Bitcoin as a monetary system examining attention and

Proposals for monetary reform, whether mild or radical, are always and everywhere informed by some underlying theory of money. A week ago I spent two days talking with a group of technologists and lawyers—perhaps I should say digital coders and legal coders—and pressed them on this point.

Chatham House rules prevent me from associating views with actual people, but the views themselves are the important thing. So far as I understand, and it is important to emphasize that there was not consensus on the details, the technologists see themselves as creating a form of money more trustworthy than that issued by sovereign states, more trustworthy because the rules of money creation whether proof-of-work or proof-of-stake or whatever limit issue to a fixed and finite quantity.

Scarcity of the tokens today, and confidence that scarcity will be maintained in years to come, are supposed to support the value of the tokens today. Importantly, no such confidence can be attached to state-issued money; quite the contrary states are seen as reliable abusers of money issue for their own purposes.

Cryptocurrency is digital gold while fiat currency is just paper, subject to overissue and hence depreciation. Once everyone else realizes the superiority of cryptocurrency, they will all want to switch over, and the value of fiat currency will collapse. According to the theory, one of the cryptocurrencies will be the future global currency, replacing the dollar, but no one knows which one. People who got into Facebook at the beginning are all multimillionaires; early adopters of the future global cryptocurrency will be too, but which one will it be?

One of the most fascinating things about the technologist view of the world is their deep suspicion even fear of credit of any kind. Fiat money is untrustworthy enough, promises to pay fiat money are doubly untrustworthy.

Simons was of course responding to the global credit collapse of the Great Depression; the cryptos are responding instead to the more recent global financial crisis.

I view all of this through the lens of the money view, which places banking at the center of attention, views banking as fundamentally a swap of IOUs, and views money as nothing more than the highest form of credit. It is view developed not so much around a philosophical ideal but rather as a way of making sense of the operation of the world as it actually exists, outside the window as it were. In that world, the payment system is essentially a credit system, in which offsetting promises to pay clear with only very minimal use of money.

And prices arise from the activity of profit-seeking dealers who absorb fluctuations in demand and supply by standing ready to take any excess onto their own balance sheet, relying on credit markets to fund the resulting inventory fluctuations. One can imagine automating a lot of that activity—and blockchain technology may well be useful for that task—but one cannot imagine eliminating the credit element.

Credit is not a bug, but a feature. At the same time, human-induced climate change represents a major threat to a liveable future. Transforming the economy away from fossil fuels will require wisdom, intelligence and muscle. Above all, it will require a great deal of finance, for example to transform the transport system, erect flood defences, retrofit ageing housing stock, or to make buildings more energy efficient.

Such investment will, however, generate employment and other economic activity. Employment in turn will generate income with which to repay the credit or debt. The fact is that carefully managed and regulated public and private credit will help finance vital de carbonising activities. The small, individual pools of money from savings accounts, credit unions or crowdfunding would be woefully insufficient for the Herculean task of transforming the economy away from fossil fuels.

It is also not acceptable, in my view, for central bankers or government representatives to be granted money-printing powers without clear, transparent checks and balances.

They will have distributive consequences, and these will be difficult to predict. There are other consequences. Providing funds directly to citizens could for example, encourage them to shop for goods from abroad, worsening trade deficits. Other imbalances could occur. These are impacts that have economic as well as social and political consequences. Therefore, given that we are discussing a publicly backed institution the central bank, nationalized in the case of the UK , elected governments ought to be in the driving seat.

At the same time, for public accountability reasons, the relative independence of the central bank must be maintained. The reason for relative independence, accountability and transparency is not complicated: As someone who has worked in African countries where politicians are known to have corruptly diverted public resources, I consider transparent checks and balances on politicians, government officials and central bankers to be vital.

There are two problems with this attempt at regulating the creation of finance: Inflation targeting has long been discredited because pre-crisis central bankers focused myopically on inflation targets to the detriment of other indicators, in particular employment, but to the advantage of creditors whose assets debt are protected by inflation targeting.

I am no defender of the private finance sector, as anyone familiar with my work will know, and I am also strongly in favour of capital control. But under the far-from-perfect existing monetary system, domestic bond markets act effectively as intermediaries between a government and its central bank.

The process of a government offering bonds to the public and private markets bidding for those bonds, places transparent space and publicly accountable transactions between a government and its central bank. It is the bond market that keeps governments honest. Of course investors can and do profit from this process and cream off gains, but losses are also possible. And as QE has proved, central banks working with willing governments can exercise huge influence over the bond market, and over the price and yields of government bonds.

But we know that bond markets can be subdued, and can play a more passive role than they have in the recent past. Just how subdued was evidenced in and when investors paid the German government for the privilege of lending it money — largely because of weaker, and riskier economic conditions in Europe brought on by incompetent economic policy-making and ideologically driven political decision-making.

Hayek, Denationalisation of Money: The Argument Refined, London: The Institute of Economic Affairs, Oxford University Press, , p. Don't have an account?

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