Bitcoins were launched with an ambitious aim. It was a technological innovation that used blockchain to produce the currency as well as monitor it collectively and anonymously.
Bitcoins were launched with an ambitious aim. It was a technological innovation that used blockchain to produce the currency as well as monitor it collectively and anonymously. The basic idea was a distrust of governments and central banks. The old libertarian preference for a currency that would not depreciate was at the heart of this. The background to the idea lay in the gold standard. In 1717, Isaac Newton, as master of the mint, fixed the pound in terms of its gold content. One way to put it was that gold was now to be bought and sold by the Bank of England at the fixed price of 3.17 shillings and 10.5 pence (£3.85875) per ounce. This price held for the next two hundred years. Any self respecting country which wanted to attract foreign capital had to link its currency to gold. Thus, the US dollar exchanged at $4.86 per £.
The advantage of the gold standard was that there was a fixed exchange rate regime for national currencies across the world. Having to keep your currency at the fixed level meant governments had to practice balanced budgets and central banks had no freedom to ‘print’ currency. Gold held at the given price till 1933. Over the two centuries price level showed no trends. There were cycles of inflation but they were reversed by deflation, bringing the level back to its previous constant. During the Napoleonic wars, the Bank of England went off gold and adopted a paper currency. Inflation followed and the paper pound depreciated against gold based currencies. After Waterloo in 1815, there was a severe deflation that brought prices back to old levels. This arrangement became the favourite of libertarians and orthodox bankers and the wealthy. This was especially the case when, during the ‘Great Depression’, president Franklin Roosevelt unilaterally lowered the value of the dollar. He did this by raising the price of gold from $18.76 to $35 per ounce. This was necessary monetary expansion for recovering from the Depression. But it also opened up the era of inflation. The libertarians were outraged.
After the war, the Bretton Woods arrangement kept the gold-dollar link by fixing exchange rates in terms of the dollar and only permitting small deviations after it had given permission.
Thus, monetary sovereignty was restricted. But the Keynesian lesson was about fiscal activism and low interest rates. Thus, in the post-war period, inflation became a regular feature. Then, in August 1971, president Nixon broke the gold-dollar link. Gold was traded freely on the market and flexible exchange rates became the new regime. The fact that gold is somewhere around $1300-1500 gives you an idea of the inflation since 1971. From $35 to $1400 is a forty-fold rise. Inflation had to be tackled by each country separately by monetary discipline or fiscal orthodoxy. The exchange rate became a signal of how well or badly a country was doing.
So it was to get away from national monetary policy and steady inflation that bitcoin thought it could replace all national currencies. Central bankers were human and tainted by the depreciation of currency. Here was a currency in strictly fixed supply, collectively produced and ‘mined’. It was guaranteed against overproduction. Since then, bitcoin, and its many competitors, have failed to displace national currencies. They are too expensive to be used as a means of payment. The transaction cost of settling your bill at the cafeteria in terms of bitcoin is exorbitant in terms of time and money to say nothing of the computing power of several computers grinding away to check on each transaction. So a bitcoin, and its rivals, have become tokens which people buy and hold for speculative purposes. These tokens (they are not currencies) have no use and possess only uncertain exchange value. People are free to buy them at their own risk.
There are moves in many countries to encourage cryptocurrency businesses to operate but with strict regulation. Small island economies such as Bermuda, Malta, Gibraltar and Mauritius have established regulatory regimes while hoping that traders will operate in their territory. Thus, from a currency liberating everyone from statist money with untrustworthy central bankers, the bitcoin family itself has become suspect to encourage money laundering and tax evasion. What it tells us is that money is not just a matter of having constant value. People want a sensible trade-off between price stability and income and employment growth.
They trust central bankers. They can be seen and heard and criticised unlike the mysterious ‘miners’ who are in charge of bitcoin production. Money is not useful just as a store of value, as there are substitutes, but also as a means of payment as it, in this, has few rivals. Where the libertarians went wrong was in making a fetish of zero inflation rather than widely shared economic growth. Bitcoin will remain as a monument to bad political economy.