This week, Swiss National Bank We held a crypto-asset and financial innovation conference. A thought-provoking keynote address explored whether fiat currencies could be challenged. If so, could it be pre-empted by gold, bitcoin, inflation-linked tokens, or something else?
The talk was delivered by economist Lawrence H. White, Senior Fellow at George Mason University and Senior Fellow at the Cato Institute. In his speech, he revealed that he ran into Hal Finney and Nick Sabo, who some believe to be Bitcoin founder Satoshi Nakamoto.
Central banks are not competitive
As inflation ran rampant in the 70s, economists devised various proposals to deal with the problem. One was to impose constraints on central bank policymakers. Hayek observed that the problem was the need for more competition. He initially proposed opening the economy to foreign fiat currencies, effectively creating competition among central banks. He then proposed the introduction of a private currency, possibly designed to preserve purchasing power.
Today, the leading candidates for private currency would be gold or bitcoin. Purchasing power can be maintained either by committing to buy back the currency at a fixed price or by limiting supply, as is the case with Bitcoin, White said.
Both Bitcoin and gold are inflation hedges, but their supply mechanisms are very different. In the case of gold, increased demand drives higher prices and more gold jewelery production and recycling. That will increase supply and keep prices down in the long run. This has been proven to the gold standard. When the United States rejoined her in 1879 and seceded in 1914, prices differed her by 1%.
In contrast, bitcoin supply increases in a predefined way and does not respond to demand. Price inflation can cause more mining activity, but it doesn’t mean more Bitcoin is generated. “It wouldn’t be unfair to say that fluctuations in purchasing power are built into the design,” White said. “And if you want it to be a generally accepted medium of exchange, that’s a problem.”
Could fiat currency be stolen?
But White sees a move away from fiat currency as unlikely, largely because of the network effects of incumbents. One caveat is the lack of alternative fiat currencies that are considered more stable, plus runaway inflation. He gave examples of people in Argentina and Zimbabwe who voluntarily adopted the US dollar.
“People are not willing to put themselves on the gold standard or the Bitcoin standard unless there is a good alternative,” White said. “Unless the dollar is equally volatile.”
Bitcoin’s advantage over gold is censorship resistance. But White believes he could be driven underground, as happened in China. That may not eliminate its use, but it does prevent it from becoming a mainstream payment method. Additionally, gold has a wider installed base (bars, ETFs, jewelery) and a much higher market cap. So, should fiat currencies fail, White would endorse gold over Bitcoin.
He highlighted some other blockchain alternatives. These include so-called flatcoins linked to a price index, such as his Ampleforth’s SPOT token with a market capitalization of less than $1 million. Another option for him is to have a cryptocurrency with flexible supply, like PraSaga (which White advises). Prasaga is not trying to compete with Bitcoin, instead focusing on industrial use cases.
Mr. White speaks well worth seeingalong with other meeting materials.
