Stability Property

Value is subjective and therefore price stability is an economic fiction. The exchange price of a money is is determined by its supply and demand which is in turn affected by the demand schedules of all people for all products. The stability of a money is not a tendency toward constant prices in all other things, it is a damping relationship between demand for the money and its supply.

We can organize monies into three supply categories:

• Rational supply (commodity)
• Arbitrary supply (fiat)
• Fixed supply (bitcoin)

In any money, destruction of units decreases supply and therefore increases the value of those that remain. Given that there is no financial incentive for loss it does not impact stability.

Commodity money supply increases due to the financial incentive to produce more when price is expected to be at or above production cost (inclusive of capital cost). This relationship between price and supply is predictable despite price (and therefore supply) not being so. Because price is not predictable this monetary inflation cannot be capitalized. Therefore all holders of the money suffer a reduction in value from the increased supply. Competition ensures that this production, financed by existing holders, is limited to capital cost (interest). The feedback of value decrease resulting from supply increase reduces production incentive, creating stability.

Fiat money supply is increased arbitrarily (or taxed as demurrage) by the sovereign due to the financial reward of seigniorage. When this monetary inflation is predictable it can be capitalized, which discounts the return on seigniorage. As such changes to supply are often not published. Due to state monopoly protection (i.e. production is the crime of counterfeit), competition cannot effectively limit returns. The resulting sovereign profit (tax) is the reward of seigniorage and the reason for fiat. Monopoly protection is the sole economic distinction between commodity and fiat money. The supply increase caused by seigniorage is mitigated only by political unrest as people resist the consequential value decrease. This unrest initially manifests as capital flight, which is countered by foreign exchange controls.

Bitcoin supply is independent of price. Given that subsidy is predictable it is capitalized and has no affect on price over time. Its purpose is to rationally distribute units and so is eventually phased out. As fees necessarily rise with demand the utility threshold eliminates demand for transaction of value below the threshold. More generally, the fee level rises to the point where monetary substitutes are more cost-effective for a given value transaction. Stability therefore results from limiting demand directly, in contrast to relying on an increase in supply to do so. Stability implies that price is bounded, yet it can rise with increased effective transaction carrying capacity of the coin, and with increased utility relative to substitutes.