The pitfalls of inflation

Is the Bitcoin the money of the 21st century or just a fleeting phenomenon of modern times? What is money anyway? Which characteristics distinguish „good money“? Especially the libertarian branch of Bitcoin enthusiasts praises the crypto currency as the „money of the future“. One reason for this is the state’s control of classic monetary systems.

This series of articles takes up the findings of the Austrian School and classifies crypto currencies in the free-market economic philosophy. The source text is „What Has Government Done To Our Money?“ by Murray N. Rothbard. The previous articles (1 & 2) showed that money is a commodity in the economy which is primarily used as a medium for exchange. Now we look at the role of the state in the monetary system.

Inflation and the Bitcoin code

The state is the only organization in society that does not receive its income from the voluntary exchange of goods and Bitcoin code services. Instead, a state confiscates, in sharp terms, its citizens‘ money in the form of taxes. While these are a relatively direct source of income that citizens easily notice, the modern state can use another, more subtle means to increase its „profit. This is inflation. Inflation refers to the increase in the money supply and means a loss of purchasing power of the individual monetary unit.

Let us take as an example an economy with a money supply of 10,000 ounces of gold. A counterfeiter enters the stage and inserts 2,000 ounces of counterfeit money. What happens first? First, the counterfeiter experiences an advantage: he is 2,000 ounces richer in gold. But the more the new money penetrates the economy, the more the prices rise. The prices rise until they have adapted to the new money supply (of 12,000 ounces of gold). The advantage of the counterfeiter arises on the backs of those who get the „new“ money last.

The consequences are dangerous for the Bitcoin code

„For many people, „more money“ means „more prosperity“ – in the case of inflation, however, this conclusion does not follow. Inflation usually happens insidiously and inconspicuously. Inflation is a race – the quickest person to get the new money has the greatest Bitcoin code advantage. Citizens with a „fixed income“ – such as pensioners – are most affected by inflation. Inflation distorts the Bitcoin code price signals of the market. Companies overestimate their situation with the additional money. Inflation rewards debt taking.

Such a monetary system cannot exist forever. The more monetary units that are added, the more people want to get rid of their money. This culminates in a so-called hyperinflation – no foreign word for the population of Venezuela or that of the Weimar Republic almost 100 years ago in Germany. In hyperinflation, prices have to be adjusted daily or hourly because money is losing value so rapidly.

The cornerstone of currency devaluation
In order for a state to be able to make use of the silent tax resource, inflation, it needs one thing above all else: a monopoly on the minting of money. Many steps are necessary for the people to bow to such a monopoly. One is to spread the myth that only the sovereign – the state or the king – has the prerogative to coin a currency. Another is the separation of the currency name from any unit of weight (so „the dollar“ was originally a synonym for a weight – namely „1/20 ounce gold“). Legal terms of payment are used by the state to determine which good is meant as „money“ in the first place. As long as these laws function with money that the market has chosen, they do not play a major role. However, these laws establish an essential precedent: state control over money.

Once the state has claimed sovereignty over the currency, it breaks all ties to other goods. Measuring the weight of a monetary unit hinders this effort. In other words, „the dollar“ must be detached from its original meaning (thus, „1/20 ounce gold“) and itself become a „tangibles good“. If any attachment to the real good is abolished, the state finally has the power to arbitrarily manipulate the money supply. The one who controls money controls the economy.

The monopoly position in the means of payment leads to further, unpleasant side effects. On the one hand, there is no longer any competition between means of payment – people can no longer choose „the best“ money. On the other hand, there is no competition in coinage – the costs for this can be passed on to the involuntary „clientele“. The monopolist simply has no incentive to produce effective and efficient money – his customers have