According to the Austrian school, free markets are beneficial to all participants.
Once upon a time, there were no cell phones, no Internet, no Google, no Amazon, no Facebook, no Twitter, no TikTok, and no YouTube. People didn’t have Apple Pay, PayPal, Alipay, or WeChat Pay. Fortunately, they already had fiat money. They paid for purchases with cash, and since there was no online banking, they had to fill out various forms. Times have changed a lot since then, especially thanks to digitalization, which has brought about truly revolutionary changes in the last twenty years or so.
Digitalization has proven to be a powerful catalyst for economic and social change. It is bringing people from many different places and cultures around the world together and bringing them closer together than ever before. It promotes competition in established markets and stimulates and spreads innovation around the world. But digitalization will not change the concept of the market as such, because the concept of the market is inextricably linked to human action. We, as human beings, replace a situation we consider less satisfied with one we consider more favorable. And we cannot stop doing this for logical reasons. As long as we cooperate with other people, there will be all kinds of markets, even in the digital age. And this is very good news, according to the Austrian school, because free markets are beneficial to all participants.
Money as a commodity
With new markets for goods and services in a digitized world come new requirements for payment services and new requirements for certain characteristics of money. For example, the Internet of Things, pay-as-you-go, or machine-to-machine payments. To take advantage of these innovative business opportunities, we need programmable money. They are often presented as money built on distributed ledger or blockchain technology, which is a textbook example, of combining digital value and programmability into one system. The search for programmable money has spurred efforts to tokenize commercial bank money or, most importantly, to issue central bank digital currency:
What is money? It is a commodity used for exchange. It has three functions: it is a means of exchange, a unit of account, and a store of value. The unit of account function is just an expression of the medium of exchange function: it describes the ratio of exchange between the units of money that must be transferred to receive the corresponding goods. And the function of the store of value is only a transfer of exchange from the present to the future. Thus, if we accept that money has only one function, the medium of exchange, we come to a rather striking observation, namely, that it does not matter how much money there is in the economy.
A money supply of, say, 15 billion euros is as good or as bad as a money supply of, say, 5 billion euros. If the amount of money is large, then prices of goods will be relatively high; if it is small, then prices of goods will be relatively low. Again, any amount of money is as good or bad as any other for financing a particular transaction in goods and services. We can conclude that if money is useful only for exchange, then increasing the quantity of money will not bring any social benefit. It only reduces the purchasing power of the monetary unit (compared to the situation when the amount of money in the economy remains unchanged).
Increasing the quantity of money leads to a redistribution of income and wealth. Early recipients of new money are favored at the expense of later recipients. The early recipients can spend their new money on goods and services at unchanged prices. As money changes hands, the prices of goods rise, so later recipients can only buy goods at higher prices. In other words, increasing the amount of money in the economy is never neutral. It creates winners (early recipients of new money) and losers (late recipients of new money).
Money for economic calculation
Often overlooked, or at least underestimated, is the fact that money is an indispensable tool in a developed economy characterized by the division of labor and trade. Money serves as the common denominator, the numerator for all commodity prices. It thus makes it possible to calculate the returns of various alternatives to economic activity. In a complex economy, only monetary calculation can allocate resources for their most productive use, that is, for use that best satisfies consumer demand. A modern developed economy could not exist without the use of money for economic calculation. This requires reliable money that does not change its purchasing power too quickly and completely unexpectedly. But there is no such thing as stable money in the sense that the exchange ratio of money for tradable goods would and could remain constant over time.
We know from the logic of human action that people change from moment to moment, and that their valuations will change with them. Sometimes people value a commodity more, sometimes less; new commodities appear in the marketplace to replace those that already exist. There is no fixed point in this constant fluctuation. This also applies to “commodity money” about all other goods and services.
If we look back in history, we find that whenever people had the freedom to choose their money, they preferred precious metals, especially gold and silver. The reason for this is obvious: for an object/good to serve as money, it must have certain properties. A “unit of money” must be valuable, durable, divisible, portable, storable, and have a high value per unit weight, to name a few characteristics. Since gold and silver are, for the most part, “money-like” commodities, they were chosen by the free demand and supply of the market as money when they were available. Why do we no longer use gold and silver as money today?.
In the last quarter of the nineteenth century, most countries eventually adopted gold as the medium of payment. This meant, at least in theory, that people used gold coins and banknotes in their daily transactions, which could be exchanged for physical gold at the issuing banks. At the outbreak of World War I, however, many countries abolished the possibility of redeeming their currencies in gold. Governments wanted to finance their war expenditures with an “inflation tax,” i.e., by issuing unsecured paper money. Thus they severed the link between physical gold and the currencies they printed. The result was high inflation, even hyperinflation in some countries (e.g., Germany, Austria, and Hungary). After the war ended in 1918, most countries were unable to return to gold money. The big exception was the United States of America. Even during World War I, the U.S. dollar retained its gold backing.
The problem with fiat money
Fiat money can be characterized by three factors. It is money monopolized by the government and its central bank. Created with the help of bank loans, it arises out of thin air. It is dematerialized money in the form of colored paper bills and bits and bytes on computer hard drives.
- is inflationary; it loses its purchasing power over time.
- benefits a few at the expense of many others; it is socially unfair.
- causes boom and bust cycles, creating artificial economic booms followed by busts.
- causes excessive debt, it is created through credit expansion, and the debt burden on the economy exceeds income growth.
- allows the state to become even larger and more powerful through civil liberties.
These and other ideas were presented many years ago by scholars at the Austrian School of Economics. Unfortunately, they play little role in the efforts of most economists, central bankers, politicians, and bureaucrats to identify the root cause of the current financial and economic crisis and, in this context, to formulate appropriate corrective measures.
There is another big sticking point with uncovered money that needs to be mentioned: they make people – indeed, the entire economy – dependent, so to speak.
Fiat money shapes the structure of production and employment in the economy. Corporate profits and jobs depend on the chronic growth of credit and money made available at ever-lower interest rates. Governments and their bureaucracies grow and become increasingly powerful with fiat money. The longer the fiat money system exists, the stronger the interest in preserving the fiat money system and the harder it will be to end it. Eventually, a situation could arise where protecting the fiat money regime from collapse becomes the ultimate political goal, which essentially takes precedence over all other political issues.
Take, for example, the ongoing bailout of the euro – which, like the U.S. dollar and all other major official currencies, is an unsecured currency. Huge amounts of sovereign debt are piling up to prevent the collapse of the economy and the system of unsecured euro money. Huge sums go to banks in financial decline; these sums are not used productively.
Central bank digital currency.
The demand for programmable digital money is one of the important official arguments for why central banks around the world are issuing a central bank digital currency. First of all, central banks want to maintain their monopoly on fiat money in this way; they do not want private money to compete with central bank fiat currencies. This is problematic, given that there are quite a few problems with central bank digital currencies (which I think are ignored or overlooked in the current discussion).
First, central bank digital currencies are not “better money.” They are fiat money. As such, central banks’ digital fiat currencies suffer from the same economic and ethical shortcomings as analog and electronic fiat money. Second, central bank digital currencies are likely to replace cash or allow governments to phase out coins and banknotes. Thus, people are likely to lose their only means of anonymous payment, and what little is left of their financial privacy will disappear. Third, without cash, you can no longer take your money out of the banking system.
It can be expropriated with negative interest rates set by the central bank. Fourth, as digital currencies are increasingly accepted by central banks, they can easily be used for other political purposes. Think of China’s social credit system. Imagine that you only get access to the central bank’s digital currency if you comply with government decrees (or the wishes of those special interest groups that determine government decrees). Otherwise, you would be disadvantaged: you could no longer travel, order certain newspapers and books, or buy groceries, your accounts could be frozen, and your money could even be confiscated if you dared to disagree too strongly with government decrees. The list of such atrocities against freedom that become possible in the world of central bank digital currencies goes on and on.
Not surprisingly, therefore, the monopoly on fiat money, in particular, has made governments bigger and more powerful – judging by government spending and public debt about GDP, the number of regulations and laws, etc. People blame the free market, and capitalism, for all kinds of evils – financial and economic crises, unemployment, income and wealth inequality, pollution, etc. But the bottom line is that we don’t have capitalism in Europe, the U.S., or China. We have interventionism, an economic and social system in which the state intervenes in the functioning of the free market – for example, through commands, laws, bans, regulations, taxes, subsidies, interference in education, health care, transportation, pensions, the environment, credit, and money.
As interventionism spreads, the free market system becomes increasingly undermined and dysfunctional. The economy becomes an economy of control, in which the state rules and orders are given to producers and consumers. In an interventionist regime, digitalization greatly increases the chances of governments and their bureaucracies, as well as the special interest groups that use it for their purposes (e.g. Big Business, Big Technology, Big Pharma, Big Banks), seizing power. And it is realistic to assume that all of these players want to achieve their goals by controlling the money used whenever possible.
What is the solution to the “fiat money problem”?
End the monetary monopoly of governments, replace it with a free money market, and privatize money. There is no compelling economic or ethical reason why the state should have a monopoly on money. Why shouldn’t people be able to offer their neighbors “something” that they voluntarily use as money? A free market in money is not a crazy, unrealistic idea. The demand side determines what money is. People will choose what kind of money they think is best.
Suppose people choose gold as money. You will store your gold in depository banks that provide storage and settlement services. In return, you get an app on your phone so you can pay easily. There will be no central bank, and there will be no interest rate policy. There will be no chronic monetary expansion and inflation, booms and busts as happens in an unsecured money system.
Source: Egor Borovik (https://www.aboutsmartcities.com