F.A. Hayek is known for his work that led him to become a Nobel Prize winner. The economist discussed a solution to the state of the 1970s government-created inflation and subsequent recession, along with the problems that it incurred. This solution would involve a private, irredeemable form of currency that would have enough power to compete against fiat. He described in a book called “The Denationalisation of Money.” Even decades before the idea of digital money could even have been a concept, Hayek already had planned for such an asset.
In a recent article by William J. Luther, who is presently the director for the American Institute for Economic Researchbalance transfer promotion 2018’s Sound Money project, he spoke on this vision, relating it to cryptocurrency. He commented that just the concept alone of crypto would be along the lines of what Hayek had described, and how critics of this type of plan were somewhat correctunderground swimming pool, like the incentive to inflate currency.
Cryptocurrency on a blockchain eliminates the concern for this type of worry, and the fixed issuance that can’t be altered by an individual entity keeps it honest. The only way that Bitcoin could solve inflation is with every single participant participating, which is a circumstance that has happened before on the blockchain in August 2010 with a hard fork. However, individuals on the side of the chain that wasn’t ultimately victorious were persecuted.
Just like Hayek thought would happen, alternatives that had not been ruined would be the ones that benefit from the move. Still, Monero and similar coins could come out victorious, since they have a certain level of predictability. With this market of private monies, which provides participants with many choices to fit what they want, Bitcoin now has an incentive to stay with the original plan and keep their network functioning properly. However, others may use this as a way to urge themselves to pursue other attempts to create the effect.
Luther wrote, “In some sense, cryptocurrencies have put Hayek’s thought experiment into practice. Privately issued cryptocurrencies compete directly with traditional government-issued monies. Unlike gold, silver, and salt, cryptocurrencies like bitcoin, ether, and dash have no obvious non-monetary use. They are not commodities, nor are they redeemable for commodities. Rather, they are privately issued irredeemable monies, much like Hayek envisioned.”
Still, Luther notes that there’s an issue with cryptocurrency – they lack “stable purchasing power.” The volatility of the market alone makes it hard for anyone to predict what monetary value the assets are redeemable for, which means that they are (at best) speculative assets. While stablecoins are becoming more and more popular, they are mostly meant for the process of trading, rather than using in a spending capacity.
When it comes to basically reinventing the economy and coming back from poor policy decisions, cryptocurrency still has to make a lot of progwhat is the best savings accountress first. Stable purchasing power is a necessity for this to happen, because it needs to be applicable to activity like grocery store purchases and bill payments. The potential for future changes doesn’t really help with the problems in the meantime.
Luther concludes that, essentially, the only thing for the crypto community to do at this point is experiment and continue to make progress. He notes,
“Hayek was clearly onto somehow do i pay off debtthing with potential when he proposed allowing private alternatives to poorly managed government monies. But as Hayek wrote elsewhere, competition is a discovery procedure: we need to let it work to reveal what types of money people most want and how best to provide them. As cryptocurrency pioneer Nick Szabo has written, the unsettled questions about cryptocurrency ‘can only be settled by actually fielding them and seeing how they work in practice.”