It’s a legendary debate between two of the greats of 20th-century monetary economics over whether “challenger money” will replace the government-backed standard currency as the world’s most popular payment medium. What might these two great men think of Bitcoin, even though it’s only a few decades old since its invention? Do they see the potential for bitcoin to rise and become a competitor to fiat currencies?
On one side of the debate was Friedrich Hayek, the Austrian-British economist who advocated classical liberalism, against Milton Friedman, an advocate of free markets. The two economists are usually on the same page, but the stand-off has centred on whether privately issued competitive money would create a more stable monetary system.
When the two economists confronted each other on the issue in the mid-to-late 1970s, the dollar system entered its most volatile period since World War II, with the cost of gasoline, air tickets and home heating soaring in the United States as a result of the Arab oil embargo. In response to the shock, the Federal Reserve flooded the market with money (quantitative easing of money), reducing the dollar’s purchasing power against almost everything else, and consumer prices, which had been rising at a steady but moderate pace, rose at an annual rate of 14 per cent.
Hayek taught at the University of Chicago from 1950 to 1962, a period that overlapped Friedman’s long tenure there, so the two economists knew each other well. But the two did not debate face to face. Hayek laid out his ideas in a series of speeches and papers in The mid-to-late 1970s and in a 1976 book, ‘The Denationalization of Money.’ At industry events in the 1970s and 1980s, the two men reportedly did not yet have opposing views. Friedman’s first public criticism of Hayek’s ideas came in a book he co-authored with the economist Anna Schwartz in the 1980s.
At the time, politicians, academics and ordinary people were worried that the dollar system was headed for collapse. At the time, the Fed was pursuing the opposite of its “sound money” policy of the past, devaluing the dollar faster than American workers could earn it. Hayek believed that during difficult economic times central banks would continue to overinflate the money supply, artificially boosting the economy quickly, which would trigger the kind of monetary inflation that the US was experiencing. The solution, According to Hayek, was for private money issued by banks or other companies to compete with sovereign money in an open market. The currency or currencies that do the best job of maintaining stable purchasing power for consumers and businesses will attract the most consumers and win.
According to Hayek, if the Federal Reserve continues to churn out dollars and make their purchasing power weaker and weaker, privately created and managed competitive currencies will replace the unstable dollar. This “let the best currency win” philosophy would allow governments to stop this reckless monetary policy, either by forcing central banks to reform or by opening the way for a new, more stable currency to take power.
What’s the future of Bitcoin?
Digital currencies issued by sovereign states will further limit Bitcoin’s future. But bitcoin has strong potential as a niche medium of exchange for transactions, especially large ones where privacy is crucial. “Bitcoin does this particularly well, whereas other currencies don’t,” Luther said.
Of course, bitcoin is used for many illegal transactions, including paying ransomware attacks, and the government will try to crack down on its underground trade. But bitcoin is hard to control, which is another advantage. “It’s much harder for governments to stop bitcoin transactions than it is to stop the use of cash, even though it’s used underground today,” Luther said.
Luther, who has studied the views of influential monetary economists, says what does Friedman and Hayek think of bitcoin? “They will applaud the growth and relative success of this experiment [bitcoin],” Luther said. In theory, they would see it as an effective check on unbridled government spending. But what they want is a money-supply mechanism that takes into account changes in the demand for holding money, which Bitcoin clearly doesn’t have. Friedman or Hayek would never have argued that bitcoin could or should replace the dollar as the primary currency of the United States. They would probably agree that bitcoin is best used for what it is for, which is to keep transactions private.”
In today’s financial world, Bitcoin has grown into a behemoth. But as hayek and Friedman, two great men, might have concluded, bitcoin’s lofty image will fade as the world realises that its future is very niche.
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