To many people, the idea of private companies offering currencies that operate outside the government’s control sounds outlandish, or even scary. As we have never known anything beyond national money in our lifetimes, an understandable response would be “why would we ever need to try crazy experiments with different currencies, if the one we have already does the job?”
Challenging the premises
Far from a revolutionary idea, private currencies have long predated national ones. We have been using private and parallel currencies for far longer than we have lived under the current exclusively nationalized system. Gold and silver were used and accepted with or without a government stamp, scrips or token coins were used by companies instead of state-issued money to pay employees, while throughout a good chunk of European and most of U.S. history, private banks issued their own banknotes.
Today, in all developed economies we have homogenous, uniform, universally recognized money, backed by and vouched for by the government, embedding our currencies with an air of continuity and authority. These attributes are all great, but are they actually good at their job? One doesn’t have to be an economist to recognize that among the most basic functions of a currency is the ability to store value, so we can use it to save, and to maintain its purchasing power, so our weekly grocery shopping doesn’t get more expensive every year. However, as evidenced by centuries of monetary history, all fiat state currencies, by nature, do not and cannot hold a stable value over the long term.
For decades, governments have gone to extremes to curtail this inherent instability, piling on debt in the process, yet despite aggressive interventionism, currency manipulations and countless reckless policies, inflation and volatility have never been effectively controlled. Even for those fortunate enough to live under a comparatively “better” national currency, such as the Swiss Franc, the perceived relative stability in salaries and savings, is not so much a triumph of the Franc itself, as it is the result of the other currencies simply losing value faster than the CHF.
Monopoly as the death of progress
There is a good reason that most rational economists and citizens, deeply dislike the very sound of the word “monopoly”. It forces people to pay exorbitant prices for a product that is simply no good – and why not, if it has a hostage consumer base and no competition to threaten it. In all business sectors, competition is a blessing for consumers. In the case of private currencies, as the less reliable ones would be eliminated by competition, it would be crucial to the survival of the new currencies to keep their value to the levels they promised. Should they fail, their users would simply “vote with their feet” and turn to another provider. Such an incentive alone would be a major improvement from the status quo, as governments have the exact opposite motivation: over decades, the net effect of their policies was the devaluation of their own money.
This would also present a historic opportunity for alternative currencies and the theories that govern them to compete in real life, without any systemic risk, as the failure of one currency in many, could not bring the entire economy down. From gold to algorithms, or any other idea about how the perfect currency should work, would cross from theory to practice, to be tested, to compete; and let the best coin prevail.
Private money critics often point to Bitcoin and its kin, with considerable Schadenfreude: The volatility, the security concerns, the “crypto-bubble”. And sure, some valid points can be made against it, and of course, Bitcoin is far from perfect. But there’s at least one thing that’s truly great about it: If you don’t like Bitcoin, you don’t have to use Bitcoin.
As more concepts and ideas are entering the private money scene, we slowly see better versions emerge, solving the problems of their predecessors, and having their own problems addressed by their successors. This constant, competitive innovation has been rewarded by investors and the public alike, who above all else, cherish the freedom of choice.
Originally written for Die Weltwoche: