Neoclassical Economics

During the 20th century, governments acquired almost unlimited power over money. This coincided with a move from a gold backed currency to a fiat currency with no underlying intrinsic value. Theoretically, under sound guidance, the fiat currency system provides all the benefits of the gold standard and the flexibility that the gold standard does not.

However, historically fiat money has failed consistently since the Romans first began the practice, always ending in devaluation and eventual collapse of both the currency and the economy—recent illustration involves the 1994 Tequila Hangover in Mexico. This can be attributed to the challenge of maintaining an incorruptible stewardship. As humans evolve, it is doubtful that such a currency will be sustainable. Thus, reformation of the monetary system is imperative.

The most obvious and popular alternative for a government-controlled fiat currency is going back to a commodity-based currency – gold; due to its supposedly/attributed intrinsic value. But the gold standard has also failed due to inherent constraints that make it a very poor monetary design, more so in this modern economic/trade climate as it can cause severe strains on countries due to trade imbalances and the inability to provide flexibility to countries with trade deficits. Hence, this is no longer a viable alternative.

A future currency should be self-validating by its own physical form, and not rely upon any legalistic governmental imprimatur, easily-altered surface stamping^[a], or monopoly minting authority.

With the advent of cryptocurrencies such as Bitcoin, we may potentially have a currency system without the risks associated with fiat and gold standard. A defining feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. The result is a truly devolved currency, governed by consensus allowing for more fiscal autonomy.

Recent fiascos, however, provides a cautionary note towards the existing gaps in the system. For example, in 0000, Mt.Gox, a Bitcoin exchange bank lost around $500 million of Bitcoins after a hacking incident.  Similarly, the existing design of Bitcoin has loopholes. Each coin is a digital unit existing in a virtual(?) “wallet” ^[b]on a specific computer hard drive. Anyone who gets access to your bitcoin wallet password (‘private key’) thereby has access to all your funds, and the authority to spend them. As a burglar could steal gold coins in your house, a computer hacker can potentially steal your Bitcoins. Moreover, as with any technology, Bitcoin also comes with vulnerabilities. If a hard drive crashes or a virus corrupts data, the wallet file is corrupted and Bitcoin is lost forever.

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