Note: This is the second of two articles inspired by Detlev Schlicter’s Paper Money Collapse. You can read part one, ‘When Should Developers Turn to Bitcoin?,’ here.
Although modern, capitalist societies usually believe in the ability of the free market to provide goods and services to everyone at a fair price, there are some instances where government-granted monopolies are seen as the only option. Perhaps the most noteworthy example of this phenomenon is found with money.
Although there are 180 legally recognized currencies in the world, each one of them (generally) enjoy a monopoly in their local region. For many people, this is a major issue. There is a contingent of mostly libertarian-minded individuals who would like to see wider use of currencies that are not tied to any individual nation state or group of nation states.
To some, it appears that bitcoin is the only practical option for achieving the denationalization of money.
Why is Denationalized Money Desireable?
There are a variety of reasons as to why the denationalization of money may be desirable for certain individuals. Most of these reasons have to do with guarding against some of the possibly-negative effects of government-controlled fiat currency.
Many advocates of the Austrian business cycle theory believe the denationalization of money would lead to a more stable economy. This is a stance that is outlined by economist Detlev Schlichter in his book Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, in which he also discusses the merits of Bitcoin.
“It is no surprise that all recorded currency collapses occurred exclusively in complete paper money systems,” writes Schlichter. “Every injection of new money must lead to changes in relative prices, to changes in resource use, to a redirection of economic activity from some areas to others, and change income and wealth distribution.”
In the opening portion of the book, Schlichter gives a basic outline of his views on economic and monetary theory, including a basic summary of Austrian business cycle theory. “Over time, the economy will necessarily become ever more distorted as a result of the accumulated misallocations of capital and misdirection of economic activity, and ever more money injections from the central bank and ever lower policy rates will be required to contain the market forces that would normally work toward the liquidation of these imbalances,” continues Schlichter.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” he adds. “The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
In Schlichter’s view, the safeguards and regulations involved with the current financial system do not remove the risks associated with a free banking system. Instead, the risk of failed banks and bankruptcies is replaced with the risk of a run on the entire banking system. To Schlichter’s point, the entire banking system in the United States would have collapsed without taxpayer-financed bailouts in the aftermath of the housing crisis in 2007.
In addition to those who wish to avoid the perceived economic perils of a government-controlled banking system, there are also those who wish to avoid the increased government power that could come from a centrally-controlled cashless society.
In a cashless society without Bitcoin, the state essentially has full control over who owns what at any given time (even more so than now). There is no financial privacy, and money can be taken out of accounts for bail-ins at the click of a button. Negative interest rates also become more difficult to avoid, and governments are able to censor any transactions they deem to be illegitimate.
Obviously, such a scenario creates an opportunity for bitcoin to flourish.
What are Bitcoin’s Competitors?
If money is going to be denationalized, then what are the options for this process of denationalization?
In reality, some countries already have denationalized money. For example, countries using the euro in the European Union defer the responsibility of maintaining a proper monetary policy to an outside authority — the European Central Bank. Other countries use the US dollar — either explicitly (El Salvador) or via a peg to their own currency (Panama).
In terms of a global denationalized currency, the idea of a world currency issued by the International Monetary Fund has been floated on multiple occasions. The IMF already issues special drawing rights, which is a special asset made up of four (soon to be five) fiat currencies, but this is not a currency. It’s unclear how an IMF-controlled currency would work in practice; it would likely be similar to the European Union’s use of the European Central Bank but at a global scale.
Of course, governments like staying in control of their own currencies because it gives them more ammunition to fight against potential recessions and economic crises (at least in theory).
In addition to bitcoin, there are also hundreds of other alternative cryptocurrencies that have been created in the past few years. None of these altcoins have come close to bitcoin in terms of their usefulness as a store of value or medium of exchange, and network effects are largely to blame here.
While customization of a specific product or service to fit a specific niche market is usually a positive, that is not the case with money. Schlichter explains this point in Paper Money Collapse:
“The good ‘money’ is only useful for anybody because others in society use the same good as ‘money.’ A customized form of money that only one person uses is no longer money. It would no longer be a medium of exchange. It would be useless. A medium of exchange logically requires that others use the same form of money, too. Widespread use is the precondition for a good to be money. Universal use would be ideal. Customized money is a logical impossibility. Indeed, the more universally accepted a good is as money, the more valuable it will be as a medium of exchange.”
Although it’s true that many different currencies exist today, it’s important to remember that each state enjoys a monopoly on the issuance of currency for their particular region. This is a creation of the state and not the market.
Gold is another option, and it’s still the most widely-used form of denationalized money today — at least as a store of value. The issue with gold is that it doesn’t work for the digital age. If you want to send an ounce of gold from California to South Africa, it’s going to take a few weeks and cost too much. You could always send someone an IOU for gold over the Internet, but at that point, counterparty risk is introduced.
Why Bitcoin Wins Out
Bitcoin is currently the best option when it comes to various forms of denationalized money. Gold had been useful as a denationalized store of value, but its usefulness as a medium of exchange is limited by its physical nature.
Gold bugs: "I don't like #Bitcoin because I can't hold it in my hands.
Me: "I don't like gold because I can't hold it on my computer."
— Kyle Torpey (@kyletorpey) May 1, 2014
Bitcoin is gold for the digital age, and its utility for online payments makes it the most useful option for a denationalized money and currency. As long as bitcoin’s most useful properties — such as fungibility, privacy, permissionless access, and being a bearer ecash — are preserved and improved upon, bitcoin’s role as a denationalized world currency should continue to grow as the world becomes increasingly digital.
Featured image via Zach Copley.