In his Washington Times column, economist Richard Rahn considers the benefits of non-governmental currency.
People see the debt buildup in the United States and most other major countries and correctly ask, “How long before the next great inflation?” This justified fear of a new inflation is one of primary motivations of many in the search for money alternatives that are independent of the irresponsible world political class.
The great economist/philosopher F.A. Hayek wrote a classic book in 1976, “Denationalisation of Money,” which not only made the economic case for non-government money, but described how private commodity-backed monies could come about.
He identifies several problems with the use of dollars as the world’s reserve currency:
The foreign holdings of U.S. dollars and very low-interest dollar-denominated debt means that the rest of the world is, in essence, giving the United States a subsidy in the form of interest-free or very low-interest loans.Obviously, this situation causes resentment in the rest of the world — poorer countries subsidizing the biggest rich country.
Another resentment is caused by U.S. financial imperialism. The United States is able to impose its tax law outside of its own borders, and regulate foreign banks, other financial institutions, and even non-financial institutions. Most international commerce is done in U.S. dollars — and the U.S. government sets the rules for dollar usage.
…If the U.S. government tells a primary bank that has an account with the Fed not to deal with another bank, because that bank deals with banks or businesses that engage in things the U.S. government disapproves of — terrorist or drug dealing finance, or facilitating U.S. tax evasion, or violations of other U.S. tax regulations or securities laws, etc., the bank has almost no choice but to comply — or be shut down.
The U.S. government, in co-operation and encouragement of some other governments, notably the Europeans, uses its power to strip away virtually all financial privacy from both individuals and companies, and even governments.
Among other things, this enabled the U.S. government to impose the terrible FATCA law. So what is the answer?
Bitcoin, with its blockchain technology, was a great step forward, by enabling peer-to-peer transactions (outside the banking system) with a high degree of financial privacy. But it has failed to provide stability given its huge price swings, and it has proved to be cumbersome to use and slow, and much more-costly — including the amount of electrical power used in its “mining” operations — than envisioned by its creators.
Hayek was probably right in that any new currency will need to be backed by real commodities. A computer algorithm, such as that behind Bitcoin and most of the other cryptocurrencies, is unlikely to meet the test. The effort to find alternatives to the dollar is almost certain to succeed given the global political and financial interest, and the amount of brainpower at work.
Perhaps he is correct, but there are also a lot of cryptocurrencies with their own benefits and drawbacks. Many improve on the short-comings of bitcoin that Dr. Rahn identified, though without being first to market like bitcoin, it is difficult for any one currency to rise above the rest. They all, however, provide the advantage of preventing government manipulation of currency. Will that be enough?
