Sorry, Libertarians, History Shows Bitcoin Isn't the Future … As we consider the digital-currency phenomenon that is Bitcoin, bear in mind that there are, broadly speaking, two accounts of the origin and history of money. One is elegant, intuitive and taught in many introductory economics textbooks. The other is true. The financial economist Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, laid out the two views in a 1998 paper, "The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas." – Bloomberg
Dominant Social Theme: Money comes from government.
Free-Market Analysis: This is the fundamental fault line between freedom and statism and one reason we've spent so much time writing about it and have been subject to so many attacks.
The meme – and we early recognized it as such – that money is a state-sponsored occurrence can be found in such books as Ellen Brown's Web of Debt. It is a Greenbacker analysis and one that yields the conclusion that if money is state-sponsored than we can use elements of the state to "change" money and make it more equitable.
This is why the enemies of freedom and solvency are constantly trying to make the argument that money comes from the state. The Bloomberg article, above, makes the same points.
But money did not come from the state. It is ludicrous to argue that it did.
The state cannot make anything and has no incentive to innovate. There is not one single invention so far as we are aware that comes from the state. Everything is invented first in the private market and then adapted as necessary by government.
And that goes for money, too, which developed out of a competitive process, as Murray Rothbard pointed out, between various currencies.
But that is not what the sophists want us to think. They want us to believe that money was invented in the neolithic as a result of war. Here's more from the article:
The first view, the "M View," is named after the Austrian 19th century economist and historian Karl Menger, whose 1882 essay "On the Origins of Money" is the canonical statement of an argument that goes back to Aristotle:
As subsistence farming gives way to more complex economies, individuals want to trade. Simple barter (eight bushels of wheat for one barrel of wine) quickly becomes inefficient, because a buyer's desires won't always match up with a seller's inventory. If a merchant comes through the village with wine and all a farmer has to offer is wheat, but the merchant wants nuts, there's no trade and both parties walk away unfulfilled. Or the farmer has to incur the costs of finding another merchant who will exchange wheat for nuts and then hope that the first merchant hasn't moved on to the next village.
But if the merchant and the farmer can exchange some other medium, then the trade can happen. This medium of exchange has to be what Menger calls "saleable," meaning that it's easily portable, doesn't spoil over time and can be divided. Denominated coins work, shells and beads also fit the bill. So do cigarettes in POW camps and jails and Tide laundry detergent for drug dealers. This process, Menger argues, happens without the intervention of the state: "Money has not been generated by law. In its origin it is a social, and not a state institution."
Goodhart points out, however, that Menger is just wrong about the actual history of physical money, especially metal coins. Goodhart writes that coins don't follow Menger's account at all. Normal people, after all, can't judge the quality of hunks of metal the same way they can count cigarettes or shells. They can, however, count coins. Coins need to be minted, and governments are the ideal body to do so. Precious metals that become coins are, well, precious, and stores of them need to be protected from theft. Also, a private mint will always have the incentive to say its coins contain more high-value stuff than they actually do. Governments can last a long time and make multi-generational commitments to their currencies that your local blacksmith can't.
But why oversee money creation in the first place? This brings us to the second theory of money, which Goodhart calls the "C View," standing for "cartalist" (chartalist is a more common spelling). To simplify radically, it starts with the idea that states minted money to pay soldiers, and then made that money the only acceptable currency for paying taxes. With a standard currency, tax assessment and collection became easier, and the state could make a small profit from seiginorage.
The state-coin connection has far more historical support than Menger's organic account. As Goodheart points out, strong, state-building rulers (Charlemagne, Edward I of England) tend to be currency innovators, and he could have easily added Franklin D. Roosevelt's taking the U.S. off the gold standard in 1933 or Abraham Lincoln financing the Civil War with newly issued greenbacks. The inverse is true too: When states collapse, they usually take their currencies with them. When Japan stopped minting coins in 958, the economy reverted to barter within 50 years. When the Roman Empire collapsed in Western Europe, money creation splintered along new political borders.
If money came about independent of states, as according to the M View, one would think it would outlast transient political structures. Historically, however, this tends not to be the case, a strong argument in favor of the C View.
The article goes on to attack Bitcoin – a "currency" about which we have longstanding doubts. But even though the article is aimed at Bitcoin, what is most disturbing about the article is its mischaracterization of fundamental economic literacy.
The crux sentence of this article is "A private mint will always have the incentive to say its coins contain more high-value stuff than they actually do."
There are no words to describe the maliciousness of such a misstatement. It really plumbs the depth of depravity.
It is the old market failure argument, but updated and casually tossed off with breathtaking arrogance. If one follows the logic of this statement, one arrives at the conclusion that the private market will always attempt to mislead and that government is a necessity to insure against private market corruption.
If one accepts this nonsensical perspective then everything else flows logically. Government was necessary to create money, to supervise it, etc.
Additionally, and most importantly, since government has MADE money, the process of government can be used to change money and make its creation and distribution more ethical and fair.
And, in fact, this is what Money Power hopes you believe.
There is a huge push underway to get people to believe that if governments are responsible for money instead of "private" monopoly central bankers, the world will benefit and societies will be financially healthy again.
Nothing can be further from the truth. Make no mistake: Those who support Greenbackerism and speak approvingly of Silvio Gesell and Major Douglas are in league with Money Power. They are propounding a myth – that government itself can be the antidote to Money Power.
But only the free market can create and circulate money fairly. Money Power controls the state, which is why statists in the employ of Money Power, want to propound the falsity that the State can liberate money.
It is a con, a falsehood … a dominant social theme.
It starts with the idea that the state created money, a falsehood on every level. It continues with the idea that the state-run money can be controlled by "the people" who can use monopoly central bank for their own benefit. This is of course the language of the Third Reich and the fascism that is now coming back into fashion.
China, India, Russia … we are supposed to believe that because these countries have public central banks, their currency regimes are "better." What nonsense.
Don't fall for this sophism. Money was created by the free market and the sooner that the creation and circulation of money is returned to the market via currency competition (ncluding gold and silver) the better off we shall be.