Fiat Versus Finance: The Centennial of the Federal Reserve versus the Rise of Bitcoins
If there is an annual pre-Christmas Eve ritual in Washington, DC, and Wall Street, some invitation-only celebration within the travertine marble headquarters of one organization and several other joint ceremonies amidst banks of computer terminals, flat-screen displays and heavily carpeted floors, if such an event does exist – a December 23rd night of champagne toasts and conspiratorial communiqués – I do not know of it. Or, rather, I have yet to receive any such greeting.
But, for champions of bitcoins as a premier form of peer-to-peer digital currency, December 23rd should be the day – this year – when we draw the ultimate contrast between a mathematically-based concept, which owes its origins (in part) to the monetarist principles of the late Milton Friedman, and the moment when we can point to the calendar and say:
“This is the day, and this is the year, one hundred years prior, when fiat triumphed over sound finance. Now is the time to reclaim the intellectual legitimacy of hard money.”
For December 23rd marks the centennial of the birth of the Federal Reserve System, an independent central bank (with regional satellites), whose legacy – at best – is mixed. My conclusion about the Fed’s record is a charitable one, considering it is only independent to a degree; it must conform to a congressional mandate (the Humphrey-Hawkins Full Employment Act), which theoretically restricts its powers, while simultaneously enjoying the right to print money with abandon. Call these actions anything you like, inveigh against their influence, condemn their legality, bemoan their short-sightedness and expose their failures — but please, never associate the Fed with anything remotely similar to a free market.
The Fed’s wholesale printing of money, the phenomenon known as “quantitative easing,” is, in my opinion, an oxymoron and the single greatest act in favor of an alternative currency like Bitcoins. As to the name itself, quantitative easing, it is a misnomer because the qualifying adjective suggests there is a scientific underpinning to the policy, something calculable and definable. As in, “We know there should be x-number of dollars (‘M0, MB, M1, M2, M3, MZM’) in circulation at any given time. If we have less than that amount we exert deflationary pressure on the economy, while anything in excess of that standard brings us into inflationary territory.”
The not-so-secret truth is, however, that neither the outgoing Fed Chairman nor the incoming Chairwoman (pending her Senate confirmation) knows what that amount is. And, before I finish this point, as it is a preamble in defense of Bitcoin, let me also remind readers that all of this – the statements issued by the Fed, including the oracular pronouncements of Alan Greenspan, as well as well the reactions by traders to the perceived bullish or bearish news from the Central Bank — all of this proves there is nothing quantitative or scientific about the Fed’s actions or fiat money in general.
I write these words without any partisan rancor, so put aside the politics of the Fed as an institution, and ask yourself this simple question: If the Fed’s printing of money is right, as a matter of pure mathematics (meaning: the policy reconciles with an equation, which yields an expected outcome), why is there such volatility in the stock market alone, with massive upswings and sell-offs, based on no change in policy? Of course, emotion and the herd mentality play a role in the behavior of markets – man is hardly a rational creature – but if the policy is correct, rooted firmly in science, then the intended result should, after more than 5-years of “stimulus,” be clear: Significant economic growth, millions of new jobs and the fulfillment of Congress’s requirement – legislation signed by then President Carter – that by 1988 the unemployment rate would be zero!
Not only is the Fed not in compliance with the law, but the entire facade – including the very greenbacks and coins in our pockets – rests on a foundation of words – the “Full Faith and Credit Clause” of the Constitution – not numbers or any singular brand of economics. These factors make an alternative currency both inevitable and a necessity.
Making the Case for Bitcoins: The Triumph of Logic
The case for Bitcoins is, as described above, inevitable, accelerated by technology and modern communications. Indeed, one of Professor Friedman’s more famous remarks involves his advocacy for replacing the Fed with a computer. Each year, it “would print out a specified number of paper dollars” to augment the money supply. “Same number, month after month, week after week, year after year.”
“The Fed has had very few periods of relatively good performance,” he continues. “For most of its history, it’s been a loose cannon on the deck, and not a source of stability.” A spot-on assessment from a Nobel laureate with a prophetic eye in which the only change (in the 14 years since the delivery of that advice) would be to pluralize the computer to hundreds of millions of computers – server farms, fiber optic cables and data centers – linking us in one worldwide web. Welcome to the Internet, home of the peer-to-peer digital currency we call bitcoins!
In not so many words: Friedman’s words are right because his theory is right. The time between the issuance of the theory and the rise of bitcoins is a matter of technology, which is often the case with any scientific argument. Put another way, technology does not create a theory; it reveals and validates one. Such is the case with monetarism and bitcoins.
Such, too, is the case with physics, where the legendary Higgs boson (the “God particle,” first theorized by Professor Peter Higgs in 1964) is now, 49-years later, verifiable — thanks to the construction of a 9-billion-dollar super collider with a 17-mile circumference. Thankfully, the proof for the necessity of bitcoins does not involve such expensive technology.
Allow me, also, to defend Friedman’s prediction without endorsing or opposing his politics. That is, the logic of monetarism, however coincidental or integral it is to the libertarian beliefs of Friedman, is its own separate entity. We need not favor abolishing the licensure of doctors or the legalization of illicit drugs, two of several longstanding arguments made by Friedman and his ideological disciples, to acknowledge and accept the closest thing to an economic scientific fact: That there is global demand for and merchant recognition of bitcoins as a legitimate, alternative currency.
Communicate the Truth with Enthusiasm and Data
The responsibility, for supporters of bitcoins, is now one of communications. Our duty is to popularize this phenomenon – to explain and showcase the facts – before our opponents politicize this issue with heated rhetoric and the illogic of insults, in lieu of intelligence.
The intensity of criticism comes from those who dismiss any kind of change. Their faith, and it is nothing more than blind allegiance, is in a single paper currency, allegedly backed by the faith of the U.S. government.
Rather, it is faith by others – in us, and the U.S., to never fail to honor our debts – that would make the most fervent adherents of monotheism blush. Critics may cite history as their shield and source of credibility, but I place my faith in the universal truth of mathematics, because history does not repeat itself – patterns of behavior recycle themselves, instead – and I recognize the difference between the two. Or, as the saying (purportedly from Mark Twain) goes: “History does not repeat itself, but it does rhyme.”
Alas, a rhyme is no substitute for rhythm — and the long continuity of numbers, measurable and eternal, transcendent of the false barriers we erect against each other. A philosophical observation on my part, to be sure, but custodianship of the greatest subsection of history we know is predictable: Mathematics.
Bitcoins is, in that regard, the intellectual heir to an esteemed branch of history and a solid trunk of science. The goal is to make that tree of knowledge grow, free of the weeds of ignorance and the pestilence of imprudence.