Another week has gone by and the bitcoin price has reached another all-time high, breaking the $6,000 mark on Sunday. While predictions of the cryptocurrency reaching $10,000 within the next six to ten months are spurring on new investors, governments across the world are less than excited that, for the first time ever, the monopoly of fiat currencies is truly being challenged.
British-American computer programmer and technology pioneer John McAfee has warned that governments are trying to curtail the use of cryptocurrencies because of the danger it poses to them. The most obvious threat, McAfee points out, is the increasing difficulty of enforcing income taxes as Big Brother’s gaze into individuals finances is obscured by cryptography.
“Our income taxes are the greatest source of revenue," he says, "but if everybody’s using Bitcoin, the government doesn’t know what your income is. They can’t tax it, and if you choose to say I didn’t have anything, they cannot prove otherwise.”
While McAfee is spot on about the chance that national tax programs will lose out, there is more on the line than income tax. An end to the fiat currency system’s monopoly would also mean an end to governments’ unlimited access to funds at the expense of consumers. Let me explain...
While the mechanism of money creation differs from one country to the next, the Bank of England’s online news and publications provide a view that might surprise a great number of people:
“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.”
If you interpreted the above statement as “money out of nothing and credit out of thin air”, you understood correctly. While the same document states that monetary policy limits the creation of new money to the rate of economic growth in order to keep inflation low and the economy stable, the Pound’s history of devaluation tells a different story:
The reality is that fiat currencies, even the Pound, lose their buying power as an ever-increasing volume of new money is created to meet the demand for loans. But, why would governments implement monetary policy that makes generations of consumers suffer at the hands of increased inflation?
Governments themselves are some of the biggest debtors as levying income tax, indirect taxes, and raising funds by selling bonds, are often not enough to cover their exorbitant spending habits.
In the United Kingdom, the government financed a part of its deficit by means of money creation up until the year 2000 when EU law forced it to a stop. The creation of money to fund government endeavours, or Sovereign Money Creation, is not a new idea nor is it an exception to the rule.
In a 2011 paper on the long-term evolution of central banking around the world, Assistant Professor of Economics at the University of Toulouse, Stefano Ugolini points out how common the process of financing fiscal deficits with money creation has been:
“The presence of government loans and securities on the Bank’s balance sheet continued to be overwhelming throughout the first half of the 19th century; it was only after the reform of 1844 that the Bank entered the commercial credit market more actively. … With the explosion of war finance in the 1910s and the decline of international trade in the 1930s, Treasury bills almost completely ousted trade bills from the discount market … thus making the Bank operate almost exclusively on Treasury securities … Therefore, on the whole, the Bank of England never ceased to play the role of ‘great engine of state’, famously credited to it in 1776 by Adam Smith.”
William Anderson, Professor of Economics at Frostburg State University in Maryland, directly blames governments’ highjacking of the money supply for the modern economy’s infamous boom and bust cycles.
In addition to monetary policy’s blame in disrupting instead of stabilising the economy, it is also guilty of funding and prolonging many historical conflicts. Professor Gabriel Calzada Alvares, a follower of the Austrian School of Economics, lists inflation, taxation, conscription-confiscation, and war bonds as four methods by which governments fund their war campaigns. World War One, for example, was partly funded by the United States’ Federal Reserve implementation of monetary policies that reduced the value of public money.
Considering the number of historical records indicating governments use of “inflation tax” to fund government war spending, economists suggest that we can expect to see the same mechanism to be used to fund future state wars.
The democratic system intends to represent and affect the will of the voters in the way money is spent, society is governed and foreign policy is drafted. While national governments have a monopoly on money creation, however, authorities are in the position to bypass the will of the electorate when it suits them.
A blockchain economy, on the other hand, would limit governing bodies’ access to funds and therefore power. Without unbridled access to funds, the government that wants to invade a foreign territory would have to gain the support of a large proportion of the nation. If governments had to ‘crowd fund’ for their war, citizens would give far more serious consideration to the facts and reasoning presented to them. Even the most warmongering people in our society would think differently about warfare if it required them to contribute a hefty sum from their own pocket.
While governing bodies around the world are grappling with how to enforce a level of regulation over cryptocurrencies, the reintroduction of finite money that is borderless and permissionless, is an unstoppable force that holds the potential to regulate governments. Should Bitcoin become a widely adopted currency, governments would have to conform to the blockchain principles of transparency, verifiable solvency, and a deflationary currency.
Though a Blockchain Economy poses a tremendous threat to those authorities who have become comfortable in their abuse of power, for the consumer it promises more protection of their buying power, more influence in matters of national importance, and fewer international conflicts.
It is for this reason, that cryptocurrencies are far more than just currencies. Blockchain technology provides a path to socio-economic reform, offering individuals independence from state-controlled capital, and a choice in how, where, when and what we spend our money on.