The latest issue of the Economist magazine (figure 1) discusses the coming digital currencies of the governments. It talks about how these currencies are risky but a risk worth taking and how they will transform finance as we know it today. Let’s see what risk we all are taking when governments are going to impose their digital currencies on us. Do they represent something fundamentally different or represent the same system but in the guise of new digits?
To understand digital currencies we have to first understand what money is and then what is the difference between money and currency?
What is money?
By definition money is a common medium of exchange against which every other goods trade in the market economy. Money’s evolution was gradual from the direct exchange barter economy to an indirect exchange money economy. Any commodity that was previously in use and highly demanded by everybody were potential money candidates. Historically this role has been played by precious metals gold and silver. Money comes into existence to solve the problem of direct exchange economy viz. the indivisibility of the good and double coincidence of wants of the barter economy. It also very importantly solves the problem of economic calculation. I will advise my readers to read the book The Mystery of Banking by Murray Rothbard to go into details of this subject matter.
With the indirect exchange money economy, banks also evolved. People will deposit their money into bank and in exchange of that the banker will issue a deposit certificate, an IOU, to the depositor. As time went by this deposit certificate became money substitute that circulates into the market on behalf of actual money, and these money substitutes are called currency. So money is a common medium of exchange and currency is any token, it can be paper notes like today or the coming standard of computer digits, that circulates on behalf of it in the market for the sake of ease and safety. This means currency per se is not a bad idea because it provides useful function of ease and safety. Instead of keeping gold or silver into your pocket, it is easy and safe to keep paper notes that represents that underlying (unit weight of) gold and silver.
The present monetary system
As I discussed above, all currencies are good if they represent and are backed by actual money gold and silver or any other commodity that market participants use as money. The problem with today’s monetary system is that currencies are not backed by anything. What circulates into the market are simple paper notes which have no backing of gold or silver. They are currencies but not money. As we saw above, only those commodities can become money which have a previous use and high demand as well as they had all the good qualities, like divisibility, high value per unit weight, durability etc., of becoming money. We can see that paper notes have none of these qualities. They are money only because of the clever historical subterfuge of the governments and their legal tender laws which force us to use them as a medium of exchange. This monetary order is in place since 15th August 1971 when the American president Richard Nixon closed the gold window, Dollar convertibility into gold, to the world. Today’s fiat paper currencies are nothing but pieces of paper circulating as currencies unbacked by any real money.
This nature of currency creates special problems. For example, because these currencies aren’t backed by real money gold and silver they are prone to inflationary policies of the governments which controls these currencies via its central banks. Paper notes are easy to produce and that is the reason why governments got rid of the gold standard in the first place. Government‘s central banks like the Reserve Bank of India can create these paper notes endlessly to generate inflation and fund government’s always increasing expenditures. This inflationary policy is responsible for three major problems in our economies viz., the business cycle, inequality of income and wealth and rising prices. Central banks also fund the costly wars of their master governments. Basically fiat paper currency is a major medium of our enslavement by our governments. By enabling the welfare warfare state, fiat paper currencies reduce our liberty.
Now the real question we all have to face is, will digital currencies change any of these outcomes associated with fiat paper currencies? Let us see.
How will this new monetary order work?
The answer of above question is, no. They will not. Digital currencies represent the same system of fiat paper currencies unbacked by any real money but just in a digital form, which is even more dangerous as we will see now. These unbacked digital currencies will not change anything. It will continue the same system but with even bigger advantages for our rulers, and that is the reason why they are bringing their digital currencies by hook or by crook. Why bigger advantages? Because the use of cash, fiat paper notes, at least can’t be tracked by our overlords. Digital currencies can be minutely tracked by the authorities. That means they will harass us for tax compliance purposes. Any chance of avoiding paying taxes for citizen will be minimised in the regime of digital currencies. Not only that, governments will have a complete control over our lives because at one stroke of a switch they can freeze anyone’s bank accounts for any reason e.g., government can freeze accounts of dissidents, their political opponents who are exposing government shenanigans or anyone with whom rulers do not agree or see them as a danger to their rule. Any kind of political debate or liberal democratic dialogue will simply become impossible in such a digital currency system. Governments can easily control populace when they can tightly control their money. Basically, civil liberty will be in full danger.
Inflation will run rampant because producing few computer digits will be even less costly than printing paper notes. Basically the welfare warfare state will go completely berserk and ruin the society.
As I have discussed in my past article, people who believe in world government are pushing this idea of a cashless economy since long under the guise of false excuses like removing corruption or terrorism/crime etc. The Indian prime minister already tried this policy unsuccessfully on Indian population when he demonetised 85% of Indian money supply in the form of 500 and 1000 rupees notes. And now RBI is readying its own digital currency for our aggrandisement.
If these digital currencies are backed by real money gold and silver then they can be beneficial, but we know that is not going to happen because it defeats the whole purpose of government. Gold and silver will tie hands of government and reduce its size to its minimum. Gold and silver cannot be produced ad Infinitum like paper and digital currencies and so they can’t be used by governments to produce systematic inflation which is used to rob us of our hard earned produces. Unbacked digital currencies will basically become the main vehicle of government’s legal plunder and totalitarianism.
Few words about cryptocurrencies like bitcoin.
Bitcoin (sic) as a crypto digital currency is much in news since last few years when its price denominated in US dollars started to rise. As I have said time and again, I am not against Bitcoin or crypto digital currencies per se. I am all for the new technological innovations/inventions that ease our lives and give us more freedom. What I will like to see in cryptos is that because they are currencies so they must be backed by real money gold and silver or any other good that market participants decide to use as money. This is most importantly necessary for stopping authorities from inflating it endlessly. Money commodity is the only commodity whose supply must be scarce as compared to other consumer and producer goods. A limited supply ensures its high purchasing power per unit weight. Because money is a common medium of exchange it is important that it maintains its purchasing power. Looking at this economic fact there are major issues with a digital currency like Bitcoin. I list them below:
- Although right now the supply of bitcoin is limited to 21,000,000 coins, but if need required then the protocol of bitcoin can be changed to increase the supply. And that is a danger. If few people can change its protocol then it is amendable to manipulation just like fiats.
- The fundamental issue with bitcoin is that, can it stand on its own? Meaning, right now everyone is rushing to buy or invest (sic) in Bitcoin because its price, which is denominated in fiat currency dollar, is rising rapidly; it is mainly a speculative vehicle and not money which is a common medium of exchange. The important question here is, what will happen to bitcoin when dollar collapses? The collapse of dollars is a near guarantee. People are demanding bitcoin today not because of its own value as money but because they want to buy it at lower dollar prices and then flip it at higher prices making profit in fiat dollar terms. So the demand for bitcoin is not its own demand right now but a derived demand for dollars! What happens when these dollars collapse to lower values or stop being international currency? Can then bitcoin stand on its own i.e., can I go and buy milk or chocolate whose price is denominated or appraised in weight or unit of bitcoin itself where no fiat currency is involved? Remember, Bitcoin has no history of prior use on its own. It is an invention of one guy Satoshi Nakomoto whose identity itself is unknown. Bitcoin hasn’t evolved on its own as money from its prior use as some valuable commodity like gold or silver. Bitcoin is a computer code. Gold and silver are today demanded by people for its own use even when they are not playing their monetary role. Will people demand Bitcoin for its own sake? We don’t know and we have to yet see that. And so my apprehension.
- Although touted as a decentralised digital money as compared to fiats, Bitcoin today actually represents a centralised monetary system. And because of this centralised management and control protocols it is amenable to same problems that exists with any centrally commanded system. Gold and silver or any other market based commodity money avoid this problem of centralisation. Because no individual decides which commodity to be used as money, no authority can capture and control it.
These are some of the major questions that lurk in my mind and so far there are no answers. I have always believed that if cryptocurrencies are backed by real money gold and silver then they are a great invention which will definitely make our lives easier and better. Instead of carrying cumbersome paper notes in our pockets if we can safely carry currencies in digital form in our digital pockets then that is surely an improvement. International transactions will also become very easy with such digital currencies. They will definitely increase the volume of trade world over and thus will improve our standard of living. More trade means we have more choices and that’s human development. Market based gold and silver money backed crypto digital currencies will avoid all problems of government controlled fiat paper or digital currencies. In the end they will give us our most desired freedom. But until such important changes take place, we have the same exploitative system in new guise of digital currencies.
3 thoughts on “On Government Digital Currencies”
Though, you do make a point about Gold backed crypto it has been thought of by many but comes back to the fundamental problem of anonymity in backing something with Gold, that is, with anonymity and without legal(even in a private law society) guarantee for your protection of the underlying assets being there, the crypto issuers can issue more crypto than there is Gold held with them to begin with. It will just become another Bitcoin.
Tether(a company which has been linked to shady business before) has already been found to be backed by 49% junk corpo bonds(ABCP) instead of USD as they claimed and these people already have a Gold backed crypto coin. The thing is, if you read their terms, they tell you that you can only take delivery in Switzerland and only of a certain quantity(10 kilos, if I remember correctly) and that they have no real obligation to deliver even, thus rendering it much like Gold-based ETFs in the stock exchange. Besides, if you lose your account details or anything like that, so long as you can identify yourself, you can get your Gold if its with a third party(like Swiss banks or offshore mint allocation). This is not possible with crypto and many have lost forever their Bitcoin like this. If you look into Monero, that is better than Bitcoin in privacy since it is a privately held ledger rather than public. But a Gold backed Monero will also have the same shadiness surrounding it due to liability being anonymous.
My idea of gold backed currency is not what you wrote above. It brings with it whole lot of other systematic changes e.g., removal of centralised state. Money is a medium of exchange and all these talks of hiding your transactions comes into picture only because of the presence of the parasitic state.
“Money is a medium of exchange and all these talks of hiding your transactions comes into picture only because of the presence of the parasitic state.”