By Jerry Bowyer
George Gilder’s new book, The Scandal of Money, is the most hopeful thing I’ve read about monetary policy in a long time. Most of what is written about money is just awful — worse than nothing: anti-knowledge. A few writers—Forbes, Gilder, Skousen, Lehrman, and their disciples (Tamny, Mueller, Benko, various folks at the Ludwig von Mises Institute)—offer genuine insight. Before them were the giants on whose shoulders our current giants stand – Hayek, von Mises, Rueff, Hazlitt, Menger. Reading all this wisdom is useful, even bracing. But getting that insight comes at a cost. That cost is emotional frustration. It’s frustrating to read the truth and yet live in a world full of both monetary and theoretical distortion. It’s painful to read about the miracle of the two centuries of high growth and no inflation under the British classical gold standard, and then look at our current degenerate age of monetary chaos and economic stagnation.
And it’s even harder to see that almost nobody, outside of the few I’ve described above, is properly diagnosing the problem. It’s like living through an epidemic, stumbling across an accurate textbook about how to control the contagion, and finding it impossible to get the people in charge to listen to, let alone implement, the cure. The gatekeepers are too invested in the disease; too addicted to false cures, and too little incentivized to take a critical look at the fiat system which has served them so well. I don’t know about you, but I am frustrated by all of that, and the more I read high quality monetary analysis, the more frustrated I get. Swallowing the red pill has not really made me any happier. Though, I’m still glad I swallowed it.
But what if something happened so that sound money no longer depended on a dysfunctional economic commentariat and a corrupt political establishment getting it right? What if we could by-pass them and do it ourselves? Remember the old peacenik saying, “What if they had a war and nobody showed up?” Well what if they had a debasement and nobody showed up? That’s exactly what Gilder is suggesting in the second half of The Scandal of Money. For him, the emergence of block chain technology, most notably Bitcoin, creates a new opportunity: the opportunity for the people to choose their own money.
Don’t trust dollars? Okay, use Bitcoin, Ethereum or BitGold instead. Or use all of them.
And what stands in the way? Not much anymore. Block chain is the most natural payment layer of the internet. When we do e-commerce we may think it’s high tech from beginning to end, but in fact there is a stopover in the middle of the transaction where the transaction lands in the plain old world of banking payment systems, before taking off again and delivering money to the seller and goods to the buyer. That stopover adds a lot of cost to the system. That’s why you can’t buy anything on the internet for a penny. Oh, sure, on Amazon lots of things are listed at a price of one cent, but when you look at the fine print, you see that the vendors are forced to add a 4.99 shipping and handling fee. Why? The banking/credit card layer, that’s why.
But get rid of that and you’ve got a monetary superconductor which flows with almost no friction. Would you be willing to buy an article for a nickel rather than suffer through five dollars’ worth of loss due to pop-ups, peripheral vision distraction and cognitive cycle time devoted to the increasingly difficult task of weeding out ‘content’ from ‘sponsored content’. Would you watch a video for a dime rather than watching an enforced commercial while your cursor hovers over the button which will allow you to skip to the end, your eyes glued and waiting for it to change hue so that you can finally click and skip the rest of the ad.
Here’s the big barrier: Bitcoin, like gold, triggers capital gains when you use it to buy something. In other words, there is a tax on top of all the other taxes when you use this stuff. That’s a headwind to be sure. Remedies? A change in the tax code, a small technical change in the fine print which treats alternate currencies as, well, currencies and doesn’t tax you on their appreciation in value. If you earn a dollar, and during a time of deflation (yes, there used to be times of deflation) it increases in purchasing power, you don’t pay an extra tax on that ‘capital gain’ when you buy a cup of coffee with it. For example, imagine that it costs a thousandth of an ounce to buy a cup of coffee. But then the price changes so that it costs half that much, ½ of a thousandth of an ounce to buy a cup of coffee. As things stand now, when you buy the coffee with the gold, you pay not only whatever sales taxes apply, but you pay an additional tax on the change in the price.
In other words, holders of gold and other alternative currencies are penalized precisely in proportion to how much they preserve purchasing power relative to the dollar. With dollars you might pay a sales tax on the java, but not on the currency fluctuation. Treating currencies like currencies rather than treating them like investments makes them much more convenient. One might even argue that taxing alternative currencies if they are gold or silver backed and approved by a state government is unconstitutional. The US Constitution gives explicit permission for states to set up gold- and silver-backed forms of legal tender:
“No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts…”
(Art 1. Sct 10).
If a state exercised this, that is, if states made gold legal tender and entrepreneurs created mechanisms to spend that gold digitally (Oklahoma, Utah, and Texas are looking at each at various stages of moving in this direction), then it would appear to violate the principle of federalism for the federal government to tax it. The Feds can’t tax state revenues; they can’t tax state munies; likewise, they should not be allowed to tax state-approved legal tender. If the power to tax is the power to destroy then giving the Fed the power to tax state-level legal tender amounts to destruction of the state’s authority to issue and/or approve it.
One way or another, through state-level action, through the tax code reform, alternate cyber currencies (especially those backed by gold) are likely to break through the barrier, especially when inflation breaks loose and public interest becomes public demand.
And when that happens, how could the welfare state possibly continue? Politicians are generally unwilling to impose tax rates high enough to fund our current orgy of domestic transfer-spending and global nation building. Big government depends on big Fed balance sheets. End the latter and you end the former.
Instead of depending upon renewing freedom by changing consensus we should acknowledge that democracy has a seriously mixed track record when it comes to the preservation of liberty, particularly economic liberty. Liberty’s more reliable ally has been the physical limits of power, what some called ‘metapolitics’. America is not free merely because the founders had certain ideas. Those ideas were present elsewhere. In fact, they came from elsewhere: Montesquieu, Locke, Smith, Pufendorf, Grotius. What made us different was the Atlantic Ocean. We were far from the King, both geographically and philosophically. Far enough that we had room to develop the habits of freedom unmolested.
In 1999, economist Richard Rahn published The End of Money and the Struggle for Financial Privacy to advance that proposition. Walter Wriston pointed in this direction as well, and Forbes (the man and the magazine) started talking about those ideas at about the same time. Perhaps they were all just a little early. Perhaps cyberspace is our Atlantic Ocean. Perhaps encryption and block chain and the internet are the metapolitical forces which will give us freedom whether fickle majorities want it or not. That was the original idea behind PayPal: to harness the potential which microprocessors offered to end the Fed’s monopoly on money supply.
The stone which will take down Goliath just might be not a stone at all, but a block… a block of itcode.
Jerry Bowyer is an American economist, author, and columnist. Bowyer was chairman of the board of Impact Total Return Portfolio, a mutual fund.