How Economist Milton Friedman Predicted Bitcoin

(@danielcawrey) | Published on March 5, 2014 at 18:12 BST

Bitcoin and its crypto-cash counterparts are essentially trustless monetary systems that upend the banking establishments ideals of how a financial system should operate.

Intriguingly, the concept of digital money was predicted as far back as the late 90s.

Milton Friedman was one of the most renowned economists of the 20th century and his ideas radically changed the way that policymakers made their decisions.

Friedman foresaw that bitcoin, or something like it, could have great advantages and would inevitably be developed – much to the animosity of incumbent institutions in the financial world.

Jeffery Tucker is an economist, the founder of the Liberty.me and a regular speaker at bitcoin conferences. He says that Friedman had precognition about decentralized forms of money.

Milton Friedman was way ahead.

The liberating web

Friedman passed away before the arrival of bitcoin, but he lived long enough to see the Internets meteoric rise throughout the 90s. By 1999, he had realized the Internet would shape authority:

I think that the Internet is going to be one of the major forces for reducing the role of government.

Despots have come to understand this too. In the recent Arab Spring upheavals, autocracy often did its best to suppress the uniting power of the web.

Friedman was long against collectivism’, a term he used for a government that had become too all-reaching and powerful.

Fortunately, authoritarian regimes now have to deal with a new digital threat – decentralization.

Systems that lack a central authority can cause severe headaches for governments both good and bad.

Take, for example, the privacy tool Tor. This encrypted network has presented real problems for governments wanting to control and police criminal activity on the web – or, indeed, suppress free speech and activism.

What Friedman had in mind when he proposed the idea of digital cash, however, was reducing the need for a third party in transactions.

The one thing thats missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A.

It seems that Friedman knew the decentralization of money would arrive one day. But its not so certain that he willed it to happen. As Coinapult founder Erik Vorhees says:

As the most popular champion of free markets, its always surprised (and dismayed) me that Friedman seemed to have little issue with central planning when it came to money itself. He would abhor central planning in basically every good, except the good of money, which is arguably the most important.

Furthermore, Friedman advocated for abolishing the Federal Reserve, to replace it with an automated system that adjusted the money supply accordingly. It seems that he also believed the free market would bring that concept to fruition. He was right.

Anonymity fears

Bitcoin has been lauded as one of the technical innovations of its time. But it has an image problem to overcome – a common perception that is dark and lawless – created largely by the stream of sensational media reports.

Many people now believe cryptocurrencies are merely an avenue for criminality or bad behaviour, such as theft, drug dealing and gross negligence.

Thats why Friedmans prediction that e-cash would be anonymous is concerning to many. Then again, this is an economist that believed in complete economic freedom; intervention was an impediment in his idealistic world.

The economist prophesized a method of electronic money that would be simliar to cash – a system that banking embraces, yet possesses major flaws:

The way I can take a $20 bill, hand it over to you, and then there’s no record of where it came from.

Eventually, Friedmans belief that e-cash would proliferate on the Internet has proved correct, of course. Its advantages could not be ignored. One concern, however, is how legitimate could a cryptocurrency be if it were truly anonymous? Friedman saw this as a small problem that the market would eventually correct:

You may get that (e-cash) without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the internet.

It seems Friedman knew that Silk Road would have to proliferate in order for bitcoin to become popular with the masses. On the negatives of e-cash, he said:

Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.

Keeping it real

Some economists deride bitcoin because it is Internet money, and argue that its not real. The fact that bitcoin is a payments system with billions in market capitalization, and has a mass collective of machines confirming transactions, seems to prove nothing. But as Marc Andreessen put it for the New York Times:

Economists who attack bitcoin today might be correct, but Im with Ben (Bernanke) and Milton.

Late last year, bitcoin almost hit a $14bn market cap. Not to mention the economy it creates. Source: Blockchain.info
Late last year, bitcoin almost hit a $14bn market cap. An industry has been created. Source: Blockchain.info

 

Brave new world

The barriers that centralized banking has put in place have proved to be major societal problems.

Crowdfunding, peer-to-peer lending and decentralized math-based currencies are new innovations, and are ideas Friedman would likely have approved of.

Mobile technology, which will shape the future of payments, would likely have been applauded too.

What also might have excited Friedman is the Seasteading Institute – a project his progeny are involved in – that has promoted the concept of creating permanent communities at sea. The institute is researching new ways to experiment with community economics outside of national borders and has embraced decentralized currencies.

Of course, Friedman didnt predict the block chain, summed up Jeffery Tucker. "But he was hoping for a trustless system. He saw the need.

Quite a premonition, indeed.

The Friedman quotes were sourced from a 1999 video interview. Below is the concluding excerpt:  

E-moneyJeffery TuckerMilton Friedman

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