Cooking the Books: Bitcoin or Bit Con?
‘Don’t write off Bitcoins as just another bubble,’ wrote Matt Ridley in the Times (19 April), ‘Demand for the virtual currency proves people don’t trust governments with their money.’ But what are Bitcoins?
The Bitcoin scheme is an attempt to create a digital means of payment which has all the advantages of cash and none of what are seen by its supporters as the disadvantages of being issued by the state.
When a note or a coin is used in payment it passes physically from one person to another who can in turn use it to make another payment. In other words, cash circulates and is untraceable in that it doesn’t bear the mark of who happens to own it at any time. The Bitcoin scheme aims to create this for electronic payments (electronic payments do of course exist today but are not untraceable).
This was a technical challenge but the geeks who thought up the scheme (maybe only because it was a challenge) solved it by requiring anybody buying or selling with their electronic money to adopt a pseudonym and by incorporating into the software encryptions and procedures to confirm transfer of ownership and to prevent double spending as well as to create new bitcoins until a total of 21 million is reached.
So, technically, it works. In fact there are claims that, being untraceable, it works too well in that it allows money laundering, drug dealing and tax evasion (just as cash does but not ordinary electronic payments). Also, people have reportedly been speculating on the exchange rate between bitcoins and conventional currencies going up or down, leading to the bubble Ridley mentioned.
But there’s also the ideology behind it. Because it’s a means of payment that has nothing to do with the state, it is being touted by free marketers (or ‘libertarians’ as they are called in America), of which Ridley is one. They have visions of it replacing state-issued money and solving the problems of depreciation, inflation and financial crises which in their view go with it. Currency cranks see it as a way of ending both the US Federal Reserve and the commercial banks’ supposed power to create additional purchasing power out of thin air.
This is not going to happen, if only because bitcoins can only be used via the internet, but also because capitalism cannot do without a state and because for most people cash and identifiable electronic payments are more convenient. But suppose that it did. This, as the Gegun Kapital und Nation Group have pointed out in their excellent article on Bitcoin (http://gegen-kapital-und-nation.org/en/bitcoin-finally-fair-money), would not solve the economic problems of capitalism since these are not caused by some flaw in the monetary system but by the very nature of capitalist production and of money capital. A fixed money supply, as envisaged under the Bitcoin scheme, would not prevent booms and slumps but it would constrain the accumulation of capital:
‘While clearly a state intervention, the central banks’ issuing of money is hardly a perversion of capitalism’s first purpose: growth. On the contrary, it is a contribution to it. Systematic enmity of interests, exclusion from social wealth, subjection of everything to capitalist growth – that is what an economy looks like where exchange, money and private property determine production and consumption. This also does not change if the substance of money is gold or Bitcoin. This society produces poverty not because there is credit money but because this society is based on exchange, money and economic growth.’