The Corner

Kudlow vs. Bitcoin

I must dissent a little from my friend Larry Kudlow’s assessment of Bitcoin. To argue that bitcoins are not “real money” because they have no central-bank regulation or central issuer is like arguing that a prepaid disposable cell phone is not a “real phone” because its number doesn’t appear in the directory and you don’t get a bill. That’s the point, or at least part of the point.

I am skeptical of the Bitcoin model, but it has in no small part been a victim of its own popularity, with speculative investments in bitcoins overwhelming their use in commercial transactions. But this phenomenon is not unknown among traditional currencies. Consider the lengths to which the Swiss have had to go in recent years to stabilize the value of the franc as euros (and, to a lesser extent, dollars) bounced about. 

But that misses the broader point in a couple of ways. The first is that bitcoins and other private currencies are intended as replacements for greenbacks in approximately the same way that the Internet was intended to be a replacement for the printing press: They may do that, sure, but they will have other uses as well. Wresting control of currencies away from politicians is the only way to let money evolve. Twenty years ago, you didn’t know that you’d want to take photos with your telephone or use it as a boarding pass at the airport. Now you do. Nobody planned that. Nobody knows what “real money” is going to mean in twenty years. 

As for price instability, that is of course a fundamental issue, and as Larry acknowledges (though I do not think he would put it quite this way) the fact that most of the world’s governments have made counterfeit currency (which is what fiat money is) legal tender complicates the environment. Still, I wonder how many of Larry’s Wall Street buddies would really think it so strange to use a fluctuating non-physical asset as a store of value rather than keeping one’s wealth in dollars. My general impression is that billionaires don’t keep their billions in passboook accounts. A financial asset may decline in value; a U.S. dollar is practically guaranteed to, if history is any guide. Very wealthy people and institutions already have access to de facto private money in the form of various financial instruments; private currencies promise to make similar benefits available to general consumers — and, critically, to move that market beyond the reach of central bankers and regulators, and probably tax-collectors, too, in the long run.

We can probably expect a robust, competitive market in private currencies to develop, and Bitcoin may or may not be a part of the long-term picture. It may turn out to be the Packard of private currencies. We’ll know the market has arrived when people have as many choices of currency provider as they do of cell-phone provider. And that will be a critical moment in the shifting balance of power between politics and markets, another way for us to stop asking permission to engage in commerce. 

This is in part why I object to Larry’s repetition of the Wall Street Journal’s characterization of the natural theater for bitcoin use as “the black market.” A better phrase for “the black market”  is “the market.” 

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