Gold and Cryptocurrency: Financial Denial of Service

When FDR became president, one of his administration’s first acts was to stop a shipload of gold from leaving the USA. It was, literally, a denial of service attack on an already deflationary economy. At that time, the US economy was in such a poor state that the very wealthy thought the best thing to do was to protect their wealth by converting their banknotes to gold and removing the gold from the USA, thereby making any economic improvement impossible – a denial of service attack on the US economy.

Metallic currencies have the failing of being inflexible in supply. In a financial system based on gold or silver – “specie” – the wealthy can simply cash in their chips and take them home, and the economy freezes because, literally, it is out of money. In that situation it is not that there is less labor, fewer farms, stores, or factories, or less demand – there is a shortage of money and barter becomes the only way to do business.

Cryptocoins combine the problems of metallic and fiat currencies - they are both inflexible in supply and wildly variable in value. The theorists of cryptocoins reasoned that, by eliminating the discretion of bankers and governments, they would create a currency that would be immune to hyperinflation and allow them to evade regulation, especially taxes - very much subject to the exploded theory of self-regulating markets. Because their theories were wrong and cryptocoin values have the fractal jumpiness of any speculation, cryptocoins cannot be the basis of a currency: they are not a reliable store of value, medium of exchange, or unit of account. In addition, since they are computational abstractions, they can be easily lost or stolen; one cannot, after all, easily put a bar of gold in one’s pocket and walk away with it. Their main practical use is evasion of the law – crime. And, as with a metallic currency, cryptocurrency holder can simply take their chips home.

So when you hear someone saying that the United States ought to return to “hard” currency what they mean in practice is to put control of the financial system back into the hands of the rich. The advocates of cryptocurrency want to put control of the financial system into the hands of criminals and currency speculators. Bad ideas, both of them.