William Dudley's Critique of Cryptocurrencies Is Crypto's Opportunity
In contemplating the importance of money, it's essential to think about the why behind it. Money doesn’t power economic growth as much as economic growth itself presumes the arrival of "money" necessary to that facilitate exchange of production.
This speaks to Ludwig von Mises’s essential statement that “No individual and no nation need fear at any time to have less money than it needs.” For one to produce is for one to demand a “ticket” that enables exchange of the production for all that’s available. Production once again ensures the creation of a measure or the arrival of a measure that enables exchange of it.
Money is what enables the vintner to regularly trade with the baker, even though the vintner really wants the butcher’s meat. Money allows us all to trade with one another, even though we all have different consumptive desires.
Reducing all of this to basics, what we call “money” would be abundant in the United States even if our federal government had never issued a dollar, quarter, dime or penny. Precisely because Americans are and have always been so productive, “money” would have eventually flowed here (or been created here) to lubricate the exchange without which we would all live in caves.
We produce to get what we don’t have, or to exchange what we have for future income streams, so the agreement about value that is money would be everywhere in the U.S. with or without the U.S. Treasury, or Mint. Just as private producers create for us shoes, socks, ground beef and smartphones, so would they market measures of fixed value that enable the trade and investment that is the driver of progress.
Which brings us to a recent comment about so-called “cryptocurrencies” by William Dudley, President of the New York Federal Reserve. He observed that “There is a bit of a, I would say, speculative mania around cryptocurrencies in terms of their valuation, which I view as pretty dangerous, because I don’t really see what the actual true underlying value of some of these cryptocurrencies actually is in practice.”
Dudley’s point was a fair one. It’s no doubt true that the cryptocurrencies lack any true underlying value, but then so does the dollar. There’s no underlying definition to it. The dollar is surely exchangeable for a great deal as evidence by its global acceptance as a medium of exchange, but what it’s exchangeable for is very much a moving target. While a gallon of gas cost .36 cents in 1970, in 2018 it costs many, many multiples of the previous number. Gasoline hasn’t become scarce since 1970 as much as the dollar’s exchangeability has plummeted.
Most readers know why the above is true, but if not, up until the early ‘70s, a dollar was exchangeable for 1/35th of an ounce of gold. Departure from that value standard in 1971 (and for good in 1973) was a signal that President Nixon preferred a weaker dollar, and markets granted his wish. The dollar’s value in terms of gold declined. And while there have been periods of a rising dollar since, the broad trend has been downward. A dollar that used to purchase 1/35th of a gold ounce is now exchangeable for 1/1330th.
Applied to cryptocurrencies, they, like the dollar, have no true underlying value. Yet there’s a crucial difference with the dollar. It should be said that the greenback’s global usage speaks to a more implicit underlying value. Specifically, the dollar is backed by the most productive people on earth and the earth’s most powerful military. This plainly means something to producers. It is value. It’s plainly not the same as a basic commodity definition, but it is real nonetheless.
Conversely, cryptocurrencies only have trust in their issuers going for them, along with, perhaps, trust in how they’re released or “mined” into the marketplace. Still, Dudley’s explicit critique of cryptocurrencies and his implicit critique of the dollar speaks to an opportunity for cryptocurrencies. They have the potential to replace the dollar, but only if the definition of “money” reverts to the classical one.
Getting into specifics, Adam Smith long ago noted that "the sole use of money is to circulate consumable goods.” That’s it. Money is just a measure. Nothing else. This is what issuers of cryptocurrencies, along with fans of same, have seemingly ignored. That’s why the private currencies of today in their present form have no reasonable chance of replacing the dollar. Important is that the demerits of cypto-monies speak to how they can easily be improved.
For one, there’s this backwards belief popular among modern Austrian School types and some monetarists that for a currency to be useful, it must be scarce. This couldn’t be more untrue. Good money that is globally recognized is heavily demanded, and is by extension abundant.
Figure that Switzerland is the world’s 99th largest country in terms of population, yet its franc is one of the world’s most circulated currencies. Well, of course it is. Precisely because the franc has long been known to be rather credible, and relatively stable, it’s broadly accepted by the world’s producers. Good, credible money is everywhere. And its supply grows and grows precisely because producers of real wealth so eagerly demand it in return for their own production, not to mention other producers of wealth whose goods and services they desire. Put more simply, the Argentine peso doesn't lubricate global trade. Neither does the Brazilian real, or the Congolese franc.
Which brings us to another perversion of money that’s popular among fans of cryptocurrencies: they judge a private currency based on how much its market value is increasing. Such a view couldn’t be more backwards. Just as money that declines in value is awful, so is money that rises. Getting right to the point, cryptocurrency owners will know their “money” isn’t money if the units are a speculative concept whereby bulls and bears constantly trade it. Good money quite simply is. Before it lost its commodity definition, currency markets were dormant to non-existent. Well, of course they were. Why trade what is a measure?
The problem with cryptocurrencies is that at present they mimic, and in the case of Bitcoin, greatly exceed the dollar’s unfortunate volatility. In that case, the opportunity for cryptocurrencies lies in mimicking the dollar and other currencies of old that were defined in terms of something known for stability. Gold has defined money for thousands of years not by coincidence, but thanks to unique stock/flow characteristics that bring it amazing stability. Private money issuers could easily peg the value of the money to a fixed weight in gold, or some other commodity known for intense stability.
Per Dudley, cryptocurrencies lack “underlying value” now. True, but that arrangement can be changed. Unlike government money, private money can be given a specific, market-based definition by its creators.
If so, the future for private money has the potential to be bright. If the U.S. Treasury devalues, the alternatives are slim. But if private money morphs into measure-like money of old, the alternatives will soon enough be endless. To be clear, the successful cryptocurrencies of tomorrow will be successful precisely because they’ll surge in terms of supply thanks to a laser-like focus on stability of value. There’s the opportunity.