“A significant benefit of bitcoin in the eyes of
many in the bitcoin community is its
assurance of a stable base money supply. …
The rate of new bitcoin mining is similar to
the mining rate of precious metals such as
gold or silver. … This means that bitcoin is largely inflation-proof. Time and experience
may prove it to be a more stable store of
value than many fiat currencies.” Last month, several people appeared before
a U.S. Senate committee to defend bitcoin,
among them Patrick Murck, general counsel
of the Bitcoin Foundation, responsible for the
quote above. You can hear in Murck’s
testimony that jingling sense of Silicon Valley certainty that comes with the knowledge that
this technology, unlike all the others, will be
immune from the ravages of historical
experience. Bitcoin is an extraordinary innovation. It also
will never replace the dollar or the euro, what
Murck refers to as “fiat currencies.” Fiat will
win over bitcoin for the same reason it won
over gold, silver, and copper in early modern
Europe. Central banks, too, are a form of technology. Like other technologies, they’ve
improved with iteration. Since the
establishment of Sweden’s Riksbank at the
end of the 17th century, central banks have
been trying out new strategies, watching
each other and copying what works. Fiat currency is not a unstable relic, waiting
to be replaced with an innovation that
prevents inflation. Fiat currency is a highly
adapted tool. Inflation isn’t a bug. It’s a
feature. There’s a fight as old as money over who
gets to determine what money is—the state or
the market. Generally, states claim the right
to make money. Whether they can hold on to
that right depends on how good they are at
making money, but they have gotten better at it over time. Before central banks, kings minted coins,
offering the public good of a verified metal
content in exchange for a bit of seigniorage,
an extra bit of value over the cost of the
metal. When they debased the metal or
demanded too much seigniorage, merchants figured it out and either melted the coins
down or hoarded more reliable ones. Early banks issued credit in the form of
private notes. This created both good and
bad inflation. Credit grew with local
economies, but sometimes outpaced it in the
hands of an improvident bank. State-run
central banks took over this function, in part, because it was a good privilege to have as a
sovereign. It was also good for markets to
have a sound but growing source of money. Money does three things. It serves as a unit
of account; you can quote prices for common
goods in dollars, as can all the other people in
America. It serves as a store of value, as
with the dollars in your bank account. And it
serves as a medium of exchange; your grocery store takes dollars—and so do you,
from your employer. Bitcoin, like gold and silver, is finite, making
it a good store of value. And it exchanges
well—magnificently, in fact, far better than
gold. The way that the bitcoin protocol uses
distributed computing power to verify
transactions at a distance is an innovation that has been wanting since the first bills of
exchange were offered in the long-distance
Mediterranean sea trade. Bitcoin is a store of value and a medium of
exchange. It’s like really awesome gold. It’s
not, however, a unit of account. Your mother
cannot quote you the price of eggs in bitcoin.
This is not just a question of waiting long
enough for your mom to get around to using bitcoin. The state has tremendous power over
the unit of account. It pays government
contracts in the unit of its choosing. It
collects taxes in that unit, too. The
psychological weight of this power can last
for centuries. Medieval Europe still accounted for its variety of coins in Roman
units. Modern Europe uses the metric system
because Napoleon wanted it so. It’s not clear
why any state would choose to give this up. The Internet beat up publishing and a couple
of other industries. It’s having a harder time
so far against the state. A currency is an
asset with an army. Bitcoin has no army. And central banks have had several
centuries of using this power to experiment
with inflation. Sometimes it has worked.
Often it has not. Inflation is not inherently
good or bad. Bad inflation, as when a king
wants to lessen debt, is bad. Good inflation helps money supply grow with the
market. You can’t generalize about fiat
money any more than you can generalize
about countries or companies. Some are run
well. Others aren’t. What matters is not the
power to inflate but how it’s used. The fiat currencies that have survived longest are run
by stable democracies, with slightly differing
views on interest rates but a rough consensus
on innovations in sound money management. In his testimony, Murck suggested that
bitcoin will provide a stable base of money
supply, “making a small central bank or
currency bloc accountable if they poorly
manage their portfolio, while at the same time
ameliorating the economic effects of the central bank’s mismanagement.” This is a
fine idea. So fine, in fact, that it has already
been happening for a long time, with mixed
results. People who live under poorly managed
currencies already collect dollars and
euros. The dollar, for example, has always
been particularly popular in Argentina. Now bitcoin is popular there. The dollar has failed to inspire Argentina to take care of its peso.
Bitcoin will fail, too. Bitcoin is a fascinating, elegant way to
confirm financial transactions. That’s not
nothing. It should make Visa, American Express, and PayPal nervous. But it will not keep Janet Yellen up at night. Nor should it.
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