The state and its politicians have a strong interest in not losing the lucrative monopoly on money creation. Spontaneously created cryptocurrencies threaten the central banks’ monopoly on money creation. Thus, Bitcoin & co. can be seen as “enemies of the state, and of the central banks”.
Why are politicians so concerned about cryptocurrencies?
Central banks, and hence the state and politicians, have an enormous interest in not losing control over the money supply. Non-state-created cryptocurrencies (such as Bitcoin) threaten a loss of state control over “sound money” and thus the No 1 instrument of power. As the saying goes: “money rules the world”.
Why is money creation so lucrative?
Whoever controls the creation of money and the initial distribution of newly created money can do the following:
This list could easily be extended.
What are “seigniorage gains”?
“Seigniorage profits” are profits made by a central bank through money creation. A simple illustration: The central bank has low costs when it creates money. These include, for example, the printing costs to create paper money which obviously do not figure in the case of electronically created money. With the money thus created a central bank can buy assets (for example, bonds, shares or real estate) to generate an income. Users of cash hold the money without demanding a return in the form of interest, which means the central bank’s financing costs are zero. The central bank has thus financed itself in the long term, i.e. given itself a long-term loan without having to pay any interest. Conversely, users of cash have given the central bank a long-term loan without charging interest for it.
The achievement of “seigniorage profits” is not only a matter of interest to “penny pinchers”. Huge incomes and wealth can be generated in this way. That is why the pursuit of seigniorage profits has for millennia led to intense competition and even war (which some define as “the continuation of competition by other means”).
As an example, before the introduction of the euro the Bundesbank made annual “seigniorage profits” of around DM 5.3 billion. The more widely accepted and suitable a currency is for transactions, the higher the potential for “seigniorage profits”. Thus, it is logical that the Fed and the United States of America make by far the largest profits from their “world currency creation monopoly”.
Why do most states want to launch their own cryptocurrencies?
The Austrian school of economists has always opposed a state monopoly on money creation
F.A. Hayek (Nobel Prize for Economics, 1974) and many other liberal economists were fearful of totalitarian states and focused on the need to protect citizens from an “Orwellian omnipotent state” (whether of the “left” or the “right”). These economists called for the abolition of the state monopoly on money creation in order to force the central bank in the direction of monetary policies dictated by economic goals, as opposed to political goals or of corruption, and to prevent “moral hazard”. These economists saw the danger that “in the name of stimulus” governments would be tempted into ever more monetary inflation in order to achieve non-economic goals such as re-election or repression. They also saw the dangers of allowing central banks excessive freedom, be it the freedom to buy up for the state large parts of the economy (disguised as a stimulus measure) or the freedom to set negative interest rates, abolish cash and take over the private banking system. Worse, they saw the possibility that a takeover of large parts of the private sector might eventually become necessary in order to prevent a systemic collapse, including of the financial system.
Ultimately, they feared that, without the discipline of “private alternatives”, an ever-mightier central bank could imply ever more restrictions on a market economy, making room for an expanding planned economy and its associated “servitude”.
A little quiz
Which central bank/state is behind which of the following statements? Please assign the central banks of China, Switzerland, the Euroland and the US to the following statements. Then rank the statements according to the degree of “monetary totalitarianism”:
Correct! The first statement comes from the SNB. The bourgeois Swiss constitutional state has no interest in completely monitoring all Swiss citizens and all other users of Swiss francs in a blockchain. Trusting in the strength of the Swiss franc, privately generated cryptocurrencies are not perceived as competition that might threaten the country or its institutions.
The third statement, reflecting an opposing view to that of the SNB, comes from the Peoples Bank of China and will not be commented on here. The second statement comes from a Eurocrat at the ECB. This leaves statement four, which must therefore come from the Fed.
Contact: Thomas Härter, CIO, Investment Office
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