The late economist FA Hayek had a great deal to say about private money, inflation, and indeed, about preserving individual freedoms against a tyrannical state. As we approach the 15th anniversary of Satoshi Nakamoto’s publication of the Bitcoin whitepaper and the currency’s release shortly thereafter, it is worthwhile to reflect on what Hayek might have thought about this technological breakthrough.
In October 2008, the pseudonymous character Satoshi Nakamoto announced that he had published a paper explaining how a peer-to-peer “electronic cash system” could work “with no trusted third party.” In January the next year, he launched Bitcoin with mention of an article in the British newspaper The Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” What was implied was that the release of this peer-to-peer electronic cash system was a response to the cronyism he saw in central banking during the Global Financial Crisis.
Unfortunately, Hayek passed long before Bitcoin’s inception, but in his book The Denationalisation of Money, he argued for nothing short of stripping the state of its monopoly power of money itself. Beyond this, Hayek imagined an economic system in which “several concurrent, distinct kinds of money are simultaneously in use in the same territory.” As such, if Bitcoin had been around during Hayek’s lifetime, he likely would not have advocated (as many bitcoiners do) to “bitcoinize everything,” precisely because a single money existing everywhere was hardly what he had in mind. Hayek wanted competition in money.
Sly and unstoppable
Hayek certainly would have appreciated Bitcoin’s unwavering resistance to political pressure. But, above all, I like to think that Hayek would have appreciated Bitcoin for at least two other important reasons: it is both sly, and nearly impossible to stop. In a 1984 interview, Hayek stated that:
I don’t believe we shall ever have good money again before we take the thing out of the hands of government. If we can’t take it violently out of the hands of government, [then] all we can do is by some sly roundabout way introduce something that they can’t stop.
The key to the “sly roundabout way” that Satoshi put together (having borrowed from those before him) was that Bitcoin was merely a protocol – a TCP/IP of money – one that quickly became highly decentralized, meaning that no parties would be capable of controlling it for their own benefit. And by being an internet-native digital asset, there would be no centralized point of failure in the real world, with tangible, backed assets that could be seized to shut the whole thing down (as happened to at least two asset-backed, privately issued digital currencies before Bitcoin).
Bitcoin and gold
Satoshi sought to imitate gold, albeit in the digital world. In the Bitcoin whitepaper, he wrote that “The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation… [although in] our case, it is CPU time and electricity that is expended.” So what did Hayek think about gold?
Hayek wrote that if gold were to remain in the hands of government, that he considered this metallic standard to be “the only tolerably safe system.” But gold also stood only as “a very wobbly anchor” to protect against “risks of fraud by government” and “would never be as good a money as one issued by an agency whose whole business rested on its success in providing a money the public preferred to other kinds.”
Hayek also argued that gold gave us a “semi-automatic regulation of the quantity of money” (something he viewed favorably), but he may have also found interesting the idea of an impenetrable algorithmic monetary policy, which Bitcoin provides.
What Hayek considered to be a better money than gold was his own proposal for a money issued by banks under a state of competition in money, and backed by real assets. Economist Lawrence H. White, however, rightly distinguishes between “Hayek’s proposal—to allow free choice and private competition in currency—from his prediction about what type of money would then dominate the field.”
Hayek also believed that the public was likely to prefer a money “whose purchasing power it could expect to be stable.” Such a stable purchasing power in money, he wrote, would reduce the strain on debtor-creditor relations (a subject that Hayek covers in detail in his book).
White argues in his own new book Better Money: Gold, Fiat or Bitcoin? that a rise in purchasing power in gold instigates (through the profit motive) a response to produce more gold “until purchasing power returns to trend.” By contrast, as a similar rise in purchasing power for Bitcoin cannot provoke a similar increase in the supply of bitcoins beyond the protocol’s fixed, coded supply schedule, there are “no expectations of [mean] reversion to dampen volatility.”
Whether Bitcoin’s purchasing power will stabilize over time sufficiently for it to become a commonly used medium of exchange is a topic of ongoing heated debate. From my point of view, what Bitcoin sacrifices in terms of stable purchasing power by being unresponsive to increases in demand, it makes up for enormously elsewhere as a superior rules-based monetary system, neither subject to human discretion of central planners nor to miners that may wish to create more units than its supply schedule is programmed to create. This is precisely why the masses may inevitably adopt it (whenever their governments are incapable or uninterested in deterring them from doing so), not only as a store of value but also as a medium of exchange. And by having an internet-native digital asset that does not respond to external forces for its supply, we achieve a radically decentralized money, unprecedented in human history.
Additionally, enough of Bitcoin’s users don’t seem to mind the volatility enough to abandon it, and its widespread use keeps growing: both on-chain and on its so-called second layer. And, in fact, the present crackdown against it – especially in the United States and Europe – as well as the rush to implement CBDCs around the world, each suggest that regulators are worried about just how powerful it is.
So, would Hayek like Bitcoin? I never knew Hayek, but I think he would have loved what it represented as well as the extent to which it takes money out of the hands of the state (as people around the world transact peer-to-peer, permissionlessly, with this stateless digital asset). Bitcoin is that sly, roundabout way that they might never stop. Oh, and remember Satoshi’s mention of The Times article about bank bailouts? By seemingly enormous coincidence, Satoshi (assuming he was unaware at the time), would have probably been delighted to learn that in Hayek’s same “sly roundabout way” video interview, he held up a copy of The Times newspaper and declared: “I read this everyday.” Great minds think alike.