“The avarice and injustice of princes and sovereign states.” This is Adam Smith’s phrase. He said that this was what is been behind the destruction of money through the ages. Two-hundred years later, F.A. Hayek, after a career of pleading with governments to stop destroying the quality of money, said that the only way to protect money as a good from the avarice of governments was total separation. Money should be produced privately.
The debate is alive again today, with digital-age monetary inventions that are attempting to compete with government money. Debunkers are everywhere. Money can’t be left to the market to produce and manage. It is a thing for the state to do. Governments have been in the money business for thousands of years. It must always be so. Georg Friedrich Knapp proved this more than one hundred years ago!
In 1963, Murray Rothbard wrote an anti-inflation tract called What Has Government Done to Our Money. The effervescent prose and searing logic made it an instant classic, and a favorite of “gold bugs” for generations. If you had never thought about the nefarious effects of government control of money, this small monograph had an amazing clarifying effect. It certainly did for me.
But what’s really interesting is that Rothbard wasn’t really making a case for the 19th-century gold standard. What he was pushing was full privatization of money. He wanted it to be created and managed by the market. His push for gold was more predictive than normative: if government left the realm of money production forever, it is likely that the golden constant would be the victor, though other precious metals would likely circulate as well.
What truly blew my mind when I read it was his case for private coinage. Abolish the U.S. Mint, he says. Wow. He points out that the free market is perfectly capable of managing weights and measures. Markets were doing that long before governments got into the act. They can do it again. There are more than enough methods to tell real from fake.
As for banks, let them be regular businesses, competing with each other like any other business, he said. The issue of solvency will take care of itself. Banks that take too many risks or go too far out on a ledge, or just miss market trends, get punished. Those that are prudent and wise win out. They will be better calculators of their own economic interests without a government and central bank guaranteeing their survival and distorting the signalling systems of the market.
It also sounds compelling. But what kept me puzzled was this claim that the private sector could be fully in charge. Who would get things going in the first place? As it turns out, the market is what creates money in the first instance, out of an existing good or service with a use value that people gradually come to acquire not to consume but to trade in another round. In this way, barter turns to indirect exchange.
We see this in prison environments all the time. Some valuable commodity serves as money, not because the wardens declare it to be so, but because informal markets in prisons cause something to emerge. It could be noodle packages, canned fish, or small soaps. It’s hard to predict, but where there is a desire to trade, there will be money.
How can we know there would be enough available for everyone who needs it? Good money is divisible and its purchasing power adapts based on supply. The costs of producing money follow a profitability model. When it is worth it, we get more production. When it is not, money production falls. The price system of profit and loss – the entrepreneurial drive to get people what they need – works here just as with any industry.
What about a real use case? You can visit any high-end coin shop and see beautiful coins from ages past that were produced entirely privately. There is no lack of evidence that these existed.
The Button Makers
But has private production ever served an entire structure of production in any historical use case? A neglected book documenting exactly this comes from George Selgin’s Good Money, which tells the case of the factory system in the early years of the Industrial Revolution. Government minted high-value coins but there was a huge shortage of money to pay laborers in the factory system.
The Birmingham button industry saw an opportunity and started making money for factories to pay workers. The system worked beautifully – too much so. The tokens were much fancier and in demand than government currency. Government cracked down and re-monopolized the money.
The beauty of Selgin’s book is that it provides the real history of Rothbard’s robust theory. It could work. But there was one problem: it stopped working when government didn’t like it anymore.
Here is the great issue in the history of money. How do you keep a perfectly good private system of money production from being trolled and finally destroyed by external entities? In the crypto world, this is the problem of the centralized point of failure. If there is a building to visit with auditors, a proprietary website to hack, a company to drag before Congress, a code that can be broken by darknet trolls, it is going to happen.
In the decade before Bitcoin, there were many attempts to create a digital unit or at least some private currency alternative: DigiCash, E-gold, the Liberty Dollar, and, even going back in time, the dream of the Gold Standard Corp to kick off a private money system (it didn’t end well). Even PayPal began as an attempt to break free from government produced and managed money.
Reasons for Failure
In the early days, I watched some of these companies come and go. There was always some issue, some problem that led to legal problems, lack of consumer interest, hackings and funny business, and so on. At some point, I had to conclude that the whole thing was hopeless.
What I saw as a long period of failure – proof that it could never happen – was actually something else. It was evidence of the indefatigable energy and creativity to figure out some solution to the problem of the government’s money monopoly. In retrospect, I should have known that this is how market innovation works. Try, fail, improve, fail, adapt, fail. Then one day, it all comes together.
That eventual solution had many moving parts (internet dependency, a protocol governing money creation rates, a publically transparent ledger, double-key cryptography, hashing to provide proof-of-work access). This was all remarkable. But a feature that made Bitcoin different from everything that came before was its decentralization. Just as Bittorrent allowed peer-to-peer sharing of movies, with no central point of failure and therefore nothing to hack or take down, Bitcoin gave the world its first fully decentralized money. Now there are thousands upon thousands.
What we’ve learned is that money can be privately produced. Hayek’s dream of choice in currency can be reality. What form it will take in the future no one can know for sure. What’s more, there is no end game here. The process of innovation will never stop. There might not be a final winner. But we’ve also learned that in order for money to be protected from the trolls both public and private – “The avarice and injustice of princes and sovereign states” – there also needs to be decentralization to make the enterprise durable in the face of attacks.
Napster was crushed, but Bittorrent lives. Uber will be regulated, but decentralized ride sharing is on the way. Many private and digital currencies – whether gold or crypto – fell before 2008. The new generation of decentralized monetary technologies have changed the game.
A version of this article appeared at Forbes.