Once upon a time, there were three copper miners with nothing to their names but $100 each. They came upon a small mining town with a cozy little community and local government. With no other prospects, the three miners decided to try their luck here and see who could make the most money.
Needing supplies, they headed to the local supply shop to buy pickaxes, helmets, boots, flashlights and mustache combs. Each miner spent $50 on supplies in total, and on the way out of the shop, they noticed a sign: "Are you a copper miner? Apply for a subsidy from the local government today! Let us help you to grow our copper mining community!"
The first two miners were excited for a free handout to help them get started with their mining prospects, and ran straight to the municipal offices to apply for the subsidy. They were immediately approved, and were each given $50. The third miner followed a different principle. He refused to accept any financial help and was determined to make his own way in the world, without any government handouts. Now only having $50 and some supplies to his name, the third miner was already lagging behind the other two, who both had $100 and their supplies.
The first two miners work for a week and manage to mine about the same amount of copper each. The third miner (who refused to accept a handout) worked harder than the other two, and managed to mine double the amount of copper they did, in the same one-week period.
The first two miners are each able to sell their copper ore to a local refinery for $50. At the same copper price, the third miner profits $100. He attributes his skill and good fortune to having a bigger mustache than the other two miners. The balances of all three miners is now at $150.
Since the previous week, more miners have come to town and the industry is growing. The government continues to give copper miners a subsidy by giving money to them to help with the cost of supplies. Since the lack of a tax system has attracted many miners, and no one is willing to lend money to the government, the government resorts to simply printing more money into existence. They print enough money to double the current money supply in the local community, and use the proceeds to keep paying out subsidies to further stimulate the local mining industry.
The three miners notice at the end of the week that their supplies have all worn out, and they need to make another trip to the supply shop. Giant mustaches can be hard on those cheap plastic mustache combs! When the three miners arrive at the supply shop, they are surprised to find that the cost of supplies has doubled to $100! The miners ask the shopkeeper why prices have skyrocketed, to which he replies, "Well, the government just printed enough money to double the money supply and devalue the dollar by half! The way I see it, it's only fair that I double my prices, so that I still get a fair price for what I sell!"
Grudgingly, the miners can't argue with the shopkeeper's logic, so they agree to pay $100 each for more supplies. All three miners now have a balance of $50 each. Remembering the subsidy program, the first two miners head back over to the municipal offices, explain their harrowing experience at the supply shop, and each get another $50 payout to help with their costs.
At this point, the first two miners have $100, and a fresh set of supplies. The third miner worked twice as hard as anyone else, and had no financial help from the government, yet he is $50 behind the other two miners. Should the third miner not be wealthier, due to his producing double the copper of each of the other two? Even if the first two miners had not asked for a second government payout, they will have done less work than the third miner, and still have the same amount of money as him.
The key to this story is that the government used its printing press to create money out of thin air, and used that money to give handouts to a specific subset of the community. This money-printing led to price inflation, and rewarded some members of society at the expense of others. The first two miners accepted help and did less work and finished with $100, whereas the third miner did extra work with no help and only finished with $50. His misfortunes were due to the doubling of the cost of supplies.
What if the third miner were a nickel miner, and thus did not qualify for the copper mining subsidy? Rather than refusing help on principle, he may not have access to help at all. In this case, he has even less choice in the matter of money printing and price inflation.
This short story is obviously grossly over-simplified, and many other factors would come into play, if the story were to take place in the real world. However, the basic concepts of fiat money and its consequences are evident. In essence, the copper industry was not a truly free market, because the government intervened and wound up helping some people at the expense of others. Even though the government may have had good intentions, the fundamental forces of the free market were subverted, resulting in inaccurate allocation of wealth to individuals that had earned it. Furthermore, the third miner had no power to protect himself from this unfair scenario. He tried his hardest to get ahead, but resulted in being no better off than anyone else.
In essence, this story explains some of the most basic concepts of the Austrian School of economic thought. There is much more to Austrian School economics than can be explained in a single blog post, so I encourage you to read more on the topic. I found the book "Economics for Real People" quite illustrative, and I recommend reading some of the other material that is available from mises.org.
Since the Austrian School disagrees with the concept of fiat money and government deficit spending (known as Keynesian economics), one of the proposals of the Austrian School is that the government should not have a monopoly on currency. One or more currencies should be chosen by the free market (as gold was chosen as currency throughout history). No one individual, corporation or government should have the immensely powerful ability to print money. Unfortunately, this is obviously not the case in today's world.
However, there is still hope! Nothing prevents the general public from using something other than fiat money as currency. In fact, many communities have already developed their own local currency:
http://en.wikipedia.org/wiki/List_of_Canadian_community_currencies
http://en.wikipedia.org/wiki/List_of_community_currencies_in_the_United_States
Additionally, a fascinating new phenomenon known as "cryptocurrencies" has arisen in the online community over the past few years, and is just recently gaining significant popularity. The most popular of these cryptocurrencies is Bitcoin, although many similar currencies exist, some with different properties than others. Coins are "mined" using computational power, and can be spent, bought, sold and saved in a distributed fashion.
I believe that the concept of a cryptocurrency presents a vast and important opportunity for the general public of the world. It has been a century or more since the old days when countries of the world did not have a central bank or a fiat money system. No one alive today would remember what trade, commerce and the economy were like in the absence of fiat money. The message from central banks today is that they play a very important role in the economy, and their elimination would be catastrophic.
But what if we could conduct an experimental return to free market economics, without having to change any existing monetary systems that are currently in place? I believe that truly decentralized and unregulated cryptocurrencies offer the opportunity to once again experience a free market economy, except it would take place only in the online world. The advantages and disadvantages of a free market economy could be safely explored and recognized, without changing anything "in the real world".
Not only that, cryptocurrencies fundamentally cannot be inflated. Banks cannot take in cryptocoin deposits and lend out more coins than they have on hand, as a traditional fractional reserve bank would do with fiat money. Central banks cannot simply "print" more cryptocoins to fund government projects. Properly storing cryptocoins in a wallet on your local computer ensures that your money will always be on hand when you need it, never being susceptible to a bank run.
An important issue in the cryptocurrency world is that those with vast resources can purchase what are called ASIC machines, or Application-Specific Integrated Circuit machines. These machines are purpose-built to do one and only one thing: mine Bitcoins. When this is allowed to happen, the people with ASICs have a vastly disproportionate advantage over small miners with relatively low-powered GPUs.
I feel that a cryptocurrency should be made as intrinsically fair as possible. One of the most important requirements of a universal currency is that it can be easily obtained, traded, and used by the common man. For this reason, I feel that Vertcoin has the best chance at being that currency, due to its anti-ASIC properties.
The rise and fall of many different cryptocoins and their daily prices is a fascinating glimpse at how a completely unregulated free market behaves. Although there are security and technical issues with many (if not, all) cryptocurrencies, I believe that it is the responsibility of not just cryptocoin nerds, but of all members of society to participate in the great cryptocurrency experiment. My GPU is so slow that I likely mine Vertcoins at a loss, but I still want to participate in the community, and help the cryptocurrency market grow and evolve as much as possible. Even if you choose to mine a different cryptocoin, by all means do so! Anything that advances the industry will help evolution improve upon what has already been created and tested. I'm excited to see what cryptocurrencies look like in the next ten years, and I hope that everyone else is too! Together, we can once again experiment with a free market and let it exist alongside the real economies of today. If we like what we see, maybe it will spill over "into the real world"!
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