I've written several posts about Bitcoin and have used the feedback I've received from commenters to undertake a deeper dive into crypto-currencies. This led me to a recent op-ed in the Cypress Times by David Barker, tackling the idea that a "private" currency like Bitcoin could displace or at least compete with government-backed money.
Here's a salient paragraph, laying out the historical/academic case:
Nobel Prize winning economist Fredrick Hayek advocated privatization of the money supply as early as 1978. Barry Eichengreen, a respected, mainstream scholar of international finance recently wrote that “maybe the Tea Party should look for monetary salvation not to the gold standard but to private monies like Bitcoin.” Former Federal Reserve Governor Randall Kroszner and widely read blogger Tyler Cowen wrote a book in 1994 that discussed “the potential consequences of a complete deregulation of money and banking.” An article in the ultra-establishment Journal of Economic Literature by George Selgin was titled “How Would the Invisible Hand Handle Money?” Other economists study historical episodes where money was privately produced, often with favorable results.
The whole piece is a clever bit of argumentative jiujitsu. Barker takes a Tea Party call for a return to the gold standard — the U.S. went off gold, theoretically for good, during the Nixon administration — and uses it as a way to dismiss that retro notion and put forward the altogether more radical idea of allowing private money to come online.
Then he ratchets it up another notch, with a "pity the Federal Reserve" gambit:
Economists at the Federal Reserve are bright and well intentioned, but they have been given an impossible job. Just as Soviet planners could not run an efficient economy, Fed planners cannot provide money as efficiently as free markets. Just as government monopolies give us poor mail, train, and urban highway service, the government monopoly of money gives us low-tech currency, periodic money valuation crises, and a dysfunctional banking system. Competitive money supply would be an improvement, and far better than a gold standard.
The Fed would be intrigued to discover that it, the institution that controls America's monetary system, is as hapless as Soviets apparatchiks allocating resources to assembly lines producing customerless products. The Fed would be even more surprised to learn that it's as bad at its job as the post office. From the Fed's perspective, its people have done a fantastic job of keeping the U.S. out of Great Depression 2.0. And the work is far from over.
In this respect, Barker is aligned with Vivek Ranadive, a wealthy technology entrepreneur who wants to replace the Fed with a computer program.
I think both these ideas would be a disaster for the economy. However, an ongoing experiment is being conducted, with Bitcoin at its center. Bitcoin mining is ongoing, as is Bitcoin trading. "Molecular," a commenter on one of my Bitcoin posts pointed out that Bitcoin is actually ahead of current fiat currencies, in terms of its evolution:
USD value was "bootstrapped" using gold backing in the beginning. This backing was slowly removed over time. The USD has something else, that gives it value: its legal tender status. It has yet something else that gives it value: the fact that US military threatens everyone who starts selling crude oil for anything else than USD (kassim tried in iraq, iran has ideas,...). So one could argue the USD is, since 1971, backed by oil.
The fact that bitcoin has acquired substantial value without having such powerful high-level support and without any gold-bootstrapping is astonishing and it happened through making it freely tradable against fiat on the various exchanges.
Having studied Bitcoin and the Bitcoin culture — or subculture — for a while now, I'm impressed at Bitcoin's resilience. It might not be the cyber-currency that knocks off the Almighty Dollar. But if the dollar ever does go down, Bitcoin will have had something to do with it.