Currency is a crossroads for many free market advocates.
Monetarists, including Nobel laureate Milton Friedman, have long argued in favor of central banks stabilizing price levels. They say the institution would provide a sense of comfort to debtors and creditors wary of inflation. Constitutionalists, albeit embracing a general disdain for the Federal Reserve, still see Article I, Section 8 as healthy advice. They say giving Congress the exclusive power to coin money would lead to increased transparency, incentivizing legislators to slash the budget.
It really isn’t until we reach the Misesian ideals of minimal government that we begin to see worthwhile considerations of private currencies. Austrian economist Murray Rothbard explains, “Many people—many economists—usually devoted to the free market stop short at money… . They never think of state control of money as interference in the free market; a free market in money is unthinkable to them… . So it is high time that we turn fundamental attention to the life-blood of our economy.”
One of the first media of exchange in the United States was classic whiskey. For men and women of the day, the alcohol did more than put “song in their hearts and laughter on their lips.” Whiskey was currency. Most forms of money were extremely scarce in our country after the Revolutionary War, making monetary innovation the key to success. The economy east of the Appalachian Mountains flourished during this period, but migration to the west was slow. This meant Western farmers drew fewer customers and, therefore, smaller salaries if they weren’t willing to travel eastward. So, they began to distill their excess grain into whiskey. The supplemental income kept them in business, and the whiskey was easier to transport through the mountains.
Indeed, it was easier to transport everywhere. Westerners began to use the whiskey as a medium of exchange, allowing them to trade with and travel to the east more frequently. Everyone from bartenders to surgeons needed alcohol, and its use as an intermediary became custom, verifying AustrianSchool founder Carl Menger’s analysis of the development of natural currencies: “The exchange of less easily saleable commodities for commodities of greater marketability is in the economic interest of every economizing individual… . Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence.”
The acceptance of whiskey as money was spontaneous, incremental, and voluntary. And, since its value was based on efficiency and not on political decree, the practice continued many years into the future, surviving then-Treasury Secretary Alexander Hamilton’s whiskey tax—an effective income tax passed off as an excise tax—long enough for Thomas Jefferson’s administration to repeal it.
Experiments came and went as people grew familiar with the alcohol’s value, and many local businessmen offered their customers an even more convenient medium of exchange: coins. These business owners—primarily distillers and grocers—would mint, engrave, and then distribute tokens redeemable for commodities at their stores. If a grocer were to price his dough at, say, ten grams of silver per loaf, he would mint a 10-gram silver coin, engrave on it the phrase “Good for One Loaf of Bread,” and distribute it to select customers.
These coins helped out in two ways. First, customers could buy to sell. This was essentially an extension of the easy-to-carry trend. Sellers could walk through town carrying on-demand receipts for an amount of bread or whiskey that they otherwise could not physically carry, attracting new customers many miles away. The coins played a second role, too, as low-denomination change. A variety of situations—the wartime economy, lagging technological advancements, or plain sour luck—have historically left certain areas of the country without a straightforward way to purchase inexpensive items.
Distillers and their customers were occasionally faced with a situation in which neither party could get their hands on anything less than a 30-gram silver coin (or find a way to fraction it) when a bottle of whiskey only cost 10 grams of silver. Instead of turning these customers away or forcing them to carry out two extra bottles of whiskey, owners simply began issuing their own versions of “change”: customized tokens, each guaranteeing on-demand redemption of one bottle of whiskey when presented. Customers, then, knowing full well that everyone needs alcohol at some point, were free to trade distillers’ tokens exactly as they would trade 10-gram coins, effectively creating a low-denomination monetary system through which the community could conduct business.
Coins backed by random commodities were inferior to the classic gold standard, but everyone accepted the coins as necessary adaptations to lousy economic conditions. “Hard-times tokens,” as people referred to them, were the market’s way of meeting a vital demand until things got better.
As time went on, the American monetary system was tried and tried again by political intervention. Yet the market flourished, continuing to adapt to ever-changing circumstances. An inflationary central banking institution, the Roosevelt administration’s obscene gold seizures, and numerous faulty reserve plans like the Bretton Woods agreement were no match for private entrepreneurs on the black market who kept their customers’ savings accounts afloat through competition.
And then came Bitcoin.
These days, many government agencies can scan bank accounts by issuing a boilerplate subpoena. Engaging in private transactions with physical currency became risky business, even through online banking. So, an anonymous developer (known only as “Satoshi Nakamoto”) created Bitcoin.
He designed the coins as virtual mirrors of that which was heretofore considered authentic money. Bitcoins are unearthed through a process called “mining,” much like with dirt and a shovel, except with algorithms and a computer. Miners who solve the pre-established algorithms are rewarded with Bitcoins. However, the underlying program can detect how many people are mining for coins; as demand increases, so does the difficulty of the algorithms, emulating competition in the marketplace. Only those miners with the highest level of determination and skill come out on top. Furthermore, Nakamoto controlled for scarcity. There is no threat of runaway inflation because his blueprint ensures that no more than 21 million coins will ever remain in circulation, and analysts calculate that Bitcoin miners won’t even reach this number until around 2140 A.D.
Nakamoto realized that, like Pennsylvanians who distilled grain into whiskey in order to transport it through the rugged Appalachian Trail, Internet users yearned for currency befitting the digital age. Our generation’s “mountains” are surveillance networks. And Bitcoins fit the bill for passage. They’re secured through public-key encryption (i.e., only Bitcoin owners have the access code to their digital wallets, which can be created without handing over any personal information), easily utilized in the marketplace when sellers are willing, and came into existence through the natural mechanisms of word-of-mouth reputation and voluntary, incremental adoption.
The digital currency came to fruition in the right place at the right time because the market chose it. No legislation, no statute, and no politician granted its legitimacy—customers did. And that’s why the government is now vying for oversight. New York’s financial regulator recently issued subpoenas to more than 20 companies associated with Bitcoin, including the prestigious venture capital firm Andreessen Horowitz.
Whereas historical private monies were created in order to bypass physical barriers, though, this digital currency was explicitly created as a means of bypassing regulations, so it’s quite unclear what will happen next. Bitcoin will likely stand the test of time, though, at least as long as whiskey did.
Brian LaSorsa is a writer in Phoenix, Arizona. His work has appeared in the Washington Examiner, Huffington Post, and Ludwig von Mises Institute.