Bitcoin is a step back not forward

November 27, 2013

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.


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Nice Article. I agree, Debt: The First 5000 Years, gives a great argument against Adam Smith’s fairy tale premise of barter preceding money.

Posted by HyperReal | Report as abusive

You’re only saying that because you don’t have any bitcoins :)

Posted by darkedge | Report as abusive

It’s too late, dear friend. Hayek’s dream is coming to life. There is no stopping it at this point. There is just too much dang incentive for all parties involved and too much distrust of the nation behind the world’s reserve currency.

The work to be done now: governments needs to prepare their people for a major collapse of the fiat currencies, across the board.

Whether we like it or not, the Keynesian experiment is over and we are in Hayek’s hands.

The markets have broken the chains and shall soon be free.

Posted by Geewhizzzz | Report as abusive

The system works by many people agreeing to use the software. You are comparing this to private money systems where some central entity issues the currency.

While there are many politically drives issues behind Bitcoin many of the people developing companies see it as a fix for a broken payment system, not the pursuit of some political ideology.

Posted by Milly-Bitcoin | Report as abusive

The Bitcoin network is run by the miners. When there are no more coins available to be mined what incentive will people have to leave their mining equipment connected to the network? No more miners means no more transaction processing means bye bye Bitcoin

Posted by toreador514 | Report as abusive

“Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system”
How might you suggest they do that? There is no authority to take it from.

Interesting article otherwise 😉

Posted by hughht5 | Report as abusive

The problem with fiat or state-backed money arises when the government is then allowed to print that money.

The reason money exists is to be a convenient exchange between people where exchanging the goods or services normally provided by the individual in his day to day work is not practical. For example, if I installed heating units in homes, I could not trade that work for you providing me with written articles on a website; it wouldn’t make sense in terms of surviving in the long term. Both activities are valued, and so money comes along to provide the interface for finding out how much value something has.

Back to the problem; governments can print money. They can create as much money as they want. This means when the government gets involved, the value of the service does not matter. The effort you put forth can be any price you want, because the government will just print off more money to cover your bill. This devalues your work, and devalues whatever goods or services you produce.

For example, your article here is worth your salary. However, the government can buy people at any price to produce similar incoherent and uninformed work. The fact that you did some work, and that you are being paid for the work, states there is some value in what you are personally doing. This value is exactly the value of your salary, and the government can generate this ‘worth’ out of thin air, inflating the system where you no longer are worth much of anything. This is the problem; the government is tied into too many matters of finance.

BitCoin cannot be created on demand. It must be extracted from the code, and it is very difficult to do so. It is comparable to mining gold from the Earth. The work involved in obtaining this virtual gold also supports the system. It is easy to transfer, and unregulated, and international, which means it is extremely convenient compared to gold or even highly taxed USD.

Posted by SeattleBitcoin | Report as abusive

“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.”

No contest there, and these social arrangements predate governments, hence government-issued currency, so…

“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.”

…before there were governments to issue currency, “purely commercial activity” relied on 1) barter? 2) Social /relationships/agreements? These are the logical alternative categories in your explanation. The second case contradicts your distinction of “purely economic activity” from “intricate social relationships” above, and thus falls outside your framework. Which leaves 1), in which case barter at least -predates- money. Money is an extremely abstract concept; barter is literally child’s play. Of course barter was thought of first.

And of course barter is inferior to money; that’s why money was invented. Whether you call it the “precursor” or the “predecessor” then I think is “splitting hairs”, as they say.

Posted by MattyH | Report as abusive

Also I’ll note that David Graeber, who you cite in this argument, is also a self-described (left) anarchist, as attested in his other book “Fragments of an Anarchist Antrhopology”. So, as an opponent of the idea of the State, he would no more support the idea of government-backed “left” currency than would most “right” currency supporters.

Posted by MattyH | Report as abusive

I’d like to see what sort of writing comes out from people like you when they actually start using it. There is a lot of debate and nobody knows the answer. Having said that, I invite you to buy your fist bitcoin and transact with it to really appreciate its potential.

Posted by fieder | Report as abusive

You make it sound as if money is some elemental ‘substance’ that should exist alongside earth, fire and water. It is not. Money is just one exchange system that has existed alongside many others in the long history of humankind. It hasn’t even been around for very long compared to other forms of exchange. Ruling classes have always, everywhere, hijacked the prevailing exchange systems, and in fact that is how ruling classes are defined: they control the means of exchange to ensure that the rest of society provides them with what they require without them having to contribute anything.

Far from money being “inevitably a tool of the state”, states are inevitably a result of ruling classes taking control of the means of exchange.

Bitcoin, and other alternative currencies and exchange systems, are attempts to demonstrate that we don’t need states to provide us with our means of exchange. These alternative exchange systems will be the demise of states, for they provide ordinary people with a remedy against the theft of their energy expenditures by the parasitic, non-producing class.

Posted by TimJen | Report as abusive

Actually, it is no more money than a tulip bulb is.

Consider the following syllogism:

1) The only incentive for people or organisations to act as clearing houses for bitcoin transactions is the commission they are paid (misleadingly termed “mining” by the anonymous author of the system);

2) One thing we now for sure about the system is that there is a hard limit on the number of bitcoins which can ever be created, because that limit is designed in;

3) Therefore, at some time in the future, it will become pointless and costly (and maybe even technically impossible according to the bitcoin protocol) for clearing houses to continue processing transactions. Unless all of the greedy people who are currently “mining” bitcoins suddenly become philanthropists prepared to work their computers for nothing, no more bitcoin transactions will be processed.

Just like tulip bulbs, this is a bearer bond which is programmed to become worthless at some undefined but possible to estimate time in the future.

Posted by Ian_Kemmish | Report as abusive

The previous generation conservatives, yuppies, splurged on krugerrand coins .Today……….bitcoins.
~Just an erotic escapade with ease, to escape reality.
~Easy come-easy go !?(Better odds than mega million)
On a more sobering note, esoteric, from me to you;~ The departure of B.S. Bernanke from the FED, there goes easy money.Contraction of money has begun, but w h o knows !?

Posted by Afrodo | Report as abusive

The only thing required for a currency (an exchange medium) is a market (an agora) and markets existed before the modern nation state as we know it. The nation state existed to protect i.e. the first nation states ran a protection racket on participants in a market. The modern nation state has no “protection racket” to run on an extra-national market such as the Internet nor is it competent or knowledgeable in protecting against the main disrupters of an online marketplace (computer viruses).

Posted by tabac | Report as abusive

People who don’t understand Bitcoin, as none of the above ( and I include the author of the article in this) appear to! Should be barred from writing articles and making inane comments about it.

Posted by Nufsed | Report as abusive

What about all the electricity being consumed by the mining community? There is major computing power and resources being throttled by this. For what? A currency that has no real value? again! The fiat currency scam has been done so many times to so many societies you’d think people would figure it out. Maybe bitcoin is going to be “backed” by electric utility corporations who are selling their “commodity” to the miners….

Posted by McLoweryJr | Report as abusive


The first premise of your argument isn’t exactly true. Miners are also paid the transaction fees (at the time of writing this, ~.0001-0.01 BTC) that the network assesses for each transaction. as the network grows and Bitcoin is more widely adopted, transaction fees will eclipse block rewards, thus maintaining an incentive for miners.

Posted by dankleton | Report as abusive