Doug French is a libertarian economist who received his PhD in the University of Nevada under Murray Rothbard and has many years of experience working in the banking sector. He was the president of the Mises institute from 2009-2012 ans is currently the senior editor of Laissez Faire Books, a libertarian book publisher run by Jeffrey Tucker. He is also well known for having been and for writing Walk Away: the Rise and Fall of the Home Ownership Myth, a libertarian look at the events and ethics of the housing bubble. Here Doug French has agreed to talk about his views on Bitcoin and the global financial system, and James M. Ray of Omnipay, an exchanger for the now defunct digital currency E-gold interjects to share some of his experiences and views on the topic of seeking legitimacy.
Vitalik Buterin: When did you first hear about Bitcoin?
Doug French: It was earlier this year, or I suppose at some point last year. I stumbled onto it, and mentioned it in an article I wrote for Laissez Faire Books. People seem to be coming down on either one side or the other – you’re either pro-gold or pro-Bitcoin, but you can’t be both, but you can’t be both, which strikes me as very very odd, and there are fights about whether it can be money.
Vitalik Buterin: The regression theorem?
Doug French: Yes, they’re throwing out that old canard the regression theorem, and I don’t see how the US dollar or the euro satisfy it, I don’t see Bitcoin following it, but I suppose if you want to flog Bitcoin with the regression theorem and call it a day and not think things through that’s fine, but ultimately we just don’t know, and we leave it to the market. The Hayekian view is that nobody has complete knowledge, and we’ll see what happens, and that was kind of my view. And then Jeffrey Tucker, who I officed with, became interested in Bitcoin. When Jeffrey Tucker becomes interested in anything, it goes from interest to obsession very quickly, so I began to hear about Bitcoin eight to nine hours all day, every day. We’re actually doing a Bitcoin conference on October 5, and it’s very interesting. I think Jeffery’s interest was at the end of last year, start of this year, and he’d give me hourly updates on the price, etc. I think his interest was really spurred up here in New Hampshire when he went to Liberty Forum. He spent some time with the gentlemen making Bitcoin ATMs and other sorts of uses of the technology and somebody gave him a bitcoin and then he became an evangelist for it. He tries to give away bitcoin himself. So we had the incredible spike at 266, then the crash, now it’s settled down, so it’s interesting and I’m fascinated by it.
Vitalik Buterin: In terms of just global finance right now, there’s the US dollar, the Euro crisis which is really still going on, and recently we have the Japanese situation. Which of those three do you think are the biggest deal at this point?
Doug French: It’s hard to say. There’s this quiet currency war going on that I think all the major currency blocs, if you want to refer to them that way, are involved in. The Japanese are much more overt with the new guy who’s in charge who says he’s going to do this groundbreaking, “we’ve never done this before” sort of thing, which is ridiculous. They’ve been doing this for two or three decades. Maybe they are going to do a little more of it than they’ve been doing, but it’s been one stimulus program and one quantitative easing round after another. Their central bank goes as far as buying real estate investment trusts and ETFs and so on, so they go beyond even what the Fed does with money created out of nowhere. I would say that he’s certainly been effective with the rhetoric and what he’s done because the yen has dropped like crazy and, what does that do, it makes the dollar look pretty good in a bad neighborhood, and same with the euro. I find it fascinating how the euro is a hot news item in the United States for five business days and then Draghi sticks a band-aid on it, and then, you could almost set your watch by it, it quiets down for six months, and then it pops up again. It’s like the fire here by the BitTent. The fire goes out and then the embers are smoldering and then they get the fire going again. I don’t think Europe’s problems have gone away; they haven’t done anything that would make them go away.
Vitalik Buterin: Their unemployment is record high…
Doug French: Sure, and yeah, I think it’s a terrible place to be if you’re a young person trying to start a life, start a career, and there are a lot of problems there, and that’s opened the door for Bitcoin, and I think the timing has worked out right for a solution that’s completely outside the state and state control, although now it’s clear that the United States is trying to do all they can to regulate this at least on a payment system basis, and by doing that they may get some kind of control over this thing. Interestingly enough, some people in the Bitcoin community who actually are involved in the use of it and making a living from it are all saying “regulate us, regulate us, give us some legitimacy, we don’t want to be associated with the Bitcoin believers who think Bitcoin will create anarchy next week” and so they’re crying out for regulation whereas the more ideological types want it to remain pure and free.
Vitalik Buterin: Well, I think some of those people would prefer that it remain untouched but they see that organizations like FinCEN are really powerful and they are going to touch them, so they might as well settle down on a framework before those people realize its full impact.
Doug French: I agree with that. I worked in banking for 20 years, and I know that if they want to regulate you they’re going to track you down and they’re going to regulate you and you’d much rather have a seat at the table during the initial regulation than be on the outside looking in. It’s kind of like being a creditor in bankruptcy court; you’d much rather make a deal out of court than have the judge make a deal for you, so I understand what the industry’s trying to do, it’s just… I mean, it’s interesting from an observer standpoint to see the sides line up, as we have the ideological folks who are both evangelists for the use and are very quick to throw in the “we’re going to take down the state with Bitcoin” idea and then the guys who are actually trying to make a living with Bitcoin are saying “FinCEN is trying to get us, let’s link arms are try to make the best deal we can”, so more than anything it’s fascinating to watch.
And it seems to be sort of a young people’s territory. I’m relatively ancient to be having any interest in this, but I gave a talk to a group of certified financial planners in Washington DC of all places, and the talk was really about, in shorthand terms, quantitative easing from John Law to Ben Bernanke, but I wound up my talk with Bitcoin. Essentially, this is how governments have screwed up money for centuries and centuries, and Bitcoin has emerged as a result of that. So I asked this crowd how many had Bitcoin, there were none; I asked them how many of their customers had actually asked about Bitcoin, one person raised their hand, but when I got done, I took questions, and virtually every question was about Bitcoin. So there is very much a fascination with this, and I think it will continue that way.
Vitalik Buterin: I know that whenever Tony Gallippi goes out to payment conferences and makes presentations, he goes out there with more mainstream folks like Stripe and Square and Braintree or whatever, and whenever they present about their various “innovations”, so to speak, and he presents about Bitcoin and BitPay, all the questions are about Bitcoin.
James M. Ray: On what you were saying before about cooperating with regulators versus fighting them, I think recent history might have some good lessons for us. Doug Jackson of E-gold tried very very hard, I witnessed it, I was there, to cooperate with the government, he testified in front of Congress and all the various agencies, but he finally got raided anyway. If they could have raided Bitcoin they already would have, and the meme I’m trying to spread, I would love to see someone like Jeffrey Tucker say it, is that Bitcoin is karma for E-gold. It’s karma for what they did. And karma will come back and bite you in the ass if you’re a government. I should be a rich @!$%= right now instead of a poor @!$%=, but because of their attack on e-gold I’m a poor @!$%=, so I’m kind of emotional about it, you know. I would have been more on the cooperation side, but I’ve seen trying to cooperate and what it does.
Doug French: No, you’re exactly right, and thanks for interjecting. It’s not like Bitcoin started this, it was actually E-gold, and to some extent Paypal.
James M. Ray: And Bernard von Nothaus, e-bullion, Crown Gold, they’ve attacked every honest system. And the first accusations are “well, the gold’s not there”. People have already tried that trick. The gold not being there wouldn’t have bee fun, you know. E-gold was only going to be fun if it was honest… it’s a long story.
Doug French: When you heard Peter Thiel talking about what Paypal is going to be, he was essentially describing Bitcoin.
James M. Ray: I spoke to him in Anguilla in 1999 at one of those conferences where you go to a place without an income tax and talk about how you want the world to be that way and he sounded much less like a credit card processor and much more like a payment system.
Doug French: Yeah, exactly, he gave up and sold out and he’s still a rich guy and that’s great.
James M. Ray: I’ll say, Doug Jackson made a variety of mistakes with E-gold, some I went along with and some I was against, but the biggest mistake he made was saying no to Goldman Sachs. Because if we had Goldman Sachs money and Goldman Sachs political backing there is no way E-gold would have ever been attacked. We live in the United States of Goldman Sachs and JP Morgan. I mean, it’s not America anymore, it’s bankerism.
Vitalik Buterin: As far as Peter Thiel goes, I wouldn’t say he completely sold out. He still does support things like the Seasteading Institute and-
Doug French: Yeah, no question about that.
James M. Ray: Has any libertarian done anything right with a floating island? What was that place, New Minerva or something, where the guy ended up attacked by Tonga’s military and getting kicked out. It doesn’t seem to work for us.
Vitalik Buterin: Blueseed is starting up right now, it’s got venture capital backing, they were at Bitcoin 2013. Anyway, do you think there is any danger that Bitcoin would suffer the same danger that PayPal has, and essentially just become part of the establishment.
Doug French: And be just another payment system, yeah, I think these guys run that kind of danger if they link arms too quickly with the government. The ECB wrote a report on Bitcoin just under a year ago, so we’re certainly not flying under the radar anymore. FinCEN’s all over them, and you’ve got the various raids. Any time any of these famous money transmitters gets shut down, I think one of the latest ones was Liberty Reserve, Bitcoin is thrown into the publicity mix even if it wasn’t involved. It’s very easy to do a deal with the devil, but I think they should recognize that the devil is the devil. Maybe they’ll all get rich and live happily ever after and it ends up just like Paypal. It doesn’t mean that the world’s worse off, the world’s probably better off for their entrepreneurial genius, but it’s certainly not what was contemplated by our mystery man who created this thing. So it’ll be interesting to see how it comes out.
Vitalik Buterin: What do you think about gold right now?
Doug French: Well, I have more gold than I have bitcoin, so that tells you one thing. As far as the price goes, I don’t know, there seems to be great physical demand. The paper price of it has been hammered in some people’s view; it’s interesting, people will say to my wife, “jeez, boy, gold’s really getting hammered”, and she asks “really, what is it?”, and they say “$1300”, so she replies, “well, I started buying it at $500”, and in that case you don’t necessarily think it’s been hammered. I point out to her that if you bought at $1900 then it’s been hammered, but markets don’t go straight up and they don’t go straight down. Central banks are doing the best they can to keep pumping air in a tire that has a hole on the other side, and they’re going to keep pumping to keep asset prices high and create employment, which they can’t do, but that’s the only thing they know how to do. Unfortunately for them, money velocity has fallen virtually to zip, and the banking system is broken at least here, and so you don’t have the money creation you would normally get with the central bank tripling its balance sheet. But the sticks are there and they could light on fire very quickly, and it’s very hard to control this thing. Whatever gold I have, I hope I never have to use it and I hope I die with it, but one of these days I may have to pull it out and find my way around. It’s an insurance policy that I think everyone should have.
James M. Ray: In view of the LIBOR scandal, do you think it’s possible that central banks are not manipulating the price of gold and silver?
Doug French: I just don’t give governments that much credit.
James M. Ray: You don’t think they could? I mean with all the derivatives out there GATA’s been screaming at it for twelve years, I read all their stuff.
Doug French: I know, I used to read it, I just don’t know. I’ve heard the GATA guy, Chris Fowl, talk; he was very compelling.
James M. Ray: You would think they would go away if they have been refuted but they haven’t.
Doug French: No, they’ve got their story and they’re sticking to it. And I think there’s probably something to it, but I can’t articulate how it’s done, and it’s hard to imagine that the government can’t deliver the mail but they can guide the price of gold around.
James M. Ray: Well, it’s not working perfectly, I mean we’ve seen a rise from $200 to more than $1300, so they’re only able to delay the inevitable I think, but I still think GATA’s right in the end. I’m like you, I’m hanging on to everything I can.
Doug French: I haven’t bought at these kinds of levels for a long time, I put it away and I forgot where half of it is. And that’s probably the best way.
Vitalik Buterin: How might the banking system be different once Bitcoin gets involved in a more serious way?
Doug French: I was just thinking about the differences between the banking system in a Bitcoin as oppose to a banking system in a fiat currency world, and one of the advantages of bitcoin is that you can’t have fractional reserve banking. Because when you lend a bitcoin, there’s a title to each and every bitcoin that must be transferred. In the case of fractional reserve banking, people put money in the bank, they retain title to it, but the money is left to someone else, so you have this duplication of money that happens over and over and over again, roughly 10 times over the course of the banking system. That cannot occur in the case of Bitcoin, which I think a lot of people probably don’t realize, and it’s one of the huge advantages to a Bitcoin world. I think people focus too much on the Fed’s ability to create money when it’s the banking system with the cartelization and the backing of the Fed as a lender of last resort that makes that possible. But in a Bitcoin world the actual title must transfer, and so you don’t have money creation happening through Bitcoin like that. Could it be possible to create a derivatives market in Bitcoin where you have essentially synthetic bitcoins created in a loan market? Yeah, probably, and I’m sure financial entrepreneurs could make that happen, but not nearly to the same extent. Right now, we have fractionalized banking with shadow banking on top, so you have layers that the average person really doesn’t understand or even realize. You may have some of that in the Bitcoin world but at least with this inability to duplicate title you nip a lot of that in the bud and this money creation could be stopped.
Vitalik Buterin: Also, in the fiat currency world, why do people deposit money banks? It’s not because they’re chasing the 0.25% interest, it’s because they have to in order to meaningfully participate in the modern economy. Whereas Bitcoin, as a base unit, exists on the internet right from the start. You would only want to participate in a banking system if you are getting a good deal, and if the bank could show you that they are stable.
Doug French: Right. I think people in the United States haven’t been touched by the banking sector nearly as much as Argentinians or people in other areas in the world that have been just racked by inflation and banking prices throughout probably throughout their whole lifetime. Those people are embracing Bitcoin much more enthusiastically than Americans are, because they realize that an alternative is needed. People in the United States, they grew up with the dollar, they don’t understand the manipulation that is going on, their life hasn’t really bee affected by banking prices, and they’ve never had to shop for bread and watch the price go up as they stand in line as you’ve had in Argentina and Zimbabwe, so it’s interesting that in a number of South American countries and Africa they have embraced Bitcoin. Also, another reason is that in many of these places is credit card transactions. They’re not able to do commerce with credit cards because credit card companies have had so much fraud from these areas that they won’t accept them, but they’ll accept Bitcoin because it’s not a credit transaction, it’s purely a market transaction.
Vitalik Buterin: Bitcoin is growing quite a lot in China recently, At least the part of the Chinese people that are internet-savvy and somewhat wealthy, they understand virtual currency and there is a much stronger desire for freedom there.
Doug French: And they’re much more distrustful of the government monetary system. I go to Turkey a fair amount, and people store their wealth not in Turkish lira, but in rugs and gold. If you go to the grand bazaar, you can buy gold trinkets of various shapes and sizes and you can buy rugs, and that’s how people store their wealth. Now, in the internet age, not everyone has a TV, but everyone has a phone. So that’s how you can transmit bitcoins, through your phone. That I think is something that Americans really can’t get their hands around, so I think they’re going to be really slow to adopt. In other places in the world, there are people selling property for bitcoins, and there are much more transactions taking place, and I think Americans realize it. As for this stigma that Bitcoin is only used for illegal transactions or something shady, whether it be money laundering or buying drugs or buying prostitutes, I think none of that stuff should be illegal anyway. Government can make anything illegal, and the way they trap people is through not paying their taxes or some kind of money transfer violation, and I think people should probably think about what kinds of things could become illegal, whether buying too much of certain ingredients in too short a period of time, implying that you’re involved in methamphetamine manufacture, and they’re probably going to try to make dealing in bitcoins, through implication, some kind of crime.
Vitalik Buterin: I don’t think they’re actually going to make it a crime. But the thing with how the legal system works is that even being subjected to legal process is itself so burdensome that it constitutes a penalty.
Doug French: You’re exactly right. People live and fear the IRS for that very reason, just as the whiff of the idea that you could be audited or the whiff of being arrested and having your picture on the front paper is enough to scare most people into toeing the line. Anyway, those are just the things I thought about, and I think the banking issue is important because I think a lot of people don’t realize how fractionalized banking works and how the world would be different with Bitcoin. It would be less inflationary, and less prone to booms in busts. It would be much better.
Vitalik Buterin: Anything else you wanted to talk about?
Doug French: I would say that I think the Bitcoin detractors miss the point that Bitcoin has a lot in common with gold, the pure mining of it is very similar, it was set up in the same way here it was very easy to get gold in the beginning if you were in the right place at the right time, now it’s harder, it takes rooms full of computer power to create one bitcoin just like it takes one of these shacks of ground to get a gram of gold created. They have a limited supply. I think the guy who really has Bitcoin figure out is probably our common nemesis Paul Krugman. You know, as much as you don’t like to cite him, he kind of understands what Bitcoin is. I personally don’t think deflation is bad, I think deflation is good, it’s bad if you’re a government, a business or individual loaded with debt, but I think for the normal person, to have prices fall with the benefit of technology I think it’s a good thing.
This idea that as money goes up in value and goods go down in price nobody will spend money on anything because they’re going to wait for goods to go down further, I don’t know why people don’t just look at the computer industry and realize that people know that there’s going to be a better version of any machine in 3 months, but they’re not going to starve themselves waiting for products to go down in price. People who say that evidently aren’t married. So, deflation is a good thing, again, except if you are massively in debt or you’re a government that want to buy votes and keep the masses happy with bread and circuses. You know, let’s give anarchy a chance, let’s give Bitcoin a chance.
