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Book Review: "New Private Monies: a bit part player" by Kevin Dowd

I am ideologically attracted to any alternative to fiat currency, which gives far too much power to the state. It's a power that has been ruthlessly exploited to steal (at least that's what it would be called if anyone else did it) from savers, investors and lenders by debasing currency through inflation. As Professor Philip Booth points out in the introduction to this book, the current pound coin when introduced purchased just 20% more than the "threepenny bit" from 1937 that it resembled. Under the "wise stewardship" of HM Government, the pound sterling has lost 98% of its value over the last century. The good old greenback that replaced it as the world's reserve currency has lost 85% of its value since 1971! 

These losses are not caused by stupidity, but malice. Abandoning the gold standard and moving to currencies backed only by trust in the state gave untrustworthy states  (that is to say all of them) the chance to tax secretly via inflation. So I would just love there to be a private alternative.

Currency serves three purposes. It's a means of exchange, a store of value and a unit of accounting. Historically it was either made of or linked to a substance (like gold or silver) that had an intrinsic value and a limited supply. Professor Kevin Dowd does a good job in this little monograph of explaining both how private currencies, including such cryptocurrencies as Bitcoin, work and why governments hate them so much.

He tells the story of two alternatives to the US dollar introduced by businessmen there; 'the Liberty Dollar" and "e-Gold". The Liberty Dollar was an actual coin (technically a medallion, because it didn't meet the legal definition of coinage) that was denominated in dollars and periodically revalued against them. People could exchange them for goods, hold them as a more reliable store of value because they were made of silver or gold, but couldn't really account in them because the relevant authorities wouldn't recognise them. The inventor, one Bernard von NotHaus, was trying to make a point about the US Government's abuse of its powers by providing a private, voluntary barter currency as an alternative. Liberty Dollars were not forgeries. They didn't pretend to be dollars. Indeed the whole point of them was that they were NOT dollars. They were something not merely different, but in key respects better.

By the time the US authorities stamped out the scheme and secured a 22 years sentence (vastly reduced on appeal) for Bernard, the people who held Liberty Dollars ended up richer than if they had held the "real" ones. He had made his point –  in practical if not legal terms the authorities were the thieves – but he paid a heavy personal price to do so.

e-Gold went a stage further. Notes were issued against an actual reserve of gold held in London (to be beyond the reach of the US authorities). Doug Jackson, an American libertarian, came up with the idea – again neither to defraud nor even for personal gain – but to make a politico-economic point. Though holders of e-Gold again did better financially than if they had kept the dollars with which they bought it, he met the same fate. As Professor Dowd observes; 

If one compares this case with the Liberty Dollar, one immediately notices worrying parallels: two decent businessmen operating out in the open, operating under the rule of law but trying to offer alternative monetary systems in one form or another, and both taken down by government agencies that were arguably operating outside the law themselves and have never been held to account – in essence, the victims of arbitrary government attack.

The ferocity of the government's response in both cases can only really be explained by its fear of citizens getting too close to a dirty secret. Economics is famously dull and few can be bothered to study it. Governments have, by the introduction of fiat currency, been able to hoodwink even quite intelligent citizens. We have accepted inflation as a fact of life (even though there was none for 300 years in the UK until we came off the High Gold Standard) and have somehow failed to connect it with the immorality of government policy. A couple of clever gents had to be "taken down" not for any actual threat they posed to the US dollar, but because their educational projects might just have succeeded in revealing the ethical horror at the heart of the Fed.

Hence Bitcoin, not actually the first cryptocurrency and now only one of many, but so far the best known. The ferocious use of state power to suppress earlier private currencies made it necessary for this new one to be utterly anonymous. Again, the motives were ideologically libertarian.

the designers of cryptocurrency sought to create not just a new currency, but a new anarchist social order

In the words of Wei Dai, the inventor of a Bitcoin predecessor, 

the objective is to have a crypto-anarchy in which the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.

Bitcoin has succeeded so far because even its inventor is anonymous, known only by the nom de guerre "Satoshi Nakamoto." It is completely decentralised. There is no central authority or organiser whatever. The "coin" is digital and uses public key cryptography. Authorising and tracking of transactions in Bitcoin is monitored by the community collectively. Before a coin changes hands, it is checked by the network to ensure that the user hasn't already spent it. As "Nakamoto" explained on its launch in 2009;

The root problem with conventional currency is all the trust that is required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust ... A generation ago, multi-user time sharing computer systems had a similar problem ... Users had to rely on password protection to to secure their files, placing trust in the system administrator to keep their information private. Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically impossible to access, no matter for what reason, no matter how good the excuse, no matter what. 

It's time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions complete. 

The other ingenious innovation is the way in which the money supply is limited. This it too technical for me to explain here without re-typing large parts of the book, but if you are interested (and by now I hope you are) you can read the whole thing in PDF format here.

Professor Dowd doesn't think Bitcoin will endure but he is confident that one of its competitors will and he believes it will not be possible for governments to suppress it. Paradoxically, given that the whole purpose of a crypto-currency is to evade state control, the more powerful the oppression, the more valuable it becomes!

A state can be defined as a "regional monopoly of violence" but if Wei Dai's dream of making violence impotent comes true, at least in this respect, it will no longer be of use. As Professor Dowd says;

If the state really wants to get rid of Bitcoin, it should eliminate the state controls that feed it, for example, if the state ended the wars on drugs and terror, reduced taxes, ended policies of financial repression and re-established the privacy of individuals' personal financial information.

We all know, whatever our views on the value of statism, how little any state wants to do that! In the end the value of a functioning crypto-currency beyond the reach of state violence may be to restore honest money in general. That, gentle readers, is a consummation devoutly to be wished.

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