This Time It's Different, Episode IX: 'The Rise and fall of some famous asset bubbles'

[Chart from the Zero Hedge post: 'It's Official: Bitcoin Surpasses "Tulip Mania", Is Now The Biggest Bubble In World History']

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QoTD: A fair question [updated]

Q: Can you buy Tulip Bulbs with Bitcoin? I think so.

UPDATE:

[Hat tip Twitter: #TulipBitcoin]

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Bitcoin: What have you got?

In this Guest Post, Paul Van Dinther invites your best arguments against the new digital currency Bitcoins.

At the moment I am tentatively for Bitcoins, but I am very keen to hear a good argument against. Here is my own take at present.

I have not yet heard what I consider a solid argument against Bitcoins. One of the video bloggers I enjoy listening to is Peter Schiff. He appears a man with great insights and I tend to agree with many of his views. Recently however Peter and many others have taken to criticising Bitcoin, offering a range of arguments against the new digital currency that I find largely unpersuasive.  I want to counter them here. (Full disclosure: I do not own Bitcoin, or gold, or gold stocks.)

Mr Schiff's main argument against digital currency is that it is not gold. Granted that for many reasons gold has proven over time to be a solid form of money. Only so much of it has ben dig up, and it’s damned hard to dig up quickly. Gold is an element, so what there is of it is not going away. Gold is both fungible and easily divisible. Gold has industrial uses, so will never lose value completely. Many alchemists have attempted to create gold and despite all the efforts, none have succeeded—it is not easily replicated. Mr Schiff’s main argument for gold is that it has this (what he calls) ‘intrinsic value.’ What exactly is this intrinsic value however?

Let's take a non-perishable item, such as a timber log. It has ‘intrinsic value.’ You can use it to make a fire or you can make things with the timber. If you have the need to cook a meal over a fire, the value of the log is the energy it contains. If you need to make a table, its intrinsic value (in the sense meant by Mr Schiff) would include its strength and beauty.

Would the intrinsic value of that log diminish if you have a big pile of logs behind the house? I argue that it doesn't. Its economic value would diminish, but not its ‘intrinsic value.’ You still need that one log for your fire needs, and the log is valued for its ability to burn for a certain amount of time.

So we might say that "intrinsic value is value in its own right"

Back to gold. Great stuff. It won't corrode, it’s a good conductor of electricity, it’s great for jewellery, and it has these other industrial uses. Gold is a pretty crap metal however in many respects--you would not want your car's transmission to be made of it, or any beams in your house. But yes, gold does have some specific intrinsic value.

But I argue that the intrinsic value of gold doesn't even get close to it's $1200 price. Yes gold is still used in manufacturing but enhanced production techniques ensure a little gold goes a longer way, at least until alternatives are found in new nano materials.

Therefore I argue that the price of gold does not represent intrinsic value at all. Instead it is a token for real world value for all the reasons so well documented. In a nutshell, gold lasts and it is rare.

The other argument against Bitcoin is that anyone could dream up a new digital currency and therefore digital currency is potential part of an unlimited supply, and no better therefore then paying with dried maple leaves. Let's see how this plays out:

I work 40 hours. I value my time and I wish to be rewarded for that time. The reward needs to be in a format that I find acceptable, and agreed on in advance of doing the work. I could choose to be paid in chickens, in gold, in dried maple leaves—or, slightly better, in US dollars, or in some new digital currency in whose continuing value I trust. If I choose to be paid in Bitcoins, then I have just placed my trust in that currency.

Now Joe Bloggs may be doing the same with a different digital currency, but the two are not directly connected. Therefore trade between me and Joe is going to be difficult. It should be clear that eventually either Joe or me will choose a different form in which to store value. Eventually, one particular digital format will leave the other formats for dead, just as VHS left Betamax dead all those years ago.

Obviously the format most secure and least inflatable will win, if not meddled with by governments.

Forget about the intrinsic value of gold for the reason already given. Why would gold not fall out of grace? It is heavy, you can't send it around electronically and, unless you are an expert, you'd have trouble to identify gold on it's pureness. Are we going to bite on coins again?

Another argument is that the Bitcoin value is very volatile. And so they are. And so too is gold. Gold doubled in value over a very short time, and now in an equally short time has all but halved from its peak. Any format of trade is subject to speculation and with that comes a certain amount of volatility. Opponents of digital currency like to gloat about how some speculator is going to lose a lot of value when the Bitcoin bubble bursts, and I agree that this is a possible scenario, but it’s no different from the poor sod that bought gold at $2000 and then saw 40% of the "investment" wiped out to the price it is today.

Bitcoin is currently a tiny player. The number of goods that are traded using Bitcoins is steadily increasing and I expect it's value to stabilise once the current speculation bubble either bursts or deflates.

There appears a lot of confusion about investment and currency. Bitcoin is supposed to be money rather than a speculative investment. Bitcoin is a vehicle to store and transfer value between it's users. Ideally, its value is stable, and that is certainly a  criterion for me before I would choose to store my value that way.

To me, the bottom line is simple. The market decides what is a suitable form of currency. That is not reflected in the speculative value of the currency, but the number of traders willing to store or trade their value in that format.

There is one reason only why I remain reluctant to use Bitcoin.  It is called unhackable but that is not enough to convince me.  It seems to me inevitable that at some point someone will find a way either to hack it, or to mine it more efficiently. However a solid track record of several decades could sway my view on that.

So, what are your views?

Paul van Dinther is a software developer and part-time Libertarian who likes the underdogs. Despite his mature age, he still asks "Why" all the time.

Bitcoin: Money of the Future or Old-Fashioned Bubble?

ZERO HEDGE: The Bitcoin bubble has burst, but not yet collapsed.

The crypto-currency is falling because of apparent distributed denial of service attacks. A denial of service attack happens when an attacker overwhelms a target with external requests, so that it can’t honour regular requests from legitimate users. This also happened last week Bitcoin reached $142 and hackers attacked the exchange.
   The Tokyo-based exchange said last week that hackers are engaging in a strategy to manipulate the price of the currency: “Attackers wait until the price of Bitcoins reaches a certain value, sell, destabilize the exchange, wait for everybody to panic-sell their Bitcoins, wait for the price to drop to a certain amount, then stop the attack and start buying as much as they can. Repeat this two or three times like we saw over the past few days and they profit.”

Time to review…

Bitcoin: Money of the Future or Old-Fashioned Bubble?
Guest post by Patrik Korda

Bitcoin has been all the rage lately. The stuff, or lack thereof, runs on peer-to-peer technology, is fully decentralized, has no patents, and is open source. Currently, there are almost 11 million bitcoin units in existence and the maximum amount of bitcoin units that will ever be created by the logic of its design are 21 million. (For more details on how they work, see the recent Mises Daily “The Money-Ness of Bitcoins” by economist Nikolay Gertchev.)

The Issue

While bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as litecoin, namecoin, and freicoin in place. This is a particularly valid point because bitcoin is a starfish, i.e., it is fully decentralized. As stated by Ori Brafman and Rod A. Beckstrom,

    The starfish doesn’t have a head. Its central body isn’t even in charge. In fact, the major organs
    are replicated throughout each and every arm. If you cut the starfish in half, you’ll be in for a surprise:
    the animal won’t die, and pretty soon you’ll have two starfish to deal with.[1]

After the music-sharing service Napster went under, Niklas Zennström (the creator of Skype) stepped in with his creation called Kazaa, which had no central server that could be shut down. Eventually, such peer-to-peer programs became more numerous, to include Kazaa Lite, eDonkey, eMule, BitTorrent, etc. While this may be good news for people who like to download and share content for free [i.e., thieves, Ed.], it certainly is not for people who are under the impression that bitcoin is a hedge against inflation. Those who compare bitcoin to a language neglect the fact that most people do not have an incentive to create a new language out of the blue. On the other hand, a great chunk of human history consists of people searching for the philosopher’s stone to magically produce gold. There can be no doubt that bitcoin has a built-in gold rush mechanism, which has already spilled over to litecoin and will be sure to spill over to subsequent knockoffs as well.[2]

Money

Does bitcoin jibe with the Austrian economists’ stand on sound money? The only way to find out is to read what the great Austrians had to say. Let’s start with Carl Menger. In Principles of Economics, Carl Menger made the point that money, a general medium of exchange, has always tended to be the most “saleable” (i.e., “marketable” or “liquid”) commodity of the time.

What is saleability? It is not simply value. One may have a Picasso at home, which will fetch quite a sum at a Sotheby’s auction during a boom, but a Picasso, like a poem by Friedrich Schiller, a work of Sanskrit, or a decades-old bottle of red wine can never be the most saleable good. As Menger put it, saleability is the

      facility with which [a good] can be disposed of at a market at any  
    convenient time at current purchasing prices, or with less or more
    diminution of the same. (...) Compare only the number of persons to
    whom bread and meat can be sold with the number to whom
    astronomical instruments can be sold.

Menger went on to point out that in the ancient world, cattle were the most saleable commodity. This is perfectly understandable in a world where bare-bones subsistence is a reality for most people and the structure of production is virtually non-existent. As society progressed, however, cattle became less and less marketable.

As civilization progressed, Menger observes,

    … peoples who were led to adopt a copper standard as a result of
    the material circumstances under which their economy developed,
    passed on from the less precious metals to the more precious ones,
    from copper and iron to silver and gold, with the further development
   of civilization, and especially with the geographical extension of
    commerce.

Gold won out due to a variety of reasons, such as being durable, amalgamable, malleable, divisible, homogeneous, and rare. Yet, the ultimate reason that gold won out is because it was the most saleable of commodities. As Menger went on to write,

     Gold nuggets extracted from the sands of the Aranyos River by a
    Transylvanian gypsy are just as saleable in his hands as in the hands
    of the owner of [the] gold mine, provided the gypsy knows where
    to find the right market for his commodity. Gold nuggets can pass
    through any number of hands without any decrease whatsoever in
    marketability. But articles of clothing, bedding, prepared foods, etc., would
    be suspect and almost unsaleable, or at any rate of greatly depreciated value, in the hands of the gypsy,
    even if they had not been used by him, and even if he had, from the beginning, acquired them only with
    the intention of passing them on in exchange.

This leads us to another criticism of bitcoin: It can never be the most saleable good. The reasoning for this is quite simple. Until the majority of the 7 billion or so people that inhabit this planet have either a smart phone or frequent access to the internet, a digital currency is out of the question.

Gold, on the other hand, is easily recognisable, as opposed to silver that may be mistaken for other metals such as nickel. Moreover, it melts at a relatively low temperature and is a relatively soft metal, which provides superior amalgamation and partly explains why it historically won out over metals such as platinum. If one questions the role of gold in the present monetary system, one only has to walk down the street in a metropolitan area and see a ‘We Buy Gold’ sign. Moreover, central banks hold gold and lots of it. They do not hold cattle, wheat, soybeans, copper, silver, or bitcoins.

Menger also wrote,

        I am ready to admit that, under highly developed conditions of trade, money is regarded by
    many economizing men only as a token. But it is quite certain that this illusion would immediately
    be dispelled if the character of coins as quantities of industrial raw materials were lost. [3]

While it may very well be true that some early adopters valued bitcoins with what Menger described as imaginary value, the point of the most saleable good bears repeating. Gold is and has been seen as an object of beauty since the dawn of civilization. Thus, the argument that bitcoins are in accord with Ludwig Von Mises’ regression theorem because a handful of people consume them as they would a Picasso, is like saying paper money has value because John Law or Ben Bernanke really enjoy playing monopoly. In fact, we might as well say that alchemy works, considering that a significant amount of human history and energy was spent in attempting to find the philosopher’s stone. Some people may enjoy work just for the sake of working. Unfortunately, this is not a sufficient justification for slavery nor for the labour theory of value.

Anonymity

With the imminent hyperinflation meme fading away, the new reason to hold bitcoins is the anonymity, nay, the freedom that it provides. Want to gamble online or buy something illegal? Bitcoins are the solution. It is a way of circumventing the authorities and uplifting free and voluntary trade, or so goes the story. Unfortunately for many of the misinformed, the reality is toto caelo. It would be best to take it from bitcoin developer Jeff Garzik himself. The fun starts at 3:20.

The ironic part about this is that anyone and everyone who has participated in illegal activity using bitcoins, presumably because they thought it was anonymous, now has a permanent record of every single one of their transactions contained on the public ledger. Those who think they are clever by using add-ons such as Tor are just as foolish as those who think prepaid cards or smart phones are anonymous. Imagine if bitcoins existed 50 years ago. Chances are, none of the last three presidents (including Barack Obama) would have run for office.

Bubble Time?

The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes. [Oops, Ed.] There is present a reflexive pattern of people buying because prices are rising, and prices rising because people are buying. The myopic are extrapolating the price trend of the past four months, which they deem is normal, and in so doing they exacerbate it to the upside, thus attracting even greater fools. The inflection point will come when the continuity of bullish thought is broken. One thing is for sure, the amount of suckers left who are willing to jump on the moving and ever-accelerating train is drawing thin, and so are their pockets.

When prices for any asset go parabolic, it does technical damage to a chart. It is sort of like someone deciding to go full speed in the middle of a marathon. Surely, one would look good for a few minutes. However, at a certain point one would inevitably collapse, with the possibilities of finishing the race being greatly diminished, let alone doing as well as they would have otherwise.

Gold went parabolic toward the second half of 2011 to $1,900/oz., which did a lot of technical damage to the charts that gold is just now beginning to shake off. Like Icarus, who had soared too high and melted the wax on his wings, parabolic moves always end in a correction, and if prolonged, a crash. Ironically, the best thing that can happen for bitcoin naysayers is if bitcoin skyrockets to $300/btc within a week.

There is nothing anti-Austrian about acknowledging that there exists in the market place a lot of naïve, irrational, and misinformed players. During the dotcom bubble, for example, a maintenance and building company called Temco Services almost tripled in a matter of minutes in 1998. The reason is because by 1998 every other layperson was involved in the market. Thus, the level of competence significantly dropped. The ticker symbol for Temco is TMCO, which was fairly close to that of Ticketmaster Online, which was TMCS. Ticketmaster Online (then TMCS) just happened to trade publicly for the first time on the day that Temco Services (TMCO) tripled. Rising asset prices create euphoria, and euphoria significantly drops the IQ of the participants.

Another reason why bitcoin is so susceptible to bubble behaviour is because it is perceived as being something new. “New era” thinking always attracts lots of attention. The tulip was introduced to Europe by way of Turkey in the middle of the sixteenth century. (In fact, the word tulip came from the Turkish tulipan, which means turban.) The tulip was perceived as something new to Amsterdam, a country which at the time possessed an abundance of newly discovered gold and silver from the New World. Likewise, the Mississippi bubble, which was perpetrated by John Law, promised vast riches to be had from the New World. The manias in railways, the radio, the internet, you name it, most of them involved something new or something perceived to be new.

There is no doubt that bitcoin is a spontaneous answer to the monetary instability that we see all around us today. On one side of the pond people are worried about the glorified currency peg known as the Euro, and on the other about the amount of damage that Bernanke is willing to inflict upon the world’s reserve currency. However, let us not become so enamoured of an innovative stateless solution that we forget Austrian economics and hitch libertarianism’s wagon to something heading for a crash.

* * * * *

Patrik Korda holds a bachelor’s degree in political science from BISLA and currently lives in New York, NY, where he works in market research. Follow him and Professor Mark Thornton on Fighting Apoplithorismosphobia.

This article first appeared at the Mises Daily, before this morning’s BitCrash.

Your Money Isn't Safe Anymore

Guest post by Jeffrey Tucker

The euro elites don't call it theft or robbery or even a tax, much less an outright default by the banks of Cyprus. They are calling it a "stability levy," a plan that could lead not to stability, but a domino-style collapse of the banking system in Europe.

True to the nature of government propaganda, the Cypriot head of state, Nicos Anastasiades, says this "stability levy" is necessary to forestall "a complete collapse of the banking sector." It's the same kind of language we heard in the fall of 2008 -- an intimidation tactic used to shove through TARP and unending bailouts.

More likely, the plan to tax all Cyprian bank deposits 6.75-10% will trigger one. Or maybe just the talk of it already has. We can't know for sure, because the government of Cyprus has declared a banking "holiday," a term that means that the robbers take a vacation from being held accountable for their actions.

What this plan signals is pretty clear: Your money is not in the bank. If you get there fast and withdraw what you can, you might survive. If you delay, all bets are off. That means an old-fashioned bank run -- the ultimate check on the soundness of banking.

Another way to look at it: It's a game of musical chairs, and the music has stopped. The purpose of the "holiday" is to tase people so they can't find their chair.

The tax is part of a $10 billion bailout arranged by Eurozone countries together with the IMF. So far during the long, slow, relentless, meltdown of the world's banking systems over the last few decades, the idea of outright confiscation has been something that governments have generally tried to avoid.

It turns out that people don't like to be robbed. They normally like to think that the money they put in the bank is accessible to them. So when Anastasiades demanded this, he got massive pushback from legislators and depositors.

Meanwhile, people were scrambling to get money from ATMs and trying to wire money out to safer havens. That's when the rude surprise came: Their accounts were locked and transfers have been stopped. ATMs are marked "out of order."

As I write, legislators have backed off the proposal to loot absolutely everyone equally, but instead will focus the most intense effects of the heist on only the very rich. [News this morning that the the Cyprus government now plans a vote to change the “levy” to 3% for deposits below 100,000 euros and 12.5% for above that sum.  And counting.]  This might make it more palatable for lawmakers, but no more so for the population at large. Politicians can promise all they want that this is a "one-off levy," but anyone who believes that is an utter fool. Citizens can be pretty dopey in believing political promises in general, but when it comes to their own money in their banks, their gullibility certainly has its limits.

Geographically-challenged Americans might be forgiven for having spent most of their weekend ignoring news out of Cyprus, a country they last heard about when studying ancient civilizations in high school. A friend of mine from Cyprus who lives in the U.S. gave up trying to explain where he is from long ago and is now satisfied to tell people he is from Greece.

Actually, Cyprus is one of the world's most prosperous countries, owing mainly to its status as a world financial hub. As Doug French put it to me, "This is a bank with a country attached."

Its population is mostly tourists and fluctuates based on season. But its prosperity for the last 20 years is due mostly to the deposits it receives from all over the region, especially from Russia. This is why Vladimir Putin has become involved in the current controversy, denouncing it as unfair and unwise.

The trouble is that Cyprus has to raise the money. It has to come from somewhere. The core problem is that this proposal, especially the idea of taxing deposits that fall below the deposit insurance ceiling, undermines that elusive but absolutely essential thing called confidence.

If people no longer believe in the system and run on the banks, the whole thing can unravel very quickly. In most countries today, there is depository insurance that provides the illusion that people's deposits are safe. The remarkable thing about the "security levy" is that it amounts to an open announcement that there is no assurance that the money must come from somewhere, so they might as well get from in the most obvious place.

There was a time when banks operated like normal businesses, performing a service in exchange for payment, while clearly delineating what part of people's deposits were at risk (and, therefore, paid a premium) and what part were security (and, therefore, a service to be paid for). But central banking and fiat paper money have confused the issue to the advantage of the financial system, but to the disadvantage of depositors, especially when faced with a crisis moment such as this.

Still, it is an unprecedented move, one that harkens back to the days of the early New Deal, when FDR closed the banks, suspended the gold standard, and outright changed the definition of the dollar in order to bail out the banking system. This kind of thing is not supposed to happen these days. The bankers are supposed to be wiser and more sophisticated, using fancy tools of monetary policy to continually shore up confidence in the system.

The suggestion that the banking system just outright steal people's money -- even if it doesn't end up getting through the legislature -- has dramatically changed the psychology of banking throughout the Eurozone. Over the coming weeks, Spaniards, Italians, Russians, and many others throughout the region are going to be quietly (or maybe not so quietly) testing the same, pulling deposits and finding other ways to secure their funds.

The word central bankers everywhere dread: contagion. It means the spreading of truth and actions based on that truth. Might Cyprus be the new bubble that breaks the world? It's a good time to revisit our friend Garet Garrett's 1932 classic that retains all of its explanatory power: A Bubble That Broke the World.

For banking regulators and politicians, this really amounts to an epic fail, even from their own point of view. They never want the veneer of stability and soundness stripped away. They want a population of depositors blissfully unaware of the vulnerability of the monetary and financial systems.

You might ask, "If you are so smart, what do you suggest?" That's easy: default and bankruptcy.

Contrary to the conventional wisdom, the Lehman Brothers case is not a model to avoid, but one to follow. Let the Cypriot banks that are under threat die a quick death, even if that means not paying those who believe they are owed. Under the conditions, there is accountability and there are permanent lessons learned.

This approach -- yes, it is far-flung and stands zero chance of actually happening -- might actually restore sound banking practices. Just imagine a world in which banks operate like honest, solvent, self-reliant businesses, not lying, not teetering on the brink, not depending on government and politicians and central authorities. Seems like a dream, but we can get there through a simple step: Allow the failure to happen.

But might that approach trigger a Euro-wide meltdown? Maybe. That seems to be something that is going to happen with or without this "one-time stability levy."

Meanwhile, the banks are closed. No one in the Eurozone is sleeping well at night. And it's going to be a wild week.

The Euro crisis alone might account for why Bitcoin has moved from $15 to $48 in three months. Is it possible that Russia's largest depositors saw this coming and have been slowly moving money out to the digital safe haven? We'll never know, because the transactions are anonymous (thank goodness). But ask yourself this question: Where would you rather have your money? In Bitcoin, or insured deposits in Cyprus? *

Sincerely,
Jeffrey Tucker

* Or gold.

FURTHER READING:

• This could NEVER happen where you live… right? – Simon Black, SOVEREIGN MAN
• Cyprus is far too important to get wrong – LIBERTY SCOTT

Paper Money = Despotism

Guest post by Wendy McElroy

The issue of money's quality is the thing that provides the fuel for the dreams of the folk who like to rule us. The animal also fuels the financial markets, now entering another bubble phase. It fuels the banking systems, that are solvent only on paper. Many people say that another crisis is around the corner, and who can doubt it?

Most fundamentally, the issue of sound money comes down to human liberty. There are great books on this topic. My personal favorites are Mises' Theory of Money and Credit and Paper Money Collapse by Detlev Schlichter.
Those two books should certainly be in your personal collection. Meanwhile, Wendy McElroy discusses what is suddenly a very topical subject.

Civil Liberties Rest Upon Sound Money
by Wendy McElroy

“FIAT” MONEY IS MONEY with no intrinsic value beyond whatever an issuing government is able to enforce. When it enjoys a monopoly as currency, fiat inevitably turns the free market functions of money inside out. Instead of being a store of value, the currency becomes a point of plunder through monetary policies such as quantitative easing. Instead of greasing society as a medium of exchange, the currency acts as a powerful tool of social control. The second harm is far less frequently discussed than inflation, but it is devastating. The personal freedoms that we know as "civil liberties" rest upon sound money.
    In his classic book The Theory of Money and Credit (1912), Austrian economist Ludwig von Mises argues,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically, it belongs in the same class with political constitutions and bills of rights.

    Yet the best solution to the harms caused by fiat is often dismissed even by staunch free market advocates; namely, allow the private issuance of money that freely competes with fiat as currency. This would involve removing all prohibitions, other than fraud, abandoning monetary controls such as legal tender laws and all reporting requirements. In turn, this might well eliminate the Federal Reserve, although people would be free to accept whatever money they wished.
    In his invaluable book What Has Government Done to Our Money? the Austrian economist Murray Rothbard addresses the strange reluctance to consider private currencies,

Many people, many economists, usually devoted to the free market, stop short at money. Money, they insist, is different; it must be supplied by government and regulated by government.

    History frowns upon that theory. Before the United States Mint issued its first coin in 1793, the 13 colonies were awash with an assortment of currencies that included both private and government-issued ones. Current fiscal reality also frowns on this. Privatizing zealot Martin Durkin calls the idea of government guaranteeing the quality of money

the sickest joke in economic history. Governments have always robbed their subjects by debasing the currency, but this abuse, in recent years, has burst all bounds of decency and sanity.

But focusing upon economics and efficiency can miss the reality of how a currency monopoly is intimately connected with the violation of traditional civil liberties.
    A key reason Mises viewed sound money as a necessary protection of civil liberties is that it reins in the growth of government. When a government prints money without the restraint of competing currencies -- even if the restraining "competition" is a gold standard -- runaway bureaucracy results. Wars are financed; indeed, it is difficult to imagine the extended horrors of World Wars I or II without governments' monopoly on currency. A white-hot printing press can finance the soaring numbers of prisons and law enforcement officers required to impose a police state.
    Floods of currency can prop up unpopular policies like Obamacare or the War on Drugs. That is why government holds onto its monopoly with a death grip. In The Theory of Money and Credit, Mises observes,

The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.
[Note: Mises addresses "sound money," which is distinct from private money, but both forms of currency would serve the function of putting a severe brake on a government's ability to swell.]

    Another way a currency monopoly threatens civil liberties is by permitting government to monitor virtually all transactions through the financial institutions with whom it maintains an intimate partnership. Total surveillance is a prerequisite to total control, which is what the government wants to establish as quickly as possible. For example, prior to establishing the Suspicious Activity Report (SAR) in 1996 -- a form that financial institutions submit to the U.S. Treasury -- banks were required to automatically report any transaction over $10,000. Now any activity deemed "suspicious" is vulnerable.
    The monopoly facilitates a vicious attack on privacy and has become a main building block of the American surveillance state. As libertarian Mark Hubbard stated,

Civilization is a movement toward privacy, a police state the opposite, and tax legislation has become the legislation of our new Big Brother states.

    Much of the tracking is a pure money grab, but it is also an attempt to ferret out and punish "unacceptable" behavior, like dealing in drugs or politically dissenting. Indeed, it is criminally naive to believe the government will not use these massive and valuable data to target its critics. Thus, people can be discouraged from speaking out. Controlling the information, however, means controlling the currency. Otherwise, anyone could mint gold coins in the middle of the night and release them covertly into the wild.
    Equally, a currency monopoly allows the government to impose social policies that punish and control categories of people. For example, as long as banks function as an arm of the government, they will refuse to open accounts for people without state-issued identification and Social Security numbers. Thus, the "undocumented" are effectively barred from the monetary transactions that are part of everyday life. By contrast, counterculture financial institutions often require little more than a username and a password to deposit funds. No wonder some politicians are increasingly desperate for government scrutiny of Bitcoin, as they fear its decentralised design.  
    The currency monopoly is vital to both the rise of a police state and the targeting of individual civil liberties. In arguing for a free market in currencies, it is important to claim the moral high ground by stating and restating what should be obvious: Civil liberties require sound money. And nothing ensures the quality of a commodity as surely as competition.
___________
Wendy McElroy is the author of The Art of Being Free and a member of the editorial advisory board of Laissez Faire Books. This post first appeared at Laissez Faire Today.

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