Since Bitcoin is often equated to and dubbed as “digital gold,” would famous Austrian school economic theorist Ludwig von Mises choose Bitcoin over the world’s favorite precious metal if he were alive today?
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Bitcoin & the Austrian School
[Note: As a fun game, feel free to substitute the word “Bitcoin” for “gold” in the quoted parts below.]
In a 1951 book titled “The Free Market and Its Enemies,” theoretical Austrian School economist, Ludwig von Mises, argues against the dangers of fiat currency, urging for a return to the gold standard. “A fiat money system cannot go on forever and must one day come to an end,” Von Mises states. “The question is how to return to the gold standard.”
In a chapter titled, “The Gold Standard: Its Importance and Restoration,” his underlying argument is that gold is apolitical and free from centralized control (e.g. the Federal Reserve, Bank of England).
“The gold standard under present conditions is the only standard which makes the determination of the purchasing power of money independent of the changing ideas of political parties, governments, and pressure groups,” argues von Mises.
Interestingly, this is also one of the key structural attributes of Bitcoin, the world’s first, global, peer-to-peer, decentralized value transfer network. The similarly named digital token (bitcoin) is used to transfer value directly between two parties without a middleman. This is peer-to-peer commerce in its purest form; unlike digital money (e.g. credit cards), but similar to using physical cash.
However, this cash supply is not only easily manipulated, but our current monetary system is dominated by the digital US dollar. In fact, only about 3% of money in total circulation exists as physical cash. What’s more is that this number decreases with each day as the digital money supply is inflated. The digitization of money has been a boon for bank intermediaries, who not only collect interchange fees on every day transactions, but also your personal information. This information enables these middlemen to block your bank account with the flip of a switch, begging the question of who’s really in control of your money.
Restoration of a Bitcoin Standard
One of the biggest issues among gold standard advocates is how and who should determine its price. Should it have a fixed or a floating rate? Or should it be left for the free market to determine? Additionally, how can this price be aptly adjusted to ever-changing economic conditions. Von Mises asks:
[H]ow should this return be effected—by accepting a gold price of [the historic] $35 an ounce? Or by determining the price of the ounce of gold according to the market conditions at the time of the transition?
It is no surprise that the renowned economist prefers the latter option. However, it is here where Bitcoin holds the advantage over gold.
The bitcoin price is, of course, determined across the various global online exchanges, in real-time. There is no central authority setting a spot price for gold after the which the market value is settled on among the traders during the day. Bitcoin’s digital form ensures that there is virtually no lag in determining the price per bitcoin, and what’s more, is that these online cryptocurrency exchanges never close, operating 24/7. It’s simply the best real-time price discovery mechanism for a commodity that’s available today.
Perhaps von Mises would prefer Bitcoin if he were alive today when he states:
I am in favor of gold coins so that the individual will be involved, so one will realize when the slightest inflation takes place. The fact that the individual citizen can see when the situation changes is one of the most important checks of the Constitution against inflation.
The arguments of gold standard advocates have held greater weight prior to the advent of the internet and online commerce. This is because in today’s digital age, money as a technology must be digital and frictionless. Even gold has become obsolete in this regard despite its historical gravitas.
While gold can certainly be used to back paper or digital currency today, its physical nature limits its usefulness in the digital age. It must still be centrally stored, and thus subject to storage fees, manipulation, and even confiscation. Bitcoin is more secure because only the holder of the private keys has full control of the funds. In fact, even President Obama admitted that cryptocurrency can empower even the smallest individual, stating:
If in fact you can’t crack [Bitcoin], if the government can’t get in, then everybody is walking around with a Swiss Bank account in their pocket. There has to be some concession to the need to be able to get into that information somehow.
This is, of course, pretty amusing in light of the Panama Papers leak, since Obama’s statement can be interpreted as only the super wealthy should have Swiss Bank accounts. Nevertheless, Satoshi Nakamoto’s invention has, for the first time in human history, given the power of money creation as well as safekeeping to the public, even if they do not realize it yet. This is something gold could never do.
The ever-increasing interconnectivity, computing power, digitization, and speed of global commerce, will necessitate Bitcoin — or whichever cryptocoin(s) attracts the most users — to become the first, truly global unit of exchange. But unlike traditional currency, it will not be enforced by government decree (i.e. fiat), but will gain users voluntarily and out of sheer necessity. Much how the internet wrested the information monopoly from central authorities, cryptocurrency will do to the same to centralized money.
Would the founders of the Austrian School of economics embrace Bitcoin if they were alive today? Let us know your thoughts in the comments section below!
Images courtesy of aaron-koenig.com, mises.org