Hayek realised: The Rise Of Bitcoin

Daniel Pryor April 2, 2013 6

“He who controls the money supply of a nation controls the nation.”
- James A. Garfield, 20th President of the United States

It is no secret that central banking is undergoing a crisis of confidence. In the wake of the 2007-08 financial crisis, only a 16 trillion dollar Federal Reserve bailout could avert the current monetary system’s total collapse in the USA. This side of the pond, EU apparatchiks have once again demonstrated that they are hell-bent on making the average citizen pay for the mistakes of the Bankocracy (in the cases of Greece, Ireland and now Cyprus). This is yet another futile attempt to prop up their failed Euro project. With the intractable flaws of central banking more obvious than ever before, now could be a good time to consider a possible alternative.

One of the most radical solutions to the problems of central banking was made famous by Austrian school economist and Nobel Laureate Friedrich Hayek in his 1978 pamphlet, ‘The Denationalisation of Money’. Instead of central banks being able to inflate their respective currencies ad infinitum  ̶  safe in the knowledge that no alternative medium of exchange exists  ̶  Hayek argued that private firms should be allowed to compete by producing their own free market ‘fiat’ currencies (those not backed by a commodity such as gold). Common objections to this idea include the assertion that with so many competing currencies exchange would be difficult, costly and time-consuming. Advocates would reply that modern computerised currency markets are more than capable of handling such a function whilst incurring minimal transaction costs, and also point to the alleged benefits of such a system: harnessing the power of the free market to determine the optimum medium of exchange. A less common but more profound objection from fellow libertarians is based on theoretical grounds; since Hayek’s private currencies would hypothetically emerge independent of a commodity that could give them intrinsic value, nobody would accept them as legal tender and they would therefore be useless.

Alternative currencies already exist in Britain, though they are backed by the pound sterling. For example, London has the Brixton Pound, which can be used in local businesses, on mobiles, and even to pay some local taxes. Time banking, first established in the UK in 1998, has facilitated the strengthening of communities by building social networks of people helping each other with practical tasks: ‘an hour of time’ being the principal unit of currency. However, previous attempts to mint currencies not backed by government haven’t gone so well. Take the Liberty Dollar. Its creator, Bernard von NotHaus, was labelled a ‘domestic terrorist’ by the FBI and is soon to be sentenced to at least twenty years in prison for simply creating his own private currency. Ron Paul summarised the situation perfectly when questioned about a Federal raid on the company offices of Liberty Dollar. Why does the state despise the idea of private currency? The quote that began this article should shed some light upon this question.

bitcoin1

Confidence in fiat currencies is evaporating fast. As global currencies are mercilessly debased by increasingly ingenious methods of theft-by-central-banking (such as quantitative easing), many are searching for other options.

It thus follows that any government is bound to be wary of the newest innovation in denationalised currency – Bitcoin. Indeed, Her Majesty’s Treasury, when contacted by The Backbencher, were unable to provide an official line on Bitcoin at this time. But what exactly is Bitcoin? The following video provides a concise exposition:

Could this be Hayek’s ideas in practice? The European Central Bank certainly seems to think so, citing the Austrian school of economics as “the theoretical roots of Bitcoin” in a report of October last year. Many libertarians temper their support, however. Indeed, Bitcoin has received a somewhat tepid reception in Austrian school circles, centred upon the fact that it ostensibly fails to satisfy Ludwig von Mises’ seminal Regression Theorem. Speaking to The Backbencher, Austrian school economist and prominent anarcho-capitalist Walter Block explains:

“An economist was asked: “How is your wife?” The response: “Compared to what?”  Ok, ok, it’s an economics joke, so by definition it can’t be too funny. What’s the relevance? What’s my opinion of Bitcoin? Compared to what? Compared to a 100% gold backed dollar? I favour the latter. Compared to present US currency? I’m not sure. I’ve not studied this. I’m inclined to support anything, Bitcoin included, vis a vis the present system. Why the lukewarm support for Bitcoin? Because I’m an Austrian economist, and thus support the Menger-Mises theory of how legitimate money arises from a commodity that had value independent of its moneyness.”

Supporters have argued that Bitcoin does in fact satisfy Mises’ Regression Theorem. Although the Bitcoin is a derivative of fiat currencies such as the dollar and the Euro, these fiat currencies can be said to have been originally derived from commodities with value independent to that of exchange. One user on the popular Bitcoin Talk forum states that:

“Despite later losing their ties to direct commodity value through state interference, paper currency retained status as money because of memory of previous money prices…once exchange can occur between a money (USD) and Bitcoins, providers of goods have a means by which to value Bitcoins as a potential medium of exchange.  The money regression is satisfied, because taken back far enough we reach traditional commodity money: BITCOINS -> USD -> MONETIZED GOLD & SILVER -> COMMODITY GOLD & SILVER.” 

The debate over Bitcoin within libertarian circles remains fierce, but both sides recognise that it presents an alternative to the current (flawed) system and should be explored further. The future of Bitcoin is uncertain, but what it has already accomplished is significant for libertarians of all denominations (see what I did there?); the total value of all Bitcoins amounts to over $1 billion. The final word goes to Austrian school economist and author of ‘The Politically Incorrect Guide to Capitalism’ Robert Murphy, who told The Backbencher:

“I do not claim to be an expert on Bitcoin, and I don’t have any idea whether it will take off or flop. But regardless of its future, Bitcoin has been invaluable in showing that there are alternatives to State-enforced fiat money. The same innovation that we see in computing and communication could be harnessed in the case of money, if only governments would get out of the way.”

 

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  • Storris

    The idea that money needs to be commodity-based is profoundly wrong-headed. There is no thing called ‘intrinsic value’. All value, as Mises knew, is in the eye of the beholder, it is always subjective.

    “Just as there is no standard and no measurement of sexual love, of friendship and sympathy, and of aesthetic enjoyment, so there is no measurement of the value of commodities. If a man exchanges two pounds of butter for a shirt, all that we can assert with regard to this transaction is that he – at the instant of the transaction and under the conditions which this instant offers to him – prefers one shirt to two pounds of butter.”

    - Mises, Human Action

    Money is only that which the seller will accept in exchange for his goods/services, whether it is Gold, BitCoin or a verbal Promise.

    • http://twitter.com/DanielPryorr Daniel Pryor

      Thanks for taking the time to read and comment!

      I don’t think that Mises’ Regression Theorem necessarily vitiates the (completely correct) subjective theory of value. He’s not abandoning cardinal utility theory, but simply saying that for something to be valid “money”, it must possess an original link with a commodity that is valued for any purpose other than simply exchange. As David Kramer puts it:

      “A medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange”.

      “Money” in the loose sense of the term is exactly what you state it to be: anything which the seller will accept in exchange for goods/services. But some would argue that Bitcoin violates the Misesian Regression Theorem of how a valid/true medium of exchange arises. For example, in a hypothetical free market economy, Bitcoin would not exist in its current form – that of being exchangable for “bogus” fiat money (e.g. USD).

      There have been some great articles asserting that Bitcoin is in fact backed by a scarce commodity (each unique cryptographic hash). Though they may be intangible, they are still scarce as they cannot be double-spent.

      • http://twitter.com/DanielPryorr Daniel Pryor

        That said, what use were the hashes before they were employed in Bitcoin? Another argument against Bitcoin satisfying MRT.

  • Robert

    You say: “A less common but more profound objection from fellow libertarians is
    based on theoretical grounds; since Hayek’s private currencies would
    hypothetically emerge independent of a commodity that could give them
    intrinsic value, nobody would accept them as legal tender and they would
    therefore be useless.”

    Cheques are not legal tender. Scottish bank-notes are not legal tender. They are not therefore useless. They are legal, but not “legal tender”. What matters is what people are willing to accept as payment without coercion.

    A currency is far less likely to be debased if it circulates on its merits and not as a result of being legal tender and therefore something a creditor must accept. The hyper-inflations in France and Germany were based on forced currencies that were, of course, legal tender.

    Hayek is very good, but better on money is an earlier and little-known author. Henry Meulen’s book, “Free Banking: a policy of individualism” (2nd edition, Macmillan, 1934) is brilliant, and he is slowly being rediscovered.

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