Bitcoin and Central Banks — the Future Love Affair

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. — Henry Ford

Can Bitcoin kill central banks? Or, indeed, can central banks kill Bitcoin? Who knows. However, the challenge of new cryptocurrencies to our dollarised world monetary system in is infinitely more transcendental than most people comprehend. Don’t listen to me, listen to Henry Ford. To understand more, we first need to take a monetary detour to grasp why the control of currency is so fundamental to dimension underlying interests.

How to make the World’s largest ever fortune

Central banks’ monopoly over the money supply has long been a scene of contention. The Rothschild family, who are largely assumed to have amassed the largest private fortune to have existed in modern history, became rich because of their European central banking empire.

Give me control of a Nation’s money supply, and I care not who makes its laws — Attributed to Mayer Amschel Rothschild, 1790

That last quote is contested. In modern parlance, “fake news”. Regardless, if you owned without dispute the largest fortune ever accumulated in modern history, and as such exert influence over national and international politics, well it’s probably not the best press, and you would be fighting that attribution too.

Attribution aside, it is impossible to overstate the implications: monetary control, whereby reducing the money supply and/or raising interest rates to stall an economy to force political change. It makes perfect sense: regardless of your political lean, when you haven’t got food on your plate and are getting thrown out of your house, you’re by definition going to vote for change. This is seen most recently in Europe with the rise of Popular Extremist Parties (both left and right). But this is best left for another discussion.

Modern era Central Banks — not much has changed

I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. — Thomas Jefferson

Moving in to the modern era, the signing of the Federal Reserve Act was designed by a group of bankers in 1910 on Jekyll Island. Surprisingly, Bloomberg itself describes that “[the Federal Reserve Act] was dodgy even by the standards of the Gilded Age: a self-selected handful of plutocrats secretly meeting at a private resort island to draw up a new framework for the nation’s banking system”. It’s no surprise, then, that, with this monopoly control over a private institution, the attendees such as the Morgans, Rockefellers and Vanderbilts, known as the Jekyll Island Club, have grown to be some of the most powerful families on the planet.

The Jekyll Island Club

The Great Depression and the One Percent’s 1970s bottom

It should, therefore, also be a surprise that since the financial crisis, where the monetary spigot was turned on via the use of Quantitative Easing (money printing) and interest rates at 0%, both of which directly benefited banks who would buy recently-issued Treasures to sell them straight back to the Fed for a profit (note: there was no price transparency for these transactions. Easy money.). This profit goes directly in to the pockets of the banker and corporate class, which can be most clearly shown with the increasing inequality, especially in the higher socioeconomic echelons.

We’re at a crossing-the-Rubicon moment, much like just before the 1930s depression, after which there was an economic boom and the implementation of a highly progressive tax (from over 90% marginal income tax in the 1940s to 30%s) and labour system (think of the decline of unions helped along Reagan-Thatcher politics and the disappearance of defined benefit schemes) which has been systematically weakened since the 1970s.

21st Century technological monetary politics

“How is this all related to Bitcoin?” I hear you scream. We’re getting there; hold on to your lederhosen.

The central idea of Bitcoin (and cryptocurrencies in general) is one of decentralisation, of removing the plodding and costly financial industry as a monetary intermediary. If monetary control has given us the largest (and some of the second, third and fourth largest, etc.) fortunes ever to exist on this speck of universe dust, and you believe acknowledge even marginally a Machiavellian worldview where politics is bought out by big interests, it begs the question: why the devil would individuals who have made the largest fortunes on the planet relinquish this control without a fight to a decentralised system?

Greed is good. Greed is right. Greed works. — Gordon Gekko

Cryptocurrency and Cashless

The truth is, Bitcoin, with a market cap of $21 billion vs $256 trillion of global assets, is, well, a mere speck in the investment universe too. Currently it’s precisely that: an asset class, not (yet) a genuine currency. But, given the latter, central banks are waking up. China, which represents around 80% of traded volume, has recently pushed to regulate the currency.

Whilst Fed Chair Yellen has stated that it has no authority to regulate Bitcoin, it would be madness to think that they aren’t looking to to stymieing its progress, or, indeed, launching their own versions as has been under study and testing in China. Indeed, Yellen said that “[blockchain] technologies could be extremely helpful and bring benefits to society”. The ability to track real-time transactions fits in perfectly with the infamous “War on Cash” under the “promote stability and fight crime” narrative, how that solves the need for negative interest rates and / or focusing on nominal GDP targeting to get us out of the economic malaise which has pervaded over the past 10–20 years.

The cult to inflation

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. — John Maynard Keynes (highlighting mine)

Using bitcoin or a cryptocurrency has one key caveat: the gold standard was finally eliminated at the end of the 1970s. This essentially gave central banks the ability to print unlimited money. The holy grail. And to have confidence in a currency, all you have to believe is a few well-meaning bankers.

This is the key part with Bitcoin, given that it tops out at 21 million coins. The ability to debase, or in this case split infinitely the coin in to ever smaller pieces, is precisely what the central banks would need to be able to print on command and keep inflation high, precisely what has happened over the past century. Notice that there have been almost no cases of negative inflation for almost 70 years.

Capitalism or Communism?

The recent trends of anti-establishment movements across Europe and the arrival of Trump (regardless of whether it’s demagoguery or not) are nothing more than society lashing out given deteriorating economic conditions, in a large part due to monetary policy.

Bitcoin, whilst private, will without doubt either be heavily regulated and / or replaced by a government alternative given the benefits to the monetary elite. Whether this is for the benefit of of the populace, or of the elite… take a guess. After decades of endless narrative and wars against communism, perhaps we weren’t so different from the communists after all.