Economic theorists have long debated whether money is best understood as “fiat” money created by government decree or as a generally accepted medium of exchange that is more convenient than barter. The “bitcoin,” a digital currency, is testing the hypothesis that an entirely voluntary currency can be successful. It is riding high at present. This week, it reached US$100 on April Fool’s Day and rose to US$147. But its extreme volatility suggests that its future is dim. On the whole, money that has some fairly reliable relationship to something such as government debt – that is, the debt of an entity that can compel the payment of taxes – is still preferable.
If the bitcoin manages, however, to establish itself for the long haul, the failed Laiki Bank and the Bank of Cyprus, until recently the two leading Cypriot financial institutions, will have left their mark on history. Most people regard their bank deposits as solid, reliable money, not as loans to a bank.The partial expropriation of deposits in Cyprus has been a chilling refutation of that view, at least in extreme circumstances.
Oddly enough, the bitcoin is said to have been invented by someone who identified himself only by a pseudonym (Satoshi Nakamoto) and then lost interest in the whole matter. Nonetheless, the concept of a voluntary currency has long been known in children’s games; for example, oak leaves can be declared to be money (children rarely know the term “legal tender”). It has a natural attraction to the purest of economic libertarians – and apparently to money-launderers, too, or at least those of them with high-level computer skills.
In the meantime, for all the flaws and conundrums of monetary and fiscal policy, it would be extremely premature to move to a self-regulating currency. The Bank of Canada need not start winding up its business, and Jim Flaherty, the Minister of Finance, should continue to consider the short list for the next governor. The dollar may not be almighty, but it is more stable and convenient than the bitcoin.