Hayek’s Denationalisation of Money and Bitcoin
We’ll never be able to know a deceased person’s thoughts on a particular subject that surfaced after their passing. The best we can do is look back at their writing, thoughts, and ideas and make an educated prediction as to what their position would’ve been.
In our case, we want to explore what Friedrich Hayek’s position on Bitcoin might have been based on his book “The Denationalisation of Money”.
Some would argue that Bitcoin’s underlying foundation is influenced by Hayek’s ideas, and that Satoshi was inspired by Hayek; if not directly inspired, then one may say that there is a lot of overlap between what Bitcoin stands for and what Hayek argued money ought to be (FA Hayek’s Foresight; The Economist Who Predicted Bitcoin).
To a certain extent, yes, there are many similarities between the foundations of Bitcoin as a money and what Hayek considered money should be. However, after closely reading “The Denationalisation of Money” by Hayek, there appears to be major differences between Hayek’s vision of good money and Bitcoin. These difference make us question what Hayek’s position on Bitcoin as a money would’ve been. In fact, assuming that his views are aligned with Bitcoin could be misguided.
Note that Hayek wasn’t describing one ideal version of money in his book, but was outlining how multiple competing currencies may allow for a better monetary system based on market dynamics. He also hinted that this market based approach will allow for a self-discovery process that might bring about new, unprecedented forms of money that might suit people’s needs accordingly. More on that later, but the point I want to make here is that we are comparing Bitcoin not to one ideal version of money, but to the qualities of money that Hayek claimed would likely win in a competitive multi-currency market.
So let’s dive into some of the main similarities between Bitcoin and Hayek’s vision of what money ought to be and then explore the major differences.
The Similarities
We should start by highlighting the central theme of freedom, or more precisely, economic freedom.
Economic freedom is a fundamental right according to Hayek. Without economic freedom, individual and political freedom is not achievable. While the Bitcoin White Paper doesn’t explicitly address the subject of economic freedom (since it focuses on the technical aspect of how Bitcoin works), one of the central themes that is implicit in the Bitcoin White Paper and loudly voiced by the Bitcoin community is individual liberty and economic freedom.
Hayek argues that a monetary system that allows money to move freely and globally without any constraints fosters economic freedom. Meanwhile, the whole point of the Bitcoin White Paper is to illustrate how a free and global money can work from a technical perspective. With that, from both point of views, money is a medium of exchange that should be used freely for trade and commerce, and this attribute of money is essential for achieving economic freedom.
State control over money, however, inhibits the free movement and global nature of money, since the state has power to impose capital controls, seize funds, and censor transactions. To achieve a free moving, global money, we should break the government monopoly over money. In fact, Hayek explicitly states this point and argues that money outside state control is feasible through a privatized, competitive currency market. In contrast, the Bitcoin White Paper illustrates how a decentralized money outside state control and centralized institutions could work from a technical perspective via blockchain technology.
As we’ll discuss later, there are some differences between what Hayek envisioned and Bitcoin’s approach, but the point here is that money from both perspectives should be free-flowing, global, and outside government control.
Another major concern about governments having a monopoly over money, as Hayek contended, is the manipulation and abuse of the money supply by officials and politicians. Given political ends, politicians lose discipline over the management of money, in particular fiat or paper money, and manage it in a way that achieves their own desires or group interests, disregarding the consequences. One of the biggest consequences being inflation.
The Bitcoin White Paper only mentions inflation once, while Hayek addresses inflation multiple times throughout his book. Nonetheless, the problem of inflation is implicit in the Bitcoin White Paper and is widely vocalized within the Bitcoin community since the early days. After all, Bitcoin is claimed to be a hedge against inflation.
In Hayek’s view, competition between private issuers of money would be the best path to manage inflation, since if issuers are acting out of self-interest, they’ll issue and manage money in the best way possible to maintain its stability and purchasing power to win market share. Moreover, in a privatized currency market, people will have the option to choose and switch between different currencies, so they aren’t solely at the mercy of one currency if it depreciates.
While Bitcoin isn’t issued by a private, centralized, and for-profit institution, it was founded outside state control and is managed by a decentralized community of participants. This decentralized structure, coupled with its codified design and fixed, predictable supply, are all features claimed to resist inflation, which, it is believed, ultimately make it a money people would want.
So, having a monetary design that inhibits inflation is a core theme shared between Hayek’s view on competitive, good money and Bitcoin. In fact, the inherent discipline found in Bitcoin’s monetary design are aligned with some of the qualities that Hayek argues are important for a good money, but, as we’ll discuss later, there are significant differences when it comes to the supply and management of it.
Interestingly, Hayek claimed that a money issued outside of state control will have to enter the market by "rebel", free market means. This money will have to challenge government backed money even if it is not accepted or recognized by the general public at first. The idea is that some pressure should be applied to break the monetary status quo, and that it's normal to face challenges at the start. While this “rebel” money may be looked at with suspicion at first, people will embrace it after seeing its early adopters benefiting from it. The line of thinking is that the crowd will start emulating the early users of this money, which will then lead to broader acceptance, recognition, and its potential success. This will eventually break the status quo of state controlled money.
This challenger money argument is very much in line with Bitcoin’s entrance into the market as a decentralized, non-government issued money. The ethos surrounding it, especially during the early years, was its "rebellion" against the status quo as an alternative global monetary system that cannot be censored. In this way, Bitcoin shares the “rebel” element that Hayek believed would challenge the monopoly of money by governments.
After all, Hayek believed that the market is a self-discovery process and that new innovative forms of money may only emerge through free market forces. In that sense, it can be argued that Hayek would be supportive of the innovative foundation and approach of Bitcoin.
From the aforementioned, it may seem that Hayek’s thoughts on money are aligned and accommodative of Bitcoin; however, what follows will highlight the major differences and caveats.
The Differences
While the fight against the government monopoly on money is a shared theme between Hayek’s work and Bitcoin, there are notable differences in their approach.
Hayek believed that money should be privatized and that private institutions should be able to issue and manage their own money. For example, these institutions may be banks or commodity companies, run as typical centralized businesses. The leaders running these businesses have complete authority over the money they issue, but the key point here is that due to self-interest and market competition, they will aim to provide the best form of money that the market will demand and will manage it with discipline to win the competition.
Bitcoin is technically a private issued money, but it isn’t run by a business as Hayek pictured. There is no company or centralized leadership running Bitcoin. In fact, Bitcoin goes a step further by not trusting private financial institutions or any sort of central authority to manage money. With that, we see that Hayek trusted centralized businesses that have their self-interest in mind, whereas Bitcoin is designed to remove the need to trust any centralized institution in the management of money; hence the term “trustless” that is attributed to the Bitcoin protocol.
Self-interest from Hayek’s point of view is clear: a business wants to issue and maintain the best quality money which people will want to use, because that results in profits, which is the ultimate goal. When it comes to Bitcoin, this isn’t the case, since, as we mentioned, there is no one central, for-profit entity running Bitcoin. However, in its decentralized design, self-interest is still evident. Other than the fixed supply, which should cause the price of Bitcoin to appreciate and in turn increase the wealth of Bitcoin holders, the miners, who are a crucial component of the Bitcoin network, are driven by self-interest since they are incentivized to maintain the security and validity of the network through earning new bitcoins and/or transaction fees, both resulting in profits (as long as the price of the bitcoin and fees earned are higher than the costs of mining it). In fact, the mining industry is huge now, with the largest mining companies publicly listed on exchanges.
Nonetheless, miners are one component of Bitcoin’s decentralized network, and they don’t have full control over the management and operation of Bitcoin, whereas Hayek’s private issuers exercise complete oversight and control over their money, as a typical business or institution would.
To reiterate, Hayek claimed that the market is a self-discovery process that evolves spontaneously, so the innovation around Bitcoin as a decentralized design might have been something he’d be supportive of. In fact, Hayek mentioned that money hasn’t been experiencing any innovation since governments monopolize it, so the inventive approach of Bitcoin might be embraced by Hayek. Nonetheless, from his writing in The Denationalisation of Money, it is important to distinguish between the “trust” vs “trustless” paradigms in their approach.
The crux of the differences lies in how money should behave or what qualities make a good money.
For Hayek, stability is the most important quality of a good, sound money. Accordingly, in the world of competing currencies, the issuers of money who want to capture the market will have to issue a money that has a stable value and will manage it in a way that maintains its purchasing power, since stable currency is what the people would want to us as money.
A key point around stability is the quantity of money. While scarcity and discipline are important to maintenance value, Hayek insists that money can’t have an assigned, fixed quantity. According to Hayek, there is no way to truly know the optimal amount of money to be supplied in an economy, so setting an ultimate quantity of money is arbitrary and results in harm (Friedrich Hayek on Monetary Policy, the Gold Standard, Deficits, Inflation, and John Maynard Keynes).
A rigid, fixed supply of money isn’t dynamic enough to react to market conditions and would result in the value of the currency fluctuating, which leads to a not-so-stable currency. On the other hand, free market dynamics may signal to private issuers the right amount of money to be supplied. To maintain the stability of their money, issuers could manage the quantity accordingly.
In other words, Hayek is arguing that the optimal quantity of money is discovered through market dynamics and adjusts according to market conditions, as opposed to being literally quantified, measured, and assigned.
Note that Hayek claimed that the best form of money under a government monopoly would be the Gold Standard (money backed by gold), since the supply and relative scarcity of gold will impose discipline on politicians and inhibit the abuse and manipulation of money. This is in line with the argument for Bitcoin, which is founded on scarcity and a fixed supply codified in its design, with the reason being that a scarce and limited quantity of money imposes discipline. However, in “The Denationalisation of Money”, Hayek made it clear that the Gold Standard is the best form of money only if the state has a monopoly over money, but isn’t the ultimate form of money, especially in a free and competitive currency market, because (1) the supply of gold, be it its scarcity or sudden supply discovery, causes volatility as opposed to stability, (2) its supply and management is still vulnerable to political abuse, (3) its supply doesn’t track real economic and market conditions, and (4) the value and perceptions around gold have changed throughout the years, which make it politically impossible to revert back to a Gold Standard. With that, a better form of money may be offered in a competitive, market based multi-currency system.
Bitcoin may seem like that better form of money, since it is decentralized with a predictable supply; however, it is vulnerable to the same issues pointed above that make the Gold Standard not so great. Particularly, (1) its fixed supply inevitably makes it volatile and (2) its supply and demand do not track real economic and market conditions.
Hayek proposed an example of how a privately issued money can be designed to achieve a stable, constant value, which make it superior to gold-backed currency. Basically, he suggests a money backed by and pegged to a basket of commodities. To maintain stability in relation to the commodity basket, the issuer can either increase supply by issuing new currency or buyback their currency to reduce supply. By tracking this basket of commodities and managing the supply of money accordingly, the issuer can manage to maintain the value of their currency to the basket of goods.
This example shows one way of potentially achieving a stable currency that preserves purchasing power. But of course, Hayek envisioned the market being creative and issuing different kinds of money. Ultimately, stability remains the defining feature and must be the goal for any issuer.
Bitcoin does not aim to explicitly achieve the stability that is central to Hayek. Its monetary design doesn’t guarantee stability. Rather, its fixed supply, and gradual, systematic release of bitcoins make it more of a money that fluctuates and eventually appreciates based on market demand and trading activity.
In one of Satoshi’s email records it states that if demand is in line with the supply mechanism of Bitcoin, then the price shall achieve a level of stability. If not, then it favors early adopters since the value will appreciate given the fixed supply.
The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase. Coins have to get initially distributed somehow, and a constant rate seems like the best formula. (The Quotable Satoshi)
If Satoshi were fully inspired by Hayek’s work, then we would expect Bitcoin, at least theoretically, to be more explicit about achieving a stable value and preserving purchasing power, but that isn’t the case.
Hayek stated that having multiple competing currencies allows for a variety of currencies that might meet the different needs of people. With that, Hayek might not explicitly be against an innovative asset that appreciates in price, but his point is that money is meant to have a stable value, since money is meant to be spent. An asset the fluctuates in price and that is designed in a way that enables it to appreciate in value would fail to qualify as good money based on Hayek’s views, since people would not want to spend this monetary asset and use it as money is intended to be used. Rather, it would be a money that people would want to speculate on and HODL (Hold On for Dear Life)
Takeaway
Even if the core themes of economic freedom and global, free moving money outside of state control are shared between Bitcoin and Hayek’s work, Bitcoin’s lack of mechanisms to achieve stability and purchasing power is the main point that makes us doubt if Hayek would recognize Bitcoin as a good, sound money, or even as money in the broadest sense.
