A Libertarian Money

Some people claim that libertarians like cryptocurrencies like bitcoin because they do not rely in any way on government. Perhaps those people meant “anarchists” because libertarians (to be safe perhaps I should just refer to my own views though I know that they are widely shared by other libertarians) accept the critical importance of government in defining and protecting property rights and personal safety. Bitcoin and most other cryptocurrencies do not satisfy the requirements for a good libertarian money because they do not satisfy the requirements for good money. This note explains why this is so and defines what is good libertarian money.

Are Cryptocurrencies the Answer?

Economists note the incredible power of markets and market prices in directing our scarce resources (our labor, capital, and technology) to their best uses. But prices are expressed in terms of money. The presumption, and actual reality, is that within each market prices are expressed in terms of the same money. It would not facilitate our choices if apples were priced at $6 per bushel and oranges at 3 bitcoin per bag. Presently, virtually nothing is priced in bitcoin. In addition, sellers don’t generally accept payment in a currency other than the one in which the good’s price is expressed, thus very few sellers will accept bitcoin in payment. Moreover, you can only accept bitcoin in payment if you have a bitcoin account together with the software required (a bitcoin wallet).

None of these are insurmountable barriers to growth in the use of bitcoins, but they do require strong incentives for putting up with and/or overcoming them. I explained the basics of bitcoins value in the following blog in 2014: “Cryptocurrencies-the bitcoin phenomena”   One incentive would be to replace the established currency in a market (a country’s legal tender) that has very unstable value (think Venezuela, Argentina, Brazil at various times in their histories). Another would be the need for anonymity (as is achieved with paper currency) that an illegal drug dealer or a political dissident in a repressive regime might require and find convenient.

Bitcoin’s claim to eliminate the trusted third party (bank accounting systems) required by existing electronic (digital) payments with bank deposits, is particularly attractive to libertarians.  But this claim is a gross exaggeration. To prevent the double spending of the same bitcoin, each transaction must be verified by so called miners (third parties you don’t need to trust) which takes five to ten minutes and very large amounts of electricity to process as miners race to solve increasingly difficult mathematical puzzles. Also, all transactions are very public on block chains, though accounts may be held under pseudonyms and are thus described as pseudo-anonymous.

Though actual bitcoin transactions have been made easier via the development of software wallets, many assign their bitcoins to exchanges (trusted third parties).  “The future of bitcoin exchanges”  The loss of a bitcoin owner’s password to his account is fatal and final. Those bitcoins are lost forever. But more deadly to the use of bitcoin as money (unit of account and medium of payment) is the volatility of its value.  The price of a bitcoin has ranged from just under $30,000 to over $67,500 over the last year. It is currently $39,268. Thus, payments of bitcoin generally involve temporarily purchasing them with dollars or some other stable currency and then exchanging them back to dollars as quickly as possible after receipt. The costs of these exchanges are often overlooked when claiming that bitcoin transfers are cheaper than traditional means of electronic payments. Most buyers and sellers of bitcoin are indulging in a form of gambling.

The Libertarian Alternative

There are monetary regimes, however, that satisfy libertarian preferences for minimal government involvement and manipulation. The Constitution of the United States provides the authority for such a regime in Article I Section 8 “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;” The classical gold standard was such a system. However, its “rules” were diluted when taken over by central banks. Moreover, the practice of actually buying and storing gold distorted its market price and was costly, flaws that are avoided in the system I propose below.

In the U.S. today, as well as every other country in the world, there are thousands of private companies that create and offer their own currency. Most of them are banks. While that would seem to make libertarians happy, thousands of individual bank producers of money would not constitute an efficient monetary system without rules and mechanisms for linking them into what we think of as one currency–in our case the U.S. dollar.

While the dollars deposited in my bank are my bank’s liability, I am protected from the bank’s failure by deposit insurance. Your bank accepts my deposits in my bank because my bank credits your bank’s account with the Federal Reserve (by debiting its account with the Fed). In short, the deposits at thousands of different banks are accepted by every other bank because they are all ultimately claims on the Fed. This is similar to the gold standard in which the money created by thousands of banks were accepted everywhere because they were redeemable for a well-defined amount of gold.

Libertarians want a currency and monetary system that can’t be manipulated by the government (central bank).  The dollar is now a fiat currency (redeemable for nothing–except a claim on, i.e., deposit with, the Federal Reserve). Thus, its supply is determined by the Fed’s judgement of what is needed for “price stability and maximum sustainable employment.” We libertarians want a currency that we each individually control the supply of. In short, we want a currency with a hard anchor (which was the case for the gold standard) supplied according to currency board  rules (which historically were violated by central banks nominally anchored by gold). Currency board rules require the currency issuer to sell or repurchase its currency at its fixed price in response to public demand. Any number of private producers of dollars redeemable at an officially fixed price for a well-defined anchor (gold, aluminum, a basket of goods, etc.) would result in a money supply determined by the public that was consistent with and appropriate for its fixed price to the anchor and that was fully interchangeable. The central bank would be passive. It would have no monetary policy (beyond the fixed price for the anchor). This seems like libertarian heaven.

I led the IMF teams that established the Central Bank of Bosnia and Herzegovina, which follows currency board rules. I have written a book about that experience:   “One Currency for Bosnia-Creating the Central Bank of Bosnia and Herzegovina”   or  “Amazon– One Currency for Bosnia” I also participated in Bulgaria’s adoption of currency board rules. The currencies of both countries are anchored to the Euro and their currency experiences have been outstanding. Their money supplies are basically regulated by market arbitrage. If the market exchange rate of the Bulgarian lev to the Euro rises above its official rate, it would be cheaper for the banks that issue lev to buy Euros from the Bulgarian National Bank thus reducing the supply of lev in the market and lowering its market price for Euro. See my blog on Bulgaria’s experience: “Bulgaria and the Chicago Plan

A Libertarian International Reserve Currency

What about cross border payments? In brief, cross border transactors have found it economical to price and settle transactions in a vehicle currency, usually the US dollar. The increasingly frequent deployment of sanctions enforced by restricting the use of the dollar has intensified the search for alternatives. See my more detailed discussion: “The Empire and the Dollar”  The search for alternatives to the dollar risks fragmenting the global market place as proposed by Russia’s Sergey Glazyev.  “A new global financial system”

The International Monetary Fund has already created such an alternative. An internationally established unit (anchor) is much less likely to be abused for national political purposes, but the IMF’s Special Drawing Right (SDR) suffers from some serious defects. However, these can be fixed. “Time for a New Global Currency”   Why the World needs a new Reserve Asset with a Hard Anchor

The SDR can be “fixed” in two stages. The first is to develop the private sector’s uses of the SDR unit of account (invoicing oil and other globally traded commodities in SDRs, borrowing and lending denominated in SDRs, SDR bonds and bills, and digital SDR deposits–eSDRs). See my more detailed discussion:  “Promoting Market SDRs”  As with national currencies, where hundreds of individual producers of the national currency are made interchangeable by being claims on the central bank, the market SDRs of many competitive producers would be interchangeable as the result of being redeemable for the official SDR of the IMF.

The second stage would require a reform of the IMF’s official SDR. Rather than allocating them from time to time to all IMF members, they should be issued according to currency board rules. In addition, the valuation of the official SDR should be changed from its current basket of five currencies to a small basket of homogeneous, globally traded commodities. The IMF’s existing rules for periodically adjusting the SDR’s valuation basket are transparent and appropriate and should continue to be used. In one sense, this would reestablish an improved international gold standard like system. It would be improved by replacing a single commodity anchor with a small portfolio of commodities and its supply would be improved by adopting the market driven rules of a currency board.  “Free Banking in a Digital Age”

Why does Turbo Tax want our data?

The usually helpful Geoffrey A. Fowler’s article in today’s Washington Post reveals that Turbo Tax and H&R Block want our tax data “to target you with “offers” — or, as they’re more commonly known, advertisements.” For them to take and keep these data we must agree. Mr. Fowler asks, “did you know that by clicking ‘agree’ to some of their privacy prompts, you may be letting them use you?”  “Tax Prep Privacy”  

Wow. Econ Prof Coats was immediately aroused.

Turbo Tax, like any other company, is in business to make money. It makes money by developing products we like enough to pay for. We are presumably better off as a result. In looking for tax assistance software, we can search the web for what we think would be useful. Or, if Turbo Tax has developed something they anticipate we would like but might not know about, they can advertise it in the hopes that we will be interested and try their new product. Or if they have information from our earlier tax returns that enable them to refine their list of who might benefit from their product, they can target only those specific individuals with their “ad” while sparing millions of others from getting the ads they have no interest in. Like most economic transactions, this would be win-win.

I clicked “agree.”

What future Russia do we want?

It is not possible to see the pictures of dead bodies (320 and counting) and to hear the reports of the barbaric massacre of citizens of Bucha or the recent rocket attack on a train station in Kramatorsk that killed 50 and injured 98 civilians without feeling outrage towards the Russians and sorrow for the people of Ukraine. Understandable though such feels are, it is not a good state of mind in which to plan for a better future.

In a face-to-face interview with the Editor in Chief of The Economist in Kyiv on March 25, President Volodymyr Zelenskyin defined victory as: “being able to save as many lives as possible…because without this nothing would make sense.”  “The Russian war in Ukraine”  In this spirit, compromises will be made by both sides and a peace deal will be signed. It is for Ukraine to decide what is acceptable to them. But what should we wish for and— via various sanctions around the globe against Russia—what should we press for?

Our hearts cry out for revenge and punishment for Russia’s aggression and inhumane and barbaric behavior. But we would be much wiser to rely more on our minds than our hearts in fashioning the future. Existing and potentially strengthened sanctions will flatten the Russian economy if not lifted. Reallocating confiscated Russian property (e.g., the Central Bank of Russia’s foreign exchange reserves) for the reconstruction of Ukraine may seem justifiable but is surely illegal and no one should forget the role played by the Treaty of Versailles (providing for German reparations for WWI) in bringing about WWII. “How to stop a new cold war”

Ukraine President Zelensky has already indicated Ukraine’s potential willingness to become politically neutral ala Austria and give up seeking NATO membership. While taking territory by force violates international law, the formal return of Crimea to Russia, which is supported by over 80% of its residents, may well be part of a peace agreement. Should the U.S. and EU oppose such provisions? Should?

There are some, not just the defense industry, which profits from war, who believe that Putin is determined to reestablish the Imperial Russian Empire and must be resisted at all costs. We should fight Russia “to the last Ukrainian.” “How to stop a new cold war”  See the following interesting interview of Noam Chomsky: “Chomsky-US policy toward Putin assures no path to de-escalation in Ukraine”

Others, myself included, take seriously Putin’s (and Boris Yeltsin before him) pleas for a European security architecture in which Russia feels comfortable. We believe that America’s Monroe Doctrine is applicable to all major powers. Our true interest is in a peaceful Russia that is a comfortable member of the European continent ten or more years into the future. We should encourage Ukraine’s peace negotiations and our own sanctions and defense policies in that direction. Our defense industries have profited enough from our never-ending wars. Enough is enough. “Economic sanctions”

And we must never forget that our own flourishing rests, in part, on our reliable commitment to the rule of law. Why are we sanctioning Russians living outside of Russia and confiscating their yachts when they have not been convicted of any crimes? “The American Civil Liberties Union helped scuttle a bill this week that would have enabled the Biden administration to liquidate Russian oligarchs’ assets and turn the proceeds over to Ukraine.” “ACLU Ukraine-Russia-Oligarchs”

Our news media are confronting us daily with Russia’s atrocities (facts Russians are unable to see in their own country). It is hard not to want to strike out against Russia in kind. Such short-sighted reactions are not in Ukraine’s, nor the world’s, long run interest. We are, and should behave, better than that. “Ukraine itself is proposing terms that, if backed by a combination of U.S. and European sticks and carrots, stand some prospect of success.” “What can the US really do to protect civilians in Ukraine”  We should not let our short sighted, emotional, anger towards Russia and our military industry get in the way.

The good and evil in us all

Listening to political dialog in the U.S. has become very painful and disheartening because there is no dialog. The Republicans and Democrats simply hurdle nasty insults at each other. They are enemies rather than fellow citizens with different views. Serious policy issues and challenges do not receive the serious debate they need. The atmosphere is ugly.

Russia’s unjustified and increasingly barbaric attacks on Ukraine is another example of the worst in mankind.  Following four weeks of Russian attacks on Mariupol, Bucha, and other cities the destruction of lives and property is clearly visible. While it may take a while to sort out the truth of who did what, “President Biden on Monday joined the chorus of world leaders who have said reports of mass killings in the Kyiv suburb of Bucha constituted a ‘war crime,’ vowing to hold Russian President Vladimir Putin ‘accountable’ for the apparent atrocities in Ukraine.” “Bucha Biden sanctions Russia Ukraine”  However, it is natural, and appropriate, that we honor the bravery of Ukrainians defending their homeland and despise the savagery of the Russians invading it.

These understandable reactions do not excuse our damaging loss of our ability to differentiate among people, judging each other individually. Removing Russian performers from western stages may seem a childish reaction–OK it is a childish reaction–but it reveals a dangerous predisposition of caveman behavior. What are we to make of the removal of compositions of Pyotr Ilyich Tchaikovsky from current orchestral programs? He has been dead for more than a hundred years. Or as tweeted by Edward Luttwak: “The U of Milano cancels Dostoevsky course; Poland cancels Mussorgsky, Shostakovich & Stravinsky…. Actual thought is needed.”

Not all Russians living in Russia disapprove of their country’s war in Ukraine (hearing only official Russian propaganda) but many do according to those now leaving Russia in fear or disgust. We are told that many of the young Russian soldiers sent into Ukraine didn’t know why they were there and are not happy fighting their Ukrainian cousins.

Seeing such behavior has been very disheartening.

But man left the caves with admirable instincts as well. Helping their fellow man in need contributed to their own survival as well. The incredible welcome of 4 million Ukrainians in Europe in one month is breathtakingly heartwarming. Though I am embarrassed that the admission of Afghan and other war refugees has not been as easy or welcoming. My friend Tom Palmer continues to help fleeing Ukrainians relocate to Poland as do many others. A recent J Street webinar interview of Naomi Steinberg from the Hebrew Immigrant Aid Society about their work assisting Ukrainian immigrants was equally heartwarming. She noted that in earlier days HIAS helped Jews flying from persecution. Today, she said: “We are helping refugees, not because theyare Jewish but because we are Jewish.”

The fear and loathing of “others” and the desire to help those in need are both impulses that helped cavemen survive. But we no longer live in caves and our survival and flourishing requires that we tame the first instinct and encourage the second one.