Why Reinvent the Monetary Wheel?

Cryptocurrencies promise to realize Friedrich Hayek’s dream of a free market in money. But human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control over its issue.

.. Underlying this recurrence is the instinctive feeling that economic calamities must have monetary causes, and therefore monetary remedies.
.. If monetary fluctuations are the main cause of economic fluctuations, and if one can ensure the right quantity of money to support normal business activity, there will be no need for government interference. This has been the main teaching of economists wedded to free markets.
.. Few remember that quantitative easing (QE) marked the start of US President Franklin D. Roosevelt’s New Deal. With the US on the gold standard, the Treasury purchased gold to lift its price and thus augment the buying power of heavily indebted farmers. FDR’s gold-buying spree, described at the time by John Maynard Keynes as “the gold standard on the booze,” has been generally dismissed as ineffective.
.. In other words, there is no elasticity in the currency. This means that long before the mine is exhausted, the currency will run into the same problem as the gold standard: not providing enough money to support a growing economy and population. This would be exacerbated by any tendency to hoard bitcoins.
.. At the same time, cryptocurrencies provide no security against inflation. Hayek thought that a competitive currency system would eventually lead to a monopoly of the one that kept its value best. But we have, of course, been through exactly this process of weeding out inflationary currencies throughout history, and we ended up with central banks. It is amazing that anyone should consider it necessary to retrace these steps, only to end up in the same place.
.. The Hayekian diagnosis of the last crisis – excessive creation of credit by the banks – is correct as far as it goes. But one has only to ask why this happened to understand that there are no mechanical answers to the question or solutions to the problem. It’s not quite true to say, “Look after the economy and money will look after itself.” But it is nearer the truth than the belief that monetary reform on its own will cure the problems of a sick economy.