Fortress of Trust

April 17, 2022

by Stephen Stofka

Adherents of the Bitcoin digital technology tout it as both a payment system and a store of value, two of the three functions of a form of money. In September 2021 El Salvador adopted Bitcoin as an official currency as a measure to reduce dependence on the dollar. After six months, customers and vendors, even those devoted hawkers of wares on Bitcoin Beach, have been disappointed in the results (Brigida & Schwartz, 2022). Gadi Schwartz, a reporter for NBC News (Video, 2022) related that few vendors take bitcoin anymore because it was not reliable. He and his film crew found a restaurant that did accept Bitcoin. They paid with Bitcoin but the transaction did not go through and, after ten minutes, they paid cash. Later they learned that the Bitcoin account had been deducted on their end but not at the restaurant’s end.

Bitcoin advocates point to recent inflation numbers as they make their case for a digital currency and against a fiat currency. Like gold, bitcoin does not grow enough to meet the growing needs of population and production technology. In the 18th century Adam Smith first noted the lack of gold available for the amount of economic activity in the American colonies. The use of gold as the dominant currency led to a number of crises and panics during America’s Gilded Age in the late 19th century.

Under a fiat currency regime, money can grow as needed. Price stability and prudent management of money and interest rates becomes the prime duty of a government and its central bank. To that end, the Fed sets a target of 2% annual inflation, which is the error term in calculating the change in prices and the comparison of utility we get from goods and services over time. We have all noticed the dramatic rise in prices at the grocery store and gas station but the 10 year average of annual inflation is right at the Fed’s target of 2% (FRED Series PCEPI). For years following the financial crisis in 2008, we became comfortable with disinflation, the slowing down of any price appreciation. Getting back to average inflation should not be so abrupt but the extraordinary slump in global production during the pandemic was abrupt.

Bitcoin boosters argue that a digital currency regime would curtail the government borrowing that fuels inflation, the borrowing that funds continual wars. That borrowing also funded the stimulus relief during the pandemic and kept millions safe in their homes and not hungry on the streets. The flexibility of fiat currencies can be good and bad. Currencies can be classified by time – the past and the future – and their flexibility in time. Gold and bitcoin are based on past effort and are proof of the work required to mine the currency, but both are inconvenient to use as such. The inhabitants on the island of Yap in the South Pacific mined limestone into round discs taller than a person. That proof-of-work, a highly immobile stone, became the island’s money. At the end of this post, check out the photo at the end of this Planet Money article (Goldstein & Kestenbaum, 2010).

From the earliest use of gold, people deposited their gold with a goldsmith who gave them a receipt for the gold. People then traded the receipts, not the gold (Cecchetti & Schoenholtz, 2021, 272). The gold was based on past effort but the receipts were based on the future – a promise by the goldsmith to redeem the receipt for gold. A fiat currency like the U.S. dollar is a receipt based on a promise as well. Few of us realize that the dollar in our pockets is a loan to the Federal Reserve as it appears on the Fed’s balance sheet. Want your loan paid back? Go to any bank, give them your dollar and they will give you a replacement dollar. The words on the back of a dollar bill may say In God We Trust but the dollar bill itself is a token of trust in the stability of the U.S. as a country.

As the NBC News crew learned in El Salvador, bitcoin may be proof-of-work in concept but it is not proof-of-trust in practice. The U.S. Fed stores the largest hoard of gold in the world. Like the large stones on the island of Yap, that accumulation of wealth is proof-of-work, proof-of-stability, and proof-of-trust. The proof-of-work is of the past. The proof-of-stability is the bridge from past to future. The proof-of-trust is a faith in the future.


Photo by Donald Giannatti on Unsplash

Brigida, A.-C., & Schwartz, L. (2022, March 15). Six months in, El Salvador’s Bitcoin Gamble is crumbling. Rest of World. Retrieved April 16, 2022, from

Cecchetti, S. G., & Schoenholtz, K. L. (2021). Money, banking, and Financial Markets. McGraw-Hill.

Goldstein, J., & Kestenbaum, D. (2010, December 10). The island of Stone Money. NPR. Retrieved April 16, 2022, from

NBC News. (2022, April 13). El Salvador adopted Bitcoin as a national currency. here’s how it’s going. Retrieved April 16, 2022, from

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