What do people want from a currency?

I find many people still want to talk about crypto currencies. There is a line of thought amongst entrepreneurs and radicals that wants a crypto currency to emerge that is free of the controls of governments and Central Banks, reflecting their distrust of these organisations. There are two main lines of criticism of national monopoly official currencies. The first is the way most of the countries backing these currencies allows or even encourages some inflation, reducing their realĀ  value over time. The second is the way national monopoly currencies give the authorities greater controls over people’s money and their way of life.

It is true that most Central Banks aim for a gentle devaluation of their money by around 2% per annum, as they think a little inflation helps growth and economic change. Sometimes they lose control and end up with considerably higher rates of inflation.Ā  Individuals in a free country which allows its citizens to buy and own real assets and other national currencies can protect themselves against an undesirable inflation in their national money by owning inflation proofed assets like local currency index linked debt or by holding other currencies less exposed to inflation. Inflation linked bonds, property and shares have some inflationĀ beating characteristics. Ā The so called crypto currencies have so far not proved to be a low risk way of protecting yourself against inflation in your national currency. There has been extreme price volatility, producing either an excess return well above the inflation erosion of your base currency, or days of large price falls Ā reminding you that in the wrong one of theseĀ  vehicles you could lose the lot.

It is true people can design crypto currencies with clever ways of restricting supply of them. All the time there is an increasing Ā number of people willing to believe in their properties, this can create substantial upward pressure on theirĀ  value. However, there is also a central paradox. To create the magic ingredient of pressure for the price to rise requires tough restrictions on the issue of new crypto currency. This means such a currency will struggle to be liquid enough and universal enough to meet the test of effective money thatĀ  is freely and widely accepted in payment. National currencies areĀ  very flexible in response to demand for more money for legitimate uses. The very flexibility that allows too much money to chase too few goods, leading to inflation, is also a crucial feature to allow money to expand as economic activity expands to permit growth and business success. Judging the right amount of money, as Central Banks have to do, is a difficult task to get right.

Some of the advocates of crypto currencies I have listened to are even more concerned about the way commercial banks holding our deposits in national monopoly currencies are increasingly the regulated creatures of the state allowing the state to exert substantial control over our finances. The answer to this is not to create a newĀ  non government currency which allows people to break the tax and financial laws. The main reason states are so suspicious of crypto currencies is they fear they can and will be used by drug traffickers, terrorist organisations, large scale tax evaders who want a currency that is not reported to the authoritiesĀ  and which allows them to do as they wish without trace. Some people used to like bearer bonds, gold bars and other stores of value that avoided direct reporting to tax authorities, but gradually governments brought these under regulatory control. Anyway people often found they had to use the normal banking system and monopoly currencies at the end of the process when they wished to spend their wealth.

The case for crypto currencies has to be made for reasons other than the dislike of tax that a national authority seeks to impose. If there are too many taxes or they are at too high a rate there has to be democratic pressure to change, or the person who objects strongly has to move to a lower tax jurisdiction to live and work permanently.

 

33 Comments

  1. Sir Joe Soap
    January 5, 2018

    Freedom doesn’t feature as a word or concept in your article.

    The freedom to receive compensation for one’s work in a form which can later be spent for at least an equivalent value to the work one has performed is an important motivational driver in us humans.
    Whilst we appreciate the need to pay our dues for any benefits we receive from the state, we also recoil at the thought of the state “taking the micky” by devaluing the value of our work when we delay consumption we expect to make in return, or by the state underhandedly double, triple or otherwise poly-taxing it, just because we choose to delay consumption.

    These are the perfectly reasonable motivations for holding value in non-manipulatable, non-inflatable, non-taxable assets. If the state wishes to avoid their use, it needs to be more honest and transparent about where all the tax goes, also why it is in the interests of folk who have had to work for their cash to see the state-sponsored CBs create more of it for no work in return.

    1. Sir Joe Soap
      January 5, 2018

      There isn’t really any democratic check or balance on the way governments tax work and create money. In a referendum which asked questions such as

      “Should the state create money out of thin air?”
      or
      “For every hour you work and save for your children, they will benefit by less than 5 minutes of your work if you bequeath them that to them in 20 years time, due to state-sponsored taxation and inflation. Do you agree that the government should desist from taxing and inflating our currency in this way?”

      we all know what the outcome would be.

      Rather like our Remain leaning civil servants, there is a Tax, spend and inflate tendency which is equally deep rooted and which cares little for the democratic mandate, but cares only to keep an old show on an old road.

    2. Lifelogic
      January 5, 2018

      It is indeed about freedom from over taxation by government or devaluation of peoples savings. But I cannot see that Bitcoin can really escape government for long. Perhaps they will put a stamp duty tax or vat on it or ban it.

      Anyway while the numbers of Bitcoins may be limited there are lots of other alternatives to bitcoin. Doubtless another one will become the next fashion so numbers of alternative Bitcoins are not limited at all. I will not be buying any. But nor will I be holding gold, or much cash. I will have lots of nicely devaluing debt and assets gently increasing in value while giving income too. Mainly commercial property, developments and trading businesses.

  2. Mark B
    January 5, 2018

    Good morning

    And let us hope this humble missive is not held up in moderation, like yesterdays šŸ˜‰

    When it comes to alternative means of exchange, be it money, precious metals, bonds or good old fashioned bartering, and when government cannot extract its pound of flesh, it does not like it.

    Our kind host has let slip when he says;

    . . . national monopoly currencies are increasingly the regulated creatures of the state allowing the state to exert substantial control over our finances

    Once again I say, and taking into account the above, what business does the Government have when two private individuals wish to exchange contracts where monies are involved ? I of course refer to Stamp Duty / Tax. Or indeed anything of that nature !

    What we are seeing in these Crypto-currencies is a deliberate challenge to the monopoly of the State. As many here must agree, when we are presented with a monopoly, be it healthcare or water, we are charged too much for so little. When there is competition, such as lower corporation tax rates in say the USA, it seems our government fear their cash cow moving to pastures new. And it is about time government itself started to come under market forces.

    1. Mockbeggar
      January 5, 2018

      While in principle I agree that people should be free to act in each other’s interest without being taxed, if taxes are not raised one way or another, where will the money come from to pay for the ever increasing costs of the NHS? I’m sure you won’t, but many others will scream blue murder as they have been doing since non-urgent procedures were delayed this month.

      It’ll come down in the end to the poor old average earner and his/her PAYE. Either that or we all vote for Corbyn and borrow money from the magic money tree (otherwise known as our grandchildren).

      1. Mark B
        January 5, 2018

        The NHS is Europes largest single employer. I takes an ever increasing amount of our nations wealth. It is a highly unionised Sacred Cow that requires majr reform. It is poorly managed. Try seeing a doctor at the weekend.

        I do not think people will mind if the NHS was privatised so long as it remained free at the point of service.

  3. Roy Grainger
    January 5, 2018

    Another issue is security. Cryptocurrencies are open to theft by hacking and as they are unregulated you get no compensation.

    1. APL
      January 5, 2018

      Roy Grainger: “Another issue is security. Cryptocurrencies are open to theft by hacking ”

      Conventional currency both coin and notes are susceptible to theft by forgeries.

      According to reports in 2009 there were 560,000 forged notes in circulation in the UK, of which 95% were Ā£20 denomination. Which is roughly Ā£10m of forged Ā£20 notes circulating.

      According to the same story [ BBC ] its estimated there are Ā£1,000,000 forged Ā£1 coins in circulation.

      If you are given either of these, and take them to the bank, you will not be recompensed for your honesty. You’ll loose you Ā£20 note and your Ā£1 coin.

      So even with a regulated currency ( sterling ) if you are passed forged notes, even if you accept them in good faith, you’ll get no compensation.

  4. Lifelogic
    January 5, 2018

    I just heard some BBC reporter say “everyone agrees we need more renewable energy”. She was discussing some daft (and doubtless absurdly expensive) battery storage plan for it on a farm). No, they do not certainly not think this, and certainly not with the expensive and unreliable technology we have currently have. Most sensible (& honest/independent) power engineers and physicists think no such thing. Most think we should generate on demand & cheaply from Gas, Nuclear or even Coal and stop exporting jobs and freezing pensioner.

    More drivel on coral reefs from the BBC too. Do these “experts” know nothing about the long term history of CO2 concentrations & coral reefs (which come and go and have done so for millenium? Almost as daft as the minister saying “everyone agrees auto enrollment has been a success”!

    1. Andy
      January 5, 2018

      The BBC is wrong if it says everyone agrees renewable energy is good. There are a few medieval stoppouts who ignore facts, deny science and are happy to go on destroying the planet and killing our children.

      There are not many of these selfish luddites left – but they are mainly old, angry and have a big megaphone so we hear from them a lot. Still, they are basically irrelevant. They lost the global warming argument decades ago – and the more they whine on the more deranged they sound.

      1. Anonymous
        January 5, 2018

        Post as Newmania please

      2. Lifelogic
        January 5, 2018

        The science is however clearly on the climate realist’s side as is the recent temperature record. The politics, fashion and the bonkers green religion may however, irrationally, be winning currently. It is a good excuse for more taxes and government and the BBC types are certainly on side of climate alarmist – this is perhaps why.

        I assume, from your comment, that you do not perhaps have any science, physics, engineering background? As you do not address this area of that debate. You just say other are selfish, Luddites and that you are right and the argument is settled.

        As Feynman put it – if it doesn’t agree with experiment its wrong.

      3. jerry
        January 5, 2018

        @Andy; ” deny science and are happy to go on destroying the planet and killing our children.”

        Oh dear, when all other rational arguments fail, accuse others of harming children….

        “[the refuseniks] lost the global warming argument decades ago”

        Nonsense, otherwise the eco-worriers could prove that Man is responsible for ‘climate change’ by publishing all the data, not just abridged hockey-stick graphs that ignore the vast majority of data and thus unfavourable facts.

        AGW now is akin to the Tulip Mania of the early 1600 or South Seas Bubble a hundred years later, far to many have invested large sums in the “AGW Cure” to admit that they have been conned and so the con carries on in the (almost certain) vain hope that their investments will eventually come good -what is more, so much political weight has been given to AGW that most politicos can no longer make the correct call without having to admit to a career damaging (if not ending) error of judgement.

  5. Epikouros
    January 5, 2018

    As long as governments use national currencies to benefit themselves; to control our behaviour and make decisions on their value that is decided by experts who are really no better than fortune tellers. Then those who use national currencies as a medium for exchange will seek to find other means such as crypto currencies. The invention of blockchain now means that the ever tightening grip of government on out finances is over. Governments must be devastated at the prospect that their Big Brother approach to our lives is coming under threat. The internet as we see is already eroding the power of the establishment as their propaganda arm and their secretive ways are being exposed. As bloggers and the like are undermining the fake news, obfuscation, deceit and cover ups of those who seek to rule our lives, influence us and hitherto have flounted the law with impunity.

    True we want governments to make money laundering and other criminal activities difficult for terrorists and other criminals but not at the expensive of our civil liberties. Also what is the point of government using prohibition which in most cases creates another section of society to become criminals because they finding ways to circumvent that prohibition or have to create yet another law to reinforce the original one ad infinitum. There is very little point in prohibition or making things illegal unless it is to stop harm being done by one individual or group to another individual or group’s person or property. If people are doing harm to themselves or doing things to each other by consent that we personally we find distasteful that is their business not ours. It is also not the business of government or vested interests to manage our finances, economy or society we have already invented the marketplace and a a legal framework based on common law and natural justice.

  6. APL
    January 5, 2018

    JR: ” National currencies are very flexible in response to demand for more money for legitimate uses.”

    But it also permits exceptional control over the lives of National citizens lives.

    Ha ha, it’s amusing if a little sad, to see the final complete transition of a radical 1990s free marketeer into a Statist totalitarian.

  7. Sakara Gold
    January 5, 2018

    If people are concerned about runaway inflation – where the central bank looses control of prices and the national government insists that fiat money is created and injected into the economy – the traditional store of value is gold bullion. Gold has been used in this way for thousands of years, for good reason. Central banks can’t print it!

    It is possible to safely buy and store unallocated 999 fine gold bullion (and silver) in the UK and store it in vaults overseas. Google “bullion vault” Have a nice day y’all

    1. APL
      January 5, 2018

      Sakara Gold: “it is possible to safely buy and store unallocated 999 fine gold bullion (and silver) in the UK”

      The question remains, Gold interms of any fiat currency is at all time highs. Buying an ounce of gold in 1967 for Ā£10 may have been a reasonable speculative proposal.

      Would you buy an ounce of gold today @ Ā£900 ?

      Do you see sterling falling to Ā£1800 per ounce in say ten years? In which case you might think it better to move to Veneuzela.

      Because, in all probability, nothing will be working in the UK either.

      1. Sakara Gold
        January 5, 2018

        I’m not making predictions. But it’s said that an ounce of gold would buy a suit of clothes at the start of Queen Victoria’s reign in 1837. An ounce of gold would still buy a nice Saville Row suit today in 2018 at Ā£900.

        1. Peter
          January 5, 2018

          A Savile Row suit for Ā£900?

          Think again. Ā£4000 to Ā£5000 is closer to the mark.

      2. Mitchel
        January 5, 2018

        Come the next downturn,how much extra fiat will the UK government of the day be printing to keep things going?

        I see Venezuela is supposed to be launching imminently it’s own petro-crypto-currency(backed by 5.3bn barrels of oil).

        1. APL
          January 6, 2018

          Mitchel:”I see Venezuela is supposed to be launching imminently itā€™s own petro-crypto-currency”

          The problem for Venezuela is two fold. Can it produce enough Oil? and who would trust its good faith petro-crypto-currency.

          Probably, no and No one.

    2. Mitchel
      January 5, 2018

      Even in the “land of the free”,governments haven’t taken kindly to citizens/subjects seeking to protect their wealth from currency debasement.See President F D Roosevelt’s Executive Order 6102 of 5 April 1933 and the Gold Reserve Act of 30 January 1934,outlawing private ownership of gold(other than jewellery or numismatic items).Not relaxed until 1964 and not totally abolished until, 1975.

      Interestingly what was probably the longest lasting polity in the Christian world,the Byzantine Empire,preserved the purity of it’s coinage (apart from one major debasement after a ruinously expensive war with Persia)and it remained in circulation for international trade for some considerable time after the empire’s ultimate demise.

  8. Bert Young
    January 5, 2018

    Crypto currencies lack a solid credibility and are not within the grasp of the average person in the street . I certainly associate them as a feature of the “dark” market and would never touch them . National currencies have a base tied to economy and however vague and unpredictable at times these may be , they are features of international report .

  9. Andy Marlot
    January 5, 2018

    The devaluation of currency has nothing to do with economic growth and everything to do with enriching the bankers at our expense. When the value of money is falling the groups closest to the source get the benefit whilst the rest of us just get poorer. Over time this results in massive transfers of wealth upwards. The appeal of a cryto-currency is that bankers are excluded which is why they hate it so much.

  10. Caterpillar
    January 5, 2018

    1. I think both the decentralisation and security are appeals in blockchain technology.
    2. As we saw after the global financial crisis, the BoE cannot push money supply, the major channel for QE was portfolio rebalancing.
    3. In an electronic world velocity of money can change easily.
    4. Store of value is important 2% devaluation per year is huge. Major earning years for many are 40 to 50, 17 + years of depreciation of these savings before retirement is catastrophic. Crypto currencies may be volatile at the moment, but no in built devaluation will continue to appeal.
    5. UK government’s manipulation of index linking does not appear honest. Index linked savings are not available, swapping civil servant pensions from RPI to CPI even for those who left and were on historic not present low pay, leaving train tickets as RPI …

  11. Peter A
    January 5, 2018

    Reminds me of the parable of talents where Jesus relates the story of three servants who were given some money when the master went away. Two invested the money wisely and the master on his return was glad of the profit, the third who had buried his allotted talent in the ground for fear of losing it was punished. So what’s the point of burying one’s savings in a “cryptocurrency”?

    1. Prigger
      January 5, 2018

      The lesson …Do not give your money to bigwigs as a third of what you give will not produce a profit due to their inability to choose staff properly. It could have been much worse!!!

  12. alan jutson
    January 5, 2018

    “What do people want from a currency” ?

    STABILITY !

    1. APL
      January 5, 2018

      Alan Jutson: “STABILITY !”

      The thing the government has told you, to your face, you’re not going to get from Sterling.

  13. Mike Parker
    January 5, 2018

    Firstly, great that you are speaking out on such a subject.

    Secondly, I think you’re missing a lot of the point around both crypt0-currency and blockchain technology. Let me say that outside of crypto-currency there is a new invention called the blockchain which will revolutionise a lot more than just currency. Its completely unhackable and maintains a permenent ledger of all data you wish to store. This will be used for currency, but also energy consumption, insurance policies, marriage certificates, home ownership, mortgages, even down to things like transferring ownership of a car with a click of a button. This is the start of a revolution and to talk about crypto currency is to fail to see the bigger picture.

    Getting back to currency. Why is the world flocking to crypto currency?
    1. Instant payments to anyone anywhere across the world with no borders, no banking systems in the way. I can transfer money instantly to India if i want. The world is becoming more and more international. Currency is way behind the curve. 3-5 working days? Are you kidding me?
    2. Provision of banking services to 3rd world countries. Billions of people lack access to basic banking services. Billions more have access to corrupt government controlled banking services which require bribes, you can have your assets seized at any time, etc. With crypto currency you have worldwide banking services with just a mobile phone connected to the internet. (many poor countries are now skipping landline infrastructure in favour of cheap smart mobiles)
    3. Permanent transaction history for the world to see. Anyone anywhere can see exactly what money changed hands. Identify a criminal? Trace his transaction history back through the blockchain. You can see everyone he’s ever paid and who paid him. Whilst there are some cryptos with anonymous access, there are also some which are tied to public identity. Some say it would make sense to ensure companies pay employees in approved crypto currencies tied to public identity for tracking and taxation purposes.

    I could go on.

  14. Rien Huizer
    January 5, 2018

    Crypto currencies might evolve into something legitimate and useful. At present they are not (1) a reliable store of value (in the sense that the price level of output is reasonably stable when expressed in that currency and that holders can expect that to remain so in the future and (2) an efficient means of payment(ie one that everyone is willing to accept without hesitation)

    Modern currencies derive their value of two things: the existence of a stable monetary governance structure for the country (rule of law, credible central bank etc) and a reliabl;e low cost payments infrastructure available to the public (coins, scip, checking accounts, cards, etc)

    It appears that crypto currencies are popular among romantic hobbyists, gamblers and criminals.

  15. Prigger
    January 5, 2018

    I have just written “200,000 BWTCOIN Bank of Wishful Thinking” on a virtual piece of paper with a photo of my pet rabbit on the other side, a computer generated ornamentation in five colours.
    So far I have had numerous enquiries from the BoE wishing to be of assistance. Also major British Pension Fund Managers sending me millions of pounds for a “slice of the action.”.
    I wish I had thought of this before.

  16. ChrisShalford
    January 5, 2018

    If we don’t like our government’s controls and taxes, we can collectively vote them out. Bitcoin holders have no such recourse.

Comments are closed.