After the Bitrush - a comment on the politics of money

Well, I dreamed I saw the silver
Space ships flying
In the yellow haze of the sun,
There were children crying
And colors flying
All around the chosen ones.
All in a dream, all in a dream

The predictions - oh yes, the predictions! Everywhere we see them, all giving their take on the future of money following the remarkable growth of Bitcoin.

But first let me tell you of a little story. It's not my story, it's Neal Stephenson's story. And it's the story of in-game money and the way that money (and assets created in the game by that money) 'leak' into the real world. Moreover, like Bitcoin's recent ups and downs the focus is on China and the desire of rich Chinese folk to get round their government's tight control of money leaving for other countries.

Remember folks that this desire is real - it actually happens. Here's something from an article back in 2006:

In one extreme case last year, an online gamer in Shanghai killed another player who had taken his cyber-weapon, called a Dragon Sabre in the popular online game Legend of Mir III, and sold it for 7,200 yuan (US$871).

The gamer almost forfeited his real-world life for doing so when he was handed a death sentence with a two-year reprieve.

Still, Tencent spokeswoman Catherine Chan said in a written statement that the company's virtual money did not pose a threat to the real-world economy.

Q coins were created to work as tokens for the consumption of the company's online services, and the Q coin "is definitely not a currency," she said.

All sounds a bit familiar, eh? And, if the bubble theorists and tulip fans are right and Bitcoin falls over, there will be another way for people to circumvent the nosiness of government. Another on-line system - call it a currency or an exchange system, maybe even a game, it doesn't matter. People will use it to get round the arbitrary controls governments place on our actions.

Ms Chan, quoted above, is right - virtual money isn't a threat to the real-world economy, it's a threat to government. Hence the concerns about taxation and the polemics about Bitcoin being evil. I would therefore leave you will an alternative view - not from some techno-whizz or Randian obsessive but from Hayek:

"We have always had bad money because private enterprise was not permitted to give us a better one.  In a world governed by the pressure of organized interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need.  Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.”

Those who believe that the only safety is the safety of government guarantee are wrong - cruelly wrong. This supposed guarantee is a fraud, corrupted by inflation and fed by the need of bureaucracy to fulfil Parkinson's Law.  It doesn't matter whether or not Bitcoin is a good investment, whether it is safe or whether other people use it for illegal acts. It really doesn't matter because the stopper is out of the bottle - the genie of liberated money is out of the bottle and is a weapon for those who would tear down the castle.

How we respond to these changes will be a measure of how much we want liberty and whether we prefer choice to government edict.

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Bitcoin threatens government ergo Bitcoin is evil

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This is the essence of Paul Krugman's argument suggesting Bitcoin's sinful nature. And this evil is defined in a quote Krugman takes from Charlie Stross:

BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions. 

It is on this basis that Krugman makes the judgement that Bitcoin is evil. Indeed, he recognises that the debate about the morality of private money is very different from the debate about how (or whether) the private money actually does the job that state money does.

Krugman's core criticism of Bitcoin - and one assumes other means of exchange (or value storage) that aren't controlled by government - is that is undermines big government. Moreover, if private money succeeds (and the jury is out on this) then there is no foundation for monetary systems that drive these big state, big corporation systems - what we can call 'national accounting arithmetic' or 'magic money tree' models.

This is only a moral question is you accept that there is a moral basis for taxation.

Since I don't believe there is any moral case for taxation (as opposed to pragmatic, practical cases) then I see no reason at all to be concerned that private money makes it hard for the government to monitor my financial transactions.

What happens under this system is that government has to make the case for raising taxes - to set the price of government at a level where people willingly pay. Just as importantly, such a change more or less destroys the use of  income taxes to promote 'equality'. Taxes become what they should always have been - means for government to provide the services that people require of that government rather than a blunt instrument of social control.

We still have a way to go - these private monies are risky and unproven. But if the direction is towards a smaller, less intrusive and consent-based government then, far from being evil, Bitcoin is a source of moral salvation.

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Bitcoin and the end of big government...

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There's a great article about Bitcoin over at ASI where Michael Taylor concludes:

The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.

There's no doubt that the opportunity to eliminate transaction costs and ensure that the transaction is private is very appealing. Not simply because it makes the word a better place or that it begins to undermine that banking hegemony but also because it disrupts the basis of government finance.

Which is why the apologists for the current finance system and other fans of big government keep talking about drugs. It's all they've got!

Me I hope Taylor is right in his prediction and we can get the monkey of big government off our backs.

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Bitcoin and the new fascism...

Guiseppe Volpi, Mussolini's Finance Minister

Like this from Izabella Kaminska:

Currencies of the realm represent a social contract between citizens and the government. Not only are they mandated as official tender, they end up being inherently superior to other units because of that government affiliation. This is because the government is the one common denominator between all participatory agents in the economy, all of whom at some point have to pay taxes. Why would you accept settlement in BP shares, when you know that ultimately your liability to the government is in national fiat.

That currencies exist because we have to pay taxes is not only untrue but a misrepresentation of the point of currency. Indeed, the liberation of money from state monopoly must be one of the objectives we strive for - monopoly is always bad and doubly bad when it exists solely for the purpose of allowing the government to take that which is ours by main force.

The other reason this is nonsense is because the direction we are travelling is away from government not towards it - thus it is no surprise that governments dislike systems of exchange they don't control. Moreover the size of government requires that these initiatives be stopped - if they are not then government cannot sustain itself (other than by debauching the very currency that Isabella claims is 'inherently superior'). That superiority is simply a consequence of government's monopoly of effective force rather than anything inherent in some mythical 'social contract'.

But then the writer here compounds the misperception by revealing her prejudice:

This is because it is still based on anti-social instincts and the pursuit of personal gain over the common good in a nefarious and unproductive way for society. 

Now - given that the writer claims some economic knowledge - I'm not going to talk about Adam Smith and that famous bit about the butcher's self-interest. Rather I'm going to ask who defines the 'common good'? If (as I suspect is the case here) the definition is 50%+1 then we are simply living in a tyranny and creating the circumstances for the rebirth of what Finer called the 'oikos' state. And the tyranny would be a platonic one - the great and good, the heads of that 'oikos' would decide the common good. Anything - such as a private currency - that would threaten what those heads determine is 'good' must be stopped. As our author puts it:

At its heart the currency is founded on anti-social tenets, which will always tempt capital that wishes to be used unproductively, especially in an economic environment where the only productive use of capital is increasingly through government spending.

Or as Benito Mussolini would have put it:

Everything within the state, nothing without the state.

Welcome to the new fascism folks!

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Will we still have banks? Pondering on the future of money....

This is a serious question about banks – in days to come will we still have banks as the businesses we love and cherish (so much we’ve given then billions of newly minted pounds and dollars so they didn’t have to cry any more)?

Now I don’t know the answer to this question – except to say that there will be a need to store money safely away from the burgling and thieving sorts (and perhaps the taxman too), there will still be investments made with aggregated funds and there will be an important role advising us on how we should be using the cash we’ve earned, inherited or squirreled away.

Firstly however we need to distinguish between the various businesses calling themselves ‘banks’ and the bank (and banking) itself. It is very likely those businesses will survive – or most of them will – but not as banks in as much as we understand banks:

The principle has been proved that innovation often occurs where the need for change is greatest. Look to Africa, where there are few banks, poor physical infrastructures and a rural population often dependent on remittances from the city. It is here that technology can really demonstrate value by offering a secure, efficient alternative to cash transactions. Such has been the success of products like M-PESA in Kenya that we are at a point where, looking forward to 2020, many experts, as well as the key players such as banks, governments and retailers, can see a world, particularly in emerging economies, where the majority of cash transactions have been replaced by digital ones – and where most of these will be made by our phones.

In the developed world we are lagging behind – partly because we have an extensive, mature and (wrongly) over-protected banking system and partly because consumers are very conservative in matters financial. In Africa people don’t have access to banks – you know those big buildings in the town centre – but are very likely to have a mobile phone:

In Ghana, for example, one in 20 people has a bank account. Meanwhile, one in three has a cell phone. 

So the mobile phone means that we are going to move our money around digitally and this money – the stuff the government prints – will be joined by a host of other forms of digital “cash”. From supermarket points schemes through coupons to ever more sophisticated digital bartering systems. After all barter is alive and well out there:

Watches, baseball cards, cupcakes and cookies, artwork, a journal entry, a bike and even a dog have all found new homes at Main Street Family Dentistry in Tupelo, Miss.

Dentist Harry Rayburn and his staff accepted the tokens as a barter from patients on a single day in exchange for fillings, extractions and cleanings, mainly from uninsured patients.

And it is but a short step from this situation to the creating of transferable forms of what amounts to “private money”. By this I don’t mean non-banking investment such as that from angels but de facto money that can be used instead of pounds, dollars and euros.

The problem with all this change isn’t that it isn’t possible – converting Tesco Clubcard points into transferable currency is simple and they could join emerging on-line approaches to payments such as Bitcoin, PayPal and so forth. It is that the authorities don't like it.  Where we previously had no effective competition in the administration and effecting of transactions – you used the government’s money – we now have a more complex, enterprising and creative system brokered on-line but (as we know from Clubcard) applicable in the real world too.

The problem with making this happen faster is that it isn’t what either the banks or the government want. After all, they will tell us, we can’t have just anybody setting up an on-line system for financial transfer and transaction – that’s what we have banks, banking regulation, banking lawyers and treasury departments to do.

Indeed, as virtual cash pops up the lawyers aren’t far behind (although, being lawyers rather than economists they don’t actually understand what money is):

Dax Hansen, an attorney at Perkins Coie in Seattle and one of the experts in this field, says virtual currency can be used to buy anything from a sword or armor in a game to a ring tone on a phone.

"It can be given away for free as a promotion," Hansen says. "It also can be given away as a marketing campaign if you provide some information. It has a value for which the marketer is willing to pay."

The trouble begins when that virtual currency can be redeemed for cash--particularly if it involves more than one company. At that point the financial services laws kick into gear, including those used to prevent money laundering.

Mr Hansen stills sees this emerging ‘money’ as a sales promotion rather than as a competitor to what he call “real money” but it is clear that we shall see challenges – indeed China has already begun:

In the latest wrinkle in the fabric separating reality from virtual reality, virtual money is being exchanged for real yuan on a booming scale. The practice is so widespread that it has raised concerns that virtual money could challenge the renminbi's status as the only legitimate currency in China. 

And not just a competing currency but one outside the control of the government. Which bothers American politicians too:

This has not stopped some American politicians from expressing grave concern about the virtual currency. Charles Schumer, a prominent Democratic senator, has inveighed against it, claiming it is just what drug dealers have been waiting for. All the clever cryptography means Bitcoin dealings are difficult to trace. But not impossible.

It seems to me that these people are railing against the dying of banking’s light – the industry has had a decent innings - latterly with the connivance of government in preventing new entry, controlling innovation and protecting the profitability of the existing system. However, just as the on-line world is transforming publishing, altering the dynamic of political discourse and changing how we communicate, we may see it first destroy banking as we know it today and then remove the state’s monopoly over money.

And this change will take place in places where government is weak – in Africa particularly – rather than in the developed world where government is strong. It will be interesting to see this play out and to discover how systems created to sell more tins of beans or allow gamers to buy a magic potion will challenge and perhaps replace the monetary systems of today.

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