Jeffrey
Tucker, in lecture called ‘Capitalism Is About Love,’ recently said that
Bitcoin “is the most exciting innovation of our time. It holds out the
possibility of replacing the national currencies which have been a menace to
civilization for six thousand years.”[1]
Is
he right? I would like to use this as a peg on which to hang a discussion of
the history of money.
The
control of currency is a source of perpetual
temptation. In the hands of princes and politicians it has been used again
and again to sacrifice the common good for their own short-term gain. Above all,
the control of currency has provided the financial foundation for war. It is
true that the mechanism was not exactly the same then and now: in the middle
ages princes profited from seignorage, the tax on the actual minting of coins;
whereas modern politicians typically profit by devaluing the government’s debt.
In both cases the princes use their control of the currency to write themselves
massive cheques, draining away the wealth of their own subjects and enabling
them to do terrible things.
If
we want politicians to stop going to war, we ought to first of all take the
currency out of their hands. This might accomplish more than all the anti-war
protests and election campaigns in the world.
Who
then do we want to control the currency?
If
we want a stable currency then we can note that the cities of Florence and
Venice, dominated by men involved in trade, kept their gold coins perfectly
stable for centuries. But as these coins were used for international trade and
were primarily valued for their precious metal content, devaluation would
defeat their purpose. These polities were specially preoccupied with the import
trade and so present a special case.
But
it is by no means certain that a stable currency is what we want. A stable
currency is not good for everyone all the time. Neither is devaluation an evil
for everyone; peasant tenants rejoiced in devaluation and protested loudly when
the currency was restored to its former strength.
The
party who controls the currency has to adapt it to the situation of the moment.
But in doing so, if he is to act for the common good and not simply his own
profit, he needs to know what is the right
value at any given time; or at least the right direction to go. How is this value
to be known? A change, or indeed stability, will benefit some and hurt others. Whose
interests are more important? How is this to be decided? And what about the
long-term consequences, which must be considered as well: what will happen after the current moment, and how is it
to be known whether the short- or the long-term is more important?
When
faced in this way the problem becomes the same as for all schemes of central
planning, whether dollar bills or bananas or babies. Even assuming the angelic
virtue of the person in charge (which is by no means to be counted on), the
epistemological problem is acute—how is the right value to be known? How many bananas make the right
amount (and at what price)? How many babies make the right amount?
The
decentralized or market alternative begins to seem attractive. Instead of some
party in charge who can alter the currency by fiat, let the currency reflect
the aggregate of many individual decisions. Call it an emergent order. The
point is not that a decentralized or emergent order will result in perfect
outcomes. The point is that it removes the moral problem of having the currency
in one party’s hands; and it banishes the epistemological absurdity of thinking
that anyone can know the right value
of the thing.
John
Munro said prices and population are twins; and there is a twin here with
population policy. Does anyone have the requisite moral character, or the
empirical knowledge, to decide on and implement a population policy? Suppose a
Malthusian alternative: do we seriously want someone granted authority to decide
whether we shall have more people or higher incomes? The wiser course seems
to be to leave it to families to make responsible decisions for themselves, and
what comes out is what we get. Of course the outcome will not be agreeable to
everyone; but the alternative is intolerable.
Similarly
with money. The history of money tells us the perils of individual authority. It
would be better left the outcome of all individual decisions, taken on ordinary
terms of responsibility, self interest, etc.
The
medievals had this advantage over us: their money was based on a commodity with
a worth independent of the prince. So the prince could reduce the precious
metal content or change the face value of a coin, but he could not control the
demand for, nor the price of, gold or silver. If a man had a pouch of gold
coins, he possessed a store of value independent of the prince. No matter what
the prince did at the mints, he could not take the value from your pouch of
gold. And likewise though the prince could devalue the currency, he could not
simply create more gold to fund whatever war he might want to afflict on the
world.
Their
disadvantage was that the availability of money as a means of exchange depended
on the stock of these precious metals; and so if the kingdom was poor of silver
then effective demand dried up, and commerce ground to a halt.
Our
paper money has solved that problem, but we are worse off in that our money is not
worth anything in itself. We are at the whim of our politicians and central
bankers. They own the printing press (figuratively speaking). If they choose to
print more, to pay for war or to buy votes or for whatever reason, they can do
it; dissipating our savings like smoke and defrauding all their creditors.
Is
there any solution? Bitcoin, or something like it, answers to both of the
problems of currency of which the history of money tells. It is not controlled
by any individual or organization. Even the creator of Bitcoin does not control
it—he wrote the software and then set it loose. There is no mainframe that can
be owned or gotten to; transactions are processed and records kept by
independent computers across the whole world, which can always be run by
anyone. More Bitcoins cannot be made, nor can they be destroyed. The value
cannot be changed at whim, but is the outcome of the aggregate of all
individual decisions ever made. And there can never be a shortage that kills
effective demand, because bitcoins can be infinitely divided: even if 99% were
hoarded and dead, the remaining 1% could be used by any number of people,
because any fraction no matter how small can be electronically processed and
recorded.
The
single requirement is the infrastructure of the internet, the processing of
digital transactions, and the keeping of digital records. That’s it.
Bitcoin
could be the perfect currency. By taking currency out of government hands, it
could rid the world of a menace which has afflicted mankind for millennia. In
light of the history of money, we seem justified in saying that Bitcoin is
indeed the most exciting innovation of our time.
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