Money is always political. This is obvious enough when we argue about Federal Reserve policy in the United States, or who should next chair the interest rate-setting body. But for over 1,000 years, we have argued about the nature of our monetary systems and shifted between different ways of making payments. Seen in this historical context, Bitcoin and other cryptocurrencies are just the latest in a long line of challenges to prevailing technology—and to current political arrangements.
The dominant design of today’s monetary systems is based on a western European tradition that can be traced back to the silver denarius of Emperor Charlemagne and before to the organization of the Roman Empire. This design bases the amount and nature of money in the economy on an interaction between government policy and what private individuals want to hold. Continual political pressure and repeated technological opportunity have produced many changes to that basic model over the years. Bitcoin’s rise may result in another round of that process.
Enthusiasm for cryptocurrencies is based, in part, on entirely reasonable frustration with our existing arrangements. People on the left who distrust the power accumulated by global megabanks in recent decades have united with people on the right who see the government as overreaching. But history suggests that trying to build a viable national and international payments system completely outside the control of governments will not be easy.
First, money is valuable only to the extent that it can be converted into goods and services. And at the moment of conversion, governments will have a lot to say about the matter, such as whether you have paid tax and whether the transaction is legal.
Second, it is very hard to come up with a technology that will completely hide transactions from governments. The movement of goods, people, or information can all be tracked, as the Silk Road case has shown.
Third, there will be a political reaction led by powerful banking interests. They will point out any illegality within the Bitcoin system and lobby for restrictive regulations.
Fighting on this ground will be difficult. It would be much more sensible for the Bitcoin community and its allies to launch a proactive political strategy. They might focus on the fact that illegal payments are currently made around the world using $100 bills and that there is a need to lower transaction costs for people in countries with a weak rule of law and great risk of theft. It could be argued that operating Bitcoin in a more transparent fashion will not destabilize the credit system or undermine the ability of small banks to make a reasonable profit.
The monetary system of the United States and the world has changed many times and will without question do so again. At the end of the nineteenth century, for example, there was a broad push to reform the U.S. monetary and credit system. Ideas that were initially dismissed as “populism,” such as moving away from a narrowly defined gold standard, had, within a generation, become mainstream.
New technology can definitely offer better ways to organize transactions. But simply assuming that the state can be bypassed is unlikely to work. Bitcoin needs a political strategy, and it must evolve to address legitimate criticisms.
Simon Johnson is a professor at the MIT Sloan School of Management and was formerly chief economist of the International Monetary Fund.