Picture by Bank of England

When I was a child, a long time ago, there was one book in our house we always deferred to for knowledge. It was primarily a dictionary, published in London during the nineteen-twenties. It included sections of weights and measures, told us about perches and jeroboams as well as giving us the correct forms of address should we wish to write to a Cardinal or an Ambassador. It also included rates of currency exchange. A Pound (Sterling) was worth four Dollars (US). Changes in this rate were not foreseen to be a big problem and for that matter neither was inflation.

Picture by Bank of England
Picture by Bank of England

Managing Inflation

Inflation is a term much maligned in today’s media, but correctly managed it is not necessarily a bad thing.  The European Central bank has as one of its objectives the management of inflation within the Eurozone area and this management is generally accepted as maintaining the inflation rate as close to 2% as is possible.  If inflation begins to rise above this magic figure then the ECB imposes credit restrictions via interest rate management and reels in economic activity back. If, on the other hand, inflation threatens to drop into negative territory and the ECB is afraid that this may stifle economic growth then they practice quantitative easing to increase the supply of money. Quantitative easing refers to the reduction of interest rates and controls and the printing of money, and that is one of the powers of a country: Countries have the capacity to print their own money. Bitcoin is fundamentally different to fiat money in that important respect.

When money doesn’t work

Looking at how various nations have managed, and mismanaged, the supply of money we can look at Germany between the two world wars. In the Weimar republic, the repayments levied on Germany after the First World War led to a decision to print more and more money and the multi million mark notes can still be bought on eBay today. The purchase of a loaf of bread required a wheelbarrow full of money and savings were destroyed overnight. A more recent example of this hyperinflation can be seen from a cursory examination of the currency of Zimbabwe. Inflation can have benefits, a 2% rate of inflation reduces outstanding mortgages by 2% per annum for instance, and fewer people place money on deposit and this leads to more spending money in the economy and this leads to further economic growth. How does a worldwide transition to cryptocurrency affect the management of inflation? Simply put: It renders inflation management obsolete.

Cryptocurrency as a solution?

When Bitcoin is established as the world’s primary currency the eras of hyperinflation and for that matter the age of bank robberies will exist only as fields of study. Transactions will be managed safely and securely, and taxation will move from being income based to being a much fairer expenditure based system. The people who generate wealth will be rewarded by being allowed to keep more of it. People will be encouraged to work harder and smarter and indeed charitable donations can be made instantly and receipted. If financial crime takes place then deep mining rigs can track the transaction path to recoup the loss. Simply put, we can track the money directly back to the criminal. Governments will be forced to abandon inflation as a tool for economic management and to derive their required taxation from the stimulation of consumption. People will have more spending money and greater freedom of choice. We should look forward to the day when politics is finally taken out of our pockets, and true fiscal management is forced upon our nations leaders.