Crypto-currencies are an entirely imaginary form of money, dreamed up by pimply nerds in basements. Or so it seemed. Yet examine the algorithms behind some of the better crypto-currencies, and look in contrast at the monetary policies that have devastated the last decade. You will recognize two things. First, fiat money is fiat money, whether or not it has a government stamp on it. And second, the best crypto-currencies, considered as a store of value, are much more solidly designed than the world’s major conventional currencies. The long-term implications of this for our economy are troubling, to say the least.
We must establish first what a sound currency consists of. To do so we must once again go back to the debates surrounding the 1819 return to the Gold Standard. In a House of Lords debate a year before that, Robert, Lord Liverpool, Britain’s prime minister with an especial expertise in economic policy said: “The best system of currency for any country, and particularly for a country such as this, is a paper circulation, measured by the precious metals as its standard, and supported in value by being convertible into cash at the pleasure of the holder.”
He then explained why he felt any paper currency issue should have statutory limits: “Unless some limit is adopted, property will become insecure, and the circulation will be subjected to repeated shocks, that might cause great public calamity and individual suffering. The evil of insecurity could not be a solitary evil. The repeated failures of banks would give a shock to public credit, and the character of all paper currency would be affected by that of the most insecure.” Presciently, Liverpool thus anticipated our present difficulties with unlimited expansion of credit.
Finally, Liverpool pointed out that “the tendency of an inconvertible paper money is to create fictitious wealth, bubbles, which by their bursting, produce inconvenience.”
Liverpool was thus not rigidly opposed to paper money; he had worked with a paper money system in 1797-1821. He also recognized that in a modern industrial economy, the vast majority of payments were made through paper instruments of one kind or another. However, he believed that the amount of paper issued should be strictly limited. In another speech a few years earlier, he had explained that Britain’s paper money system of the Napoleonic era differed from the French “assignats” or the U.S. “continentals” because the bank notes were issued by the Bank of England, then a private sector entity, so that normal banking prudence and avoidance of leverage would limit the amount of paper that was issued.
