In a speech that made a case for cryptocurrencies in the mainstream economy, Federal Reserve Bank of St. Louis President James Bullard said that their introduction in the United States has set off a drift toward a non-uniform currency system. If the drift becomes a practical reality, then consumers will be able to purchase goods and services using currencies other than the U.S. dollar. (See also: Federal Reserve May Introduce a Cryptocurrency In The Future.)
“Both forms of currency (private and government-regulated) can coexist,” he said. Bullard pointed to instances from history when multiple currencies held sway in the country. For example, 90% of the U.S. money supply during the 1830s consisted of privately issued banknotes from large concerns, such as J.P. Morgan. But these notes traded at different rates in different places and at different times.
Competing Currencies Then and Now
That situation is not dissimilar to the current markets for cryptocurrencies, which have a global footprint from South Korea to the United States back around to India. Back in the 19th century, public fatigue with multiple currencies and the American Civil War propelled the currency system toward a uniform U.S. dollar.
To be sure, a non-uniform currency system already exists today on a global scale with multiple national currencies. These currencies are responsible for trillions of dollars in trading volume in FX markets. By comparison, cryptocurrencies, which also trade on exchanges, have lower volumes. (See also: Sweden on Fast Track to Become First Cashless Society.)
According to Bullard, the cryptocurrency ecosystem is “unwittingly pushing in the wrong direction” by trying to solve a social problem instead of an economic one by customizing cryptocurrencies. He said private money facilitates exchanges in an economy that would not otherwise be possible. The result would be an increase in the number of transactions “which is a good thing” for the U.S. economy.
Monetary Policy Is Still Important
Most cryptocurrencies have bristled at the suggestion of regulation or a defined monetary policy. But Bullard said the “vagaries” of monetary policy would still be applicable for cryptocurrencies. “Even under the gold standard, governments set the exchange rate between notes and gold,” he said.
While the money supply determines monetary policy in an economy, issuance of coins could determine the same metric for cryptocurrencies. Many cryptocurrencies have planned for limited or defined supply. But a slew of forks, due to internal bickering or hacks, have put paid to those plans. Bullard said credibility of promises on limits of future issuance would play an important role in determining the worth and place for cryptocurrencies in the future economy.
The bullish tone on cryptocurrencies apart, Bullard still sees a position of pre-eminence for the dollar. “I’d say the dollar is in great shape and will stay in great shape,” he said, adding that it was backed by “good” monetary policy. But he left the door open on a non-uniform currency system within countries. “Historically, it’s [a uniform currency system] been true,” he said. “Will it be in the future? I don’t know. Maybe there’s a technological solution.”
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