The Idea of Alternative Currencies Is Going Mainstream
Mastercard, one of the big players now looking at this new money, is starting a cryptocurrency team.
“Do you have the desire to work at the cutting-edge intersection of payments and cryptocurrencies,” MasterCard asks. Those hired will “monitor crypto currency ecosystem trends” and “develop new products and solutions.”
A credit card expert called it “a smart move.”
Bill Hardekopf, CEO of LowCards.com, says Mastercard “sees there’s a lot of activity in this area. Even if it isn’t going to offer its own cryptocurrency, they know it’s important to have people who understand the subject.”
Others Already Playing the Money Game
Mastercard is part of the Libra Association, which includes Pay Pal, Visa, and other big players. Libra intends to create “a globally, digitally native, reserve-backed crypto currency built on the foundation of blockchain technology.”
There were between 2.9 million and 5.8 million users of a cryptocurrency wallet in 2017, according to a Cambridge University study. Most used bitcoin. Four years before that there were between 300,000 and 1.3 million users.
“Mastercard,” says Panda Analytics CEO Bill Xing, is “trying to build a crypto wallet solution, possibly an alternative to Facebook’s Calibra cryptocurrency, which is supposed to begin next year. It is preparing for the situation when crypto (peer-to-peer transaction) is adopted as the mainstream payment solution.”
Direct Transactions without Intermediaries
Peer to peer means that the middleman in today’s traditional transaction could disappear if cryptocurrencies revolutionize money. Cryptocurrencies are decentralized because there is no intermediary; transactions are party to party through electronic addresses without central banks. In fact, they represent a vote of no confidence in the policies of central banks. They see central banks as consistently devaluing money through currencies that aren’t backed by anything but government promises. Critics call this unbacked currency “fiat money.”
Some countries ban alternative currencies. Others embrace them or acknowledge tax them. In 2014 the IRS ruled bitcoin will be treated as property, subject to capital gains taxes.
Today there are hundreds of cryptocurrencies. Bitcoin is the biggest.
These currencies’ value is volatile. Some investors make millions. Others lose big. But the idea of competition between currencies goes back at least to the 1970s. This was an idea explored by economist F.A. Hayek’s 1976 book Denationalisation of Money.
Hayek contended the “government monopoly of money must be abolished to stop the recurring bouts of acute inflation and deflation.” He also argued that the increasingly outrageous overspending of government — which can now be seen in the federal government's one-trillion-dollar deficit at a time of supposed strong economic growth — would be restricted if the money monopoly was ended.
“The monopoly in money by government,” Hayek wrote, “has relieved it of the need to it keep its expenditure within its revenue and has thus precipitated the spectacular increase in government expenditure over the last 30 years.” Hayek’s wrote these words back in the mid-1970s. Since then, government overspending, deficits, and debt have progressively worsened. Trillion-dollar deficits are now routinely accepted. Few seem worried about government overspending.
Democrats call for trillions of dollars in new spending. Republicans such as Dick Cheney now defend this massive red ink with the assurance that “Reagan proved that deficits don’t matter.”
Actually, several economists told me in a story I did for the New York Post about a decade ago, that the true amount of federal government red ink was a lot more than what the government was saying.
Central Banks Want to Preserve Their Monopolies
But what if the money revolution succeeds? As in any revolution, today’s top dogs have the most to lose.
“In theory,” Xing says, “if these payment companies don’t study new technology around bitcoin or explore new business models, they could be out of business in the next decade.”
So, a revolutionary money is developing. Some governments are trying to stop it for an obvious reason: human nature. Almost everyone would like to be in a monopoly position but competition prevents it in a functioning marketplace. However, governments have the legal power to make competition go away or prevent it from coming back in the cases of goods and services that were once offered privately but are now prevented by the power of government.
Here in New York, where we have the terrible state-run subways, all major pols agree that the state system, no matter how bad it becomes — and millions of subway riders can attest to their egregiousness — must be continued and no privatization allowed. That’s even though, in the earliest period of the subways, when they were considered “an engineering marvel,” and private transportation companies were an essential part of the system. They were later driven into bankruptcy by government price controls. The subway fares, under private companies, were never allowed to raise above a nickel. That’s something that changed quickly once government took over.
More Money Screwups
The movement for alternative money is the result of the history of government monetary mismanagement.
It is a sad story of government central banks and monetary disasters. The Great Depression, of course, happened on the Federal Reserve's watch.
And most monetary historians agree that the explosion of the money supply in the early 1970s, just before the election of 1972, was a disaster. The easy money policies, designed by Fed chairman and President Nixon appointee Arthur Burns, bolstered the president’s re-election. This created a Potemkin village effect.
The economy grew in the short term, then blew up creating the 1970s stagflation, ruining millions of lives for about a decade. Interest rates went over 20 percent, a nightmare for interest-sensitive industries.
The Fed’s easy money led to low or no growth along with high inflation rates. That was something that Keynesian economists, backed by a devotion to the Philips curve, had previously said would never happen. It happened.
It is logical that many historically literate people want to take away the money-making monopoly from government central banks. Their records of frequent recessions and sometimes depressions, inevitably lead to a boom and bust cycle.
Those governments that want to ban these new money developments may be fighting those who have come up with a better mouse trap. Canute like, the central bankers and their political allies may be trying to stop an inevitable wave.