Few investment topics provoke as venomous a clash as cryptocurrencies. For supporters, they are a revolutionary godsend to escape the malign intent of currency debasing government, while opponents dismiss them as a dangerous fad peddled by the unscrupulous few to the naïve many. With often messianic zeal, the former predicts a future where the flimsy paper of sovereign issuers is replaced by the anchored certainty of decentralised scarcity, while the latter warn loudly of an historically pumped Ponzi collapsing again since November. The volatile path of Bitcoin – the grandaddy of crypto – neatly summarises the jagged battle:

Bitcoin/US Dollar – 2-Year Chart

Notwithstanding the newness of the technology, the central issue is centuries old. Fundamentally, the search for a stable store of value is a constant and is a constant challenge. The gold standard met this challenge for over two and a half centuries and was effectively the global monetary regime from well before its formal adoption by Great Britain in 1717 to the shutting of the gold window by US President Richard Nixon in 1971.

While its operation was sometimes suspended, or tweaked, in response to war, revolution or depression, the general adherence of most of the globe to this fixed intrinsic standard was a largely unquestioned constant in political, economic, and social life. The rationale for this widespread conviction was summarised memorably by John Maynard Keynes in his 1919 book: The Economic Consequences of the Peace:

‘Lenin was right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million can diagnose.’

But the world changed on the 15th of August 1971. After more than a quarter of a millennium broadly tied to gold, the money of the world was cut free. The pressured decision of an ultimately disgraced US President to break with centuries of accepted wisdom has left us searching since for a stable monetary anchor.

Hyman Minsky was a US economist best known for his provocative 1975 paper ‘The Financial Instability Hypothesis’. Importantly, his characterisation of the of the macro economy as a system prone to bouts of dramatic instability generated endogenously by the financial system proved especially insightful in the aftermath of the Lehman collapse. As importantly, almost a decade and a half later, his pithy insight that: ‘Everyone can create money; the problem is to get it accepted’ helps us grapple with the Crypto battle today.

MMT is a relatively young school of unorthodox economic theory. While it draws its inspiration from the early 20th century thinking on money of German economist Georg Friedrich Knapp and the later ‘functional finance’ ideas of Keynesian disciple Abba Lerner, MMT is less than three decades old.

The core assumptions of MMT are that modern money is generally sovereign, fiat and is given value by being the only means acceptable to settle taxes. In Minsky terms, it’s this capacity to settle taxes as demanded by the sovereign that makes money acceptable and ensures its value.

One of the more telling and long-lasting examples of this was the tally stick. Popular throughout medieval Europe, the tally stick became a sovereign money system in England under King Henry I and tally sticks were still circulating in parts of the Kingdom until the early 19th century.

The split tally was a stick marked with a system of notches and then split lengthwise with one half spent into the community by the King and the other half retained by his exchequer. Accepted as payment of taxes by the Crown and consequently accepted as a means of exchange and a store of value throughout the realm, the regime as it operated in the England of the late 12th century is described by Richard Fitz-Neal:

‘The manner of cutting is as follows. At the top of the tally a cut is made, the thickness of the palm of the hand, to represent a thousand pounds; then a hundred pounds by a cut the breadth of a thumb; twenty pounds, the breadth of a little finger; a single pound, the width of a swollen barleycorn; a shilling rather narrower; then a penny is marked by a single cut without removing any wood.’

In our post-Nixon era of unanchored money, the combination of Minsky and MMT helpfully frames the Crypto debate. The fracturing of trust, leadership and authority is often both a cause, and a symptom, of a fracturing monetary system. Having dispensed with centuries of accumulated practice as recently as 1971, the current system is showing increasing signs of succumbing to the historical pattern. Clearly, the appeal of cryptocurrencies such as Bitcoin needs to be seen in this light.

In truth, the risk is growing that the current experiment in unanchored money might collapse in anger, drama, and mistrust. But the cryptocurrency response is fatally undermined by the insights of Minsky and MMT. Clearly, there is no barrier to the issuance of an all but infinite number of cryptocurrencies, but without major governments inexplicably undermining their own power by accepting them, all such currencies run the real and high risk of being worthless.

The legendary banker Mayer Amschel Rothschild (1744 to 1812) famously quipped: ‘Permit me to issue and control the money of a nation, and I care not who makes its laws!’. This power is no less and no less understood in Washington, Frankfurt, Beijing, and Tokyo today. As the cryptocurrency battle roars on, be careful not to find yourself on the wrong side of Sovereign power.