US Digital Currency: A Response
A few months ago, Sam Altman published a blog article proposing that the U.S. government create its own cryptocurrency, “USDC.” He suggested a number of features the currency could have and argued that such a cryptocurrency might become the de facto currency of the future.
While Sam Altman deserves a lot of respect for his success as an entrepreneur, this latest article was ripe with economic fallacies and an unfailing (and equally undeserving) tribute to the state.
Altman begins his proposal by claiming that current cryptocurrencies have inherent issues (at least in the eyes of the state). Two of the three issues are just red herrings, while the third isn’t a real issue in the face of anyone but the state.
And from the perspective of a nation, there are real problems with current systems, especially around pseudo-anonymity, ability to function as an actual currency, and taxability.
If psuedo-anonymity is a problem, then true anonymity would be an even bigger problem. Unfortunately for his argument, anonymity has been the status quo for centuries, only changing marginally with the adoption of modern banking. Cash is entirely anonymous and practically untraceable; it requires no authority to monitor or approve transactions.
Besides, USDC wouldn’t have a monopoly over transactions. Currencies first originated as commodities with inherent value (e.g., gold or copper) and could always return. Outside of criminalizing barter, the state cannot combat anonymous transactions; the introduction of USDC would be neutral on this front.
I’m not sure what the “ability to function as an actual currency” actually entails. I’d assume Altman describes an oft-given critique of bitcoin, which is that its purchasing power fluctuates wildly. Perhaps he thinks a lack of adoption is its inability to be a currency. Either way, he neither addresses the current issue, nor does he propose how USDC would solve either of the two criticisms commonly given above. It’s a generally meaningless “real problem.”
Finally, he describes an inability to effectively tax cryptocurrencies as the final problem. Surely, this is a problem in the eyes of the government, which has found few areas outside the scope of its tax collectors’ outstretched hands. The government’s readiness to ascertain the wealth contained within its borders is unparalleled. Apparently, the opportunity to tax even more must be seized. National cryptocurrencies are the windfall the IRS has been waiting for.
Ideally the initial coins would be evenly distributed to US citizens and taxpayers—something like everyone with a social security number gets two coins, one that is immediately sellable and one that you have to keep for 10 years.
This “ideal” situation is problematic in every sense. It’s clearly an attempt at an egalitarian distribution of wealth, but it’s simply farcical.
Coins cannot just be given away. They are no more valuable than chocolate coins or post-it notes with “$20” written on them. There’s no guarantee that anyone will accept them as payment for resources. Without an additional increase in capital wealth, an increase in the money supply is meaningless. If giving each person two coins increased their wealth by a non-zero amount, then why wouldn’t we give them 200 coins? It’s obvious that the value of these coins would be zero. Scarcity alone does not imply value.
The coins would have to be introduced with some sort of fixed exchange rate. This was how almost all modern currencies were introduced: with the gold standard. It’s the only way to guarantee value for a new currency without pure speculation driving its price, as bitcoin’s huge evaluation swings now prove.
There’s also no reason to obligate the saving of USDC. I can’t tell whether it’s a grand retirement savings ruse or, more likely, preventing someone from selling away all of their worthless tokens.
USDC could require that certain transaction can only happen with wallets with known owners. It could even build a tax system into the protocol.
I cannot fathom how blocking transactions between individuals would attract users. Besides, Democrats often critique voter I.D. laws for discriminating against minorities and the poor. A widespread inability to use one’s government-given currency would deal significantly more pain to those same communities.
The taxes again make their return to the spotlight. It’s almost as if there’s no other reason to fabricate such a currency.
A tricky part of this would be how to balance letting the network have control over itself and letting the government have some special degree of input on ‘monetary policy’. It’s certainly ok for the government to have some, but I think the network needs to be mostly in charge (e.g., the government couldn’t be allowed to arbitrarily inflate the currency when it wanted to).
If “ok” is the standard in determining government power, I’m glad monetary policy falls into the “certainly ok” category. Sarcasm aside, absolutely none of this currency is network-controlled. No distributed system could ever be created to satisfy all of a statist’s demands. “Input,” as he describes it, is just a facade for control. Besides, the government would never willingly surrender such power.
Interestingly, Sam Altman seems to think that inflating the currency should be off the table for the government. This is an unexpected twist of plans for a currency whose sole purpose is to increase the power of the state. He might not know that monetary policy often includes arbitrary inflation, like quantitative easing.
The government can likely create a lot of de novo wealth for its citizens in the process.
Finally, we’ve arrived at the core misunderstanding behind Altman’s proposal. Wealth isn’t created by the government in the form of minting digital coinage. That process is no more effectual that printing Monopoly money and giving it away to the poor.
Indeed, if this approach was able to create wealth for people, this exact proposal would have already been realized. Nothing stops someone from copying these exact steps and emulating such a currency, even keeping all of the tokens for themselves.
Altman unknowingly falls into the same pit Keynes fell into nearly a century ago. Wealth is created through private innovation, not at the hands of some all-powerful bureaucrat. After all, if it were possible for Congress to create wealth, we’d all be rich. If running the Federal Reserve’s printer were all we needed to live in luxury, it’d be running non-stop.
Owning currency entitles you to purchase resources elsewhere for fair value. $5 is equivalent to some amount of capital goods, like a gallon of gasoline. But while one can print money, one cannot print gasoline. Gasoline requires significant investment (e.g., labor) to harvest from natural sources. It’s illogical to believe that arbitrarily growing the money supply leads to more capital goods, as capital goods require the consumption of other goods to produce. Money supply is infinite; capital goods are finite. Printing a $5 banknote doesn’t generate more gasoline elsewhere in the world; it merely depletes a currency of its purchasing power, inflating the U.S. dollar everywhere its spent.
This is true for all commodities, not just currency. If crude oil production skyrocketed throughout the world, the price of gasoline would plummet. Supply and demand dictates this natural response, and money is not exempt from the free market.
In Keynes’s The General Theory of Employment, Interest, and Money, a similarly misguided understanding of wealth creation is proposed.
According to him, the capital wealth of a community can be increased by burying freshly printed banknotes in abandoned coal mines.
I suppose the only reason this process isn’t done continuously is a dearth of available coal mines; indeed, it seems foolproof.
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again .., there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.