It’s rare to see a central banker discuss Austrian economics. Yet, the Federal Reserve Bank of Richmond did exactly that in a recently published paper called: A Historical Perspective on Digital Currencies where they give their opinion on past literature as it pertains to the use of private currency.
The three authors, all PhD holders, one from the University of Chicago, compare the views of a Hayek (Austrian School) to Friedman (Chicago School) to conclude that market intervention is preferred to a free market choice in currency. Here’s part of the abstract:
This perspective suggests that government interventions have a critical role in creating a well-functioning money and payments system.
Government intervention and a well-functioning anything are hardly compatible. But let’s see how they arrived at this idea, and why a currency monopoly (managed by seven people) is their preferred choice.
They give credit where it’s due, admitting private currency has been debated “in the economics literature for a long time.” Noting:
In fact, the intellectual roots of cryptocurrencies such as bitcoin can be traced back to the Austrian school of economics and its criticism of the government monopoly over fiat money.
So far so good.
They then cite Hayek’s 1976 book Denationalisation of Money: The Argument Refined where he explained:
…instead of a national government issuing a unique currency and imposing legal tender laws, private businesses should be allowed to issue their own forms of currencies. That is, currency issuance should be open to competition.
No refutations of Hayek’s ideas are mentioned. This continues a long standing tradition of ignoring free market principles since forming a coherent argument against capitalism in favor of socialism is no easy task. Therefore, rather than explaining the problem of Hayek’s ideas, they appeal to popularity by citing a book written by Friedman 16 years prior to Hayek’s, which unapologetically championed interventionism. The authors write:
Hayek’s ideas, however, have not been broadly adopted. Rather, in his 1960 book “A Program for Monetary Stability,” Milton Friedman pointed out that “monetary arrangements have seldom been left entirely to the market, even in societies following a thoroughly liberal policy in other respects, and there are good reasons why this should have been the case.”
The quote fails to explain the alleged shortcomings of the market. But they follow with ideas on how society benefits through central bank/government support:
According to Friedman, those good reasons are:
- The high resource costs of issuing currency
- The difficulty of enforcing contracts and preventing fraud
- The difficulty with limiting the amount issued
- Possible externalities on other parties
The four points are hollow, relying on a simple opinion as to how difficult something is, rather than using any form of reasoning or a priori knowledge. However reading Hayek’s book noted above, or his aptly titled book: Choice in Currency: A Way To Stop Inflation should convince anyone that a voluntary system is superior to an involuntary one. As the saying goes: “Good ideas don’t require force.”
Consider Friedman’s “difficulty with limiting the amount issued” bullet point. 62 years after his book, the Fed has a $9 trillion balance sheet and created almost $5 trillion of US dollars in the last two years. US debt is still at $30.5 trillion, and despite the Fed finally shrinking the balance sheet, it’s only a matter of time until Quantitative Easing returns. Naturally, a central bank creates way too much power to be left in the hands of a few individuals.
The quantity of hamburgers, running shoes or cell phones in America are not regulated by a planning committee. However, we live in a society where billions of dollars in salaries supports a system that decides the national interest rate and quantity of money. History shows central banks and unbacked fiat currency inevitably lead to hyperinflation, while the military industrial complex and many more evils are supported by this system. Concluding that money is too important to be left in the hands of hundreds of millions of people blatantly denies human history, current reality, and Austrian economics.
With the advent of central bank digital currencies, anyone who champions liberty, freedom, privacy, and purchasing power should be concerned. Fedcoin will be another way central bankers can inflate the money supply. Whether the new money is sent to big banks or the poorest members of society first, it will cause currency debasement. They do not want digital currency for the purpose of stopping money creation; the whole purpose is to streamline money creation, on their terms.
If you think prices are high now, wait until the Fed sends money directly to your digital wallet! We can only guess what Hayek and Friedman would say to that.
