Mark Carney’s initiation at the Bank of England last week coincided with two tech conferences in Canary Wharf about the future of money. Yet the biggest story released during his first week as governor was preventing the removal of women from the face of our English banknotes.
He argued that “our notes should celebrate the diversity of great British historical figures and their contributions in a wide range of fields”. Indeed, fiat currencies around the world contain the images of their popular public figures.
Since 1971, the Bank of England has taken suggestions for future banknotes. Bitcoin, of course, has no historical figure, and instead appeals to its analogy with the gold standard. As Mark Carney realised this week we have to pick our historical references carefully. Bitcoin is no different.
Analogies and metaphors are integral for comprehending new phenomena. The introduction of bitcoin in the mainstream media and presentation often appeals to existing forms of payment and monetary systems in order to explain the invention. It allows people to put bitcoin within their traditional frame of reference and define it by its differences compared to what is familiar to us.
Bitcoin’s image, the now ubiquitous golden coin with the letter B mixed with the dollar, represents the inability of governments to manipulate its supply and reinforces the analogy of the “new gold standard”. The computer-driven mining process makes the comparison an obvious one. However, this comparison might not be as healthy as first thought.
At the beginning of the eighteenth century, the unit of account for Britain was still in silver. The government issued gold guinea and its value fluctuated relative to the unit of account. Sir Issac Newton, master of the mint (1699-1727), noticed that the government was unable to stabilise the value of the guinea and by the late eighteenth century, Britain was on a de facto gold standard, with the unit of account being 20/21 of a guinea.
At the recent Bitcoin London conference, Sveinn Valfells, a Stanford-trained economist, laid the foundations for what it would take for a country like Iceland to adopt bitcoin. Addressing a member of the Central Bank of Iceland in the audience, he paid homage to the contribution of the scientist Sir Issac Newton to Britain’s monetary management and hopes that Satoshi Nakomoto will one day hold such a reputation.
Sir Issac Newton famously stated that there was only one unit of account and that was silver. However by mispricing the guinea, he generated an influx of gold from Brazil and an exodus of Britain’s silver eastwards, first to France, and later to China and India resulting in the de facto gold standard in Britain.
Eventually, in about 1880, the majority of sovereign states made a commitment to fix the prices of their domestic currencies in terms of a specified amount of gold. On the surface, bitcoin attempts to instigate a private gold standard, where the supply of bitcoin is fixed and it has a floating price against the dollar.
This does not bear much resemblance to the classical gold standard as the state and their Central Banks played critical roles in determining the rules of the game and their implementation. Bitcoin does have similarities to this monetary episode not in the construction of the currency but mainly in its precedents, the private issue of tokens.
The dogma of standard economic thought is that if the problem is big enough then the market will adapt to solve it. The financial crisis has brought the world economy to its knees and there is little doubt that bitcoin’s rate of adoption has been linked to this disaster.
Bitcoin was born out of the needs of privacy and a global system of payments. The classic gold standard in Britain (1880-1914) has been attributed to both government policy and the innovation of the market.
Before the government intervened, merchants imported foreign coins as a way of implementing a spontaneous debasement to cure shortages of small coins. They also created ghost monies, units of account, which private traders used to circumvent a government-mandated unit of account.
Finally, in the 17th and 18th centuries, there were instances of firms issuing tokens and eventually convertible tokens, providing the government with proof of concept of the standard formula observed during the classical gold standard.
Ultimately the British government nationalised a smoothly operating system of privately issued tokens.
It remains to be seen which governments and financial institutions will learn from the bitcoin community but there are certainly echoes of history repeating itself. Whilst Satoshi Nakomoto fulfils the Bank of England’s criterion of an “indisputable contribution to their particular field of work”, I doubt we will ever see his face on the back of the pound sterling.