The craze for cryptocurrency can be explained by a host of factors: the allure of getting rich quick; the attraction of off-the-grid accountancy for malefactors like tax evaders and drug dealers (though Bitcoin is traceable); the glamour of the new. Despite blockchain currencies’ wild volatility thus far, I’d still posit that the more underlying attraction is to a reliable store of value. Bitcoin investors may not recognise their motivation as such, but the impulse behind computer-generated currency is revolutionary: to take the production and control of money away from government.
Now that we live in a world of 100 per cent fiat currencies — backed by nothing — governments can print their hearts out, and they do. The rounds of quantitative easing since 2008 — money-printing on Red Bull — may not seem to have produced the inflation many a conservative economist predicted. But they have. Asset bubbles like London and New York property markets, fine art, collectibles, equities — hitting historic highs — and Bitcoin itself are all evidences of inflation. There’s too much money in the world right now, sloshing from investment to investment and bloating every bolt hole one can think of to stash with capital (an unholy proportion of which is founded on debt). Because it costs central banks nothing to turn on the pumps.
What makes the likes of Bitcoin extraordinary is that the currency is limited in quantity, thus functioning more like precious metals. Producing a single Bitcoin requires so much computing power that environmentalists have criticised the process as cataclysmically wasteful of energy. Further, every Bitcoin mined requires more computing power than the one before, meaning that the total coinage in circulation rapidly approaches an absolute mathematical limit.
Contrast that with fiat currencies. The smallest little child knows that keeping your capital in cash is a mug’s game. For years central banks have cheerfully informed us that they aim for an inflation rate of 2 per cent. (Mind, at only 3 per cent — which the UK’s CPI currently exceeds — inflation will halve the value of your money in a mere 23 years.) The public has grown inured to the notion that a functional economy mysteriously requires their currency to rot like meat. This is a lie. One British pound in 1797 was worth about exactly the same amount in 1914 — bouncing up and down a bit, but averaging no inflation whatsoever for 117 years. The Industrial Revolution would qualify as economically functional. Enlarge the picture, and the pound took 164 years between 1750 and 1914 to roughly halve in value. Yet in the century since the first world war? The pound has plunged to the penny.
The ‘almighty dollar’ is no different. One dollar today is worth one cent of a century ago. Although classically one primary purpose of a currency is to act as a store of value, modern currencies are no longer intended to do so. The dollar retains its coveted status only because other currencies are corrupting even faster. The only real check on inflation, every other country is also playing the printing-press game, competing over whose money is the more worthless.
The purposeful inflation of fiat currencies, the very measure of which is rigged to underestimate the degradation of a people’s savings (imagine, in Britain, that the statistic excludes the cost of housing), amounts to a steady, deliberate usurpation of a nation’s wealth, and constitutes the ultimate stealth tax. Deficit-dependent governments love inflation, because they can repay loans of more valuable money with crap money.
I had a ferocious argument with a left-leaning journalist not long ago, who jeered that ‘sound money’ was a fetish of the rich, to the detriment of the poor. I differed. Although monetary decay favours debtors over savers, these days the wealthy are as apt to rely on debt as the impoverished, and on a much grander scale. Who takes out multi–million-pound mortgages in Kensington? Not the exiled residents of Grenfell Tower.
Especially with today’s near-zero interest rates, it is those who have accrued only modest capital who are especially screwed by a currency that evaporates. The rich can afford to play games with their wealth. For the frugal working and middle classes with small savings on which they depend for retirement, not only is it difficult to make gains hand over fist; without putting precious nest eggs at risk of getting smashed — in equities, for example — it is impossible even to keep what they already have.
Government is too self-interested to be trusted to maintain a currency that sustains its value. The blockchain experiment may not be the answer. (Check out Hashgraph — faster, requiring minimal energy, and more capable of scaling up.) But I hope the renegade entrepreneurs keep trying. For on the face of it, any currency that costs nothing to multiply, when its manufacturer actively benefits from running the presses, will inexorably fritter to confetti. Citizens in any income stratum should have a right to expect that a pound in their pocket today will buy a pound’s worth of goods or services tomorrow. But apparently that’s pie-in-the-sky. What was do-able in 1797 we can’t, or won’t, do now.
Hilariously, even the Bank of England is now considering generating its own digital currency — which Mark Carney would prefer to use only for transfers between central banks, but which many of the governor’s colleagues would like to market directly to consumers. I say ‘hilariously’, because a Bank of England Bitcoin would be linked to the value of the pound. Great. Can’t wait.
Imagine a secure international cryptocurrency whose steady value was not subjected to deliberate, systematic decay, whose supply was strictly limited, whose coin was universally accepted, and whose production was beyond the control of the state. Even if the investment couldn’t be expected to appreciate in the slightest, I’d put my every last farthing in such a currency in a heartbeat.
Subscribe to The Spectator Australia today for a quality of argument not found in any other publication. Subscribe – Try a month free