January 7, 2022 ☼ crypto
Source: Stephen Diehl (Link)
So called “cryptocurrencies” aren’t actually currencies, and cannot fulfil the function of money.
Money exists to exchange for goods and services in an economy. It is created to mediate the exchange of goods so that we have a common unit of account we can trade instead of bartering goods directly. Money needs to have a reliable and stable value compared to a domestic basket of common goods and services, in order to achieve that the supply of the money needs to be controlled by a monetary authority which can expand or contract the supply according to market fluctuations.
A dynamic money supply is a fundamental necessity for a modern economy. A small amount of inflation discourages hoarding and incentivizes investment into productive enterprises which grow the economy and produce prosperity. Conversely a static fixed money supply encouages hoarding, and is inflexible in times of crisis because it does not allow intervention. Economies do not stabilize themselves and require active intervention to curb recessions.
In an environment in which multiple currencies can commingle there is a perverse incentive to create counterfeit currency or to create parallel currencies. Counterfeit currencies dilute trust in commerce, create counterparty risk and catalyze crime. Parallel currencies introduce exchange risk and create artificial barriers to commerce. The optimal solution within any economic region is to thus have a single currency with a single authority to control the supply, protect against counterfeiting and lower barriers to commerce by discouraging other systems through creating demand. The only possible entity that can fulfil this role is the State and it creates demand for a single currency by requiring citizens to extinguish their obligations to the state in that currency. A single currency and single monetary authority is the inevitable role of the state because of its singular monopoly on taxation and justice.
Historically commodity-based money (so called “hard money”) was based on backing by metals and was used extensively in the 18th and 19th century. Instead of vesting power in democratic controls, it instead vested power in non-elected international parties who could source, mine and mint metals. Under a gold standard, inflation, growth and the financial system were all less stable due to trade imbalances. This led to frequent recessions, larger swings in consumer prices and perpetual banking crises. When these events occurred in one part of the world, the distress would be transmitted more quickly and completely to others and thus created a politically unstable, unequal and more violent world. We saw this in the Gilded Age of the 1870s to 1920s in which hard money created a world of massive wealth inequality, thus ultimately leading up to the speculative market manias that lead to the Great Depression. The United States ultimately devalued its currency with the policies of the New Deal which slowly decoupled the dollar’s dependence on gold and which led to an era of economic growth and prosperity. Conversely Europe largely did not engage in these corrective policies and this era saw the rise of populist strong men and fascists who promised to correct the wealth inequality of the common man, and ultimately plunged the continent into the most violent period in human history.
Money is always going to be inseparable from politics. As much as some libertarians want to believe that value should be determined by a God-given order independent of the will of men, they cannot escape the logical and historical contradictions at the heart of this idea. The fixed-supply ideas of deflationary coins like Bitcoin fundamentally misinterpret the properties of fiat money as bugs when they are in fact features. The crypto project contains unresolvable logical and economic contradictions in its stated purpose. State controlled money embeds control and accountability for fiscal stability and market intervention in the democratic process where it inevitably and rightly belongs.