Advertisement Continue reading the main story 
 
 This is a tale of three money pits. It’s also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress. 
 
 
 
 
 
 
 
 
 
 The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea, one of the world’s top producers. The mine has a terrible reputation for both human rights abuses (rapes, beatings and killings by security personnel) and environmental damage (vast quantities of potentially toxic tailings dumped into a nearby river). But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must. 
 
 The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because ... well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers. 
 
 Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use. 
 
 The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal. So Keynes whimsically suggested an alternative: have the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. It would be better, he agreed, to have the government build roads, ports and other useful things — but even perfectly useless spending would give the economy a much-needed boost. 
 
 Clever stuff — but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York, where hundreds of thousands of gold bars sit, doing nothing in particular. 
 
 Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations. Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold. (Keynes dubbed the gold standard a “barbarous relic.”) Bitcoin just adds to the joke. Gold, after all, has at least some real uses, e.g., to fill cavities; but now we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits. 
 
 Advertisement Continue reading the main story 
 
 Advertisement Continue reading the main story 
 
 I suspect, however, that Adam Smith would have been dismayed. 
 
 Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold. 
 
 So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold and, even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits? 
 
 Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal. 
 
 Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future. 
 
 But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century. ||||| 
 
 Paul Krugman (Scott Eells/Bloomberg) 
 
 Paul Krugman doesn't like Bitcoin. He's taken several swipes at the technology on his blog over the last couple of years. And yesterday he devoted a full column to denigrating the cryptocurrency. He argues that Bitcoin mining, the process where new bitcoins are created by repetitive mathematical calculations, is socially wasteful. And, he argues, that's reflective of the pointlessness of Bitcoin more generally. 
 
 There's just one problem: Mining isn't just a process by which new bitcoins are created. Those newly created bitcoins are a clever mechanism for rewarding miners for participating in the mining process. The point of the mining process is to process Bitcoin transactions. Without it, the Bitcoin network wouldn't function at all. By neglecting to mention this fact, Krugman misleads readers more than he informs them. 
 
 Unfortunately, that's par for the course in public discussions of Bitcoin. Bitcoin has a dual character as a currency and a payment network. The latter is what makes Bitcoin useful and potentially important. Yet the former is what has gotten all the media attention. 
 
 That's partly because gyrations in Bitcoin's value has generated most of the press. It's easy to report that the value of the currency has risen by a factor of 10 in a matter of weeks. It's much harder to explain how the payment network works and why it might be useful. 
 
 But Bitcoin advocates themselves also deserve much of the blame for the press's myopic focus on Bitcoin's character as a currency. Bitcoin fans overlap heavily with critics of the Federal Reserve who favor tighter monetary policy. They love the fact that the supply of bitcoins are permanently capped at 21 million, and they've touted it as an alternative to the inflationary policies of central banks. 
 
 Naturally, that has caused people with more conventional monetary policy views to approach the technology with skepticism. They've argued that replacing the dollar with Bitcoin as a national currency could easily lead to a Great Depression or worse. 
 
 The skeptics are probably right about that. But the smart case for Bitcoin isn't as a replacement for the dollar. Rather, Bitcoin is best seen as an alternative, or complement, to conventional payment networks like Visa, PayPal and Western Union. 
 
 Leading Bitcoin payment processors such as BitPay and Coinbase already give merchants the ability to price their goods in conventional currency. The dollar or euro price is automatically converted to the corresponding number of bitcoins (or fractions of a bitcoin) at the time of purchase. That makes Bitcoin's price fluctuations almost irrelevant for the thousands of merchants who now accept payment in Bitcoin. 
 
 Will the Bitcoin payment network carve out a significant niche for itself alongside today's mainstream payment technologies? That's a hard question to answer. Bitcoin is a technological platform with sophisticated capabilities not available on older payment networks, so it could prove to be a big deal. But the Bitcoin community will need to overcome a number of technical and regulatory obstacles to make paying with Bitcoin convenient for ordinary consumers. 
 
 But Bitcoin's long-term prospects have almost nothing to do with Bitcoin's unorthodox monetary policy. And the technical and regulatory issues that will determine whether Bitcoin succeeds or fails has received very little attention in mainstream coverage of the currency. In the mainstream imagination, Bitcoin is either the second coming of the gold standard or a repeat of the Dutch tulip craze. That debate obscures everything that makes Bitcoin interesting and potentially important.
– Economist John Maynard Keynes called gold the "barbarous relic"—and it has a lot in common with Bitcoin, writes Paul Krugman in the New York Times. Right now, both are being collected at high cost. In Papua New Guinea, the Porgera open-pit gold mine is a leading producer worldwide, but it's also a center for terrible abuses, both of human rights and the environment. It keeps functioning because of gold's soaring value—even though the printing press has long meant "unlimited amounts of cash could be created at essentially no cost." After the toil of getting it, gold sits in vaults "doing nothing." Meanwhile, there's the Bitcoin mine in Reykjanesbaer, Iceland, which is expending energy "to create virtual objects with no clear use," Krugman writes. "Gold, after all, has at least some real uses ... but now we’re burning up resources to create 'virtual gold' that consists of nothing but strings of digits." Why the effort for gold and Bitcoin? For one thing, there's the unfounded fear of the debasement of government-backed currency. And with Bitcoin, there's "the sense that it’s high-tech and algorithmic, so it must be the wave of the future." But really, we just miss "the days when money meant stuff you could jingle in your purse": We're "digging our way back to the 17th century." Click for Krugman's full column. Or over at the Washington Post, Timothy B. Lee says Krugman just doesn't get a key element of Bitcoin.