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Bitcoin and the Dangerous Fantasy of ‘Apolitical’ Money

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Posted on Dec 26, 2013
btckeychain (CC BY 2.0)

By Yanis Varoufakis

(Page 3)

Secondly, two major fault lines are developing, quite inevitably, within the Bitcoin economy. The first fault line has already been mentioned. It is the one that divides the ‘Bitcoin aristocracy’ from the ‘Bitcoin poor’, i.e. from the latecomers who must buy into Bitcoin at increasing dollar and euro prices. The second fault line separates the speculators from the users; i.e. those who see Bitcoin as a means of exchange from those who see in it as a stock of value. The combination of these two fault lines, whose width and depth is increasing, is to inject a massive instability potential into the Bitcoin universe. While it is true for all currencies that there is always some speculative demand for them, as opposed to transactions demand, in the case of Bitcoin speculative demand outstrips transactions demand by a long mile. And as long as this is so, volatility will remain huge and will deter those who might have wanted to enter the Bitcoin economy as users (as opposed to speculators). Thus, just as bad money drives out good money (Gresham’s famous ‘law’), speculative demand for bitcoins drives out transactions demand for it.

Can these two flaws be corrected? Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which would of course defeat the very purpose of having a fully de-centralised digital currency.

4. Conclusion: The Fantasy of ‘De-Politicised’, ‘Honest’ Money

The Crash of 2008 has infused our societies with enormous skepticism about the role of the authorities, both governments and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people, by the people, for the people. Bitcoin has emerged as the great white hope for something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies, which enabled them to improve welfare in their midst, especially at times of acute economic crises, there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

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Since the second industrial revolution made the emergence of large, networked oligopolistic companies possible (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from doing so? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies it did. Indeed, it would have stagnated and spawned social tensions that would have put its institutions under a cloud well before 1929. So the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that Bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the Bitcoin economy. Finance would either have to find ways of introducing Bitcoin denominated securities, 1920s-style, which would cause asset bubbles to form, or the Bitcoin political economy would nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon the currency altogether.

The reason money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect disparate groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.

Yanis Varoufakis is an economics professor at the University of Texas and the University of Athens. He is the author of “The Global Minotaur: America, the True Causes of the Financial Crisis and the Future of the World Economy.” Follow him on Twitter here.


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