26:39

M: Some time ago, Idaho was trying to have gold and silver recognized as legal tender.  I think South Carolina and some others.  Whatever happened to that?

00:26:51

00:26:54

STEPHAN KINSELLA: I’m not aware of that, but I think it would probably be unconstitutional under the Constitution’s prohibition of states interfering in that, or it would at least be illegal because the government has preempted the field by determining what legal tender is.  I can’t imagine that it would survive a challenge in the federal courts.

00:27:12

M: The state we’re in right now I know does not tax gold and silver, so obviously coin shops offering along the Georgia border have residents from Tennessee that come across to convert your fiat into gold and silver for savings.  The venders in Georgia have that advantage.  I remember that’s one thing you spoke about is some of the states are taxing the sale of gold and silver, and that’s something we’re looking at pushing back against in the state of Tennessee to get that fixed.

00:27:55

STEPHAN KINSELLA: Well, I do think for gold, say, to ever become money again, we have to remove these obstacles.  Tax is one.  Of course, there’s still federal capital gains tax, which would apply, and who knows?  Maybe the government is going to start trying to tax the states that gold sales might start trying to tax Bitcoin sales.  I’m not sure.

00:28:17

STEVEN: My name is Steven.  I think it’s very interesting, this question of legal tender laws because fundamentally it’s all irrelevant if you’re dependent on the state for enforce contracts.  It’s completely irrelevant if you no longer are dependent on the state for the enforcement of contracts.  So I guess it’s not so much a question as it is something – food for thought.  What does happen when we’re no longer dependent on the state for the enforcement of contracts?

00:28:48

STEPHAN KINSELLA: I absolutely agree, and I think if we can come up with private arbitration measures or even some kind of anonymous contract enforcement system, that would be one way to severely hamper the government’s ability to impose legal tender because, as I said, they do it primarily through these executory contracts, enforcement.  A lot of the, of course, larger, more established, bigger companies play it very safe and very conservative, and they’re going to be very reluctant to opt out of the state’s system at the current time I think.  So that’s going to slow the adoption rate, but I agree.  That’s our hope is that we can go to alternative systems.  There’s a group called judge.me, which I’m signed up to be an arbitrator for, which we’re trying to do things like that, but it’s still in the infancy, and it’s still uncertain of course.

00:29:30

00:29:35

M: So at the beginning you mentioned if somebody’s got a contract and paid for a million dollars, you said can I refuse a million dollars in cash, and I don’t think you answered that very complete.  So if somebody wants to pay you a million dollars in cash and you say no [indiscernible_00:29:50].

00:29:51

STEPHAN KINSELLA: I actually was unable to find an answer when I did it back 24 years ago.  But since then I’ve researched it, and my understanding is that you can.  It’s hard to find – the problem is – well, not the problem.  The good thing about a relatively free society is that we don’t live by permission.  We don’t live like in the Soviet Union where everything that is – everything that’s not permitted is forbidden.

00:30:12

It’s supposed to be the other way around.  We have islands of restrictions in an ocean of liberty, and we’re supposed to have that.  So you can’t find a restriction in the law of some activity, then the presumption is you’re free to do it.  And I couldn’t find a restriction, but you never know if you’ve exhaustively looked at every one of the 17 shelf feet of federal register rules.  So I couldn’t find a restriction, so my conclusion was I think you can do this.  But in the meantime, I’ve researched it, and it looks like it’s pretty clear that you can.

00:30:35

You can refuse a mode of payment.  If it’s too dangerous to receive a briefcase of cash, you’re not really refusing dollars.  You’re just refusing the mode of payment.  So I believe that you can refuse it.  Of course, you can specify in the contract ahead of time you have to pay me some regular safe method of cashier’s check or wire transfer.  I mean when you close on a house, quite often they’ll insist on a cashier’s check.  If you show up with a personal check, they won’t take it.  That’s not really a violation of legal tender law.

00:31:02

M: Hi.  I wanted to ask you a question that I heard you ask recently at the Property and Freedom Society about the Rothbardian conception of property rights in which all rights are property rights, and all crimes are violations of property rights because it seems like in the Bitcoin space, either a passive observer of a Bitcoin user, a careless Bitcoin user or else some really smart mathematician can transpose someone’s Bitcoins involuntarily.  Would you describe this as stealing?  And do we need to rethink our version of property rights since it’s something that has more to do with societal norms?

00:31:37

STEPHAN KINSELLA: So this is my amateur opinion on this, my layman’s opinion.  I know there are experts on how Bitcoin works, its standards, the code, more than I am.  From what I’ve been told by people that know a lot more about Bitcoin than I do like you, it’s actually not a violation of the rules of Bitcoin to somehow discover someone’s private key and use that to take Bitcoins from their account.  For it to be against the rules, you would have to have clicked on the terms of service or something like you do, but that’s contrary to the purpose of Bitcoin being pseudonymous.

00:32:14

So I don’t believe there’s any terms of service anyone agrees to, so it’s actually not prohibited by any sort of rules that anyone agrees to.  And it’s not a property right because a Bitcoin is not a scarce resource.  It’s a ledger entry.  It’s a distributed system that people agree to, to use because it’s useful.  And it basically associates some accounts with others, and that could be useful.  So I don’t believe there’s a property right in it.

00:32:36

I think it’s analogous to property rights in the way it works, and it may be even better than some property rights the way it works in terms of practical reliability on it.  So whether norms that arise that people point their finger and they – at people that somehow were able to do that, because it’s so secure, the only way I could think of doing it would be some kind of social engineering anyway.  I don’t know how they’re going to guess someone’s private key or get it.

00:33:03

Now, if you break into someone’s computer, you hack their computer, or you break into their home to get their keys, then that should be a crime because you’re trespassing against their actual owned property in order to get the information.  And then what you do with the information would be a measure of the damages that’s owed to the victim of the trespass.  But I don’t view Bitcoin as property – a property right, but I don’t mean that as a criticism.  I don’t think that’s a negative thing or a bad thing.

00:33:28

[clapping]

00:33:37

M: So as we head to lunch, a couple of things to think about.  You need to take anything that’s valuable with you—computers, Bitcoin.  Take it with you.  The hotel here has a wonderful restaurant, and I highly recommend the tomato soup.  If you are alone for lunch and you’re sad about that, just turn to the person next to you and invite yourself.  I guarantee you there is no one in this room who is uninteresting, so you’ll have a wonderful time.  Thank you.  See you at 1:30.  Peter Surda is coming.

00:34:08

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{ 2 comments… add one }
  • Dwain Dibley January 19, 2015, 11:03 pm

    Is the credit that populates every deposit account and used in thousands of transactions daily Legal Tender? If no then; if we to properly segregate the Legal Tender Money from the Private Credit in use, would the value of the Legal Tender rise or fall?

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