The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?

Abstract

The rise of crypto currencies, notably bitcoin, has fueled new and old debates about money. We discuss attempts to complement or replace fiat money by ‘stablecoins’. In a first step, we review today‘s endogenous and debt-backed money. Second, we analyse attempts to use stablecoins in order to overcome the inherent speculative and deflationary design of fixed supply coins like bitcoin. Building on theories stating that economic and liquidity expansion go hand in hand we find that stablecoins have flexible supply designs. However, we also find that the algorithmically planned allocation of new coins, that is characteristic of stablecoins, is inferior to contemporary ways of money creation for two reasons: (i) it is not market-based and (ii) it is not backed by a ‘We Owe You’. Moreover, it builds on outdated monetarist theories in an attempt to control prices. We predict that crypto-monetarism in its present formulations will fail because quantity adjustments are not a sufficient condition for stable prices. Finally, regarding price stability, we suggest the importance of overcoming the illusionary dichotomy between the real and the financial circuit in (crypto) monetary policy. We show that, in the real world, firms set prices according to cost-based pricing rules, so that changes in unit labour costs correlate well with inflation. As a consequence, and in line with a path-dependent and institutional perspective on the labour market, coordinated wage bargaining appears vital to achieve price stability. Against this backdrop, we propose that wages have to grow in line with productivity plus the inflation target. Such an approach, if properly complemented with fiscal, interest rate and fx policies, would not only benefit price stability, but also financial resilience and economic development at large.

Keywords: Crypto Currencies, Endogenous Money, Monetarism, Blockchain, Post-Fiat World, Unit Labour Costs, Coordinated Bargaining

JEL Classification: E32, E51, E64, G21