The Dollar Will Never Fall to Bitcoin

“A significant benefit of bitcoin in the eyes of many in the bitcoin community is its assurance of a stable base money supply. … The rate of new bitcoin mining is similar to the mining rate of precious metals such as gold or silver. … This means that bitcoin is largely inflation-proof. Time and experience may prove it to be a more stable store of value than many fiat currencies.”

Last month, several people appeared before a U.S. Senate committee to defend bitcoin, among them Patrick Murck, general counsel of the Bitcoin Foundation, responsible for the quote above. You can hear in Murck’s testimony that jingling sense of Silicon Valley certainty that comes with the knowledge that this technology, unlike all the others, will be immune from the ravages of historical experience.

Bitcoin is an extraordinary innovation. It also will never replace the dollar or the euro, what Murck refers to as “fiat currencies.” Fiat will win over bitcoin for the same reason it won over gold, silver, and copper in early modern Europe. Central banks, too, are a form of technology. Like other technologies, they’ve improved with iteration. Since the establishment of Sweden’s Riksbank at the end of the 17th century, central banks have been trying out new strategies, watching each other and copying what works.

Fiat currency is not a unstable relic, waiting to be replaced with an innovation that prevents inflation. Fiat currency is a highly adapted tool. Inflation isn’t a bug. It’s a feature.

There’s a fight as old as money over who gets to determine what money is—the state or the market. Generally, states claim the right to make money. Whether they can hold on to that right depends on how good they are at making money, but they have gotten better at it over time.

Before central banks, kings minted coins, offering the public good of a verified metal content in exchange for a bit of seigniorage, an extra bit of value over the cost of the metal. When they debased the metal or demanded too much seigniorage, merchants figured it out and either melted the coins down or hoarded more reliable ones.

Early banks issued credit in the form of private notes. This created both good and bad inflation. Credit grew with local economies, but sometimes outpaced it in the hands of an improvident bank. State-run central banks took over this function, in part, because it was a good privilege to have as a sovereign. It was also good for markets to have a sound but growing source of money.

Money does three things. It serves as a unit of account; you can quote prices for common goods in dollars, as can all the other people in America. It serves as a store of value, as with the dollars in your bank account. And it serves as a medium of exchange; your grocery store takes dollars—and so do you, from your employer.

Bitcoin, like gold and silver, is finite, making it a good store of value. And it exchanges well—magnificently, in fact, far better than gold. The way that the bitcoin protocol uses distributed computing power to verify transactions at a distance is an innovation that has been wanting since the first bills of exchange were offered in the long-distance Mediterranean sea trade.

Bitcoin is a store of value and a medium of exchange. It’s like really awesome gold. It’s not, however, a unit of account. Your mother cannot quote you the price of eggs in bitcoin. This is not just a question of waiting long enough for your mom to get around to using bitcoin. The state has tremendous power over the unit of account. It pays government contracts in the unit of its choosing. It collects taxes in that unit, too. The psychological weight of this power can last for centuries. Medieval Europe still accounted for its variety of coins in Roman units. Modern Europe uses the metric system because Napoleon wanted it so. It’s not clear why any state would choose to give this up.

The Internet beat up publishing and a couple of other industries. It’s having a harder time so far against the state. A currency is an asset with an army. Bitcoin has no army.

And central banks have had several centuries of using this power to experiment with inflation. Sometimes it has worked. Often it has not. Inflation is not inherently good or bad. Bad inflation, as when a king wants to lessen debt, is bad. Good inflation helps money supply grow with the market. You can’t generalize about fiat money any more than you can generalize about countries or companies. Some are run well. Others aren’t. What matters is not the power to inflate but how it’s used. The fiat currencies that have survived longest are run by stable democracies, with slightly differing views on interest rates but a rough consensus on innovations in sound money management.

In his testimony, Murck suggested that bitcoin will provide a stable base of money supply, “making a small central bank or currency bloc accountable if they poorly manage their portfolio, while at the same time ameliorating the economic effects of the central bank’s mismanagement.” This is a fine idea. So fine, in fact, that it has already been happening for a long time, with mixed results.

People who live under poorly managed currencies already collect dollars and euros. The dollar, for example, has always been particularly popular in Argentina. Now bitcoin is popular there. The dollar has failed to inspire Argentina to take care of its peso. Bitcoin will fail, too.

Bitcoin is a fascinating, elegant way to confirm financial transactions. That’s not nothing. It should make Visa, American Express, and PayPal nervous. But it will not keep Janet Yellen up at night. Nor should it.