Thursday, May 28, 2009

The Importance of Digital Currencies in the 21st Century

From The Gold Economy Magazine
Friday, July 13, 2001

Are Digital Currencies merely toys for “techies” and gold-buffs, or do they represent a deeper change in the currents of history? It is my belief that digital currencies will change the face of global politics and economics for centuries to come.

Over the course of history there have been technological developments at certain junctures that changed the balance of power in the interaction between states, people and their religious institutions.

From approximately 800 AD until 1,250 AD the feudal era in Europe was characterized by microstates bound to the Church and to each other by oaths of fealty and by marriage. In war, the advantage was to the defender, with castle walls to hold out invaders, and suits of armor being something that only the rich could afford. This prevented massive scale invasions and accumulations of new territories by conquest. It simply took too long to successfully capture your neighbor’s territory, and cost too much to amass huge armies of knights on horseback. This, combined with the lack of money, prevented kings from being able to maintain standing armies.

Land was the currency, hence kings hired their armies with land and oaths of fealty. This decentralization and weakness of the State allowed the Roman Catholic Church to become extremely powerful. The State bureaucracies that we see today were mirrored by Church bureaucracies in the 1,400’s.

Three technological advances contributed to the decline of Feudal Era and the rise of the Nation State. Gutenberg invented the printing press which had the most far reaching consquences of any invention in the past thousand years; the longbow was developed which was powerful enough to penetrate a knight's armor; and gunpowder brought the advent of artillery, ending the defensive advantage of the castle.

The invention of the printing press brought the price of publishing information down so much that it effectively destroyed the Roman Catholic Church’s monopoly on religious and philosophical teaching. This resulted in the Protestant Reformation that laid the ethical and philosophical foundations for a new social order and mercantilism that changed the face of Europe and then the world.

Gunpowder changed the balance of power between States.

Previously the advantage was to the defender. Empires were built by intrigue, treaties, oaths and strategic marriages. Yet gunpowder allowed cannons to destroy castle walls. The longbow brought about the extinction of the kight as a military unit. The new weapons could be mass-produced at a fraction of the cost of suits of armor and warhorses, allowing an ambitious ruler to arm the peasantry and invade his neighbors. More territory gave him a larger tax base, which allowed him to build an even larger army, and invade yet more of his weak neighbors. Thus began the 500 yearlong rise of the nation state.

Economies of scale required that the state grow in size and strength in order to defend itself from other states that were attempting to grow. This contributed to an inevitable arms race as nations conglomerated either voluntarily or by force of invasion. The final century of the nation-state witnessed two world wars and the development of weapons of mass destruction. The twentieth century was the bloodiest in history. In 1989 the five largest nations or alliances of the world contained over half of the earth’s population and two thirds of its land mass (Russia, Canada, The United States, The United Kingdom, and China).

Yet, at the beginning of the 21st century, there are new technological developments that promise to change the Industrial World just as dramatically as gunpowder, longbows and the printing press changed the world of Feudalism.

The Internet

The Internet has been the subject of unbelievable hype over the past decade. The dotcom’s came and went as a stock market phenomenon and many of the promises turned out to be pipe dreams. But the Internet has brought about underlying changes to society that are here to stay.
The combination of the microcomputer with global telecommunications networks has fundamentally altered the economy of scale that existed in the Industrial Era.

As Moore’s Law continues to produce the doubling of processing power every eighteen months, the microprocessor is putting power in the hands of individuals and small organizations with a decentralizing effect that has forced corporations to downsize, and soon nation states as well.

The industrial era gave us “one size fits all” mass production and mass media. The Internet brings us customization and niche markets. I write this article on a Gateway Computer that was custom-ordered through a web site and delivered by UPS to my home. This is the new era of micromarkets and microbreweries. Rather than building empires on mass production, there are now millions of niches waiting to be carved out by enterprising small entrepreneurs.

In the same way that microcomputers have allowed individuals and small businesses to successfully compete against mega-corporations for niche markets, this new development is now allowing microstates to compete against the empire states for customers (citizens) and their money.

The advent of financial cryptography combined with the Internet now makes it possible to move money and assets around the globe using a laptop computer or a cellular phone.

Not only can money and assets be moved, but cryptography enables these transactions to be shrouded in a veil of privacy from snooping government eyes.

Small jurisdictions such as Andorra, Liechtenstein, Belize, and Panama are now able to compete for the capital flows that had previously been domiciled in the G7 nations. Tax competition is forcing the large nation states to curb their appetites for unlimited tax money. This is why the OECD (a cartel of populous, wealthy, socialist countries) is so intent on controlling “global tax competition” by threatening small countries with blacklisting and other sanctions. To quote the OECD’s paper on the subject of “tax distortions” the reason it is so terrible for microstates to offer low or zero-tax domiciles to international business is that producers and wealthy individuals of socialist countries will move their business offshore to escape high taxation, which will "take away the source of funding for welfare programs." This outcome is, of course, unthinkable.

The members of the OECD are trying to keep their wage slaves from escaping the big government plantation. Unfortunately for the OECD, the new state of affairs was produced by fundamental changes in technology and markets. The only way to reverse it is to eliminate the Internet itself.

Attempts to browbeat microstates into raising their tax rates, or to regulate international capital flows, will only accelerate the process and create an international “black market”. The world is a different place now. OECD bureaucrats may think “there’s no place like home” but there are no magical ruby slippers that will turn back the clock and take us back to Kansas. We’re in Oz now, and the Welfare State is definitively obsolete. The patient has terminal cancer but hasn't given up the ghost yet.

Weapons of Mass Destruction

History sometimes “repeats” itself, or at least, parallels itself. Just as the invention of the printing press was accompanied by the proliferation of gunpowder, the new info-revolution is being accompanied by the proliferation of weapons of mass destruction. However, unlike gunpowder, which allowed the nation-state to grow to giant proportions, these new weapons will do the opposite. They will raise the cost of being "big" and reward those who are small, decentralized, and polite to their neighbors and enemies alike.

It took Nation States to concentrate the resources to develop the Atom Bomb. However, now that the Internet and the microprocessor have made it extremely cheap to publish and procure information and materials, it is becoming easier for anyone to produce nuclear, biological, and chemical weapons. In fact, it is so inexpensive, that most wealthy individuals could afford to purchase a few for their own private arsenals. A determined individual could put together a biology lab and create enough botulinum toxin to kill everyone in New York City for under $100,000.

The implications of this are only beginning to be worked out, but some can already be seen in the news. Who is considered to be the greatest threat to the United States of America: Russia or China? The answer is... neither. Public Enemy #1 is an individual man: Osama Bin Laden and his followers. Why? Because he possesses nuclear, biological, and chemical weapons and the will to use them against “The Great Satan.” Likewise, Russia is still smarting from the sting of the Chechnian separatists who took credit for bombings in Moscow and the sinking of The Kursk. China has cracked down on the Falun Gong, but has failed to eliminate the sect. Japan was shocked by the Sarin gas attack in the Tokyo subway system. It is only a matter of time until one of these nations experiences the first terrorist-deployed nuclear weapon against a major city. (This article was first published in “The Gold Economy Magazine” on July 13th, 2001, two months prior to the tragic World Trade Center & Pentagon Attacks.)

Weapons of mass destruction fundamentally alter the balance of power between nation states, because they are extremely potent against large, centralized targets; but they are worthless against a decentralized individual or cell group. What city would the US nuke to get rid of Bin Laden’s network? Even if you killed him, his network would take revenge. This fact was demonstrated by President Clinton’s fruitless Tomahawk Missile attack on terrorist base-camps in Afghanistan in response to the bombings of U.S. Embassies in Africa. It is doubtful that the missiles killed any key personnel, and there is no doubt that the cost to the United States of expending the missiles was hundreds or thousands of times more than the cost of the damage done to Mr. Bin Laden. However, President Clinton DID give his enemies more fuel for their hatred and determination to use weapons of mass destruction against the United States by launching a missile attack into the sovereign territory of a country with which the USA was not at war. Two years later it has been verified that Bin Laden now has nuclear weapons in his arsenal.

What this means is that a tiny country can now theoretically defend itself against a monster like China with the last resort use of biological weapons.

The balance of power has also changed with conventional weapons. The microprocessor has allowed the development of smart shoulder-launched missiles that can destroy aircraft (Stinger Missile) and armor (Copperhead Missile). The Mujahadeen in Afghanistan successfully repelled the Soviet invaders in the 1980’s with the help of US-supplied Stinger Missiles. The new Copperhead anti-armor missile can be carried and deployed by a single infantryman, yet it is effective against even M1 Abrams tanks, and only cost $10,000 per unit. This means that for the cost of one tank, a nation can purchase approximately 100 Copperheads. Armor and aircraft are the primary weapons of invasion, whilst light infantry is the premier weapon of defense. Economically, the military advantage has swung back to the defender because microprocessors have now made it two orders of magnitude cheaper to defend than to attack. Meanwhile the cost of producing offensive weapons continues to soar into the stratosphere.

The low cost and easy availability of weapons of mass destruction now allow cell groups or dissidents to take revenge upon large centralized governments or corporations. The United States has spent the past decade making enemies by gallivanting around as the world’s policeman, prosecutor, and judge. The new balance of power will punish arrogant bullies with terrorist attacks on the home front. Over several centuries, this logic will necessarily produce nations that are small, decentralized, and polite to their enemies, whether they are of the ideological or national variety.


If the mantra of the Industrial Era was “bigger is better”, the defining motif of the new age might be “move away from the center”. As the mega-states degenerate into microstates the proliferation of national jurisdictions will create a need for private digital currencies.

International trade requires money to lubricate the gears of market transactions. The Internet now makes it possible for private companies or individuals to offer asset-backed digital currencies from small friendly countries that desire to attract capital. These digital currencies transcend political borders and will facilitate a new era of international mercantilism while simultaneously freeing businessmen from the tyranny of national fiat currencies and the draconian controls that go along with them.

As Bob Hettinga has pointed out, digital bearer instruments are three orders of magnitude cheaper to use than book entry money. So again, digital currencies, once they come to full maturity, will take the world by virtue of the fact that they are the most secure, the most efficient, and the most inexpensive way to complete business transactions.

While the transition to this new world has been and will continue to be turbulent, the end result of these new technologies will probably be a world that is safer, more peaceful, and more prosperous than the previous century.

For further reading:
"The International Gold Community Digital Currencies", The Gold Economy Magazine, July 13, 2001
"Why Use Digital Currencies?", The Gold Economy Magazine, July 13, 2001
"Honest Money through bearer shares, a proposal", Paul Birch, October 20, 2000

No comments:

Post a Comment