For all the regulatory crackdowns on Bitcoin in recent weeks, the cryptocurrency’s advocates remain unfailingly optimistic. Bitcoin is the future, they tell us; it heralds a future where private, stateless currencies will dethrone the dollar and other monetary dinosaurs.
Sorry, but Bitcoin isn’t the future. If anything, it’s a throwback to an earlier era, when private currencies circulated alongside government-sponsored money. In fact, if you strip away its technological trappings -- the encryption, the peer-to-peer networks -- and Bitcoin closely resembles these earlier private efforts.
This isn't a comforting historical parallel. The alternative currencies of the past are long gone, thanks to a decades-long campaign by governments aimed at monopolizing the money supply. The lesson of their rise and fall is one that Bitcoin’s boosters would be foolish not to heed.
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Outside of libertarian circles, it has become conventional wisdom that it is both natural and desirable for governments to monopolize the production and quantity of currency. Rulers and regents throughout history certainly believed as much, claiming that they alone could issue -- and just as often, debase -- coins used by their citizens.
But such claims of monetary sovereignty collided with the realities of monetary exchange. For centuries, rulers found it impossible to keep competing currencies out of circulation. This was particularly true of the sorts of coins that served as small change for the lower classes of society. According to monetary historian Eric Helleiner, merchants in England issued low-denomination coins made of copper, lead and tin from the 13th century onward. By the 17th century, approximately 3,000 different businesses in London alone issued “unauthorized” tokens.
The authorities turned a blind eye, largely because the crown wasn’t able to supply much-needed small change. Indeed, by 1787, only 8 percent of all the copper coins in circulation looked as though it came from the mint, though much of this was likely counterfeit. Similar conditions prevailed elsewhere. In Mexico, for example, Helleiner estimates that 2,000 shopkeepers in Mexico City issued their own coins in 1766.
Private currencies got a further boost during the industrial revolution, when British factory owners became desperate for small change to pay wages. As economic historian George Selgin documents in "Good Money," the nation’s industrialists minted their own cash in far greater quantities and at a cheaper price than the government itself could muster. The right to “make money” was most definitely not in the exclusive hands of the government at this time.
Much of this currency consisted of coins made of copper, or occasionally silver, but by the nineteenth century private paper currencies became common as well. In Tokugawa Japan, for example, local lords issued their own paper notes, with 1,694 different kinds of currency in circulation by the 1860s. Likewise, in the U.S., state-chartered corporations -- banks, mostly -- issued a dizzying diversity of so-called “bank notes.” By the eve of the Civil War, at least 10,000 different kinds of notes competed with the coins issued by the U.S. Mint.
And this wasn’t the only evidence of the weakness of governments in monetary affairs. In most nations, foreign coins often circulated alongside official coins, sometimes supplanting them. The most famous of these interlopers, the Spanish peso or silver piece of eight, was the de facto currency in America. If you visited the U.S. and asked for a dollar in coin, in all likelihood you would get handed a Spanish piece of eight minted in a place like Potosi, Bolivia. Such coins remained legal tender in the country until the 1850s; in other countries, such as China, they served as a de facto currency into the 20th century.
So what changed? How did governments, which had shown little inclination, never mind ability, to exercise their monetary sovereignty, come to monopolize the issuance of money? Over the 19th century, nationalist politicians in a number of countries came to view the private and foreign currencies circulating inside their borders as impediments to the creation of unified nations and national markets.
In particular, reformers pushed for standardization and control over small change in order to reduce transaction costs. While thousands of different kinds of currencies may work well enough for small, local markets, national markets demanded national monies -- or so the thinking went. In Britain, the government seized control over the currency from issuers of private tokens as early as 1812, ramping up production of standardized copper coins while banning private tokens.
Reform came later in the U.S., and for different reasons. During the Civil War, far more sweeping monetary legislation put an end of the era of private paper money, which was taxed out of existence by 1866, replaced by uniform fiat currency known as greenbacks and a new, standardized system of “national bank notes.” This was a wartime exigency, but it was framed as an act of patriotism. As one defender of an exclusive, state-issued currency averred in the darkest days of the war, “Government and the people … would for the first time become inseparably united and consolidated. The people would have acquired a new and direct interest in the support of the Government, because their currency would depend for safety on the maintenance of that Government.”
Advocates of a more powerful central government came to view a common, state-issued currency as a valuable tool for accomplishing a host of nationalist projects, from collecting taxes to influencing economic conditions by controlling the money supply. The creation of central banks was but a further extension of this logic, giving nation-states even further control over the currency. Even the design of the nation’s money, argues Helleiner, came to be seen as a means of instilling allegiance to the state, with nationalist imagery becoming commonplace on currency at this time.
All of this was accomplished at great cost and with considerable controversy. To eradicate older currencies and to drive competing currencies from circulation was a monumental undertaking, and in most countries it took years. Private mints fought back, as did issuers of non-state currencies, but in the end the economic nationalists triumphed, steamrolling the opposition and prosecuting anyone who dared challenge the state’s monetary prerogatives. The process was largely complete by the early 20th century.
Anyone who thinks that Bitcoin will triumph has to believe that it will succeed where earlier generations of private currencies failed -- that Bitcoin will, improbably, manage to overthrow more than century’s worth of accumulated state power, jealously guarded and ruthlessly enforced.
That’s a preposterous fantasy -- and a dangerous one, if you’re an investor. Indeed, people who believe that governments of the world will let a stateless cryptocurrency usurp their hard-won monetary prerogatives aren’t forecasting the future. They’re living in the past.
(Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Ticker. Follow him on Twitter.)