Tuesday, October 4, 2016

Is a Central Bank or Bitcoin Right for the US?

Scrapbook #5: Does the US need a Central Bank?

Summary of article:

Fifty (50) attorneys have joined forces to form another blockchain industry advocacy group. The Digital Currency and Ledger Defense Coalition (DCLDC) will focus its efforts on legal issues that surround the digital currency and blockchain environment.

Reason article was selected:

The Federal Reserve, our central bank, seems to be a key part of our financial system, but is it really necessary?  Should Bitcoin ever replace a national currency such as the US Dollar?

Personal/social values at stake:

I began my research into this matter by reviewing the history of central banking in the US, and, in very brief summary, here it is:  For much of our history, actually, there was none.  Treasury Secretary Alexander Hamilton and founding president James Madison's creation of the first central bank(s) in the US was contentious, opposed by other presidents, namely, Thomas Jefferson and, later, Andrew Jackson, who foresaw them as an engine of speculation, financial manipulation and corruption.  They prevented the renewal of the charters of the First and Second Banks of the US, respectively.

These early and short-lived First and Second Banks of the US had produced only a percentage of the country's paper money (also backed by gold and silver) along with the states.  Then, given the non-renewal mentioned, there was an era between 1837 and 1862 in which there was no central bank, just state banks.  These state banks lasted only five years on average due to their eventual failure to redeem customer notes, due to liquidity crises, panics and bank runs.  Moneys were variable across banks and usually uninsured, so there was a lot of uncertainty and loss.

After the Civil War, national banks were formed again with higher reserve standards (greenbacks too) and a uniform national currency, but there were still panics, one of the worst occurring in 1907.  Resultantly, in 1913, in an effort to stabilize the economy and prevent panics with a money creator of last resort, President Wilson signed the Federal Reserve Act into law.

During WWI, the Reserve issued war bonds to raise money.  And, since 1971, the US has been off the gold standard, which is pretty phenomenal.  Also, during this later time, the Fed was further charged by Congress to effectively promote the goals of maximum employment, stable prices and moderate long-term interest rates.

Today's twist in centralized vs. decentralized banking comes in the form of the blockchain ledger technology, which is the technical foundation of the Bitcoin cryptocurrency. Bitcoin, along with numerous other smaller cryptocurrencies, have gained favor in recent years due to an unlikely group of allied interests: those interested in cutting edge technology; others interested in moving money internationally; and still others wary of central banks and fiat currencies -- they've all a vested interest in seeing it succeed.

Recently a group of legal experts have teamed up to create what is known as DCLDC or Digital Currency and Ledger Defense Coalition to help defend the currency against legal challenges. The group likens themselves to the ACLU and EFF.

Bitcoin is the antithesis in some ways to a central bank; its legitimacy is not backed by any central authority.  Instead, its ledger and the shared interests of the “miners” who found the money are what keep it in check. This has profound implications, as there is no government group or bank backing the currency.

One could take a not too far-fetched leap then and wonder what the world would be like without any central authority for money, for what is money, simply, other than an exchange mechanism for goods and services? Considering the US existed for many years without one, it is not entirely without precedent.  However, ultimately, I conclude that it would be prohibitively volatile and risky without the full faith and credit of the US backing it, just as it was throughout history before it.

Creditability of the source:

Fast Company describes itself as a leading progressive, business media company, which was launched in November 1995 by Alan Webber and Bill Taylor, two formerHarvard Business Review editors.

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