Ruchir Sharma penned an interesting article discussing the primacy of the dollar as the number one world reserve currency (“Will bitcoin end the dollar’s reign?”, Opinion, December 10). While he makes a few valuable observations, his overall assessment of bitcoin’s potential is off the mark.
He makes a comparison with gold which used to be a worldwide reserve money for a long period of time. This is misleading for two reasons. First, gold was commodity money, which means it used to have a double function: a natural one (eg, jewellery, etc) and as money. Without the first it could have never acquired the second use. Why? Because for the evolution of a commodity into money it needs to have a natural commodity use in the first place.
Modern money is usually called credit money because it is created by lending. It has a single use only: it is money and nothing else. It looks similar to bitcoin. But there is a big difference: credit money is created by the banking system which is regulated by a state monopoly called a central bank. People have trust and confidence in credit money only because, and so long as, they trust the central bank and the state. Without the state no single-use money can discharge the most important functions of money its role as a medium of exchange and medium of payment.
There are four conditions which make the dollar supreme today: the dollar is fully convertible; it is backed by the largest economy of the world; the US has the largest and most liquid capital markets; and rule of law reigns supreme in the US. All these conditions must prevail at the same time. If one is missing there is no chance a currency can emerge as the number one world reserve currency.
Bitcoin may enjoy the very first of these requirements but never the others. It shows rather eloquently that without the stamp of approval of a large, strong and good quality state no money will be accepted as a global reserve currency.
Lajos Bokros
Professor of Economics and Public Policy
Central European University, Vienna, Austria
