Our current system of coinage and paper money has evolved from centuries of turbulence – could digital currencies provide the stability to prevent shocks in the future?
The upfront cost of printing a piece of paper and calling it “currency” is essentially zero, as Robert Mugabe can confirm. The short term benefits of printing lots of money are as enormous as you want them to be, but the long term costs of inflation and loss of reputation are devastating.
So there is not much more reason to believe that a privately created currency will demonstrate any more monetary discipline than a desperate despot. In America, various colonial and continental currencies were in circulation before independence in 1776. Ten years later the Continental Congress tied the value of the US dollar to gold reserves, marking the start of almost 200 years on the “gold standard”.
Even during this era, America suffered from a boom in bank-issued currencies, plagued by the problems that come with over-issuing and devaluation.
When Richard Nixon finally broke the link to gold in 1971, bullion traded at $35 an ounce. Today it is around $1,200 an ounce: in gold terms, the dollar has lost more than 95% of its value. The Romans took two centuries to devalue their money to a similar extent; the Americans have done it in 40 years.
In the 1970s, economist Frederich Hayek proposed that markets to issue currency could be opened up to competition, just like other markets. He saw the benefits of ending the government monopoly over money, putting it bluntly: “with the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.”
You would expect free market economists to support these arguments, but most don’t. Milton Freidman rejected Hayek’s concern arguing that the “failure” of one currency would quickly impact others because the high costs of switching currencies. For private money markets to work effectively, users must have the ability to promptly and punitively punish (by switching to other currencies) any issuers abusing their customers. The sooner a customer can identify and penalize inflationary overprinting, the more stable a private money market will be.
The emergence of digital currencies and the widespread digitisation of trading platforms now provides the potential for consumers to act promptly and punitively.
Bitcoins and other digital currencies, with no central authority, have no corporation or government to control them. The BitCoin model is attractive, with disaggregated rules around creation and exchange, and with no one company in control, no one person can profit from virtual “over-printing”.
Who knows whether, in the future, Australian airlines will hold digital currency reserves to buffer against changes in the value of our dollar? Maybe foreign venders in will soon prefer to be paid in Bitcoins for large scale infrastructure projects. The possibilities are enormous and well worth exploring.
A Senate Committee inquiry kicks off Canberra today to examine the rapid emergence of digital currencies around the globe. It will address these and other questions, as Australia considers what money might look like in the future. Australia’s fledgling digital currency industry is fully supporting the inquiry, and they are right to do so. If they do not help shape their operating regulations, then regulation will soon shape their operations.
There is no reason why more competition and choice in money markets can’t deliver the same kind of benefits that more competition and choice have delivered in product markets: greater stability, greater choice and ultimately better outcomes.
Even if it means giving up some of their powers, governments should be taking the emergence if digital currencies seriously.
That is why we are excited about our humble Senate inquiry – we have the opportunity to consider what the future of money might look like.
This opinion piece was co-authored by Senator Sam Dastyari and first appeared on The Guardian's Australian website on 26 November 2014