Edward Hadas

Bitcoin is a step back not forward

Edward Hadas
Nov 27, 2013 16:00 UTC

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.

Has quantitative easing worked?

Edward Hadas
Sep 4, 2013 15:05 UTC

It is nearly five years since the U.S. Federal Reserve slid into quantitative easing, the deployment of artificially created money into the bond market. QE and a prolonged period of near-zero interest rates have been the highlights of post-crisis monetary policy. That era is far from over, but it has lasted long enough for a preliminary judgment of monetary policy – especially as the Fed says it is now preparing to “taper” its bond purchases. My verdict: QE could have been worse, and it should have been better.

We know that policymakers might have done a worse job, because that is what they did in 1929, the last time a cross-border credit boom ended in a cross-border credit bust. Today’s central bankers have done better than their professional ancestors. In the 1930s, central bankers in many countries presided over debilitating deflation, and failed to prevent banking crises. This time, prices have neither collapsed nor exploded, and Lehman Brothers was the only big financial institution to topple.

While monetary policy helped stabilise economic and financial conditions, government bank rescues, large fiscal deficits and the automatic benefits of welfare states all played more important roles. The central banks’ support of weak institutions, and, in the euro zone, of weak governments was more important than their monetary policy.