Bitcoin vs Central Banks
According to the Bitcoin project description, located on Coinmarketrate.com – this is a cryptocurrency, which, according to the document of Satoshi Nakamoto himself, seeks to become a technology that works without a central authority or bank. Therefore, the question is whether she will be able to abolish them.
There are arguments both for and against the demise of central banks, and this is not a trivial issue at all. Whenever this discussion arises among economists, things get a little hotter. Let’s look at the pros and cons so that you can draw your own conclusions.
The role of central banks
Not only cryptocurrencies want to do away with central banks, but also the digital age. However, they won’t be able to do that.
These institutions have existed for many years, the first of them was established in Barcelona, Spain, in 1401. The function of this first central bank and subsequent ones was to help governments raise funds to invest in society or to pay for wars.
The British went further and in 1844 passed a law giving these institutions the monopoly right to print money. This was justified by the fact that it would help to stabilize the financial system during the crisis.
Many experts agree with this assumption, citing as an example the fact that in 2007 they helped prevent the spread of the crisis. But, as we can see, the crisis remained, and continued its dirty work.
However, we can also argue that the monetary expansion of central banks is to blame for this happening. But this is a topic for another conversation.
The most important central bank in the world, the US Federal Reserve, pursues certain goals when conducting monetary policy:
- To maintain stable prices
- So that everyone has a job
- Provide people with access to loans
- Protecting banks from the banking crisis
- Stabilize the economy during crises
The tools available to this bank (and others) to achieve these goals are interest rates (which rise and fall), as well as the creation and destruction of money. We are observing the work of these tools today, and to be honest, it does not please.
If the economy grows too fast and prices suffer from inflation, central banks can raise the interest rate, making it more expensive to get a loan. It can also withdraw money from the economy, reducing the available amount of money that banks can borrow from the central bank.
For the central bank, this is not difficult, because today the economy is practically digitized, so lending money is nothing more than changing several values in the database. It is also a double-edged sword.
If you manage to eliminate the money circulating in the economy in either of these two ways, then you have to spend less, and therefore the prices of goods and services tend to decrease.
The problem with such manipulation of the free market is that we get other consequences, for example, that now businesses and individuals cannot borrow money at a low rate.
If this happens, especially with companies, we see that there is less investment, and therefore fewer employees are hired.
In case of insufficient economic growth, central banks have the opportunity to lower interest rates to flood the market with cheap loans, or directly create more money.
With a lower interest rate, it is easy to take out a loan, and businesses and consumers can start buying and investing.
But this is not the only way they can manipulate the economy. It often happens that they buy bonds in the market to create more demand, which lowers the interest rate because issuers no longer need to offer very high interest rates to raise capital.
But all these practices carried out by the central bank, in the long run, have consequences so great that they can be difficult to control. After all, although it seems like a good idea on paper, there are points of no return when the economy no longer responds to these incentives in the same way. An example is the Fed’s latest increase of 75 basis points.
In addition, there are other side effects that are not always taken into account. For example, when interest rates are very low, investors prefer to look elsewhere for higher returns on their investments.
It also affects the currency, which becomes stronger or weaker depending on the measures taken.
A strong currency makes it difficult to sell goods and services abroad, creating unemployment. A weak currency makes import prices competitive, but it is more difficult for the population of this country to buy these goods.
A serious problem in all this is the “lag” between the measures taken and the consequences for the economy, which makes people think that there is no connection between cause and effect. In the end, this led to the fact that some governments began to use these methods for corrupt purposes.
Do we need central banks?
Relations between countries and their central banks are very complicated, and we have only scratched the surface of the whole issue.
One of the arguments against central banks, presented to us, for example, by the Austrian economy, is that there are so many variables in the economy that it is impossible to manipulate it in a satisfactory way.
This argument can be used to speak well about Bitcoin and its ability to replace these banks. They use complex schemes to achieve what can theoretically be achieved by a free market.
Other arguments against central banks go back to their origins, as they have caused a lot of controversy since their inception.
- On the one hand, there is a monopoly power enjoyed by these institutions. This worries a lot of people.
- Another thing is that an “independent” institution has the right to manipulate the entire economy. For many, this only creates more problems for people than it solves.
In the end, all these manipulations can lead to much bigger problems. How much? Well, so much so that it is believed that the Great Depression after the crisis of the 1930s was a product of the Federal Reserve System itself.
In an era when people can buy and sell digitally without the need for a central authority, the question arises whether we really need these banks. It’s not just the problems they bring, but also the fact that they no longer perform such an important function.
Banks, and especially central banks, are largely to blame for the subprime crisis in the US, allowing money to be lent to people who cannot repay it, and eventually it all collapsed like a house of cards.
If we have a technology like Bitcoin that does not require intermediaries and is safe enough for everyone, then trusting organizations like the Federal Reserve System, which has a rather negative history, is a very big risk.
Conclusion
Central banks are the dominant structures in the countries that use them to manage the economy. They have a monopoly power and, it seems, are not going to part with it without a fight.
Although Bitcoin and other cryptocurrencies have aroused great interest, their spread is still small enough to talk about a complete replacement of central banks.
For some, it is necessary for governments to make Bitcoin a legal tender, but it is believed that a revolution on the part of people can also happen when they, having left the official market, begin to accept cryptocurrencies as their exchange unit.
This happens in countries like Venezuela, where the purchase and sale of goods and services takes place informally. There is a significant growth of cryptocurrencies that serve as an exchange commodity.
Finally, there is the possibility that central banks themselves will issue their own digital currencies – CBDC. But does it make sense? After all, the money they create is created digitally, and in some countries the economy is already fully digitized.
The difference between cryptocurrencies and digital fiat money is small, if we do not take into account decentralization, anonymity, cross-border payments and confidentiality. But this is not something that central banks rightfully plan to implement.