I am intrigued by the Bitcoin experiment – the attempt to launch a virtual currency as an alternative to the current global patchwork of local state fiat monies. Bitcoin has recently been hotly debated in the online community and among libertarians, and has now aroused the interest of the mainstream media and the political establishment. Bitcoin’s challenges seem to be mainly operational – related to computer and internet security and cryptography, which is of paramount importance to the Bitcoin project. These are areas in which I am no expert by any stretch of the imagination. But many of Bitcoin’s monetary properties strike me indeed as highly interesting and commendable, and I am somewhat surprised by the indifference or even hostility Bitcoin has encountered from many free-market ‘Austrians’.
I cannot presently see it challenge gold, and after some recent setbacks – again, mainly of an operational nature – I am not even sure it will survive, but in terms of pure monetary economics it has considerable advantages over state fiat money, many characteristics of gold – and potentially even some unique advantages. The concepts and ideas behind Bitcoin cannot easily be dismissed.
Before I try and evaluate Bitcoin, let’s put this story into the broader context. Please bear with me for a moment as all of the following does indeed relate to the Bitcoin project.
The decline of state paper money
We are presently living in the twilight of the fiat money era. The twentieth century was the century of statism, of big state ideologies, such as communism, socialism, fascism, and, since the end of World War 2 and certainly since the fall of communism in 1989, of global social democracy — the combination of nominal capitalism (nominally private ownership of the means of production and moderately free trade) combined with a highly interventionist state apparatus legitimized by the concept of majority rule.
All the big state ideologies of the first half of the twentieth century (and I include here the ‘fascism lite’ of 1930s New Deal America) were hostile to gold. If the state was to create a better world and fulfil the historic mission of the class, the race, or the nation, its activities couldn’t be restricted with the straitjacket of a gold standard. The Bolsheviks confiscated all gold after the revolution, so did Roosevelt during the depression in 1933. Maybe nothing signifies the end of the classical liberal era of the nineteenth century more than the demonetization of gold, and the Nazi economist Werner Daitz was not just speaking for his fascist masters but reflected widespread ideology when he declared:
“In future, gold will play no role as a basis for the European currencies, because a currency does not depend on what it is covered by, but rather it is dependent on the value which is given it by the state, or in this case by the economic order which is controlled by the state.”
The modern social democratic state has largely maintained the concept of complete state control over money via its territorial monopoly on paper money creation. Historically, state paper money was introduced – openly and unashamedly – as a tool to fund the state, predominantly for the purpose of warfare. Of course, the modern client state has to argue somewhat differently. Conveniently, modern macroeconomics has, in the twentieth century, come up with a number of ultimately dubious theories for how the national economy – obviously a political fiction – can be made to perform better through the clever manipulation of the national money supply and the administrative setting of national interest rates by the central bank, in which the national monopoly power of money creation is vested. Bizarrely, in the latter part of the twentieth century, even self-styled “free market” economists have found ways to make peace with the concept of state money (Milton Friedman).
This system is not only suboptimal it is in fact unsustainable – even if those who are in charge of the fiat money franchise do exactly as they say they would. The system’s Achilles heel is the very elasticity of the money supply that today’s mainstream doesn’t tire of touting as its main advantage: “No dreadful deflation and we can always ‘stimulate’ the economy!”
The fallout from decades of ongoing and essentially unconstrained paper money production is now accumulating all around us – unsustainable debt levels, overleveraged and weak banks, and distorted asset prices globally. The crisis is at the moment still unfolding in slow motion, although I reckon things are about to accelerate soon.
Continue reading at Paper Money Collapse.