By Douglas French
Laissez Faire Today
Tuesday, November 13, 2012
http://lfb.org/today/currencies-of-the-future/
Many people complain about government control of currency, but only a
few do something about it. I’m not talking about movements to “audit
the Fed” and such. I’m talking about real innovation that makes an end
run around the government’s iron grip on the monetary system.
A few of us old folks might like to return to the days of slapping a
silver dollar on the bar for a shot of whiskey, but the younger
techno-savvy generation sees paying for their Negroni cocktail with
virtual currency from their hand-held device. To serve this market, a
new world of virtual currencies has popped up spontaneously.
In a debate, Mitt Romney said, “You couldn’t have people opening up banks in their garage and making loans.”
Really? Some people are thinking precisely along these lines and even going further to create new units of accounting.
You might think these people are crazy. After all, to be a proper money,
a currency must have a nonmonetary value, a high value per unit weight,
a fairly stable supply and be divisible, durable, recognizable, and
homogeneous. Gold and silver fit the bill perfectly. But does that mean
something else (or a variety of things) can’t?
Money develops from being the most marketable good that in turn is
used for indirect trade. Historically, that has been gold and silver.
However, governments have worked very hard to demonetize gold and silver
with taxes on precious metals and legal tender laws. And while a few
people swear by storing their wealth in gold and silver, in relation to
all other financial assets, the percentage of portfolios invested in
precious metals is only 1%.
The idea that government is going to re-shackle its currency to gold
anytime soon, when the only way federal governments are staying in
business is with an unfettered printing press, is naive. Governments
always have driven and will keep driving the value of their currencies
to the value of the paper. It may take decades, it may take centuries,
but it will happen eventually.
The answer to the currency question may not be to reform government
in a way that it can’t reasonably be reformed, but to turn loose
entrepreneurial genius to solve the problem and create a quality
product. There are plenty of government roadblocks, but every new
innovation encounters government resistance. Entrepreneurs persevere.
However, this is a particularly risky area. There are currency
entrepreneurs sitting in jail for competing with the government.
In 2009, Japanese programmer “Satoshi Nakamoto” (not his real name)
was designing and implementing Bitcoin. It’s not for the faint of heart.
It’s proven to be highly volatile. But it’s also proven to be very
useful in a digital age.
Some people in the free-market community don’t know what to think of
Bitcoin and have dismissed it. They say no currency can exist that
doesn’t have a prior root in physical commodity.
That is because, as Robert Murphy summarized Ludwig von Mises: “We
can trace the purchasing power of money back through time until we reach
the point at which people first emerged from a state of barter. And at
that point, the purchasing power of the money commodity can be explained
in just the same way that the exchange value of any commodity is
explained.”
The naysayers contend Bitcoins never had a nonmonetary commodity
value. The case for it is then dismissed without thought or argument.
However, Mises built his “regression theorem” on the work of Carl
Menger, the father of Austrian economics and subjective value.
In Menger’s view, economizing individuals constantly look to make
their lives better through trade. These individuals trade less tradable
goods for more tradeable goods. What makes goods more tradeable, Menger
emphasizes, is custom in a particular locale.
“But the actual performance of exchange operations of this kind
presupposes a knowledge of their interest on the part of economizing
individuals,” Menger writes. But Menger goes on to explain that not all
individuals gain this knowledge all at once. A small number of people
recognize the marketability of certain goods before most others.
These might be considered currency entrepreneurs. They anticipate
consumer needs and demands, and as is the case with any other good or
service, these entrepreneurs recognized more salable goods before the
majority of people.
"Since there is no better way in which men can become
enlightened about their economic interests than by observation of the
economic success of those who employ the correct means of achieving
their ends, it is evident that nothing favored the rise of money so much
as the long-practiced and economically profitable acceptance of
eminently saleable commodities in exchange for all others by the most
discerning and most capable economizing individuals."
For example, cattle were, at one time, the most saleable commodity
and were thus considered money. Although cattle money sounds unwieldy,
the Greeks and the Arabs were both on the cattle standard. This currency
had four legs that could move itself, and grass was everywhere, so
feeding it was inexpensive.
But then the division of labor led to the formation of cities, and
the practicality of cattle money was over. Cattle were no longer
marketable enough to be money. Cattle still had value, but, “They ceased
to be the most saleable of commodities, the economic form of money, and
finally ceased to be money at all,” Menger explains.
Then began the use of metals as money: Copper, brass and iron, and then silver and gold.
But Menger was quick to point out that various goods served as money in different locales.
"Thus money presents itself to us, in its special locally
and temporally different forms, not as the result of an agreement,
legislative compulsion, or mere chance, but as the natural product of
differences in the economic situation of different peoples at the same
time, or of the same people in different periods of their history."
So while people contend that money must be this or must be that, or
come from here, or evolve from there, Menger, the father of the Austrian
school, seems to leave it up to the market. When a money becomes
uneconomic to use, it loses its marketability and ceases to be money.
Other marketable goods emerge as money. It’s happened throughout history
and likely will continue, despite government wanting to freeze the
world in place to its liking.
Which brings us back to Bitcoin, what the European Central Bank (ECB) calls in its
latest report “the most successful — and probably most controversial — virtual currency scheme to date.”
Ironically, while some economists are pooh-poohing Bitcoin, the ECB
devotes some of their lengthy report to the idea that the Austrian
school of economics provides the theoretical roots for the virtual
currency. The business cycle theory of Mises, Hayek and Bohm-Bawerk is
explained in the report and Hayek’s
Denationalisation of Money is mentioned.
The report writers indicate that Bitcoin supporters see the virtual
currency as a starting point for ending central bank money monopolies.
Like Austrians, they criticize the fractional-reserve banking system and
see the scheme as inspired by the classic gold standard.
Bitcoins are already used on a global basis. They can be traded for
all sorts of products, both material and virtual. Bitcoins are divisible
to eight decimal places and thus can be used for any size or type of
transaction.
Bitcoins are not pegged to any government currency and there is no
central clearinghouse or monetary authority. Its exchange rate is
determined by supply and demand through the several exchange platforms
that operate in real time. Bitcoin is based on a decentralized
peer-to-peer network. There are no financial institutions involved.
Bitcoin’s users take care of these tasks themselves.
Additional Bitcoin supply can only be created by “miners” solving
specific mathematical problems. There are somewhere around 10 million
Bitcoins currently in existence, and more will be released until a total
of 21 million have been created by the year 2140. According to
Bitcoin’s creator (whomever he or she is), mining on Bitcoin provides
incentives to be honest:
"If a greedy attacker is able to assemble more CPU power
than all the honest nodes, he would have to choose between using it to
defraud people by stealing back his payments, or by using it to generate
new coins. He ought to find it more profitable to play by the rules,
such rules that favour him with more new coins than everyone else
combined, than to undermine the system and the validity of his own
wealth".
The ECB’s report explains that Bitcoin supply is designed to grow in a
predictable fashion. “The algorithms to be solved (i.e., the new blocks
to be discovered) in order to receive newly created Bitcoins become
more and more complex (more computing resources are needed).”
This steady supply increase is to avoid inflation (decrease in the
value of Bitcoins) and business cycles caused when monetary authorities
rapidly expand money supplies.
Bitcoin has become the currency of the online black market. For
instance, The Silk Road (the Amazon of the illegal drug trade that can
only be accessed through private networks using the IP scrambling
service called Tor) only accepts payments in Bitcoin. However, as the
ECB report points out, there are only about 10,000 Bitcoin users, and
the market is illiquid and immature.
So why does the ECB give a damn about Bitcoin and other virtual
currencies? The central bankers are worried that they are not regulated
or closely supervised, that they could represent a challenge for public
authorities and that they could have a negative impact on the reputation
of central banks.
At the same time, the report makes the point that “these schemes can
have positive aspects in terms of financial innovation and the provision
of additional payment alternatives for consumers.”
The report says big players in the financial services arena are
purchasing companies in the virtual payments space. VISA acquired
PlaySpan Inc., a company with a payment platform that handles
transactions for digital goods.
American Express (Amex) purchased Sometrics, a company “that helps
video game makers establish virtual currencies and… plans to build a
virtual currency platform in other industries, taking advantage of its
merchant relationships.”
This would dovetail with American Express’ entry into the prepaid
credit card business. Banking industry insiders are upset with Amex and
Wal-Mart, that also is offering prepaid cards, because these prepaid
accounts would amount to uninsured deposits, according to Andrew Kahr,
who wrote a scathing piece on the issue for American Banker.
Kahr rips into the idea with this analogy:
"To provide even lower ‘discount prices,’ should Wal-Mart
rent decaying buildings that don’t satisfy local fire laws and building
codes — and offer still better deals to consumers? And why should
Walmart have to honor the national minimum wage law, any more than Amex
honors state banking statutes? With Bluebird, Amex can already violate
both the Bank Holding Company Act and many state banking statues."
Kahr is implying that regulated fractionalized banking is safe and
sound, while prepaid cards provided by huge companies like Amex and
Wal-Mart is a shady scheme set up to rip off consumers. The fact is, in
the case of IndyMac, panicked customers forced regulators to close the
S&L by withdrawing only 7% of the huge S&L’s deposits. It was
about the same for WaMu and Wachovia when regulators engineered sales of
those banks being run on. Bitcoin supporters, unlike the general
public, are well aware of fractionalized banking’s fragility.
Maybe what the banking industry is really afraid of is the Amexes and
Wal-Marts of the world creating their own currencies and banking
systems. Wal-Mart has tried to get approval to open a bank for years,
and bankers have successfully stopped the retail giant for competing
with them.
However, prepaid credit cards might be just the first step toward
Wal-Mart issuing their own currency — Marts — that might initially be
used only for purchases in Wal-Mart stores. But over time, it’s not hard
to imagine Marts being traded all over town and easily converted to
dollars, pesos, Yuan, or other currencies traded where Wal-Mart has
stores.
Governments are destroying their currencies, and businesses know it.
Entrepreneurs won’t just stand by and theorize. They’re doing something.
They recognize a market opportunity. The banking industry realizes it.
As Mr. Kahr concluded his article that calls for an end to all uninsured
deposits: “Otherwise, we might have an unregulated Facebook or Google
of payments, even PayPal, quickly becoming both highly vulnerable and
TBTF. (It could actually be run by someone wearing a hoodie, without tie
or even white shirt!)”
Here at LFB, we don’t know what tomorrow’s money will be. Digits and
computer algorithms? Silver and gold coins engraved with someone wearing
a hoodie, perhaps? What we know for sure is that we’re rooting for
enterprising entrepreneurs to give the government a run for their money
in the money business. Watch this space.
Douglas E. French is senior editor of the Laissez Faire Club and former president of the Mises Institute. Reprinted with permission.
For further reading/viewing:
"Jeffrey Tucker on the future of private money" (video),
Goldmoney, November 12, 2012
