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The ICPI and Bitcoin as an Ideal Money Basis

Validated Individual Expert

Confessions of the Maximalist View

Adam Back, George Selgin, and Saifedean Ammous are all quoted as suggesting Nash’s proposal Ideal Money rests on using a basket of commodity prices as its basis. Here we will disambiguate the truth of this. Nash defines the ICPI in his Southern Economic Journal Article:

A possible non-political basis for a value standard which could be used for money would be a good “ICPI” statistic where this acronym refers to “industrial consumption price index”. That could be calculated from the international prices of commodities, such as copper, silver, tungsten, etc. that are used in industrial activities.

It is noteworthy to point out the basis for the proposal is stated to be ‘non-political’ in nature. This is will be relevant later in this writing.

Why Multiple Commodities for a Standard and Not (Just) Gold

The idea of using a basket of commodities and/or commodity pricing extends from the consideration and observations of using gold as a global standard for money. Whereas economists are left fighting about whether or not a gold standard is a favorable scenario for the global economy, Nash instead, inquires about the advantages and disadvantages.

The disadvantages are what lead Nash towards a direction of an ideal basis for our existing currencies:

Nowadays, however, few would propose a return to the actual use of simply the metal gold as a standard, for the following reasons.(i) The cost of mining gold effectively does depend on the technology. Recent cyanide leaching techniques have made it possible again to profitably mine gold at formerly abandoned sites in the U.S. so that it is now a big producer. However, the unpredictability of the cost is a negative factor.(ii) The location of potential gold-mining locations may not be “politically appealing.” So it would seem undesirable to make a political choice to enhance the economic importance of those particular areas.(iii) There is some negative psychology about gold such that even if it were the most logical choice after all, the unpopularity of the idea could be very obstructive.

It’s notable to consider that the location of the mines associated with the commodity or commodities chosen for a standard could cause geo-political conflict because Bitcoin mines don’t have specific geo-locations to capture.Although at this point to the reader, it might seem absurd to consider Bitcoin for this role, these disadvantages of gold, which are alleviated by the convention of an ICPI (aka a basket of commodity prices), are ALSO NOT weaknesses that would significantly affect Bitcoin if Bitcoin were to be used as the single global basis for currency stability.

Where the ICPI Fails Is Where Bitcoin Succeeds

This is where it gets important to understand the nuance that Back et al appear to have missed. Nash explains a fatal problem with the implementation of an ICPI:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI index is constructed it should not be expected to be valid, as initially defined, into all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve. Here, evidently, politicians in control of the authority behind standards COULD corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through “political corruption” might become as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.

What is also said here is that one or some of the commodities chosen for all of the central banks to target could have dramatic price fluctuations if there happened to be technological advances that affected the cost to produce the commodities.

Nash chooses the thought experiment of a miracle energy source to make his point that you would then need to re-weight the basket to adjust for this market imbalance. Re-adjusting the weighting of the ICPI composition would require political discussion and intervention which was the process was meant to replace in the first place.

Satoshi Solved the Problem Nash Posed

We also observed that a method of calculation could be employed that would use “moving averages” to achieve that the money value being defined would vary as smoothly and gradually as practicable with the passing of time.

For Bitcoin enthusiasts an alarm should be going off. We ask what happens with Bitcoin if it were used as a global basis for value standardization and a miracle energy source dramatically reduced the cost to mine it. In Satoshi’s words:

The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.~Satoshi Nakamoto

With Bitcoin if the cost to mine were significantly reduced the network would be flooded with hashpower looking to profit. However, the Difficulty Adjustment Algorithm (DAA) adjusts the cost to mine in a time/moving averaged response to such changes. The crux of the algorithm Satoshi implemented in Bitcoin, the Difficulty Adjustment Algorithm, is EXACTLY what Bitcoiners herald as the brilliance Satoshi brought to the iteration of digital money implementations. And it happens to exactly solve the problems Nash outlines with the ICPI concept.

Nash and Satoshi’s Quests to End Central Bank Pardoning

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.~excerpt from London Times used to validate Bitcoin’s Genesis Block

…there can be novelty in the details and in terms of the context and the times. Our key proposal was/is that an index that can be called an ICPI or “Industrial Consumption Price Index” could be employed as a basis for the standardization of the value of money. This proposal was for an index based on the international prices of specific goods. For example like the prices for silver or copper as recorded daily at London.~Ideal Money

Many complaints of our modern day global financial system and especially the recent quantitative easing responses to the covid pandemic are addressed by the implementation of an Ideal Money standard:

So it seems that such an ICPI index could be calculated in an essentially “scientific” fashion, after some practical initial choices were made. And this standard, as a basis for the standardization of the value of the international money unit, would remove, where it would be used, the political roles of the “grand pardoners”, the state authorities that can forgive the debts of debtors including, particularly, those of themselves. (The “national debt” of a state can, in principle, be “trivialized” by a sufficient amount of inflation.)~Ideal Money

Without any other counter-argument it might be that the circumstances of the global economy only increase the general demand for an Ideal Money standard. As for the ICPI it was only a bridge to understanding and expressing a general direction for ideal-ness not for a certain type of money or money issuer (such as Satoshi) but rather ideal-ness in regard to a basis for our existing global currencies. The ICPI concept simply helps illuminate the vector for ideal-ness:

The concept I developed of “Ideal Money” became, in my view of it, sufficiently advanced when I conceived of a practical basis for a standardization of the comparison of the value of a currency with an appropriate standard or ideal. And the key to that was the idea of an ICPI or (international) “Industrial Consumption Price Index”.

It seems possible and not unlikely, however, that if two states evolve towards having currencies or more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value.

Then the limiting or “asymptotic” result of such an evolutionary trend would be in effect “ideal money” but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.~Ideal Money

Is a Deflationary/Bitcoin Standard Ideal?

We are then only left with the question of whether or not Nash intended the basis for all major global currencies to be value stable or, for example in regard to how many perceive the implied value of Bitcoin to be, whether or not there could be a deflationary basis for our global currency systems:

…if a sort of “central bank” or “currency board” or “treasury” were issuing a form of currency related to this normative index, that the proper duty of this source of the currency would be to act so as to achieve that IN THE LONG TERM that the index of costs should be asymptotically constant (or fluctuating around a constant mean value).

Thus, for example, were the “basket” of goods forming the index composed ONLY of the single item of gold, Element 79, then the rule would be for the gold price to be, in an average sense, constant. (So this is the same as a sort of “gold standard”.) On the other hand typical standard “cost of living” commodities could be used.

My opinion now is that it is desirable that a standard for a comparatively “ideal” currency should be structured so that the form of money established would have some attractiveness for “hoarding” (so that sometimes people might hide some of it in their mattresses!).~Ideal Money

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