Prague is home to a strong community of cryptocurrency supporters and users. The city even has a café where customers can pay only in bitcoin. Many users of digital currency see it as a viable alternative to the current monetary system. They even question whether institutions such as the Czech National Bank should be afraid of bitcoin and other independent currencies, and of their power to marginalise traditional money.
There really is no reason for banks to fear them. All of the alternative currencies are negligible in terms of size and scope: electronic transactions using bitcoin worldwide amount to only 16% of the electronic transactions conducted in the Czech koruna, a currency used by just 10.5m people.
A more fundamental issue is bitcoin’s constantly changing purchasing power. Money is a means for paying and settling transactions, a unit of account and a store of value. Swift changes in purchasing power are the enemy of any good currency. If a currency is losing value, people want to get rid of it quickly. In contrast, if it is gaining value, they hoard it.
The key principle of bitcoin is that its supply will be fixed, which makes it inherently volatile. This is the antithesis of our elastic money system, which is based on the principle that to keep the purchasing power of money relatively constant the amount of money has to change flexibly over time. The monetary policy lesson of the late 19th and 20th centuries is that price stability matters. People may take it for granted but this is the most beneficial feature of money in its present form and the monetary policy behind it. People can use a currency and not even think about why they trust it.
Central bankers have failed to explain that one of the key reasons for their actions during and after the 2008 financial crisis was to maintain price stability. This sometimes required unorthodox policies.
People tend to be concerned about too much money being ‘created’, but they typically have little idea about the size of the money supply. When I ask well-educated audiences, I often get wildly wrong estimates for the money supply but fairly precise ones for the inflation rate. Price stability, not money supply, matters.
As long as central bankers abide by this principle, there is no reason to fear that our existing monetary system will be replaced by a fixed-money alternative.
Mojmír Hampl is Vice-Governor of the Czech National Bank.