Bitcoin and The Public Function of Money

I want to write a bit about the public function of money, especially as compared to the market function of money, in light of some of the recent discussion about Bitcoin.

Bitcoin is already a very useful technology due to the fact that it allows transactions to take place without any central authority. This alone is significant. The technology behind it is also perhaps applicable in other areas, such as the Namecoin project to replace the centralized Domain Name system.

Does Bitcoin have the potential to replace Government fiat money? No. It doesn’t. It only has the potential to be one commodity form within the money economy.

Countless books and papers have described money, money is a very complex thing which serves many functions. Keith Hart has written about the “Two Sides of the Coin,” heads on one side, tails on the other. One way to interpret this might be to contrast between the public function and the market function of money.

The origin of money is tribute. The source of money is the public, in whatever form, whether empire or democracy or something else, money is spent on public expenditure and demanded back as tribute. Whatever its commodity value, whether minted on gold, printed on paper or electrified as bits in a database, this sort of money has value because it can be used to fulfill tributary obligations, for example, it can be used to pay taxes. As the entire source of this money is government spending, the amount of this money is determined by the amount we want to provide on behalf of all as a society. This is the “Heads” side.

Not all economic activity is done for money. Much of it takes, and has historically taken, gift and kin-communal forms, where work and wealth is shared without specific prices for specific commodities, but rather on a basis of social trust and reciprocation. Markets emerge as economic activity extends beyond communal and neighbourly forms, markets extends the social to beyond the kin-communal, and along with such social distance come more transient relationships that can not rest on trust and reciprocation, and thus must be encompassed by spot transactions, and as a result specific prices for specific commodities and specific price relationships between commodities. With these transient relationships comes money. But this sort of money is different.

Commodities can also be traded directly, even if their relative worth is counted in “Heads” money, and trade can also be done on-account, by credit. The amount of which is not limited to the physical amount of “Heads” money in circulation. In the wider economy, money is endogenous, the amount of money circulating in the economy is not a function of any monetary base, but rather is a function of the amount of things we want to make and do for each other. More specifically, the amount we want to make and do for each other for money. This is the “Tails” side.

This is vertical money and horizontal money. Vertical money is created and destroyed by the public, horizontal money expands and contracts as a result of the economic activity of private individuals and their incorporated forms.

Money that has a commodity base, i.e. Gold, is not completely rooted in a particular public form, since it’s value can cross international borders.

This is where Bitcoin, a digital specie essentially, emerges as a new and rather unique form of money. It’s built-in cryptographic limits on supply make it essentially a virtual commodity form of money, fixed and “hard”, like Gold, yet digital and transferable electronically across global telecommunications networks. As such, it has attractive features as both means of exchange and store of value. Yet, while it certainly is useful on the “Tails” side of money, as one of the various kinds of assets circulating in the global market economy, it does not serve public function well. There is a reason that modern public forms of money are not commodities, why modern economies use “fiat” money, money that is not based in or guaranteed by conversion to any sort of commodity.

If the public restricts itself to commodity-money for public expenditure, this means that what it spends must be limited to what it taxes plus what it borrows, since commodities have a fixed available supply. And though many ignorant or simply disingenuous commentators, such as promoters of austerity, present this to be the case even now, in a modern monetary economy based upon fiat money issued by the public for public purpose, this is factually not the case.

The thing about public money is that we can have as much of it as we want to have. How much we spend relative to how much we tax is a public policy choice, and the right-wing dogma that the appropriate choice is for the budget to be balanced, for taxes to be equal to spending, is universally understood to be false, even among the most celebrated right-wing economists. In his 1948 article “A Monetary and Fiscal Framework for Economic Stability”, “Chicago Boys” patriarch Milton Friedman proposed a counter-cyclical policy, where government spending would be increased beyond taxation during economic downturns, similar to Abba Lerner’s “Functional Finance” which is often referred to as “Keynesian” economic policy. Whatever their ideological stripes, there is little disagreement among economists that to the degree that public budgets need to be balanced, they must be balanced relative to economic cycles and sectoral balances and not merely between annual public spending and taxation.

The balance between spending and taxes is simply the balance of the public “Heads” side of the coin, always in counter-balance with the private “Tails” side of the coin, as expressed by the activity of private interests in the global market.

It is no secret that the national State form is unsatisfactory. Not only is it burdened by its aristocratic roots, and not only is it corrupted by the fact that its modern form is largely captured by the international corporate elite, but the State is clearly unsatisfactory for modern publics as a result of the fact that static territorial forms are increasingly ineffective and inappropriate structures to serve global, distributed communities.

The public form has to evolve from the state form to the networked form, but for that to happen, new, networked public forms will need to emerge that are able to take over the socially necessary public functions. Including the management of forms of public money.

The critical feature required of public money is that we can socially determine how much of it there is, and how much of we want to apply to public purpose. We need ways to create and destroy public money so that we can can have a counter-balance to private activity, to manage cycles, to counter-balance economic sectors, and to socially pursue public objectives, such as health, education, and justice.

Thus, Bitcoin’s innovation in terms of creating a networked form of commodity money is not useful in creating networked forms of public money, and as a result it does not create a way for networked public forms to replace the current State forms.

I’ll be at Stammtisch this evening at 9pm, please come if you’re in Berlin, if not, R15N continues at Mal au Pixel in Paris, you can join the network by calling +33 181 97 97 11


  1. BladeMcCool

    The state can not tax my bitcoins nor can they prove how many I may or may not control. If my cashflow comes through crypto-currencies there is no tax liability on any books linked to my government issued identity. If I abstain from living lavishly with my hidden income, I will continue to remain out of the tax authorities view indefinitely. And as everyone begins to do this, the nation state as a concept becomes impotent and takes on a ever-diminishing societal role as time progresses.

    I’m not really sure what you mean by “socially determine” the amount of public money there is and how much to spend on public works. It sounds like a meaningless concept. I will personally contribute to public works I believe in using a crowd-funding model, but nobody will force me to fund anything I don’t want to fund.

  2. Pingback: Bitcoin and The Public Function of Money « Poor Richard's Almanack 2.0
  3. Poor Richard

    I don’t know that international public “network money” would not wind up needing to share many of the features of Bitcoin, for the same reason that Bitcoin has the features it has. As far as I can see the only difference between Bitcoin and an international “public” currency would be the particular arrangements for controlling the supply.

  4. KLP

    Thank you for this thoughtful treatment of the bitcoin. I have suspected a similar shortcoming, but you’ve expressed it much better than I could have. Have you heard of the Ripple Project (, yet? I think its concept of issuing credit of any denomination and passing IOUs through social relationships might better serve the “public function”. However, in its current state, Ripple is still too centralized. Implementations still depend on central servers which cannot talk to each other. It also lacks the gold rush incentive that has made Bitcoin so popular. I am not sure how Ripple’s developers will overcome these shortcomings. In any case, I am curious to hear your thoughts on it.

  5. Rudd-O

    Pretty uninformative article, rife with statist dogma about the origin of money (false) and other myths from the statist mythology.

    BUT, BUT, the article is certainly correct in its conclusion: Bitcoin absolutely does not work as “public money” (money to be spent by any State), since the State can’t control it like it does with fiat money, and can’t tax it like it does with money that circulates in the statist financial system.

    And that’s the point of Bitcoin.

    Isn’t it awesome we have Bitcoin?

  6. Dmytri

    @Poor Richard, exactly, But the ability to control the supply implies a much a more difficult challenge, the ability of networked communities to make decisions. This requires the creation of new public forms.

    @BladeMcCool, the government can certainly tax bitcoins, taxes have existed much longer than digital or even fiat currencies. Even if some are able to evade taxes, the majority of producers, especially those of significant scale, can not. The point is that if goverment spends bitcoins, or any other commodity based currency, then it must always tax or borrow everything it spends, a situation which inevitably increased unemployment, crisis, price instability, etc, because such money can not perform the public functions that fiat money can, as described above.

    @Rudd-o As mentioned above, the state can certainly tax bitcoins. Also, you seem to miss the pont that because bitcoin can not replace public money, public money will continue to exist. So long as we use money at all, the function that public money performs are necessary. Bitcoin is useful and interesting, but it is not in any way a threat to the State. Not even a little tiny bit. Bitcoin is specie, noteworthy because it’s digital, but politically and economically no more threatening than gold, cash or cocaine, simply easier to store and transfer.

  7. Anonymous

    @Dmytri “exactly, But the ability to control the supply implies a much a more difficult challenge, the ability of networked communities to make decisions. This requires the creation of new public forms.”

    Yes indeed –new public institutions/forms is a harder problem than any public network currency technology. Many people are working on the harder problem, but ironically the work isn’t very well coordinated. Who/What do you see as the strongest or most promising nuclei of that work?


  8. Poor Richard

    @Dmytri: “exactly, But the ability to control the supply implies a much a more difficult challenge, the ability of networked communities to make decisions. This requires the creation of new public forms.”

    Indeed the necessary new public institutions/forms is the harder problem. Many people are working on that problem but ironically the work isn’t well coordinated. Who/What do you see as the strongest or most promising nuclei of that work?


  9. Dmytri

    @Poor Richard, most promising work so far is, IMO, to be found among free software communities, the various pirate parties, and initiatives around occupy, but we have a long way to go.

  10. Dmytri

    @KLP, Ripplepay is very interesting, and I’ve been following the project for many years, but like Bitcoin, only has application in terms of Horizontal money and does not address vertical money. However, because it is based on mutual credit, and not a commodity, less wealth would be captured by financial elites. Of course, these are not mutually exclusive, since you could have a ripplepay community based on bitcoin.

  11. KLP

    @blademecool: As long as only relatively few individuals possess a large chunk of the wealth, the crowd-funding model isn’t especially promising. Assuming no other source of public funding, we will just find ourselves at the mercy of the elites who have amassed the most bitcoins. I suppose that isn’t too different from the way things are now, except for even less democracy. Dmytri has already made an insightful post on that topic:

    @Dmytri: You could also have a Ripple community based on labor. Its members wouldn’t have to depend on anything but their own productive capacity. As such, I think that the Ripple concept could help in decentralizing and democratizing the coordination of production so as to avoid the establishment of a coordinator class.

  12. mikeriddell62

    Wow that’s a terrific piece. Congratulations on your ability to articulate!

    Let me tell you what i think an alternative to bitcoin looks like.

    Imagine if community based organisations could be persuaded to adopt a digital way of recording and rewarding the time volunteers gave to their community. imagine if that time were converted into points (say 1 hour = 1,000 points) then you’d be able to identify those people who deserved reduced or concessionary prices on goods and services that might otherwise go to waste, and capture a universal measure of positive social impact.

    Stuff that perishes – end of line stock (costly to business) or idling capacity (such as seats on public transport or cinema). Give those businesses a means to dispose of this ‘waste’ to people who deserve it and you end up with personalised pricing instead of a one-size fits all pricing system that we have now.

    The points would be the store of value (‘we value your contribution to your community, so thanks and come again!’), a means of exchange (one mans trash is another mans treasure) and a unit of account (gross national contribution rather than gross national product).

    The points = social impact thus conusmers can see which businesses give to community and which businesses don’t.

    this would counter-balance our mindless consumerism economy with a mindful version of the same.

    In my opinion.

    And the currency is backed by the world’s most valuable resource which is time.


  13. Dmytri

    @Erik, I have to admit it’s a little tedious to respond to articles that depend on long discarded nonsense like the barter origin of money. We know from anthropology, most recently written by David Graber, that money prices do not predate taxes, and that there was no barter before money, or even commodity prices defined in other commodities. The barter origin theory of money is simple well know to be false. So before you call other people’s understanding of money “misguided” you should prerhaps update your own scholarship on the subject.

    Anthropologists gradually fanned out into the world and began directly observing how economies where money was not used (or anyway, not used for everyday transactions) actually worked. What they discovered was an at first bewildering variety of arrangements, ranging from competitive gift-giving to communal stockpiling to places where economic relations centered on neighbors trying to guess each other’s dreams. What they never found was any place, anywhere, where economic relations between members of community took the form economists predicted: “I’ll give you twenty chickens for that cow.” Hence in the definitive anthropological work on the subject, Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing” [2]
    a. Just in way of emphasis: economists thus predicted that all (100%) non-monetary economies would be barter economies. Empirical observation has revealed that the actual number of observable cases—out of thousands studied—is 0%.
    b. Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero. If any sociological prediction has ever been empirically refuted, this is it.
    — David Graeber

  14. Pingback: If only the hot air of its supporters where as limited in supply as Bitcoin itself. » @dmytri
  15. ScottA

    Dmytri’s argument is quite correct, when he talks about the two types of money (public and private), and how bitcoin is not suitable as public money.

    i’m going to have to re-read it a few times, because his phrasing isn’t really hitting me immediately. for example, a major confusion was his use of the term “public” itself in the title, and throughout the text. oh, he does use it quite correctly – in the sense of “public ie govt spending” –

    but when i first read the term “public” i actually took it to mean what he actually means by “private”: ie, the great unwashed public who needs a currency so they can trade things amongst themselves and escape the clutches of the central bankers and the govt. so what i informally, instinctively might call “money for the public (for the masses”, he actually calls that “private money”, and when he says “public money” he means governnment spending, taxes, avoiding austerity, etc.

    so i am afraid that the phrasing of this article – with its highly technical use of the terms “public” and “private” – can be initially confusing to some people – at least to me! when i’m reading an article about “bitcoin” and i see the word “public” the first thing i think is: “yeah, the public, we the people, screw the government and the banks!” but it seems that Dmytri’s use of the word “public” here means quite the opposite: he means “public ie govt in terms of communal decision making about allocating resources and funds, including printing of said funds (in defiance of the austerity idiots)”

    so he seems to be saying that bitcoin works fine as a currency functioning to support the private economy of people circulating goods and services among themselves – but it cannot function to support public ie govt spending.

    this makes sense. i think i do recall having heard similar ideas about the “two kinds of money” (government-issued and privately issued) from Michael Hudson and the MMT (Modern Monetary Theory) crowd, and they did make sense. something about how austerity is needless, since the govt (aka the public) can just decide how much money it wants to “create” for public projects (provided, of course, that the real resources are actually available: people, materials, etc.)

    however, it’s not much of an objection. he’s basically saying that bitcoin works for what he calls “private money” (and what i call “the public at large, people”), but it can’t be used to print money and allocate resources for public (ie, govt) expenditures.

    fair enough. but not much an objection. just give the govt a separate bitcoin system of its own, call it govcoin or something. i don’t see any problem here

    …except for convertibility between govcoin and bitcoin – and i have heard elsewhere arguments made for having two separate currencies: one for the government, and one for the “private” economy. i’m not sure what the issues all were, but it seemed to make some sense, and again, i don’t see bitcoin as being intrinsincally incapable of this.

    “bitcoin” doesn’t just refer to the unit of currency, or the community using it – it also refers to the open-source software itself, and this already has been used to create several parallel other currencies which compete with bitcoin, as well as other things such as bitmessage (which is a secure way of sending encrypted messages instead of sending money).

    so my initial response to Dmytri would be: just create govcoin (or pubcoin?) and set up some kind of massive online wiki-game where the public decides what “govt” projects to spend “our” 21 million govcoins on or whatever.

    again, the tricky point is always the interface between two currencies. mathematically, economically, politically, psychologically, criminologically – this is a weak link all the time. if you’re gonna have a bitcoin and a govcoin, then people are gonna want to convert between the two. i have no idea where that leads, but i as i said i do recall reading proposals which explicitly stated that is may be a good and necessary thing to indeed have a separate public (govt) currency and private currency.


    some individual lines:

    Does Bitcoin have the potential to replace Government fiat money? No. It doesn’t. It only has the potential to be one commodity form within the money economy.

    ok, point granted. but there’s a lot of assumptions to unpack here, and observation to make, eg:

    (1) is govt fiat money a thing which we want to even perpetuate?

    (2) bitcoin “only” has the potential to function as a kind of currency in the money economy. this seems to be what alternative currencies usually do, and usually do to very good effect. so i wouldn’t say “only” here.


    The origin of money is tribute.

    I was quite taken aback when i read this blithe, sweeping statement.


    i believe david graeber has written a whole book on the subject, based on extensive anthropological studies, and his answer was quite different!

    i think what Dmytri means is “the origin of govt fiat money is tribute”. i have heard this argument also made elsewhere, and, when this adjective “govt fiat” is added, it appears to be correct: fiat money gains acceptance precisely because people are required to use it to pay taxes.

    i have never really felt that the government should be burdening everyone with taxes anyways. i have read some very persuasive arguments to the effect that the only thing that should be taxed is “rent” in the sense of “rentiers”: the only people who should be paying any tax are the people who lucked out and were granted “ownership” of the public’s communal assets such as land, airwaves, etc. in this alternative system, things like wages would be untaxed.

    plus i have often daydreamed that the govt could extract no taxes at all, from anyone. when we see that the govt (or its central bankers) are able to summon into existence 14 trillion dollars at will, it starts to strike me as kind of odd that they feel the need or the right to come and badger me for 25% or more of my paycheck. go print your own damn money, government, like you always do!

    so it seems there could be various ways of giving the government its own govcoin (or giving the public its own pubcoin, to use another terminology), in parallel to the “private” bitcoin economy, supporting transactions among private individuals, private institutions, etc.


    the notions about two kinds of money (which he variously calls “heads” and “tails” money, or “public” and “private” money) are certainly quite important. the fact that bitcoin seems quite capable of handling at least one of these kinds of money seems like something in bitcoin’s favor, rather than against it.

    here Dmytri makes an assumption which points the way to the solution:

    If the public restricts itself to commodity-money for public expenditure

    ok, fine, so as i was saying, just don’t do that.

    just set up a separate bitcoin system called pubcoin (or govcoin) to handle public expenditure. problem solved.

    (except you need to address somehow the issue of the inevitable urge to convert between pubcoin and bitcoin. my initial suggest is: disallow it. not sure if that would even be enforceable though. a skilled economist might be able to figure out various scenarios regarding convertibility.)


    this is fine:

    The critical feature required of public money is that we can socially determine how much of it there is, and how much of we want to apply to public purpose. We need ways to create and destroy public money so that we can can have a counter-balance to private activity, to manage cycles, to counter-balance economic sectors, and to socially pursue public objectives, such as health, education, and justice.

    but it doesn’t give him the right to conclude, in the next sentence:

    Thus, Bitcoin’s innovation in terms of creating a networked form of commodity money is not useful in creating networked forms of public money, and as a result it does not create a way for networked public forms to replace the current State forms.

    we are still just trying to figure out what happens when multiple bitcoins systems are run in parallel. probably all the the me-too parallel bitcoin systems released this far fall into the category of “(yet another) private bitcoin system” (“private” in Dmytri’s sense: among individuals and institutions, not publicly debated as part of govt). and it seems likely that there may be a first-out-of-the-gate rule for multiple bitcoins in the private realm: the first one out of the gate (bitcoin itself) is the one that wins, probably by sucking all the other systems into it somehow, simply by virtue of having gotten the early momentum.

    but there’s no reason why a different, more “public” or “democratic” sort of bitcoin system couldn’t be set up in parallel to the “private” one, in order to serve the purpose of government funding. i think this is an interesting issue which should simply be brought up – and not dismissed as being impossible the way Dmytri does.

    in fact, it may be somewhat related to our recognition that there is a need for a more democratic bitcoin: one where everyone got the same number of bitcoins at the outset!

    i could envision a kind of “world-peace-game” inventory of the world’s resources (assets), problems (liablilities: eg, toxic waste cleanup sites – or even more generally: tasks to be worked on: thorium energy development, healthcare, etc.), and people – and some way of divvying up an intial allocation of “govcoins” or “pubcoins” to the various “stakeholders” at the startup moment of a system for public administration.

    this would be a step in the direction i always want to go: implementing many of the decision-making and organizing and work-performing actions of groups like occupy within the framework of an actual, legitimate framework of economy and governance: taking over the reins as it were from the central bankers and the government leaders who have proven themselves too corrupt and paralyzed to do these things.

    so i simply take Dmytri’s essay as an elucidation of a problem which we should try to solve: applying a bitcoin-type approach (along with many other democratic mechanisms) to issues of public funding, decision-making, banking, etc.

    i think the problem in this case has to do with trying to establish a kind of inventory of where we are (in terms of resources and needs), and then capturing that as a sort of starting point of a pubcoin (govcoin) system.

    and of course any “govcoins” or “pubcoins” which people get at the outset in such a game/system are not to be traded in the private market. (you have regular old bitcoin for that). in some sense, these govcoins and pubcoins are really like “votecoins” – in the sense of direct budgeting etc which is implemented an old site i saw over 10 years ago, and which never seems to be updated or mentioned, but which is still there and still seems to make sense:

    in some sense, much of voting should revolve around “what should we spend our money on”. (which is a much better question than: should we ban abortion, allow gay marriage, allow pot smoking etc. i like to keep govt focused on “where is the money?” rather than on “who should we hate?”)

    it seems – taking an optimistic note from dmytri’s pessimistic essay – that a “govcoin” or a “pubcoin” or maybe call it a “votecoin”, allowing all stakeholders to directly determine budget allocations, could actually be a step in the direction we want to go in – away from austerity.


  16. ScottA


    (sorry for my previous ultra-lengthy post. i’m trying to summarize it here:)

    dmytri has conceded that bitcoin works fine for private transactions.

    but like he says, that’s only half the problem. we need a solution for public money – ie, govt money, “our” money.

    rather than assuming that such a “public money” system necessarily has to be based on traditional govt printing of fiat currency and demanding fiat currency back in taxes, this may actually be an opponity to solve the public/govt half of the problem – by also taking a “bitcoin”-based approach


    starting with…

    – the same ole “bitcoin” software for creating and circulating a transparent, limited-supply (but infinitesimally divisible) currency;

    – notions of direct budget allocation from sites like or

    – notions about resource-inventorying and problem-solving based on ideas like John Hunter’s World Peace Game

    – notions about “challenges” and “special missions” and “rewards” based on ideas about game design / gamification as expounded by Jane McGonigal

    – offline, real-life activities such as MeetUp-style events (or Ripple-style? i haven’t researched Ripple yet), or based on the highly practical consensus decision-making systems developed for the past few decades and currently used very successfully by groups such as Occupy, perhaps applying results from successful alternative currency projects but in the context now of govt (not private) money

    (to name just a few alternative currency projects which come to mind: WIR in Switzerland, Banco de Palmas in Curitiba with involvement from Bernard Lietaer, the long-running LETS project in Ithaca, New York – the list of successful alternate currencies is endless – plus the example of public banking as successfully implemented in North Dakota, following the ideas of Ellen Brown

    …it could be possible to create a public funding decision-making system (based partially on bitcoin software), perhaps named “govcoin” or “pubcoin” or “votecoin” or “budgetcoin” – which supplements and eventually supplants our current pretty-much broken system of “public money” as handled by our current central-bank-borrrowing, austerity-worshipping government “representatives”.


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