Jerry Dwyer on the History of Free Banking and the Future of Bitcoin

Jerry Dwyer is a professor emeritus of economics at Clemson, a vice president at the Federal Reserve Bank of Atlanta and is currently a senior fellow at the Bitcoin Policy Institute. In Jerry’s first appearance on the show, he discusses what it was like having Milton Friedman as a mentor, the history of free banking, the status of cryptocurrencies including Bitcoin, and much more. 

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This episode was recorded on July 22nd, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us. 

Our guest today is Gerald Dwyer. Jerry is a professor emeritus of economics at Clemson University, and from 1997 to 2012 was the founding director of the Center for Financial Innovation and Stability and a vice president at the Federal Reserve Bank of Atlanta. Currently, Jerry is a senior fellow at the Bitcoin Policy Institute. Jerry has written widely on the history and theory of money and has taken this interest to digital money. 

In fact, Jerry first published about cryptocurrencies in 1999 in a journal article and has several widely cited pieces on this topic, including a 2015 article in the Journal of Financial Stability titled, “The Economics of Bitcoin and Similar Private Digital Currencies.” Jerry joins us today to help make sense of cryptocurrencies and how to invoke history properly when we think about stablecoins. Jerry, welcome to the program.

Gerald Dwyer: Thank you. It’s a pleasure to be here.

Jerry’s Career

Beckworth: It’s great to have you on. Before we get into cryptocurrencies and the history of free banking and its application to stablecoins, one thing I wanted to talk about is your career. You have a pretty amazing career. You spent a long time at the Federal Reserve. You also were a professor at Clemson. I’ll let the cat out of the bag: You even taught me macroeconomics in grad school. You took time off from your busy schedule as an Atlanta Fed vice president and drove up to UGA and taught my second macroeconomics course.

Dwyer: I enjoyed that. You were sufficiently prominent in the class as opposed to most students, where they just go away. You have definitely not gone away. I followed all of your moving around and everything.

Beckworth: Oh, great. Jerry, thank you for contributing to my education back at the University of Georgia, which is interesting because you came and taught a class. Of course, we had George Selgin, Larry White there. You can say I got my fair exposure to free banking literature. Now, of course, you did not teach that. You taught actual DSGE models and mainstream macro at the time. In that class, I learned something interesting about you, Jerry. You had Milton Friedman as your major professor, your dissertation chair. That makes sense why you’re such an avid monetary economist today. What was that like, having Milton Friedman guide you?

Dwyer: Actually, that was great. I wrote a piece for a book at one time about what he was like as a teacher. He said I was too kind. I sent it to him after it was published, not before. I didn’t think I was being too kind. He was interesting in the following way. My first job was at Texas A&M, and they had him and Paul Samuelson come in and speak to an audience of what my wife calls regular people, not people like you and me. It was interesting to watch the two because Friedman, somebody asked him apropos of today, even, “We need to protect our industries from all this foreign competition, don’t we?” He said, “It would seem like that, wouldn’t it?”

Then he explained why it was wrong. Samuelson’s answers to quite a few questions was “It’s really complicated, but here’s the answer.” In other words, you’re not able to understand it. Friedman, the interesting thing with being a graduate student was is he wasn’t nearly so forgiving. If you said something stupid, you would know it really soon. He ran the money and banking workshop. We all read the papers in advance, and then we made comments.

Bob Barrow was there. He would make comments all the time. On the other hand, as a graduate student, sometimes you would make one comment and you wanted it to be really good. You didn’t want it to be dumb. I took price theory from him, not monetary economics, actually, because he alternated between teaching the two. I just learned an incredible amount in his class. He was just a great teacher. What he actually did was is he would take things out of the newspapers often and then just explain them. Then the mean thing he did is then he would go through in his grade book and ask one of the people in the class.

If the person was unable to answer the question, he went to the next one. Then he went to the next one. There was no way to prepare for this. You were going to get a question, and God only knows what it was going to be. One time, what happened actually was, is he asked a question and he went through the entire book and people just said, “I don’t know.”

Dwyer: After a while, your incentive was to say, I don’t know, because you didn’t want to say something really stupid. It was great. It was a lot of work. On the dissertation, he was good. He was very helpful in terms of things to do and things not to do. In my case, another person on the committee was Robert Lucas, whose technical aspects were very different than Friedman’s. Lucas liked one part of the dissertation, and Friedman liked a different one. I guess that caused me anxiety before I even knew that that was true, because as a student, you’re worried, you want to look good. Part of the reason I went to Chicago was because he was there, George Stigler was there, Sam Peltzman was there. I thought they were all great guys. Very impressive.

Beckworth: Oh, what a legacy. Yes. You had a great education at the University of Chicago, and then you joined the academy. You also eventually joined the Federal Reserve. At the Atlanta Fed, you started the Center. You were a vice president. I was looking over your publications during this time. You did a lot of interesting work. You did a lot of time series work. You did a lot of work on, at the time, monetary aggregates, does money still matter questions. You also did some articles on the topic we’re going to get to today, and that’s the free banking period. You had a 1994 JMCB paper, “Bank Runs in the Free Banking Period.”

This was right before you got to the Fed, but they would have been aware of this. You also have an Atlanta Fed Economic Review article, “Wildcat Banking, Banking Panics, and Free Banking in the United States.” You were well known, I’m assuming, about this literature and the arguments you made in it. I’m just curious, how was this received at the Atlanta Fed and by your Fed colleagues?

Dwyer: I never got any negative feedback. I’m not saying I got a lot of positive feedback either. I was encouraged. The article you’re talking about, actually, I got a lot of encouragement while I was writing it. 

Beckworth: Jerry, you worked at the Fed. You took time off to teach grad students like me. You were also a professor at Clemson for a number of years, and you’ve written a lot on free banking and, more recently, on cryptocurrencies. I’m going to come back to that in a minute, but I want to lay the table for the conversation we’re going to have today about those papers.

That is the current developments going on in the policy world related to crypto assets, and then a reaction we’re seeing. As you know, Jerry, the Senate passed the GENIUS Act, which is for stablecoins. On June 17, the House passed this version, July 17. Then President Trump just signed it into law July 18, just a few days ago from the date we are recording now. It defines stablecoins, the digital asset pegged to a fixed monetary value, has to be backed up, has a required reserve of sorts, 100%. There’s all kinds of laws about where you get chartered. A lot of issues we don’t need to get into in terms of legality, but it’s basically like narrow banking, 100% reserve banking. It’s now law. Now stablecoins are in their perimetry of the regulatory fence of US financial regulation. 

We see also that there’s some other bills coming through the CLARITY Act, which is going to work on the micro market structure for cryptos. What’s interesting, though, is this has passed, we’ve seen a lot of responses to it. This is why I really wanted to get you on the program. I would submit some of the responses are nothing short of hyperbole. They are literally the prophet Isaiah crying in the wilderness, “Whoa, watch out for stablecoins. It is the end.”

It’s pretty remarkable because some of the people making these claims, I think, should know better. My good friend, Peter Conti-Brown, I think, responded well. He said, “Look, the history is much more complex than they’re making it out to be. Secondly, the regulatory structure today in the law, they’re very different than they were back then, something we’ll get to in a minute. Just to illustrate this, Jerry, and I know you saw these, I want to just highlight some of the press we’ve been getting, which makes it seem that the stakes are super high.

One well-known academic, Gary Gorton, now, this is a few years back in ’22, ’23. He had an article, “Taming Wildcat Stablecoins” was the name of the paper he had published, another paper about the same time, making money. It was all tied to stablecoins and how unstable they were. He would draw upon the wildcat banking examples. The FT, the Financial Times, just recently had an editorial out called “The Rise and Risks of Stablecoins.” This is the editorial board. Let me just quote from them real quick.

They say, “The technological transformation about to hit payments is fraught with risk. If stablecoins succeed, they are likely to eat into the business of banks, while being regulated with nowhere near the same rigor. The US itself has painful historical experience of what can go wrong. The mid-19th century era of free banking, ushered in by President Andrew Jackson’s successful campaign against a federal proto-central bank, featured chaotic monetary conditions as each bank issued its own currency, which traded at varying exchange rates to one another.”

They’re definitely aghast this thing is happening. They see some pretty ominous things on the horizon. Then I’ll end on this example, because this is probably the most strident one. This was by Barry Eichengreen, the New York Times. He says, “The GENIUS Act Will Bring Economic Chaos.” That’s the actual title of it. I won’t read all of it. What he says is, “Look, this is going to be the undoing, it’s going to bring chaos, it’s going to bring runs in the financial system.” To his credit, he does acknowledge there were different states in the US free banking period that had different experiences, but he lands on the worst case, Michigan, and says that is what’s in store for us.

It’s pretty striking to see all of this concern, and again, I would say hyperbole, because I think it really exaggerates what happened in the past. Even the Bank for International Settlements, Jerry, their annual economic review that just came out, or their report, they really are concerned about stablecoins. They’re a little bit more measured, to be clear, but they’re concerned. You’ve probably seen the reports, Jerry, that stablecoins could grow to $2 to $3 trillion, some say $4 trillion, over the next decade. They could really become big and important. 

Free Banking Period

What I would like to begin with is just lay the table for our listeners. What is the free banking period? What time period are we talking about, and how did it emerge?

Dwyer: It’s basically the late 1830s to 1865. Free banking, in this context, means that you could start a bank without discretionary approval. The alternative was chartered banking. Chartered banking meant that you went to the state legislature, paid off some legislators, and then you could get a charter for a bank. You had to do it individually. It’s not like you went to the banking regulators and asked them. You didn’t ask them. It was the legislature. It’s actually the time period when corporations were just starting to take hold. If you wanted a corporate charter, you had to go to the state and get a charter, and it was the same deal. It was the 1830s.

Actually, in the paper you mentioned in the Atlanta Fed Review, basically, what I do is I talk about the first two states that got free banking in some detail. I talk about other states too, of course, and they were Michigan, which everybody talks about, and New York, which nobody talks about. There’s a reason for that. Michigan, part of the reason I wrote the article was because I was just really curious about Michigan. I couldn’t figure out a way to get a journal article out of it. I wanted to do a survey article of the whole free banking thing. There were enough papers out that you could tell the contours.

Then I filled in details and did stuff like maps of where were these banks actually anyway. Were they in little towns like people often said they were? Now, Michigan is interesting because it’s hard to remember this, at least for some of us. I don’t think of Michigan as being a Western state, and I don’t think of it as a frontier state for sure. It was both. It was part of the old Northwest is what it was called in high school history. It was just being settled. It just became a state. Then, within the first year or two, they passed this free banking law.

It’s related to Andrew Jackson in the following way, is what they were trying to get away from was you had to ask politicians permission to start a bank. Instead, you could start a bank if you met certain criteria. If you met those criteria, then you could start a bank, and if you didn’t meet those criteria, you couldn’t. Some of them are ones that still exist today, like you couldn’t be a convicted felon and be president of a bank. Just no, no, no. Now, of course, they were different because a large part of their business was issuing currency, and they would have the name of the bank on it because they were liabilities of the individual bank.

They were liabilities of the individual bank, and that created the possibility that somebody could do the following, which I’m sure some people did, which is you could start a bank, issue some currency, and leave town. You have to remember it’s the 1830s, and the telegraph had not been introduced at that time. If you wanted to get news in New York City about what was going on in Michigan, it took days because it had to come by post. It had to be physically carried the whole way. This is part of where people mess up when they think about, “Oh, free banking is just like today.” It’s not at all.

Not only do we have the telegraph, we have the internet. You find out instantly about things that go on all around the world, and it’s just available freely. That’s totally different than in this period. In Michigan, what ended up happening was they put together the rules, and two things happened. One of them was some people were crooks. Crooks are always with us. The other thing that happened was the federal government suspended payments for banks. These are state banks. The state banks then suspended payments. That is, the state of Michigan said that they didn’t have to pay gold and silver either.

You could start a bank, promise to pay gold and silver, but you didn’t have to. That’s an opportunity ripe for fraud. It happened. That is, once they passed this law, then there were a lot more banks. The name wildcat banks actually arguably comes from Michigan. The people started banks out where the wildcats roamed. The idea was, is that if you could locate an obscure location, then it would be a long time before your notes ever came back and you had to give gold and silver. You were just issuing them, and then you could just keep the funds and collect the interest on the bonds, and life was good.

You didn’t really have to worry about coming up with gold and silver. Now, the other thing that happened in Michigan, this is interesting, there was a guy named Felch, who was a legislator when they passed the law, and he voted no. Then he was a bank commissioner. He was going around and examining these banks. Then he wrote a report. His report is really the basis of a lot of quotes, like the historian Bray Hammond, on terrible things that free bankers did. Presumably, they did them in Michigan. I have no reason to think he was making this stuff up.

What banks would do is they’d have some gold and silver for when the examiners were there. Then, when the examiners left, they knew the next bank they were going to. They’d load up the gold and silver in a wagon and just race to the next bank. The gold and silver would be there. It’s very entertaining stories. The question is, is it typical of free banks? Basically, what I say in the Atlanta Fed article, and I think I support it, is it wasn’t. This lasted about two years. Then Michigan just repealed its free banking law. There were no more free banks.

The ones that hadn’t already failed, they were closed. Now, at the same time, New York started its banking system. It’s widely reputed to be a very good banking system. There are a lot of differences between New York State and Michigan in this period. New York State, of course, was a settled state. New York was a financial center, Boston arguably more so. Still, it was very settled. Stagecoaches would be going around. Communication was relatively cheap. You could find out stuff. The government had existed for some time. They started with bank commissioners, and there were bigger losses at the start of the banking system than there were later on. 

Part of it is experience. See, one of the things that maybe people don’t realize this is, if you go back and read the laws in this period, they were constantly tweaking them. That is, a problem would come up, and they would pass a law. One of the things that came up, like I said, was people starting banks in villages with five people or something, if you want to even call that a village, or 50 people. They passed a law, for example, in Illinois, that there had to be 200 people in the town, which at that time in Illinois wasn’t that small. They were constantly trying to deal with problems that were occurring, and they were learning as they went on. Now, that’s the legislators and the bankers were, too. They were sorting things out.

One of the things people complain and say, “Oh, but they had these state bonds.” It’s like, “There weren’t that many federal government bonds that were traded.” That was a period when the federal government had almost no debt before the Civil War. What were they going to use? They wanted to use marketable instruments. People say, “Oh, they should use bonds. They should use Treasury bills.” There weren’t any. There weren’t any short-term securities either. The opportunity set, the set of things that they could do in this period, was much more limited than what it is now.

In the GENIUS Act, they say, Treasury bills are one of the things. They let them hold bonds, which I don’t think is such a great idea, but that’s neither here nor there. You have these short-term securities that are very liquid. What bonds were liquid in this period? State bonds, actually. That is, in the New York newspaper, they published on a daily basis the prices of all these bonds. These bonds were very liquid. The prices were readily available in the New York papers. 

Now, those prices wouldn’t be available immediately in Michigan or anywhere else in the US, because the paper had to be transported. Although by the 1850s, the telegraph was in place. Information traveled much more quickly. The New York system was successful, arguably, because the economic circumstances of the state were different. Actually, one of the things they did in New York that nobody ever comments on is, in the state of New York, the only bonds that the banks could hold was New York state bonds. That is, people say, “Oh, they were trying to increase the demand for their own state bonds.”

Several states, actually, would not allow their banks to own their own state bonds. They could buy other state bonds, but not our state, because they were trying to basically counter the criticism that they were just trying to increase the demand for their bonds. Whereas, New York actually required them to hold New York state bonds. They were very successful over time, and the loss rates were quite low. They were a little higher early on, and then they fell.

Then basically in other states where they had difficulties, which is Indiana in 1854, and then at the start of the Civil War in Illinois and Wisconsin, it was external developments. That is, bond prices fell a lot for various reasons. That created losses for the banks. That’s no different than the recent bank failures, where if you’re holding a bunch of long-term bonds and the prices fall, uh oh.

Beckworth: Yes. You have these different experiences. You have some extremes, if you can say, the really bad example being Michigan, which you said is a frontier state. New York, highly developed, strong economy behind it, good state capacity, good laws happening. What happens is many of the critics of stablecoins look only at Michigan. Then you proceeded to say, “Hey, but even then it’s not a good example because the information differences are so very different.” Stablecoins, that’s on the blockchain. The world knows instantly what’s happening.

There’s information about the firm behind it as well. It’s not as if you can play this game where you take the notes and no one really knows for sure. We’ve talked about before how they had these books where you would look up how much of a discount on your note the farther away you went from when the bank was issued. Your article does a really good job showing that it’s far more complicated than some of these simple stories like to make out, like to say it’s not just all Michigan. Even if it were Michigan, it’s a very different beast than what we have today.

Dwyer: Yes, it is really different. Actually, a former graduate student of mine arbitrages stablecoins for a living. He’s sitting at a computer looking at the prices in various markets around the world and seeing if he can sell one place and buy another. If you look at the price differences, even across exchanges around the world, they’re very small, because sometimes people will say, “Oh, but there were these big discounts on these notes, 1% or 2%.” It’s like not on stablecoins. You can look at coinmarketcap.com, and you see no.

Beckworth: Something else you bring up in your research, I think I saw this in your Journal of Money, Credit, and Banking paper, is when they did have runs, some of them at least were motivated by the fundamentals. It wasn’t just because it was free banking, but the economy was weak, like you mentioned the external shocks. We recently had on the podcast Emil Werner, and he has done some great work on the history of banking in the US empirically. He shows most bank runs in the US were caused by fundamentals. They weren’t caused by a Diamond–Dybvig model of just a sudden run on the bank itself.

If you get the fundamentals right, it makes a strong case for the rest of it falling into place. Stablecoins, we want to be careful when we use these examples. One other question about free banking before we move into actual stablecoins, bitcoins, and your work there. It’s also important, I think, to keep the distinction in mind between the free banking system of the US and, say, the free banking system of Scotland. That’s a very different beast altogether. Any comments on that?

Dwyer: There was a lot of research in the ’80s and the ’90s, and to a lesser extent, but still in the 2000s, on free banking. There are more examples, actually, than just the US even and Scotland. Basically, banks were issuing notes at various places around the world at various times. There’s no particular evidence that there were losses uniformly. Some of them, like Michigan, worked out badly. A lot of them worked out fine. In the US, why did they shut down the free banking system? Because they wanted to increase the demand for national banks’ notes. That’s why.

Because they were only allowed to hold US government securities. It increased the demand for government securities. They wanted to get rid of free banks. There’s no evidence that currency holders and dissatisfaction with the way the free banking system was working was behind doing away with it. Which gives you an idea is if people aren’t in any rush to get rid of it, it probably isn’t all that bad. Part of it is, like we were talking about, you have to consider the context in which some of these things happen. What the options of people actually were, as opposed to, in the 1830s, they couldn’t introduce stablecoins. They didn’t have an internet. They didn’t have arbitrage around the world instantaneously. Whereas we do.

Beckworth: Yes, and it’s great to point out that in the Scottish free banking system, it lasted a long time, too. 1716 to 1845, no central bank. Each bank had issued their own notes. It was competitive. They had relative financial stability, solid economic growth. The only reason that system ended was because the Bank of England and Parliament decided to change the laws that only the Bank of England could issue notes. It didn’t go out of existence because it was failing, but because it was taken out of existence by law, by fiat. 

The Canadian banking experience, as well, just real briefly, 1817 to 1935, it’s a little bit different. No central bank and they seemed to do fine as well. Definitely much better compared to the US banks. It’s useful to look around the world as you outline and to look beyond just the US case of free banking. If we’re going to talk about stablecoins and find some history, maybe it’s useful to look broadly for lessons learned. Even then, I guess I would caution, world’s a very different place than it was back then. We want to think about how regulators work today, how laws work today, central banks, and all that stuff.

Bitcoin and Stablecoins

Let’s segue into your work on Bitcoin and stablecoins more generally. Let me ask this question before we get into your research. What drew you into this space? Why did you get excited about cryptocurrencies? I mentioned you actually wrote an article in 1999. I don’t know if you use the term cryptocurrency, but you were thinking along those lines. You’ve written a lot since then. What was the pull into this space?

Dwyer: Generally speaking, people at that time called it electronic money. That was basically the idea. It couldn’t have been cryptocurrency because Nakamoto hadn’t come around and basically invented crypto combined with the blockchain to keep track of everything. There was a scheme by a guy named David Chum that basically involved every transaction had to be approved by a financial institution. They wouldn’t know who you were, but it had to go to an intermediary, because otherwise, the big issue is what computer scientists call double spending.

The obvious example is suppose that I have a file on my disk and it says, “I’m worth a dollar.” I can give you one, and then I can make a copy of it, and I can give one to somebody else. Then I can make a copy and give it to somebody else. Obviously, that’s worthless. That’s basically what Nakamoto solved was decentralized currency. Now, why was I interested in this? For the same reason, I was interested in the free banking. This is personal. When I was in graduate school and getting done, Hayek’s Denationalisation of Money came out. The idea of non-national money was like, “That’s really weird.” 

It was a great book. It was really interesting. Ben Klein wrote a paper about the same time in the JMCB that he originally presented in the money and banking workshop in Chicago. I was interested in private money all along. Electronic money is just another version of private money, really. Maybe this is extreme. Nobody in their right mind would think it would be a great idea for banks to start issuing banknotes. It’d be pointless. We’ve got US dollar bills. If they’re going to be convertible into a dollar on demand, they’re not obviously superior. There’s no payout. Whereas with electronic money, all right, you can engage in transactions. You don’t have to be physically present. You don’t have to transfer a piece of paper.

Like I said, the private part has always interested me, because it’s a weird thing, actually. Yes, I run into people and I say, “If it’s not issued by the government, it’s not money.” That’s just the way it is, and it’s like, “What planet are you living on?” Because it’s not been true, historically, and it doesn’t have to be true. We can have private money. The question is, is it going to work well or badly, and is it something people want? When they talk about bitcoin to people actually, in the US people say, “What do I need bitcoin for?” US dollars, they inflate a couple percent a year, could be worse. In some places it is worse, like in Zimbabwe. I have a $1 trillion bill from Zimbabwe. This is a couple of inflations ago, actually. A couple hyper inflations ago. Yes, it can be a lot worse. 

An alternative, like Bitcoin, can be better. I found it very interesting, the piece that you mentioned in the Journal of Financial Stability. Maybe I’m well positioned to do this in a way. I’ve actually even published articles in computer programming magazines, not in journals, but I know a fair amount of programming. I can understand when computer scientists write in technical journals, if I work at it. Bitcoin was put together by basically cryptographic programmers. They weren’t professors.

The question is, is this workable, from an economic standpoint? That is, is it sustainable? Now, there’s a different question, which is, is there a demand for it? That’s a different question. What I was doing was, is I was looking at the setup and saying, “Is this something that can persist and not fall apart because of a lack of confidence or run on it, or a variety of things you could think of?” That’s what that article was about, is it something that could work? The answer is, the fixed quantity is really the thing. It’s a combination of two things, really. One of them is the fixed quantity. The other one is, you can actually tell of, at any instant, what the actual quantity is.

If it deviates from what it’s supposed to be, you know. If somebody issues a bunch of Bitcoin, and goes out, and buys stuff, and it shows up on the blockchain, then everybody knows. That would be the end of Bitcoin. It actually would be difficult to do that, but it’s a worry that you could, and if you could, that would be the end of it. 

Beckworth: Let’s talk more about Bitcoin, because it is the predominant crypto assets, the most popular. You’re affiliated with Bitcoin Policy Institute. Let me use an analogy. Maybe you can give me the counteranalogy for something like Bitcoin and blockchain assets in general. When you think of traditional payment systems, we typically think of central clearing. When I go to the grocery store, and I swipe my card, or I put my Apple Pay on the reader, I’m going through an intermediary to settle with my retail. If I’m at Walmart, it’s a Walmart and me transaction, but we go through some central clearing to settle up. 

Now, with physical cash it’s decentralized. We settle up, I hand the bill over, so that’s more decentralized, but most of my transactions are centralized, but with Bitcoin it’s different altogether. There’s a public ledger, there’s blockchain. How do you understand that whole setup? Especially for those of who may not have looked closely at this. What’s the best way to think about how we clear and do transactions with crypto assets on the blockchain?

Dwyer: There’s two questions here. One of them I actually had to deal with to write the article we were talking about, which was, how do I know if I have a Bitcoin? The truth of the matter is. My wife has a hard time with it because it’s like, you can’t feel it, you can’t touch it, you can’t smell it. She says, “It doesn’t exist.” The truth of the matter is, your checking account doesn’t exist either, because what do you have? You have a ledger that keeps track of all of your transactions, what’s coming in, what’s going out. There’s no sense in which you can hold your checking account. If you want to, you can hold your checkbook, but nobody uses those much anymore anyway.

The blockchain is very important in terms of keeping track of transactions, and it’s a ledger. It really is what it is, in a lot of ways, like I say. It’s different because, like you’re talking about, you’re having a clearing going on, that is, I can transfer from me to you, and you can transfer it to someone else, and to someone else, and there’s no direct intermediary involved. Now, the blockchain is substituting for that. The blockchain basically substitutes for that because it’s immutable, it’s cryptographically secure, at least short of quantum computing, maybe.

You can look any time you want and you can see what transactions you’ve done with what addresses, not necessarily what people. Like I said, it’s like your checking account. From the personal standpoint it’s like a checking account. They call it a wallet. You have a program on your computer that goes out and looks on the blockchain and basically keeps track of your addresses and how much is there. A wallet’s not really a good analogy because we think of wallets as having pieces of currency in them, and a wallet doesn’t have anything like that in it. It’s really just a ledger. It’s a big ledger out there, and then you have your little ledger. That’s the way I think about Bitcoin. Actually, Ethereum is similar. It’s different in details.

Beckworth: Just to summarize again, and going back to the analogy I used. When I pay at Walmart, usually my banking account, I’m using a centrally cleared ledger. When I do cash I’m using just an impersonal ledger, but it’s decentralized, because I am paying Walmart and no one else has to know about it. It’s decentralized. When I use Bitcoin I’m using a public ledger, everyone sees it. It’s very transparent, but it’s also very uncontrolled by any third party out there, unlike traditional central clearing.

Dwyer: Correct. I don’t see that as a cost. Here’s where it comes in, and it comes in with why I wrote the article actually, in a way. When you’re dealing with your bank and then a Fed, you know the institution’s involved, they have reputations, and you’re basically relying on the fact that Wells Fargo is not going to rip you off, and the Fed even less likely. With Bitcoin, what are you relying on? Actually, and I think this is a problem for some people, you’re relying on algorithms. That’s what you’re actually relying on. You’re actually relying on the way that blocks are added. You’re relying on this contest to see who gets to add a block, to make the whole thing work. It’s not trivial to understand. Now, the flip side of that is, most people don’t understand the internet either, that doesn’t stop them from using it.

Beckworth: True.

Dwyer: How much time do you want to spend understanding TCP/IP, internet protocol? This is no.

Beckworth: Most people don’t understand Federal Reserve payment system either.

Dwyer: That’s true.

Beckworth: That’s a fair point. 

Dwyer: It is reputation. See, those institutions have reputations whereas the blockchain in 2012, there is no reputation operating there at all. It could just be computer scientists goofing off.

Beckworth: We have 21 million bitcoins that can be mined, and I think we’re getting close to that. I know the closer we get the harder the algorithm gets, so you can’t just easily mine as you could back in the early days. Ultimately it’s an inelastic supply. This reminds me of a commodity money standard of sorts, although with commodity money standards, that inelastic supply in the long run actually might be elastic as miners go look for more gold as prices change here. It is truly fixed.

Dwyer: Right.

Beckworth: The challenge, I think, for many people, Jerry, is what do you do if you want to turn this into an actual transaction asset or as a monetary base, maybe asset? I think I go back to the Scottish free banking system, where it handled demand shocks for money by doing some fractional reserve banking, but do you see a future for Bitcoin given its fixed supply being actually used as a transaction asset, as opposed to right now, more of just as an investment asset?

Dwyer: Not in the US. I don’t see it happening in the US because the implication is that changes in demand translate into changes in prices and sometimes large ones, and sometimes for reasons that aren’t entirely obvious, even. If you think about the way I think about it, like when I was an undergraduate, I got paid twice a month. At the start of the 15 days, I knew how much money I had, and we budgeted out the last dollar because there weren’t a lot of them. If the value of that currency had fallen, we would have been in trouble. People place a high value on predictable value of the money that they use, so I don’t see it in the US.

Now, on the other hand, something that’s a little bit of a puzzle, but I don’t really know how much it’s used, is if as long as the technology is available, for example, for remittances, Bitcoin is much cheaper than paying 6% to 8% or 10% Ethereum to money transmitters. It’s a lot cheaper than that. You can translate from one, shift it, and then translate back pretty quickly. You still have fluctuations, but they’re unlikely to be huge. I can see it being used for things like that. I can see it being used, like if I were in Zimbabwe and said, “You can hold Zimbabwean dollars or you can hold Bitcoin.” I’ll take Bitcoin.

Beckworth: Right. We see it being used in places where money is very unstable. The question is, is Bitcoin stable? You say relative to what? What’s the next best option in those places, but even in the US, I would think, in the limit, there would be some innovation, some hope, some aspiration by Bitcoin people. Wasn’t the original purpose for Bitcoin to provide a substitute to the dollar? I know the early chat rooms and people who talked about it, they were inspired by the free banking literature. They drew from that.

Dwyer: Right.

Beckworth: I guess here’s a scenario I’m painting. We reached the 21 million Bitcoins. Maybe the price around it does stabilize, but could you foresee some technology, some platform, some financial innovation that allows the ability for it to be used as money to be stabilized, some kind of demand buffer that’s provided by these services on top of the existing Bitcoin base?

Dwyer: I’m going to answer by making a comment that might not seem quite to the point, but it just seems to me it is.

Beckworth: Sure.

Dwyer: I don’t know any financial development like that. On the other hand, 30 years ago, nobody would have thought we’d all be walking around with supercomputers in our pockets. Or the way I put it sometimes when I’m talking to people is, remember, even Star Trek, they used flip phones. If you say 10 or 15 years from now, where is this going to go? I don’t know. Part of it is that there’s a whole other use besides currencies, like smart contracts, for example.

Now, Bitcoin itself, the script actually doesn’t allow for them, but you can actually do what’s called wrapping, where you can take a Bitcoin and you wrap it, and then you can put it on the Ethereum blockchain, which does have a more complete computer script language. You can then turn around and write smart contracts on the basis of Bitcoin. One of the issues that arose a few years ago was just the sheer length of time and the expense of doing transactions with Bitcoin. Because the demand for doing transactions was going up, and the available space is limited.

Somebody came up with the idea of what’s called the Lightning Network, which is a side chain, so that you can do transactions over there, and then you go back to the Bitcoin blockchain later on. It’s pretty hard to tell when innovations are going to occur. Actually, I don’t think you can, but I think where there’s a will, there’s a way.

Beckworth: That is a great answer, actually. Because what you’re saying is allow innovation to try out options, allow fintech to explore. Don’t put handcuffs on them. Let them try out possibilities. We never know where we may end up. That brings me full circle back to stablecoins here. We will end on this note. What are your thoughts on stablecoins? Because they do seem to be the best use case right now for a transaction asset in the crypto space. What do you hope to see and what do you expect to see in there?

Dwyer: Yes, they are used a lot for transactions, actually. A lot of transactions on exchanges of cryptocurrencies actually settle in stablecoins, as opposed to US dollars. One time, I’m not sure what it is right now, but at one time, Tether, the velocity of transactions relative to the stock of money, was once a day, not five or six times a year. Once a day, it would turn over. There are a lot of transactions actually using stablecoins. I would guess there are various reasons for that that make it convenient. The interesting thing about the GENIUS Act, in a way, and I mentioned this in the context, but it just got ignored, is it assumes that all stablecoins are relative to US dollars.

There’s no particular reason for that to be true. That is, there are stablecoins in euros right now. There are stablecoins in gold right now. They’re stable relative to the price of gold, if that’s what you want to be, that’s where you’re going to be. You can imagine innovations in what they promise to deliver, but the GENIUS Act doesn’t really allow that and assumes that everything is going to be US dollars. As far as I can tell, it doesn’t really say that, but it’s all implicit.

Beckworth: That’s one of the critiques of the GENIUS Act. It doesn’t deal with stablecoins offshore, which are the biggest stablecoins. I think it’s intended to make sure that the dollar remains the dominant currency, the dominant asset backing stablecoins. You’re right, stablecoins could take off another asset form, so gold, euros. Although Jerry, I’ve talked to people on this podcast, you probably know as well, the Europeans aren’t very excited about stablecoins, and they’re practically regulating them out of existence. They’re going for a CBDC instead, as are many others in China. They’re pushing real hard for central bank digital currency. I guess the space would be US dollar stablecoins and then other places, other than the euro area, China, but who knows, maybe they’ll change too, going forward.

Dwyer: I think once people understand central bank digital currencies, they’re not going to be very excited about them. Like I tell people, look, every time you buy a tank of gas with this central bank digital currency, or every time you’re buying a pack of gum, the government’s going to know it. They won’t necessarily know what you bought, but they’ll know where you bought it, they’ll know how much you paid. You can say, “Oh, but they wouldn’t do that.” It’s like, “Yes, we would’ve said that 20 years ago, but not anymore.” Privacy is difficult to keep, and central bank digital currency kills it, especially if you eliminate currency at the same time because then the government could figure out every transaction that you engaged in and used money, literally every one. I find that spooky personally.

Beckworth: Jerry, one of the critiques of stablecoins is that it is easy to do cross-border payments, and something nefarious could happen. Now, you and I both like the liberty, the privacy perspective of stable coins, of crypto assets, but there are legitimate concerns too. People would worry about, man, these terrorists, they can just move a million dollars across the border with a keystroke, drug dealers. How do you, as someone who loves freedom and human flourishing and loves that side of crypto, how do you wrestle with also the law enforcement side of it and state security side of it?

Dwyer: That’s a common criticism of cryptocurrencies in general, and it’s wrong. Actually, I’m working on a project on crypto and crime, which is more a review of a bunch of books than anything else. The thing is that there are people who specialize in tracing transactions on the blockchain. That’s what they do for a living, they’re investigators.

How do we know how much North Korea stole? It’s because these people trace it on the blockchain, and they can figure out where it went. The idea that this stuff is anonymous, it’s not really anonymous. In computer science, they call it pseudo-anonymous, which another translation is sorta-anonymous, and it’s anonymous in the following way.

You have this address, unless you’re given some other source of information, you don’t know who it is. It’s like not a check where your name is at the bottom or anything like that. Now, on the other hand, the minute I know that address is yours, I know every transaction you made. Literally, I can trace them all. You can use mixers to try to make it difficult, but all it does is make it difficult, and these guys have figured out ways around it, and some of it’s proprietary and all of this, but the bottom line is that cryptocurrencies in general aren’t nearly as anonymous as people think they are.

Now the issue that arises with stablecoins is they still have to be transferred from one person to another, and actually, stablecoins are transferred at a central institution. Stablecoins are a liability of the issuer, and it’s hard to imagine operating that business and having no idea who owns it. Actually, the GENIUS Act has written into it, at least with respect to who gets the currency initially, all of the Bank Secrecy Act material, know your customer. I don’t really see it as being as insurmountable.

One of the books I read actually is called There’s No Such Thing as Crypto Crime. Now his point was, all the crimes you hear about, they all existed before. They’re just using cryptocurrency to do it. That’s the only difference. It’s a different medium, but the crimes are the same. Investigating them is similar, although you have to have this technological part of it going for you, too. Are they going to become untraceable? I have a hard time believing that. For one thing, if nothing else, the federal government’s not going to let that happen. FinCEN is going to go after them.

Beckworth: Jerry, let me transition to our final question, and this speaks to something you brought up earlier. You mentioned the threat of quantum computing for crypto assets. Tell us a little bit more about that.

Dwyer: Basically, the security in cryptocurrencies comes from the crypto part of it, cryptography. Cryptography is used in sealing the blockchain, cryptography is used in people’s addresses, and all of that cryptography relies on not on that you can prove that nobody can ever do this. What it relies on is, practically speaking, you can’t do it. A lot of it just relies on, can you take a number and factor it into the two prime numbers that it came from, a large number, like 512 digits, and can you factor in as a prime. It’s a product of two primes, and can you find the two prime numbers that created it?

The answer is with current computers, you might get lucky, but most likely it’s going to take you half a million years, and so nobody tries for practical purposes. Quantum computing, actually, has various aspects to it, but one of them is it’s faster and it’s orders of magnitude faster. A little bit of it has already occurred, is you can break current cryptography algorithms. Now the issue for Bitcoin is going to be, what do you do about everything that’s sealed by this now breakable algorithm? I think the answer is at the moment, nobody really knows. I’m sure people have proposals, but nobody really knows.

It’s basically a threat to the security of the system eventually, but again, it’s hard to know where quantum computers are going to go to because they’re fundamentally different.

Beckworth: On that note, our time is up. Our guest today has been Jerry Dwyer. Jerry, thank you so much for coming on the program.

Dwyer: Thank you for having me. It’s been a pleasure.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.