Bitcoin is a step back not forward
The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.
Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. However, the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.
Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.
I think of the concept of privately issued tender as “right money,” because the whole idea appeals instinctively to right-wing thinkers. They dislike centralised authority of all sorts, including monetary authority. For example, Friedrich Hayek, Margaret Thatcher’s favourite economist, proposed replacing the state’s monopoly on legal tender with competing currencies offered by rival banks.
Hayek presumably would have approved of bitcoin. The currency’s issuer is an unknown computer programmer, about as far from a government as can be imagined. Right now bitcoin is tiny; at the current exaggerated exchange rate the total projected volume of “coins” is worth less than the GDP of Mongolia. Still, Hayek might well have dreamt of bitcoins becoming a global currency for wages, prices and loans. He would, though, have hoped for a more stable value, not the increase from $13 to $900 per bitcoin in less than a year.
But the right-money historical narrative is simply wrong, as anthropologist David Graeber explains in his book Debt, The First 5,000 Years. Straightforward barter played a tiny role in all pre-modern economies. Instead, what we nowadays think of as purely economic activity was inseparable from an intricate structure of social relationships and spiritual beliefs. Purely commercial activity was rare – and it almost always relied on some form of government-issued money. Barter was not the precursor to money: it has always been the inferior alternative.
So it is not surprising that barter economies only develop when governments break down. Similarly, truly private money is an inferior alternative to the money that comes with the backing of a political authority. After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can raise taxes or pass laws to unwind monetary excesses.
In short, while the freedom promised by right money may be ideologically appealing, monetary relations are too closely interwoven with other economic, political and social relations to be managed well by any institution with less sway than a government. The detailed work of money creation can be delegated to independent central banks and to a credit system of regulated private banks, but the ultimate authority of any functioning monetary system will always be the ultimate political authority.
Bitcoin exemplifies some of the problems of private money. Its value is uncertain, its legal status is unclear and it could easily become valueless if users lose faith. Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system. The authorities might be motivated by a genuine concern about the stability of a shadow monetary system or they might act out of self-preservation. Tax evasion would be too easy in a right-money parallel economy.
Hayek thought left-wing thinkers ignored the dangers of big government. He may have been right, but his idealism cannot overturn reality. All effective money is state-backed – what could be called “left money.”
Of course, the global left monetary system has suffered from appalling management in recent years. The authorities, especially in the United States, first allowed banks to act almost as if they were in a right-money world, lending and speculating wildly. That led to a typical right-money disaster – a sudden loss of trust and the failure of leading institutions. The authorities rescued the financial system, but their monetary system still cannot provide steady support to the rest of the economy.
The outcome could have been much worse. Banks are still in business and consumer inflation rates are generally low. Still, the typical current combination of low policy interest rates, large government deficits and high ratios of debt to GDP amounts to an invitation to monetary accidents.
Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity. Part is technological – this is a cool idea. And part is speculative – punters bet that bitcoin’s value will increase.
But I suspect another important factor is political: bitcoin appeals because governments are not fully living up to the responsibility that comes with state-sponsored money. Bitcoin, or something like it, will thrive until the authorities do better.