A 21st Century Roadmap for Competition in Currency

In 1976, Professor F.A. Hayek – the 20th Century’s preeminent classical liberal – published a groundbreaking proposal for the denationalization of money. Under the auspices of the Institute of Economic Affairs, Hayek’s monograph called for financial institutions to be afforded the freedom to issue their own competing private currencies. Forty years on, the policy initiative remains off the political agenda. This essay seeks to restate and revitalize the case for competition in currency; as well as outline a 21st Century roadmap for the realization of Hayek’s vision. Drawing upon our understanding of the process of institutional change, it argues that advances in distributed ledger technology (the Blockchain) present a newfound means of discovering a spontaneous monetary institution; a ‘Common Money’. One that would unleash economic freedom and prosperity across the developed world. The following essay was long-listed for the 2017 Richard Koch Breakthrough Prize; as sponsored by the Institute of Economic Affairs, London, UK. A complete PDF version may be downloaded here.

I. Freedom & The Price of Money

“…The task of preventing inflation has always seemed to me to be of the greatest importance, not only because of the harm and suffering major inflations cause, but also because I have long been convinced that even mild inflations ultimately produce the recurring depressions and unemployment which have been a justified grievance against the free enterprise system and must be prevented if a free society is to survive.” – F.A. Hayek[1]

The trials and tribulations of the business cycle – from the inflationary booms to the deflationary busts – ultimately have their beginning and end in the price of money. The rate of interest “acts the same way that gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset”.[2] Interest rates signify the price of time; or in other words, the clearing of present and future time preferences.[3] By drawing the intertemporal supply and demand for money into equilibrium, interest rates serve to allocate capital efficiently through time.[4] A mismatch between the market rate and the natural rate of interest is what drives fluctuations in the business cycle. Artificially high or low rates draw factors of production into otherwise unprofitable activities by distorting the expectations of investors and entrepreneurs.[5] The misallocation of capital eventually leads to depression and unemployment, as the economy seeks to cleanse itself of the excesses and waste of an artificial boom.[6] Such bouts of economic turmoil ultimately spur distrust in our capitalist system.[7] Even today, recurrent financial crises have spawned a populist backlash against a free economic order.[8] The price of money, therefore, is paramount; not only to price stability, but to the safeguarding of individual freedom and the wealth of nations.

II. Monetary Policy: The Cure or the Disease?  

I do not think it is an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments.” – F.A. Hayek[9]

Monetary policy is hailed as the solution to our economic problems – whether it be ‘secular stagnation’, deflation, or other sacred cows of macroeconomic orthodoxy. In fact, governmental control over the money supply is the disease of which it purports to be the cure.[10] One important lesson of Hayek’s landmark work on central planning – as well as the devastating experiences of Communism – is that prices must be discovered through the free exchange of buyers and sellers.[11] No governmental organization has the ability to collate and utilize the tacit knowledge that is dispersed among a multitude of economic actors. Nor is such a body capable of directing the most efficient allocation of resources. Although it is now widely accepted that the prices of everyday goods and services are best discovered through the market process, the most important price in the economy – the price of money – is still regulated by a centralized bureaucracy. Under the proviso of price stability and full employment, modern day central bankers tinker with the money supply and set interest rates. Such intervention is no less egregious than the prior efforts of central planners, who sought to fix prices and steer the command economies of yesteryear. Conceptually, interest rates may never be an instrument of policy, as “no authority can beforehand ascertain, and only the market can discover, the optimal quantity of money”.[12]

Despite its flaws, the pervasive influence of monetary policy has reached unprecedented levels.[13] Shrouded in technocratic jargon – like “quantitative easing” – central bankers have manipulated the price of money to levels not seen in the entire history of interest rates.[14] This effort has destroyed the equilibrating function of interest rates. Although indebted entities have benefited enormously from such artificially low borrowing costs, savers, retirees and pension funds are forced to bear the cost. The greatest beneficiary of this large-scale redistribution of wealth has of course been the government. Monetary policy has facilitated the largesse and profligacy of government by allowing it to borrow beyond its means; indefinitely.[15] As noted by Hayek, “the modern expansion of government was largely assisted by the possibility of covering deficits by issuing money – usually on the pretense that it was thereby creating employment”.[16] However, “the argument that government deficits are necessary to reduce unemployment amounts to the contention that a government control of money is needed to cure what it is itself causing”![17] Every inflationary stimulus, whether it is the direct result of an increase in the quantity of money, or an indirect expansion of the government deficit, necessarily draws capital into uneconomic activities.[18] Recurrent periods of depression and unemployment are, therefore, the consequence of government’s monopoly over the issue of currency.[19] Such an exclusive right has not only given us a worse form of money, but also become the chief instrument for expanding the welfare state and undermining economic freedom.[20]

III: Competition in Currency  

“The reform proposed is not a minor technicality of finance but a crucial issue which may decide the fate of free civilization” – F.A. Hayek[21]

According to Hayek, “the rate of interest, like any other price, ought to record the aggregate effect of thousands of circumstances affecting the demand for and supply of loans which cannot possibly be known to any one agency.”[22] Moreover, “only competition in a free market can take account of all the circumstances which ought to be taken account of in the determination of the rate of interest.”[23] The true path to price stability therefore resides in the freedom to issue currency. Only through the interaction of competing currencies can we hope to discover the natural or equilibrium rate of interest and thereby ameliorate the severity of the business cycle. Financial institutions should be afforded the right to issue their own non-interest bearing notes or negotiable instruments. These notes would not constitute a claim on the issuer in terms of some other unit of value. Rather, the bank itself would determine the value of the unit in which it was to hold its debt and keep its books.[24] The only legal prerequisite would be an obligation for each issuer to redeem its notes for other competing currencies; as opposed to some predefined commodity standard.[25] As Hayek notes, “this would create the conditions in which the responsibility for the control of the quantity of the currency is placed on the agencies whose self-interest would make them control it in such a manner as to make it most acceptable to the users”.[26] For the skeptical reader who doubts the workability of such non-redeemable private notes, they should be reminded that this is precisely what all central banks have been doing for nearly half a century.[27] The financial system would thus come to resemble a network of competing and privately owned central banks.

Currency issuance would no doubt prove a highly lucrative business, given that each issuer’s total cost of capital would effectively amount to zero.[28] Issuers would nonetheless be restrained from exploiting such a privileged position by the need to retain the trust of their note holders.[29] The decision to hold a particular currency would rest on an issuer’s ability to ensure the purchasing power of its notes remained relatively constant. In practice, each issuer would stabilize the value of its currency by regulating the total quantity in circulation, either through the creation of new loans (assets) or through open market operations.[30] However, it is unclear which set of prices each noteholder would wish to remain constant. As Hayek notes, “different people or enterprises will evidently be interested in the prices of different commodities”.[31] Just like an investor’s discount rate, the ideal measure of value is an inherently subjective matter. Accordingly, issuers would come to maintain the purchasing power of their notes in terms of a particular basket of goods or commodities, which is uniquely valued by a certain segment of customers.[32] Such a competitive process would lead to the discovery of multiple new monetary standards. The free interaction between borrowers, lenders and issuers would also facilitate the discovery of the natural rate of interest and thereby balance “the demand for money for spending purposes with the supply required for keeping the price level constant”.[33] The system would not only stabilize prices organically, but also bring about the most efficient allocation of capital through time.[34] Choice in currency would further ensure that a collapse of trust in any one issuing institution would not have the same systemic and disastrous consequences that we see today.[35]

IV. The Institution of Money

the superstition that it is necessary for government to declare what is to be money… …probably originated in the naïve belief that such a tool as money must have been invented” – F.A. Hayek.[36]

The nationalization of currency has been perpetuated by certain misconceptions about the nature and role of money itself. For one, the idea that only a sovereign can confer value on money is rooted in the false concept of ‘legal tender’ – defined as “the means of discharging a debt contracted in terms of the money issued by government or due under an order of a court”.[37] As noted by Lord Farrer: “the ordinary law of contract [already] does all that is necessary without any law giving special function to particular forms of currency”.[38] In practice, ‘legal tender’ simply enables “a debtor to pay and requires a creditor to receive something different to that which their contract contemplated. In fact, it is a forced and unnatural construction put upon the dealings of men by arbitrary power”.[39] The concept also betrays the fact that money, by definition, can have no preassigned value. As noted by Hayek: “…There is no such thing as a perfectly stable value of money – or anything else. Value is a relationship, a rate of equivalence, or, as W.S. Jevons said, ‘an indirect mode of expressing a ratio’, which can be stated only by naming the quantity of one object that is valued equally with the equivalent quantity of another object.”[40]

No doubt, such confusion stems from a similarly false belief: that currency is itself money. In fact, currency is simply the means of representing transferrable debts. As noted by Henry Dunning McLeod: “currency and transferrable debt are convertible terms; whatever represents transferrable debt of any sort is currency; and whatever material the currency may consist of, it represents transferrable debt, and nothing else”.[41] Money – on the other hand – is “the underlying system of credit accounts and their clearing”.[42] Gold coins, paper notes, and all other forms of currency are just the tokens used to record and match those accounts. As noted by financial historian Niall Ferguson: “money is really about credit; not metal”.[43] It is a social institution – akin to language, law or morals. It embodies our shared understanding of the world – a common belief system.[44] Ultimately, money is a network of confidence and trust. In the words of Walter Bagehot, it “is a power which may grow, but cannot be constructed…. [it] is an opinion generated by circumstances and varying with those circumstances”.[45] Like all other institutions, money is a type of social structure that humans instinctively impose upon their dealings with one another.[46] In order to realize competition in currency we, therefore, must start by understanding the process of institutional change.

V. The Process of Institutional Change

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”. – F.A. Hayek.[47]

According to Douglas North: “it is adaptive rather than allocative efficiency” which drives the development of institutions.[48] Adaptive efficiency entails “an institutional structure that in the face of ubiquitous uncertainties of a non-ergodic world will flexibly try alternatives to deal with novel problems that continue to emerge over time”. Such institutions are underpinned by a rich belief system that embodies the stock of human knowledge derived from conscious experience. Culture, in turn, is the mechanism for transmitting this accumulated knowledge through time.[49] How the mind works to interpret its environment, form beliefs and select cultural norms is at the heart of adaptive institutions.

Experimental and behavioral economics teach us that humans instinctively rely on experience and folk knowledge in their decision-making.[50] People follow certain rules and modes of behavior without ever being able to articulate why. Such rules, traditions and cultural norms have formed “out of the ancient history of human social interactions”.[51] As noted by Vernon Smith, “this leads to an alternative, ecological concept of rationality”. One that is based on “trial-and-error cultural and biological evolutionary processes”.[52] In other words, belief systems and cultural norms emerge spontaneously through a process of “group selection”. They are not deliberately designed but are discovered through human interaction.[53] Institutional change is therefore akin to the dynamic process of evolution through natural selection. According to Vernon Smith, “institutions undergo evolutionary change adapting beyond the circumstances that gave them birth. What emerges is a form of “social mind” that solves complex organizational problems without conscious cognition”. A true form of artificial intelligence! Money, therefore, is a manifestation of our collective knowledge, which has advanced only through commensurate progress in the human mind. This begets the question: how can we hope to establish competition in currency when the underlying institution of money itself – the true object of our reformist zeal – is the result of human action, not human design? The answer lies in the development of networks, which throughout history have mirrored the evolution of institutions and economic progress.[54]

VI. In Search of a Spontaneous Money

“We cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need” – F.A. Hayek.[55]

Networks act as the driving force of institutional progress by facilitating and encouraging human interaction. Our propensity to “truck, barter and exchange” – whether it be in goods, information, or beliefs – is what spurs the evolutionary process of natural selection.[56] Modern advances in information and communications technology, culminating in the recent advent of Blockchains, have provided a new mechanism for building networks and discovering emergent orders.[57] At their core, Blockchains are a tool of accounting, which facilitate the peer-to-peer exchange of value.[58] They are secure, transparent, distributed ledgers, which rely on cryptographic incentives to achieve consensus.[59] In effect, they are giant public databases that contain the entire history of transactions within a community. Blockchains, therefore, are a means of building seamless webs of deserved trust; without relying on a centralized intermediary. In the words of Vitalik Buterin, “They’re Lego Mindstorms for building economic and social institutions”.[60] But what does this all mean for the institution of money?

The legitimate task that government initially assumed over money was the role of trusted intermediary or custodian of a communal ledger. Even today, global payment systems are still heavily centralized, with most transfers being cleared through central banks.[61] In contrast, Blockchains verify transactions through cryptography, thereby eradicating the need for a centralized intermediary (the Blockchain itself is the custodian). By imbuing trust into a payments network, Blockchains organically match and clear the accounts of self-interested debtors and creditors. More importantly though, such distributed ledgers have the capacity to reconcile credit held in alternate units of account.[62] Blockchains, therefore, are the technological means of settling alternative measures of value and facilitating competition in currency. In other words, they are the foundation of a spontaneous institutional structure – a ‘Common Money’ – which evolves alongside “the perpetual roll of the tide of circumstances as society advances”.[63] ‘Common Money’ would not only eradicate the depressions and unemployment associated with severe fluctuations in the business cycle, it would free us from the ‘tyranny of centralized trust’[64] and unleash economic freedom across the developed world. Ultimately, it would help us realize the unlocked potential value of human exchange and advance our shared belief in the virtue of liberty: the true fountain of prosperity.[65] Although it is impossible to foresee the specific benefits of a newfound freedom to issue currency, we should remember that the great merit of freedom is that it encourages new inventions, which by their very nature are unpredictable.[66]

In conclusion, the proposed roadmap for competition in currency seeks to embrace the spirit of prior landmark reforms by looking to discard bad policy ideas – namely central banks and monetary policy – rather than crafting new ones.[67] It is not an attempt to design a new kind of money, but to envision what a truly free monetary system might look like in the context of recent technological advances. It emphasizes the need to remove existing barriers to human interaction and exchange, rather than constructing new tools of benevolent intervention. As Hayek famously stated: “The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”[68]

[1] Hayek, F.A (1990), Denationalisation of Money – The Argument Refined: An Analysis of the Theory and Practice of Concurrent Currencies, Third Edition, pp. 13 London: The Institute of Economic Affairs.

[2] Buffett, W. and Loomis, C. (2001), “Warren Buffett on The Stock Market”, Fortune Magazine, Accessed on Jan 1, 2017:  http://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm  

[3] Goetzmann, W. (2016), Money Changes Everything: How Finance Made Civilisation Possible. pp. 6. New Jersey: Princeton University Press

[4] As noted by financial writer and journalist, Jim Grant: “Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars.” Grant J. (2016), “Hostage to a Bull Market”, The Wall Street Journal, Accessed on Jan 1, 2017: http://www.wsj.com/articles/hostage-to-a-bull-market-1473456611

[5] In the case of investors, it specifically distorts the discount rate, which can be defined as “the rate of interest that would make an investor indifferent between present and future dollars. Investors with a strong preference for the certainty of the present to the uncertainty of the future would use a high rate for discounting their investments”. See Klarman, S. (1991), Margin of Safety: Risk-Averse Value Investing Strategies for te Thoughtful Investor. pp. 125-126. New York: Harper Collins Publishers.

[6] See Hayek, supra note 1. pp. 82: “what is in the long run even more damaging to the functioning of the economy and eventually tends to make a free market system unworkable is the effect of this distorted price structure in misdirecting the use of resources and drawing labor and other factors of production (especially the investment of capital) into uses which remain profitable only so long as inflation accelerates. It is this effect which produces the major waves of unemployment.”

[7] See Hayek, ibid. pp 101: “The long depression of the 1930s, which led to the revival of Marxism (which would probably have been dead today without it), was wholly due to the mismanagement of money by government – before as well as after the crisis of 1929”.

[8] Ferguson, N. (2016), “Five Ingredients for a Populist Backlash”. Presentation at Zeitgeist 2016.Youtube, Accessed on Jan 1, 2017: https://www.youtube.com/watch?v=pmdxYTyrI-E

[9] See Hayek, supra note 1. Pp.34.  

[10] See Hayek, ibid. pp. 102: “Monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamor for cheap money, to cause those misdirection’s of production that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions. The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process. A single monopolistic government agency can neither possess the information which should govern the supply of money nor would it, if it knew what it ought to do in the general interest, usually be in a position to act in that manner.”

[11] Hayek F.A. (2007), The Road to Serfdom: Text and Documents – the Definitive Edition, The Collected Works of F.A. Hayek Volume II, Edited by Bruce Caldwell, London: The University of Chicago Press.

[12] See Hayek, supra note 1. Pp. 81.  

[13] Reinhart, C. and Rogoff, M. (2012), “Public Debt Overhangs: Advanced Economy Episodes Since 1800”, Journal of Economic Perspectives, Vol. 26 No. 3. Pp. 69-86. Accessed on Jan 1, 2017: http://online.wsj.com/public/resources/documents/JEP0413.pdf  

[14] Homer S. and Sylla R. (2005), A History of Interest Rates, Fourth Edition, Wiley Finance

[15] Hayek, ibid: “the power over money has also relieved government of the necessity to keep their expenditure within their revenue…. There can be little doubt that the spectacular increase in government expenditure over the last 30 years, with governments in some Western countries claiming up to half or more of the national income for collective purposes, was made possible by governmental control of the issue of money.”

[16] Hayek, supra note 1. Pp. 33.

[17] Hayek, ibid. pp. 119.  

[18] Hayek, ibid. pp. 97.  

[19] Hayek, ibid, pp. 105.

[20] Hayek, ibid. pp. 117: “the two goals of public finance and of the regulation of a satisfactory currency are entirely different from, and largely in conflict, with each other. To place both tasks in the hands of the same agency has in consequence always led to confusion and in recent years has had disastrous consequences. It has not only made money the chief cause of economic fluctuations but has also greatly facilitated an uncontrollable growth of public expenditure…. Even during relatively stable periods the regular necessity for central banks accommodate the financial needs of government by keeping interest rates low has been a constant embarrassment”.

[21] Hayek, ibid, pp. 131.  

[22] Hayek, ibid, pp. 107.  

[23] Hayek, ibid, pp. 107.

[24] From a historical perspective, the proposal most closely resembles that of “transferrable ledger balances held by medieval merchants and the notes issued by early bankers”. As noted by David Fox and Wolfgang Ernst, this was a system of “privately created currencies operating outside the sovereign’s monopoly on coinage. Their acceptance as a means of payment and the value at which they circulated depended on the trust of the commercial actors who used them. They worked only as long as networks of confidence were sustained. Legal measures, such as statutory incorporation by a city or the conferral of legal tender status as payments, were only indirect means of supporting the social fact of confidence”. Fox D. and Ernst, W. (2016), Money in the Western Legal Tradition: Middle Ages to Brenton Woods, pp. 14. Oxford: Oxford University Press.

[25] Hayek argues that it would be neither necessary, nor desirable, for an issuer to tie itself to a particular standard, as the objective for each issuer would be to maintain a constant rather than a fixed value of its currency. Although it is historically true that currencies backed by gold (and other metals) have managed to retain their value over a substantial period of time, such convertibility was only necessary to safeguard against the tendency of a monopoly issuer to debase its own currency. Convertibility is entirely unnecessary under a system of “competing suppliers who cannot maintain themselves in the business unless they provide money at least as advantageous to the user as anybody else”. On “the belief that only gold can provide a stable currency, and that all paper money is bound to depreciate sooner or later”, Hayek says “all our insight into the processes determining the value of money tells us that this prejudice, though understandable, is unfounded”. He argues that: “the value of a currency redeemable in gold (or in another currency) is not derived from the value of that gold, but merely kept at the same value through the automatic regulation of its quantity”. Concluding, “the very same fact which at present makes gold more trusted than government-controlled paper money, namely that its total quantity cannot be manipulated at will in the service of political aims, would in the long run make it appear inferior to token money used by competing institutions whose business rested on successfully so regulating the quantity of their issues as to keep the value of the units approximately constant”. The situation is reminiscent of Charles Munger’s famous quip: “Civilized people don’t buy gold; they invest in productive businesses”. See Hayek, supra note 1. Pp 32 and 131.

[26] Hayek, ibid. pp. 92.

[27] Hayek, ibid. pp. 50.  

[28] Hayek, ibid. pp. 94.  

[29] Leading proponents of the ‘Modern Free Banking School’ have argued that such an incentive is insufficient to deter an issuer from seeking a one-shot profit through debasement of its own currency. Instead, they suggest a contractual obligation for issuers to redeem their notes for a predefined standard (such as gold), arguing that this would make privately issued money “trustworthy by giving its holders a buy-back option, an enforceable claim against its depreciation”. The argument is erroneous for two reasons. Firstly, it ignores the incredible intangible value of an established reputation for issuing currency. The potential gains of a one-off over issuance would never exceed the long-term economic benefits of zero borrowing costs; a truly significant competitive advantage. Secondly, the self-regulating mechanism of a competitive market would ensure that an issuer could never reap the full benefit of a one-off over issuance; as note holders would immediately be alerted to the sudden increase in circulation by its depreciating rate of interest (see supra note 30). Ultimately, the willingness to hold a private currency would not rest on the ability to redeem it for a basket of commodities, but instead be a matter of trust in the issuer’s reputation for maintaining the value of its currency. For the School’s complete argument against Hayek’s denationalization of money see: White, L. (1999), “Why Didn’t Hayek Favor Laissez Faire in Banking?” History of Political Economy, 31:4, Duke University Press, Accessed on Jan 1, 2017 at: http://www.cameroneconomics.com/white-hayek-hope.pdf

[30] Insofar as such lending or investment activities are not based on a corresponding increase of customer savings, Hayek notes that “such attempts would inevitably rebound and hurt the bank that over-issued. While people will no doubt be very eager to borrow a currency offered at a lower rate of interest, they will not want to hold a larger proportion of their liquid assets in a currency of the increased issue.” Similarly, in the event of a downturn, competition would automatically prompt an issuing institution to increase its lending and the amount of currency in circulation as the value of its notes began to rise. According to Hayek, an issuing bank “would not wish to incur an obligation to maintain by redemption a value of its currency higher than that at which it had issued it. To maintain profitable investments, the bank would presumably be driven to buy interest-bearing securities and thereby put cash into the hands of people looking for other investments as well as bring down the long-term rates of interest, with a singular effect”. Ultimately, “to keep a large and growing amount of its currency in circulation, it will not be the demand for borrowing it but the willingness of the public to hold it that will be decisive”. See Hayek, supra note 1. pp. 63.   

[31] Hayek, ibid. pp. 74.

[32] Hayek, ibid. pp. 48: “Experience of the response of the public to competing offers would gradually show which combination of commodities constituted the most desired standard at any time and place… …they could represent not merely different quantities of the same metal, but also different abstract units fluctuating in their value relatively to one another”.

[33] Hayek, ibid. pp. 107.

[34] In other words, the system would achieve intertemporal equilibrium through the perfect matching of present and future time preferences.

[35] Hayek, supra note 1. Pp. 129. “though the holders of cash, either in the form of notes or of demand deposits in a particular currency, might lose their whole value, this would be a relatively minor disturbance compared with the general shrinkage or wiping out of all claims to third persons expressed in that currency. The whole structure of long term-contracts would remain unaffected, and people would preserve their investments in bonds, mortgages and similar forms of claims even though they might lose all their cash if they were unfortunate to use the currency of a bank that failed”.

[36] Hayek, ibid. pp. 37.

[37] Hayek, ibid. pp. 37.

[38] Lord Farrer, Studies in Currency, London, 1898, cited in Hayek supra note 1. Pp. 38-39.  

[39] Lord Farrer, supra note 38. Also see Hayek supra note 1. Pp. 128: “it was solely the power of government to force upon people what they had not meant in their contracts which produced this absurdity [of legal tender]. With the abolition of the government monopoly of issuing money the courts will soon recognize… that justice requires debts to be paid in terms of the units of value which the parties to the contracts intended and not in what government says is a substitute for them.”

[40] Hayek, ibid. pp. 69.  

[41] Macleod, H. (1882), The Principles of Political Economy. Pp. 188. London: Longmans, Green Read, and Dyer.

[42] Martin, F. (2014), Money: The Unauthorised Biography. Pp. 12-13. New York: Alfred a. Knopf

[43] Ferguson, N. (2009), The Ascent of Money: A Financial History of the World, London: Penguin Books.  

[44] See “Douglass C. North – Prize Lecture: Economic Performance through Time”. Nobelprize.org. Nobel Media AB 2014. Accessed on 1 Jan 2017: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1993/north-lecture.html: “the relationship between mental models and institutions is an intimate one. Mental models are the internal representations that individual cognitive systems create to interpret the environment; institutions are the external (to the mind) mechanisms individuals create to structure and order their environment”. Moreover, “Shared mental models reflecting a common belief system will translate into a set of institutions broadly conceived to be legitimate”.

[45] Martin, supra note 42. Pp. 204.

[46] Institutions may be defined more broadly as the “formal rules, informal constraints (norms of behaviour, conventions, and self-imposed codes of conduct) and the enforcement characteristics of both. In short, they consist of the structure that humans impose on their dealings with each other. Institutions, together with the technology employed, affect economic performance by determining transaction costs and production costs”. See North, D. (1992). Transaction Costs, Institutions and Economic Performance, California: International Centre for Economic Growth, Accessed on Jan 1, 2017: http://pdf.usaid.gov/pdf_docs/PNABM255.pdf

[47] Hayek, F.A. (1988), The Fatal Conceit: The Errors of Socialism, edited by W.W. Bartley III, The Collected Works of F.A. Hayek, Volume I, London: the University of Chicago Press.  

[48] North, supra note 44.

[49] North, D. (2005), Understanding the Process of Economic Change, New Jersey: Princeton University Press.

[50] See Smith, V. (2009), Rationality in Economic: Constructivist and Ecological Forms. 1st Edition. Cambridge University Press and Kahneman, D. (2013), Thinking, Fast and Slow. 1st Edition. Farrar, Straus and Giroux.  

[51] “Vernon L. Smith – Prize Lecture: Constructivist and Ecological Rationality in Economics”. Nobelprize.org. Nobel Media AB 2014. Web. 1 Jan 2017. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/smith-lecture.html

[52] Smith, supra note 51.

[53] Smith, ibid.

[54] Ferguson, N. (2014), “Networks and Hierarchies”, The American Interest, Accessed on Jan 1, 2017: http://www.the-american-interest.com/2014/06/09/networks-and-hierarchies/   

[55] Hayek supra note 1. Pp. 131.  

[56] Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations. Fifth Edition. Bantam Classics.

[57] Davidson, Sinclair and De Filippi, Primavera and Potts, Jason, Economics of Blockchain (March 8, 2016). Available at SSRN: https://ssrn.com/abstract=2744751 or http://dx.doi.org/10.2139/ssrn.2744751

[58] the Blockchain is a technical solution to the double spending problem, which in the world of computer science is known as the “Byzantine General’s Problem”, see Nakamoto, S. (2009), “Bitcoin: A Peer-to-Peer Electronic Cash System”. Accessed on Jan 1, 2017: https://bitcoin.org/bitcoin.pdf  

[59] Numerous cryptographic consensus mechanisms now exist, on top of the original “proof of work” mechanism devised by Nakamoto.

[60] Buterin, V. (2015), “Visions, Part 1: The Value of Blockchain Technology”, Ethereum Blog, Accessed on Jan1 2017: https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/

[61] The Economist (2015), “the Great chain of Being Sure about things”, Briefing Section, Accessed on Jan 1, 2017: http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable  

[62] Note that the peer-to-peer capabilities of Blockchains do not eradicate the need for banks or financial institutions in their entirety. Such financial intermediaries must still play the necessary role of matching savers with investors.

[63] Ferguson, N. (2012), The Landscape of the Law, The Reith Lectures, Recorded at Gresham College, London and first broadcast on BBC Radio 4 and the BBC World Service on Tuesday, 3 July 2012. Accessed on Jan 1, 2017: http://www.bbc.co.uk/programmes/articles/2wGL4ypn7C8N54r9flsvX3x/niall-ferguson-the-landscape-of-the-law

[64] Vigna, P. and Casey, M. (2015), The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order, International Edition, New York: St. Martin’s Press.

[65] McCloskey, D. (2016), “How the West (and the Rest) Got Rich”, The Wall Street Journal, Accessed on Jan 1, 2017: http://www.wsj.com/articles/why-the-west-and-the-rest-got-rich-1463754427

[66] Hayek, supra note 1. Pp. 132, footnote 3.

[67] As noted by Nassim Nicholas Taleb: “the greatest – and most robust – contribution to knowledge consists in removing what we think is wrong” i.e. subtractive epistemology. See Taleb, N. (2012), Antifragile: Things that Gain from Disorder. London: Penguin Books.

[68] “Friedrich August von Hayek – Prize Lecture: The Pretence of Knowledge”. Nobelprize.org. Nobel Media AB 2014. Web. 1 Jan 2017. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1974/hayek-lecture.html


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