Saturday, January 4, 2014

The most ridiculous critique of BitCoin and crypto-currency yet published

Stephen Mihm, Associate Professor of History at the University of Georgia, graces the WNJ today with  an amazing (in the traffic accident sense that you just can't turn away) argument that BitCoin and other crypto-currencies are doomed:

For all the regulatory crackdowns on Bitcoin in recent weeks, the cryptocurrency’s advocates remain unfailingly optimistic. Bitcoin is the future, they tell us; it heralds a future where private, stateless currencies will dethrone the dollar and other monetary dinosaurs. 
Sorry, but Bitcoin isn’t the future. If anything, it’s a throwback to an earlier era, when private currencies circulated alongside government-sponsored money. In fact, if you strip away its technological trappings – the encryption, the peer-to-peer networks – and Bitcoin closely resembles these earlier private efforts. 
This isn’t a comforting historical parallel. The alternative currencies of the past are long gone, thanks to a decades-long campaign by governments aimed at monopolizing the money supply. The lesson of their rise and fall is one that Bitcoin’s boosters would be foolish not to heed. 
Outside of libertarian circles, it has become conventional wisdom that it is both natural and desirable for governments to monopolize the production and quantity of currency. Rulers and regents throughout history certainly believed as much, claiming that they alone could issue – and just as often, debase – coins used by their citizens.
OK, so the idea of a non-governmental currency is old (yep), and governments have engaged in a decades-long (if not centuries-long) campaign to convince people that it is only money if it is issued by a central bank and backed up, as Paul Krugman likes to say, "by men with guns."

Apparently, only Libertarians still think about the possibility of non-State issued money.

But let's go with Mihm down history/memory lane and point out some of his missed metaphors:

First, there's this:
For centuries, rulers found it impossible to keep competing currencies out of circulation. This was particularly true of the sorts of coins that served as small change for the lower classes of society.  
In other words, the technology of the day didn't really allow rulers the ability (or the force) to stop people from coining or printing their own money--particularly money used "as small change for the lower classes of society."

Oops.  Right off the bat a problem:  BitCoin is not designed for the "lower classes of society" or for use as "small change."  Nor were those competing currencies intentionally designed to undermine the existing sovereign currency--which BitCoin undoubtedly is.

Next, after a brief run to document the ubiquitous existence of competing currencies not just in the West, but in Asia as well, Mihm asks rhetorically,
So what changed? How did governments, which had shown little inclination, never mind ability, to exercise their monetary sovereignty, come to monopolize the issuance of money? Over the 19th century, nationalist politicians in a number of countries came to view the private and foreign currencies circulating inside their borders as impediments to the creation of unified nations and national markets. 
Watch that phrase, "the creation of unified nations and national markets," as we go.
Advocates of a more powerful central government came to view a common, state-issued currency as a valuable tool for accomplishing a host of nationalist projects, from collecting taxes to influencing economic conditions by controlling the money supply. The creation of central banks was but a further extension of this logic, giving nation-states even further control over the currency. Even the design of the nation’s money, argues Helleiner, came to be seen as a means of instilling allegiance to the state, with nationalist imagery becoming commonplace on currency at this time. 
Notice that all the talk of unified markets disappears in favor of the naked power of the State to collect taxes, establish central banks, and control the money supply for "influencing economic conditions," and (one might add, since Mihm does not) waging war, engaging in crony capitalism, and centralizing not just fiscal but also social and cultural power away from communities.

The war for competing currencies, Mihm opines, might have been a good war, but it's over:
All of this was accomplished at great cost and with considerable controversy. To eradicate older currencies and to drive competing currencies from circulation was a monumental undertaking, and in most countries it took years. Private mints fought back, as did issuers of non-state currencies, but in the end the economic nationalists triumphed, steamrolling the opposition and prosecuting anyone who dared challenge the state’s monetary prerogatives. The process was largely complete by the early 20th century. 
Notice again that the argument was concluded in terms of political might and not moral or economic right(s):  "economic nationalists triumphed, steamrolling the opposition and prosecuting anyone who dared challenge the state's monetary prerogatives."

Mihm's is essentially a dystopian Whiggish view of history, where developments move in one direction only, and once an argument is settled (even if by naked force) it is never revisited.

And thus, while he whiffs occasionally at the moral problems with all this, he finds BitCoin not only doomed but actually dangerous:

Anyone who thinks that Bitcoin will triumph has to believe that it will succeed where earlier generations of private currencies failed – that Bitcoin will, improbably, manage to overthrow more than century’s worth of accumulated state power, jealously guarded and ruthlessly enforced. 
That’s a preposterous fantasy – and a dangerous one, if you’re an investor. Indeed, people who believe that governments of the world will let a stateless cryptocurrency usurp their hard-won monetary prerogatives aren’t forecasting the future. They’re living in the past.
OK, here's the thing:  Mihm is right that states will attempt to maintain their monopoly on money, but he is preposterous wrong both on his analysis of what crypto-currency actually is, what it represents, and what the ultimate outcome of this conflict will be.

I will admit that BitCoin will not end up being the currency of the world--the first innovator rarely wins. But BitCoin is going to be remembered as the forerunner of the stateless currencies that will rule world markets in less than a century.

Why?  At least two very important attributes set BitCoin and other crypto-currencies apart from private currencies of the past.

First, BitCoin is intentionally subversive.  Its creators, and those who use and champion it, are consciously and intentionally declaring long-term war on the monetary dictatorship of the State.  This is an important distinction, because earlier competing currencies were utilitarian rather than ideological.  BitCoin represents a pushback against the omnipotence of the State--any State--in favor of a means of exchange that allows people themselves greater control than governments or corporations.

Second, BitCoin exists in a technological world that Professor Mihm barely seems to acknowledge to be in existence.  The internet and associated technologies that are mutating faster than even the NSA or BMI/ASCAP can keep up are not just flattening hierarchies of information and communication, they are playing hell with the mechanisms of state and corporate authority.  Edward Snowden is a symptom not a cause.  If technology has given faceless bureaucrats (hi guys!) the ability to eavesdrop on us all, it has also given the very best and the brightest the greatest challenge of the new millennium:  breaking the grip of Big Sister (hello, Diane Feinstein!).

Historians have no real trouble seeing the long-term, generational conflict between, say Islam and Christianity, and how it plays out across time.

Historians like Professor Mihm are less gifted at examining the implications of technology (particularly numbers-based technology) that changes too rapidly to fit their models, and which is (not for lack of trying) not under the control of the State.

But then, why would Professor Mihm see that?  The State pays his salary in good monopolistic fiat money backed up by men with guns.


NCSDad said...

Disturbingly ( for a cybercurrency fan) this:

tom said...

Cowen neglects the need for acceptance by market makers and merchants. There are already numerous bitcoin clones, and none of them have had much effect on it's value.

tom said...

The real problem with BitCoin is that it has no intrinsic value.

It is merely a "better" fiat currency--governments can not inflate away it's value, but if enough merchants lose faith and stop exchanging goods & services for it, BitCoin becomes worthless.

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