EspañolWhen the state takes over an activity outside of its realm of competence, it creates more problems than it solves. It still perpetuates itself, however, as the sole provider of the good or service in question.

The first problem arises from the principle of unanticipated consequences. The second stems from the creation of path-dependent bureaucracies.

That begs the question: why don’t people react against this? One reason may be the process that the authorities so skillfully apply in order to justify their actions, and which usually involves apologizing for the first problem, while doubling down on the second.

Money is a key area of the economy in which we see this process at full force. As both the monetarist and the Austrian schools of economics have shown — their differences notwithstanding — the irresponsible management of the means of exchange in the hands of the state is the ultimate source of boom-and-bust business cycles.

However, the state keeps repeating that it simply must maintain the monopoly it created. Further, it will attack any potential competitor and threat to its captive market, and that is why the state is attacking bitcoin.

Experts, like Professor Steve Hanke of the Cato Institute, have carefully studied this nascent medium of exchange. Others have put forward ​​persuasive arguments in its defense, several of which can be found in this article. My purpose is not to repeat what has already been said, but to show how the most recent attacks launched ​​by some states seek to perpetuate a function that was not initially carried out by the government, and how this is done by creating confusion around the economic principles involved.

As reported here, the Internal Revenue Service (IRS) has decided that bitcoin will be treated as property for tax purposes. A few days earlier, in Colombia, the Financial Superintendence — the Colombian government entity ultimately responsible for curtailing financial freedom in the country — decided to ban bitcoin transactions, considering them a source of speculation.

In this context, it is worth discussing several issues. First, the nature of money. As demonstrated by authors such as Carl Menger and Ludwig Von Mises (Human Action, Chapter XVII), a good becomes a means of exchange not for its intrinsic characteristics, but for its marketability. In this sense, the decision of the IRS is meaningless. The fact that bitcoins are property doesn’t mean they are not suitable as a medium of exchange. On the contrary: a medium of exchange is an economic good, therefore, in a market economy it is always owned.

Now, in order to eliminate speculation, the Colombian government would have to ban all human actions, since it is impossible to avoid the natural phenomenon of uncertainty. It is present in all decisions, since no one is certain about what will happen in the future.

Meanwhile, a Colombian expert claims, as a warning, that bitcoin can function as a means of payment (exchange), but is not suitable for “making money.” There is no point in discussing this statement, beyond noting that this expert — the director of an economics faculty — conflates such basic notions as money and capital.

Second, the origin of money. The means of exchange were not created intentionally or deliberately, by decree or by any explicit agreement between individuals, as demonstrated — in addition to the aforementioned authors — by F.A. Hayek. Consequently, whether bitcoin becomes a widely accepted medium of exchange depends on individuals, not on the IRS or the prohibitions of the Financial Superintendence of Colombia.

Third, the relationship between money and the state. Historically, the state has minted coins, purportedly for ensuring their weight and veracity. Even though today we can appreciate that allowing the state to take over this function was a serious mistake, the truth is that the function itself was very simple.

Therefore, it is unsettling to see the argument of Colombian Economy Minister Mauricio Cárdenas for the ban, that the Colombian peso is reliable and bears no risk — otherwise it could not be used for transactions either. This is not only false, but the minister — a renowned economist — forgets that money is not neutral, and therefore both its value and purchasing power are constantly changing as a result of the reactions of individuals to market data. Neither the Colombian peso, nor the US dollar, nor Bitcoin are exceptions to this rule.

Consequently, the measures taken by the aforementioned state agencies have only one intention: to justify the perpetuation of a monopoly created by the states themselves. And they do it with a single tool: confusing the public with the irresponsible use of basic economic concepts.

If a currency is imposed by the state, as in the case of the Euro, apparently that’s fine: the currency’s weakness is irrelevant, according to the regulators. But if individuals create an alternative means of exchange simply because they wish to, then that is immediately seen as something that needs to be banned. Bottom line: all the state wants is to perpetuate the control it has historically exerted on individual action.