National currencies

Argentineans have had a troubled relationship with their money over the last half century. The Argentine Peso has been revalued numerous times, with 13 zeroes having been dropped (a devaluation factor of 10 trillion) since 1969. Last month the ‘blue dollar’ (the black market price of US dollars) hit 10 peso, whereas the official exchange rate was half that, at around 5 peso, causing speculations of further devaluations. Devaluating the Argentine Peso is a Sisyphean task if there ever was one. Tragic, to be sure, but would have been comic too if so many real people weren’t hurt so badly by this inevitably repetitive chain of events.

The Argentineans are trying to get dollars because these are more stable than the peso. Had they been free to hold any currency they wished, the peso would have gone down the proverbial toilet as ever more people protected their assets by divesting away from the troubled currency. Instead, the populace is forced to hold only the peso, thus the tragedy continues, hitting hardest the honest and naïve, who cannot or do not want to go down the black market route. If government wanted the best interest of their people, they would let them hold the dollar. In the name of patriotism, having a national currency is clearly more important than the welfare of the people.

While not as bad, in the U.S. some don’t think the dollar has great prospects. A preferable alternative would be gold or something else that maintains its value. The truism still holds that if government, here, wanted what’s best for us, they would let us hold gold without the penalty of a 28 percent tax, or they would let us transfer our wealth to Bitcoin without targeting exchanges and denying what would otherwise be a purely voluntary free-market transaction. The fact that the peso in Argentina, the dollar in the U.S. and all legal tenders in their respective countries have to be protected by the full might and force of the law illustrates clearly that national currencies are relatively worthless and that, given the choice, many people would not be holding them.

Then why are legal tender laws and ‘forced’ national currencies so commonplace in this enlightened age? What is it that makes them so irresistible to the legislators who dictate what is right and wrong for us (not them) to do? If an unavoidable consequence of the ongoing monetary printing press is constant inflation and potential revaluation of the currency, what is it about printing your own money (and preventing others from doing the same) that is so desirable to the political elite? To ask that question is to answer it. Everyone, if they could get away with it, would want to counterfeit money or add a few zeros to their bank account balance. However, creating money from thin air is fraudulent and immoral regardless of who does it. The outcomes of private individuals counterfeiting money include buying a new car or a new house. The implications of government being able to print its own money are far worse. These include funding wars, enriching the politically well-connected and creating policies which favor one class of citizens at the expense of another class (both of which, by the way, represented by the very same government), for example: consumers vs producers; importers vs exporters; home owners vs renters; and the list goes on.

The only alternative that is both morally superior and economically sound, ensuring no person or group of people can defraud one group and enrich another, is having either one or a competing set of commodity monies (virtual or physical commodities) whose creation and dissemination are dictated by the forces of a voluntary and free market. The number of competing currencies will also be dictated by the free market, much as how the number of shoe manufacturers, software developers and security services are not centrally planned.

The alternatives for national currencies

It goes without saying that gold and silver would be the first in line to become functioning money the world over if national currencies are no longer protected by law. These are the epitome of sound money and they are not tied to any single nation. But can Bitcoin play a role as one of a competing set of sound, international currencies?

I do believe Bitcoin has what it takes, as I’ve written previously. Despite it being virtual, Bitcoin can acquire value. Value, after all, is an attribute given to a scarce good by individual actors in the marketplace. Anything subject to finite supply and demand will acquire some value. Hence scarcity is key, rather than tangibility. Bitcoin meets all of the requirements for a medium of exchange and potentially money in the future (depending on its adoption). Furthermore, while it did not arise as a commodity with alternate uses – as gold did – Bitcoin is a different and new breed of money, and it can still fulfill the role it seeks. More generally, an economy of commodity money would naturally tend towards deflation. While not solely a Bitcoin phenomenon, it is favorable for the value for each money unit to continually rise, in contrast to the inflationary environment around us. Bitcoin’s divisibility ensures that no matter how high the value goes, Bitcoin is still perfectly usable. Objections have been raised about its volatility since money must be stable. This is true, but we must appreciate that its current volatility is simply a symptom of the pre-adoption stage. Any newly discovered commodity will have a period of extended volatility as people try to contend with its potential on one hand and the uncertainty on the other. As Bitcoin becomes better known, more readily accepted by the common man and as uncertainties subside, the volatility will decrease to levels of your average foreign currency. I contend that this is no insurmountable challenge for Bitcoin since it is a built-in payment system as well as the money itself. While people may refrain from holding it long-term or price their goods solely in Bitcoin, people can convert in and out of the currency and use the Bitcoin payment system while denominating their goods in stable currencies.

Whether in small drops at a time or in large torrents all at once, Bitcoin is being adopted by people who have realized its advantages. Some with the need for international money transfer appreciate the cheap and almost instantaneous global transmittal; those with privacy concerns flock to it for its virtual anonymity; and then there are the ones who are tired with the banking system’s fees or afraid of its potential bank runs who realize they no longer need a bank to store their money.

People are voting with their cash and showing that Bitcoin can indeed fill the need. There are those who use it as a store of value/potential speculation and there are those who use it to spend. The hoarders increase its value and the spenders increase its popularity. Eventual equilibrium, as always, is reached between spending and saving where the supply and demand curves for Bitcoin meet…that is, assuming a free market.

Free markets can make or break a currency

Legal tender laws, taxes on precious metals and regulation of firms dealing in Bitcoin all manipulate the supply and demand curves of money and of non-monetized goods. However, they won’t eliminate the demand of the forbidden fruit altogether. One needs only note the prevalence of speakeasies during the Prohibition era to understand that it is not in the human nature to simply abide by arbitrary legislation. It is quite evident that fewer people in Argentina want the peso, hence the market for a ‘blue dollar’. In much the same way, in various circles, fewer people in the US want dollars. Fortunately our alternatives (such as Bitcoin, gold and silver) are not yet illegal, which makes me a proponent with a clear conscience.

On the face of it, when commodity prices rise, they are simply more valuable. But when prices rise for Bitcoin, gold and silver (which are commodities with a history or express purpose of being money) this shows they are more desirable than peso, dollar and pound. Small fluctuations mean nothing, but large movements like those seen over the course of a month for Bitcoin and over the course of 5 years for gold makes you think whether these commodities are becoming ‘monetized’.

Fiat money (e.g. national currencies) hangs on the faith people have of it. If the faith goes, the value of the fiat money will plummet like a rock. When a currency experiences this sudden and aggressive drop, it is defined as hyper-inflation. This can simply be thought of as ‘hyper demonetization’ of the currency in favor of a replacement commodity money that gets monetized or replaced by barter conditions. Any fiat money could be subject to this, given the right environment. As long as the U.S. dollar is the world reserve currency, circumstances must become drastically worse for gold or Bitcoin to unseat it but the potential is always there. All it takes is enough people to lose trust. Take, for instance, the official national debt. At $16.7 trillion, this is a sum that can never be repaid (let alone if you include Social Security liabilities and other ‘off-the-books’ debt totaling an estimated $222 trillion), no matter how much you tax or how little you spend. To illustrate with an extreme scenario, by taxing 100 percent of the U.S gross national income and eliminating spending altogether, the U.S. is still left with a $1.5 trillion debt! To pay its debt the government is putting one credit card’s bill on another credit card. Needless to say, the thread by which fiat money is hanging is thin and flimsy. It won’t take much to snap.

As noted, individual people are realizing there is something amiss and are moving to gold, silver or Bitcoin. The Chinese government (saddled with more than $1.2 trillion in U.S. bills, notes and bonds) is showing it wants out too, while being conscious not to cause panic and hurt itself. The heavily censored nation aired a documentary last month on its state-run TV informing its populace about Bitcoin (!) and it allows (possibly even encourages) the purchase of gold and silver from local Chinese banks. Clearly the largest holder of U.S. debt is trying to divest away from the dollar. Central banks are buying gold like there’s no tomorrow. Clearly the ‘banks of the banks’ know that even paper money must be backed by real money.

Sure enough, Bitcoin is the big unknown and it is fraught with legislative risk. And, yes, gold and silver prices have seen better days. Hardly anyone alive today knows what it is like to live in a world of sound money. But as Hamlet asks, “[what] makes us rather bear those ills we have, than fly to others that we know not of”? In the long run, even Sisyphus would give up on any attempts to maintain a paper money. Whether or not one holds real assets to preserve material wealth, the first stage to anything is educating oneself to the options out there and to the reality at hand. The greatest amount of wealth is that which is contained in one’s mind. The emergence of Bitcoin, for its part, has got a lot of people thinking, and that alone has made all those involved more wealthy.