Published on Sunday, 24 November 2013 07:35
Written by The Daily Bell
The strange convergence of Bernanke, Hayek and Bitcoin … Every time Federal Reserve Chairman Ben Bernanke opens his mouth, the markets move. But few could have guessed that in an offhand remark he would add legitimacy to the Bitcoin, the virtual currency that competes with the American dollar as a reserve currency and an international trading medium. Yet that is what he did when he held out a friendly hand to the notion of fantasy currencies in a letter to the Senate Committee on Homeland Security and Government Affairs. Understandably, this improbable endorsement from the guardian of the mighty dollar sent the value of the Bitcoin soaring. – Reuters
Dominant Social Theme: Maybe bitcoin is the future of money after all.
Free-Market Analysis: Bitcoin is making its way forward as digital money. Perhaps, as we have speculated, it has been chosen to anticipate other such currencies and to be controlled if possible.
This opinion piece from Reuters explains the possibility of this control and also makes a stirring case for regulation of bitcoin.
Again, we are not surprised. The endorsement of Ben Bernanke may come as a shock to some but it is in line with what must happen if bitcoin is to become a favored digital currency.
Here’s more from the editorial:
Until recently, the Bitcoin was seen as a novel, experimental, somewhat piratical cyberspace Monopoly money that has proved useful in moving money around the world without the hampering and costly help of banks, which slow things down, waste days while the cash lingers in limbo, and take a hefty slice of every transaction.
Bitcoin’s headiest moment was as the currency of choice of the Deepnet black market website Silk Road, which sold everything from crack cocaine to child porn, and was closed down by the FBI last month. Bernanke sees far beyond the illicit uses of virtual currencies as a means of paying for contraband or shuffling hot money around without being traced.
He believes they could become an ingenious means whereby the globalized market in legitimate goods and services can work more efficiently without the dead hand of the banks. The Fed chairman told the Senate Committee members, who are anxious that something outside the control of Congress will be used as a currency for criminals and terrorists, to think before consigning Bitcoin and similar monetary confections to oblivion.
Forget money-laundering, he wrote, “there are also areas where [virtual currencies] may hold long-term promise.” Bernanke’s guarded welcome to virtual currencies as an ingenious innovation that will liberate world trade seemed like an aside, but his glancing approval may ultimately prove a revolutionary step in both economics and politics.
Competing private currencies have long been seen by free market economists as the holy grail. So long as the state governs the price of money through interest rates and insists that only one currency can be used in a geographical area, there is no chance of approaching a truly free market. Friedrich Hayek‘s stunted Austrian economic notions may have failed to prevent the Keynesian revolution in macroeconomics, but his broader political vision of a world where untrammeled commerce replaces state-run, community-accountable institutions regulated by democratic bodies remains potent among conservatives.
Before the Civil War there were a number of other competing currencies in America, all of which went by the board. When they collapsed they took with them the savings of Americans who misplaced their trust in them. Without sufficient assets to maintain the currencies’ value, there were quotidian runs on banks and sudden bankruptcies that made honest people destitute overnight.
If we are about to witness an explosion in competing currencies we can expect similar collapses and the human tragedies that will accompany them. Hayek looked at only the bright side, where ideal currencies kept pace with each other and goaded each other through healthy competition to maintain their value and keep inflation at bay. But as we have seen from the events of 2007-08, even the best laid plans of bankers go awry.
When things go wrong, banks desert their customers. And who picks up the pieces? Why, the elected government, of course, for it alone is responsible for the welfare of its people. Only effective regulation can ensure that banks entrusted with our money will be there when we need to withdraw our cash.
We have seen what happens when there is a lack of regulation: bankers take rash risks that threaten the whole world with penury. The same applies to virtual currencies. Without a framework of rules, virtual currencies will leave their customers vulnerable. Caveat emptor is not a smart enough response to the prospect of currency collapses.
Virtual currencies will only catch on if they are thought to be honest and reliable. And the only way of ensuring that is to treat them like conventional banks. As Ronald Reagan would put it: trust but verify.
We have quoted at length because the editorial makes so many predictable points. In fact, Hayek did suggest competing currencies, as Congressman Ron Paul has also suggested. But Ron Paul believes that gold and silver would probably emerge as the money of choice.
What is even more predictable about this article is that it suggests that bitcoin can only be seen as reliable if it is properly regulated. It uses pre-Civil War money as the example of why this needs to be.
But the problem with this is that it leaves out the real reason that competitive money was a questionable system at the time. In the case of banks’ competing money, municipalities routinely demanded that banks purchase local government bonds before receiving banking franchises.
Also, many banks were not allowed to have more than one branch, which made the banks woefully subject to runs and general weaknesses. In other words, the problem with pre-Civil War banking was its lack of real laissez faire.
Continue reading at Bitcoin: Hoping for the Best After Bernanke’s Endorsement.