Bitcoin and the Denationalisation of Money
Political Economy9

Bitcoin and the Denationalisation of Money

Last month I wrote about Hayek’s and Rothbard’s conflicting monetary ideals. Much of the difference between their visions can be chalked up to differing predictions, but Rothbard’s prescription involves one important proviso that Hayek’s does not – namely, the institutionalization of the 100%-reserve warehouse receipt model of money.

It was the failure of Rothbard to distinguish between prediction and prescription in Hayek’s work that led him to reject Hayek’s predictions on what free-market money could look like.1 It is this important distinction which lets us imagine the reactions of the two men to a very new monetary development – Bitcoin – even though it looks nothing like either of their predictions.

First, let’s look at the main schools of Austrian thought as to what free-market money would look like:

All of the analysis that then follows is only ever conditionally valid – that is, if these particular monetary arrangements come to pass

There are, of course, pretty safe predictive bets, which the theories have in common. A central bank could not exist in a free market. Without legal tender laws, there will be some degree of competition among currencies. And all of the theories involve banks issuing currency. Pretty solid assumption, right? How else could it be done?

Enter Bitcoin. Bitcoin is issued by no bank – made possible by advances in peer to peer networking. It is completely decentralized. It is not backed by hard specie, and yet it is noninflationary – made possible by advances in cryptography applied on several levels. It is nearly impossible to create illegitimate coins (though “mining” is possible by hashing values, but the electricity costs make it generally not worth the investment), and the possibility of fraudulent transactions decreases with the number of people connected to the network.2 That is, as the value of the Bitcoin goes up, the possibility of fraud should diminish.

The technology which allows Bitcoin to exist is very new. And since computational cryptography and monetary economics haven’t typically had much to do with one another, it wouldn’t be very fair to fault any mid-century economist for failing to predict its possibility.

Bitcoin should demonstrate then that monetary arrangement is a technical problem – not something which can be deduced a priori. We can say certain things about certain types of money a priori, but the economist can no more talk about the absolute “best” type of money than he can about the “best” type of computer chip. An iMac is obviously a better computer than ENIAC, but it would be foolish to rule out further innovation in the field for this fact. And of course, a state monopoly is no better at solving technical monetary problems than it is at solving technical industrial problems. Things can plod along passably well (as economies have done since the rise of central banking), but it’s still no substitute for market innovation and competition.

The fundamental difference between Hayek and Rothbard then, is that Hayek believed money to be a technical problem, best solved by the market, where Rothbard believed it to be an institutional problem, best solved by an economist. This is why the vagueness of Hayek’s predictions and their allowance for human discretion in regulating monies seemed distasteful to Rothbard. And this is why, even though it comports with neither of their predictions, Hayek would welcome Bitcoin into the market, where Rothbard would scorn it.

In fact, Bitcoin takes the denationalisation of money a step further than Hayek did. Where Hayek’s system requires government to remove legal tender laws and Rothbard’s requires governments to return to the gold standard, cryptocurrencies like Bitcoin have no such political prerequisites. There is no bank to shut down, no specie to seize (the downfall of the ill-fated Liberty Dollar) – nothing at all for governments to aim at, except individual users. And as the war on internet piracy should demonstrate, such a campaign cannot be other than costly and ineffective.

In short, if we believe the recurrence of inflationary cycles is a problem too urgent to leave to the political process, Bitcoin could be our best bet in the fight to divest government of its monetary monopoly.

  1. Rothbard, Murray. “The Case for a Genuine Gold Dollar” (1985). In The Gold Standard: Perspectives in the Austrian School (1992): “It would have to be imposed (to use a derogatory term from Hayek himself) as a ‘constructivist’ scheme from the top, from government to be inflicted upon the market.”
  2. See the Bitcoin whitepaper by Satoshi Nakamoto, especially section 11.


  • 1


    Jun 08, 2011 at 18:26 | Reply

    Bitcoins are specie. They are things desired in and of themselves. We have so much mental baggage in the way that we try to categorize money (token, commodity, fiat,..) that it becomes hard to recognize things like bitcoins that challenge our initial assumptions (digital is token, hard is commodity).

    Bitcoins are a particular use pattern of numbers that emerge from the use of a cryptographic framework (Bitcoin). They are not tokens or symbols of something else. They are discreet entities with cryptographic rather than physical boundaries.

    I think both men would have ultimately welcomed Bitcoin. Rothbard especially so because of what it may foreshadow for the state.

    • 2


      Jun 08, 2011 at 19:16

      If you mean that the distinction between token and specie is “specious” (har har), then absolutely. If the subjective theory of value means anything, then “cryptographic electronic signature” is not inherently less valuable than “ooh, it’s shiny”. The important thing is just that it’s hard to create more.

      You’re absolutely right that there’s no reason Bitcoins couldn’t be used economically in exactly the same way as gold. If government pressure eases to the point where we can get stable formal institutions around it, I’ll predict fractional-reserve banks which issue their own “Bitcoin-backed” currency. This would operate along the lines of Selgin’s free-banking theory, and would provide a measure of price stability for prices in that currency, even if Bitcoins themselves remain deflationary. Bitcoin itself I would imagine then being used mainly for reserves, for the same reasons that banknotes eventually superseded gold coins in daily use (not just because they’re easier to carry). And considering all the hoarding worries around Bitcoin, it should be a relatively small leap from major hoarder to moneylender, and then bank.

      You may be right about Rothbard welcoming Bitcoin. But his followers at least, from what I’ve seen, have been pretty down on the idea. Mental baggage sounds about right, hah.

  • 3


    Jun 08, 2011 at 19:39 | Reply

    It’s good to see that some Austrians are taking the rise of Bitcoin seriously. This is a fine article on the subject, and that is saying a lot since so many of your peers are filling the Internet with rushed Bitcoin commentaries littered with error.

  • 4


    Jun 09, 2011 at 0:38 | Reply

    “it wouldn’t be very fair to fault any mid-century economist for failing to predict its possibility”

    True we can’t fault them for not predicting Bitcoin. However Bitcoin isn’t that different from a pure decentralized peer-to-peer system of valuing and trading rocks for example is it? The one distinction is that the inflation of Bitcoins are definitely capped at 21.

    Bitcoin is technically a more advanced currency, but in principle doesn’t seem that different than anything Rothbard or Hayek had seen historically.

    Am I wrong?

    • 5


      Jun 09, 2011 at 16:22

      You’re right, economically it should behave similarly to gold. As far as this is true, all their insights should remain valid. But it has other unique features as well, especially as regard politics, which would definitely influence the path we take towards a free market in money (which they both wrote about). Rothbard’s insistence that we need a gold dollar, for example, is looking less and less relevant as the dollar itself becomes less and less relevant.

      The main difference is, gold is easy to monopolize, and has few alternatives (silver? copper?). There can exist any number of equally good cryptocurrencies, however, and this is the practical strength of the idea. Particular cryptocurrencies can be monopolized, but it’s very simple to just use a different, more or less identical one. They can spring up faster than they can be monopolized.

      (I elaborate on this in the next post)

      So yeah, it’s a new form, perhaps more general, which still conforms to old economic laws, but has very different political implications.

  • 6


    Jun 25, 2011 at 4:52 | Reply

    Thank you for this great article.

    At last, someone with in depth knowledge about Austrian School Economics is taking Bitcoin seriously and approaching it with rigour and references to theory.

    This article also goes some way to explain why some ‘Rothbardians’ have been so reflexively hostile to the idea of Bitcoin.

    Bitcoin really is the best current option in the fight to destroy the State’s monopoly on money, and everyone should adopt it, even on the scale of a few tens of dollars, for that reason alone.

    If all the hundreds of millions of disaffected people out there all put $20 into buying a bitcoin, and ran the client full time the networks worth and integrity would be strengthened to a level that would put it way beyond the reach of the State, and any lie its media outlets tried to spread about it.

  • 7

    Jon Matonis

    Jun 26, 2011 at 11:59 | Reply

    Great focus on bitcoin from an Austrian economist. I particularly like your comment above about the subjective theory of value in relation to a cryptographic math puzzle versus a shiny element atomic number 79. It seems to me that both would have the same value on a deserted island.

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