The promoters of crypto currencies have gushingly touted them as the mechanism by which the present central banking cabal and the system of nation states, from which they derive much of their power, will be brought down and replaced by digital money. Despite their meteoric rise as speculative “assets,” there are fundamental economic reasons why they will never act as a general medium of exchange despite the wild enthusiasm for them by the crypto-currency cultists.
Money – a general medium of exchange – is the most marketable (exchangeable) commodity in an economy. As a good, money is not sought after for its direct use – to satisfy individual wants – but to satisfy wants indirectly through exchange for other goods. Over time, one good becomes money since it possesses qualities superior to all other goods as a money. When gold became demanded not for its “use value,” but for its “exchange value,” it became a general medium of exchange – money.
As a consumer good, gold possessed a value or a “price” prior to it becoming a money, as the eminent monetary theorist Murray Rothbard explains:
…embedded in the demand for money is knowledge of the money-prices of the immediate past; in contrast to directly-used consumers’ or producers’ goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., forornaments in the case of gold.)
Murray N. Rothard, What Has Government Done to Our Money?
Thus, Bitcoin’s “price” is not in terms of its original commodity price, but its price is in terms of dollars, Euros, yuan, etc. In the dollar’s case, it was at one time linked to gold, but has since been severed from it, while Bitcoin has had no such relationship.
Once money is established, then prices are expressed in terms of it and thus economic calculation can rationally take place and the division of labor and specialization can be expanded. Rothbard continues:
The establishment of money conveys another great benefit. Since all exchanges are made in money, all the exchange-ratios are expressed in money, and so people can now compare the market worth of each good to that of every other good.
Once gold became money, the price of goods became expressed in gold not in other elements – nickel, zinc, lead, etc. With the proliferation of crypto currencies, there will be a myriad of different price ratios for each good. There will be a Bitcoin price for a car, an Ethereum price for a car, a Dogecoin price of a car, and so on. This is the antithesis of the purpose of money – one unit of account that reflect prices for all commodities – as Rothbard shows:
Because gold is a general medium it is most marketable, it can be stored to serve as a medium in the future as well as the present, and all prices are expressed in its terms. Because gold is a commodity medium for all exchanges, it can serve as a unit of account for present, and expected future, prices. It is important to realize that money cannot be an abstract unit of account or claim, except insofar as it serves as a medium of exchange. [my emphasis]
Crypto currencies, therefore, directly violate one of the main principles of monetary theory. The vast array of digital money, all with unique price ratios (to say the least of their volatility), would make economic calculation and rational planning next to impossible. In this sense, the current world of fiat dollars would be preferable to a Tower of Monetary Babel that digital currencies would create.
Central banks and governments do not fear crypto currency challengers to their monetary hegemony. They, of course, jealously monitor the crypto market worried that any gains accrued may not be subject to tax. Central banksters do fear gold, for it remains, despite being demonetized, the last check on profligate central bank monetary expansion. And, because countries who wisely understand gold’s importance and seek to get out from under the yoke of King Dollar (most notably China and Russia), continue to voraciously accumulate the yellow metal.
The return of true prosperity will only come about when gold is once again at the center of the monetary order and fiat currencies such as the dollar, Euro, and now Bitcoin are forgotten memories of a misguided and corrupt age.
Originally published at Antonius Aquinas