Will Bitcoin vindicate Hayek?
The new era of competitive private moneys
The creation of money has been effectively in private hands since … well forever. Looking at the modern times — after the creation of the US federal reserve system in 1913 — one of the greatest misconceptions instilled in the masses is the belief that public institutions, such as the US Fed or the ECB, are only expression of public interest and that money creation is the exclusive prerogative of sovereign “nation states”. Although it is so widely purported — or simply conveniently led to believe — the truth is rather different.
Indeed, in addition to the fractional-reserve banking — which enables commercial banks to create most of the broad money in the system — the very same well known, too big to fail, privately held commercial banks, also own substantial direct interest in the above institutions. Take the ECB for example, its governance is formally in the hands of 6 Executive Board members and the Governors of each of the 19 national central banks of member states. So you might think it is all politically endorsed by the democratically appointed governments of each member country. Well, not really.
In Italy for instance — though the same applies to other EU countries — the shareholders of the Banca d´Italia are mostly private banks or large insurance companies such as Unicredit, Intesa Sanpaolo and Assicurazioni Generali.
Though the situation is much more obfuscated in the USA, the concept is the same: nationally-chartered banks own each one of the 12 Federal Reserve Banks which are then part of the FED. As to which the members of the 12 FRBs are, good luck in finding, because it is quite difficult to come up with much information. It seems like a closely guarded secret.
Regardless, exists a monopoly on money creation, which is awarded by the governments to the private banking sector — though it is concealed by the appearance of the FED and the ECB as being independent authorities — and it is safeguarded by the very same governments which legally endorse privately issued fiat moneys and make them legal tender by decree, thereby perpetuating the privileges of the banking sector.
In 1976, F.A. Hayek — the 1974 Economics Nobel Prize winner and one of the most prominent late members of the Austrian School of Economics — wrote a pamphlet titled “Denationalisation of Money”, in which he foresaw the emergence of privately issued moneys which could compete among themselves and against the governments´ monopolies, which, in his words, has the defects of all monopolies as “it prevents the discovery of better methods of satisfying a need for which a monopolist has no incentive”.
Despite his visionary and highly interesting theories, all his assumptions regarding the benefits of a competitive regime for moneys remained essentially untested because, so far, the monopoly and the “legal tender” privileges could not be challenged by any privately issued money without it being immediately attacked by the governments.
But Bitcoin has been the first privately issued money which enables a radical paradigm shift and may start testing effectively Hayek’s assumptions, because it is able to challenge the monopoly privilege thanks to its decentralized nature and the properties that make it resistant to coercion, censorship and geopolitical manipulation.
Without a central point of failure, governments cannot effectively attack Bitcoin.
While granting to Hayek that the banking monopoly on money creation is one of the causes of the many illnesses of our financial system and of the increasing social inequality to levels not seen since 1929, the alleged advantages of competing moneys are still to be proved.
Hayek envisaged a competitive money regime which enabled currency price stability, preservation of purchasing power and store of value, as well as usability as a unit of account and medium of exchange for daily purchases.
The Italian professor F.M. Ametrano of the Universita´ Bicocca Milano and Politecnico di Milano, who is one of the leading voices in favour of Bitcoin, was one of the first to argue — back in 2016 — in favour of the new regime of competitive moneys foresaw by Hayek.
Professor Villaverde, of the University of Pennsylvania, is one of the first to have recently studied the impact of crypto currencies and this new regime of competitive moneys enabled by Bitcoin. In his column he casts some doubts on the ability of a regime of competing currencies to maintain price stability. But one must also consider that the crypto sector develops and experiments at lightning speed and this makes any analysis quite soon obsolete. Take the emergence — in the meantime — of stable coins as an example. Even if I do personally share most of the concerns highlighted here on their ability to maintain price stability under stress conditions, they are a clear and important sign that there is a growing trend of creating different crypto currencies with different properties and functionalities, which may all have a specific market and a good reason to coexist. There is clearly a need for cryptos which preserve purchasing power and may become a store of value (such as Bitcoin), there is a need for stable coins to be used as unit of accounts and medium of exchange, there is a need for enhanced privacy issues (such as Monero), etc.
All those cryptos can theoretically fulfil different functions and being equally in demand among users.
Then of course issues — such as their interoperability and how to effectively exchange each crypto with the others, as well as their ease of use — are all to be answered by new technological developments in the due time.
But one point made by Prof. Villaverde in his column is chiefly important: “the threat of competition from private monies imposes market discipline on any government that issues currency. If a central bank, for example, does not provide a sufficiently ‘good’ money, then it will have difficulties in implementing allocations. This may be the best feature of crypto currencies. In a world in which we can switch to Bitcoin or Ethereum, central banks need to provide, paraphrasing Adam Smith, a tolerable administration of money. Currency competition may have a large upside for human welfare after all”
If Gresham’s Law does not fully apply and good money does not drive out bad fiat money, then hopefully it will make fiat money a lot better and vindicate Hayek’s vision after all.