by Matt Ridley
I have a column in the Times on bitcoins and their implications for private money
Bitcoins — a form of digital private money — shot up in value from $90 to $260 each after Cypriot bank accounts were raided by the State, then plunged last week before recovering some of their value. These gyrations are symptoms of a bubble. Just as with tulip bulbs or dotcom shares, there will probably be a bursting. All markets in assets that can be hoarded and resold — as opposed to those in goods for consumption — suffer from bubbles. Money is no different; and a new currency is rather like a new tulip breed.
Yet it would be a mistake to write off Bitcoins as just another bubble. People are clearly keen on new forms of money safe from the confiscation and inflation that looks increasingly inevitable as governments try to escape their debts. Bitcoins pose a fundamental question: will some form of private money replace the kind minted and printed by governments?
It has happened before. Pennies and halfpennies were effectively privatised by industrialists in Birmingham in the 1790s. New industrial employers had to pay workers in cash rather than kind, as farmers had done. But there was a chronic shortage of small coins. The Royal Mint had given up making silver coins because people melted them down when their value as metal exceeded their face value and had stopped striking copper halfpennies, which were too easily counterfeited.
So Thomas Williams, the owner of an Anglesey copper mine, and Matthew Boulton, keen to put steam engines to work, offered to make pennies for the government. Rebuffed, Williams made coins anyway. Called druids, they were harder to fake or clip (because they had raised rims) and cheaper to strike than state coins. Being convertible into guineas and pounds at a fixed price of one penny, they were soon accepted all over Birmingham and even in London.
By 1797 there were 600 tons of such tokens in circulation and the counterfeiters were put out of business. The coiners started making silver tokens too but a jealous Royal Mint lobbied Parliament to outlaw the competition. It succeeded in 1818, three years before it could produce new copper coins to match the high standards of the private ones, so the coin famine resumed. …