From a purely economic point of view, money has three basic functions: it serves as a unit of account, store of value and means of exchange. From a political standpoint, however, money can first and foremost be considered as a materialisation of power. If one grasps power as a capacity to influence events and achieve results in society, then it is safe to say that money can be as powerful as heavy artillery.
Money gives you the power to produce and consume, access to education and important information, the capacity to get media coverage and publicity, the power to implement important political decisions, the capacity to bend legislation in your own favour, the ability to directly or indirectly control individuals or even whole populations, etc. Since the purchasing power of money can straightforwardly be converted into various kinds of social power, the issuing of money is a matter of utmost political importance. From the Roman empire onwards, rulers were well aware of this: Roman emperors asserted and fiercely defended their minting prerogatives (the so-called Regalia) as they rightly saw in them one of the chief sources of their own political authority. Jean Bodin, who in the late renaissance era developed the concept of political sovereignty, treated the exclusive right to coinage as an essential precondition for practicing sovereign power. From ancient times to the rise of the modern era, notes the Austrian economist Friedrich Hayek: “the coins served, largely as the symbols of might, like the flag, through which the ruler asserted his sovereignty, and told his people who their master was whose image the coins carried to the remotest parts of his realm.” This goes to show that the question of who has the right to create money, was never merely a technical or economic question, but a political one as well.
From antiquity up to this day, one significant thing has not changed: the prerogative to make money has mostly remained firmly in the hands of the governments. In modern market economy, the governments continue to assert and defend their monopoly over the creation of money. And since money equals power, this centralisation of money supply also amounts to centralisation of power. During the last century, we have been witnessing a process of increased centralisation of power and control in the hands of the governments, due to the fact that more and more functions concerning the monetary system have been taken over by the government backed central banks. In the gold standard period, the role of the governments was limited to functions like stipulating the denomination of the unit of price and controlling the metallic reserves of banks. After the fall of the Bretton Woods system in 1971, however, the governments started to play a much more significant role of ensuring the general acceptability of money. In the gold standard regime, the acceptability of money was based on its convertibility to gold, while in the contemporary system of fiat currencies, the acceptability of money rests on central state authority. The provision of trust in money thus shifted from a commodity to a centralised state institution.
Until recently, the nation state’s role of the ultimate guarantor of general acceptability of money was not questioned. In the last couple of centuries, there have been numerous cases of private provisions of money: for example, in the USA, in the so called Free banking era (1837-66) everybody from banks, private companies, individuals, stores and even churches could issue private currencies. Yet, all of them were shored lived. None of them was a serious alternative to official national currencies, since none of them could provide as secure and trustworthy means of discharging obligations as the central state authority. Due to lack of transparent monitoring and reliable systems for verifying transactions, issuing of private money was susceptible to all kinds of frauds. This in turn reinforced the belief that a sound monetary system can only function under the alert supervision of central authority.
The recent rise of cryptocurrencies, however, challenges this widespread belief. What distinguishes cryptocurrencies from previous forms of private money, is their underlying cryptographic basis, which allows trust to be sustained in a distributed rather than a centralised way. Distributed ledger technology (blockchain) ensures a transparent system of peer-to-peer monitoring through a synchronised and dispersed digital database and an effective arrangement of discharging obligations without the need of verification and guaranties from any kind of central authority. Cryptocurrencies thus provide an alternative to monetary systems based on regulation enforced from above by a central administrator, such as state fiat currency systems, as well as to fully deregulated and non-transparent systems of private money, by means of a currency system, based on transparent and decentralised self-regulation from below.
It would be too early to claim that cryptocurrencies are a sound and long-lasting complement to official fiat state currencies. In some instances, they have already proven to be superior to national currencies: for example, by lowering the costs of producing means of exchange to almost nothing. In other instances, however, they still lag behind: as long as we are witnessing such wild and sudden price fluctuations as those of Bitcoin, people will have good reasons to distrust cryptocurrencies as secure stores of value. Nonetheless, cryptocurrencies have a potential to challenge the age-old state monopoly of money creation with platforms for a more open, decentralised, democratic and non-hierarchical currency systems, where individuals, decentralised autonomous organisations (DAOs) or sub-governmental administrations could bypass the restrains of central government money management.
As noted by the promoter of free open source software, Devin Balkind, cryptocurrencies have the capacity to shift the current balance of power between individuals, DAO’s, cities, and nation-states. He outlines several instances of how the US federal government has been using its monopoly of money making for subordinating both sub-governmental (state and municipal) administrations and foreign nation-states. Since cities and states in the USA are crucially dependent on federal funding, they regularly have to bend to the dictate of the federal government: in fear of being cut off from federal government assistance, they are forced to implement even the most unpopular measures. Moreover, on the international arena, the US federal government uses the US dollar’s status of world reserve currency, to force foreign enterprises or even whole countries to bend to its will: the most notable example is the dollar monopoly in energy trade, which makes countries and enterprises in the Middle East constantly vulnerable to US sanctions and dictates of its foreign policy.
Cryptocurrencies have the potential to transform the contemporary political landscape. By offering parallel sources of funding and autonomous currency systems that challenge the nation-state’s money monopoly, they give individuals, enterprises, DAOs or sub-governmental administrations the chance to bypass the harmful dictates of central governments, and even have the potential to shift the balance of power across different nation states. It would, again, be too early to claim, that cryptocurrencies will bring about a thorough change in the relations of power. Nevertheless, they do show fruitful prospects not just for a different provision of money, but also for a different provision of power: one that is not concentrated in the hands of central institutions but rather dispersed amongst the people, empowered to take matters into their own hands.
- Balkind Devin (2017): Cryptocurrency can shift the Balance of Power: http://devinbalkind.com/2017/02/10/cryptocurrency-can-shift-the-balance-of-power-between-cities-states-and-nations/.
- Michael D. Bordo et al (2016) Central Banks at a Crossroads, Cambridge University Press.
- Friedrich Hayek (1990): Denationalisation of Money, The Institute for Economic Affairs.