When thinking about the possibilities of central bank involvement in the exchange of Bitcoins, it is easy to become confused about the different methods of intervention that are possible. After all, we have been taught that the goal of the central bank is to stabilize the value of the national currency. Is that goal achieved when a government currency is allowed to depreciate while the value of Bitcoins continues to rise? Or does the goal of stabilizing the value of the Austrian National Bank disappear altogether when the value of Bitcoins surpasses $600 per each unit?
The answer depends on a few different factors. First, we must consider whether there is an ability for a government to intervene in the economy through its printing press. The history of the US dollar shows us that there has always been a certain amount of faith placed upon the ability of the federal government to control the flow of money in and out of the economy. That history has not changed despite a steady increase in the volume of business conducted on the Internet.
For those who subscribe to the deflationary school of thought, a decrease in the volume of spending on goods and services will always lead to a decrease in the overall value of the currency. This means that any decline in the purchasing power of the currency will cause a decrease in the purchasing power of the national currency. This, in a nutshell, is the basic philosophy of deflation. If the Austrian school is correct, and there is no inherent ability for the government to intervene in the economy via the printing press, then what can government officials do to control the value of the Austrian National Bank’s currency?
There are a number of ways that Austrian economists believe the government can use to try and control the economic situation. The most common is the regulation of money. By banning the use of the Swiss Bank Account, or making it illegal for corporations to hold accounts outside of Austria, the government can effectively make money flow through the economy more smoothly. Without the availability of offshore banking vehicles, there would be no funds available for imports or exports, and this could have a significant negative impact on the overall economic performance of the nation.
Another option open to the government to attempt to control the value of the Austrian Mark is to intervene in the interest rates market. Many Austrian economists believe that a central bank should invest in large quantities of debt security, such as government bonds. By purchasing a large number of bonds with a high interest rate, the central bank can raise the value of the national currency to offset the additional risk that the interest rate poses to the national monetary supply. While this method would not change the overall level of the Austrian Mark, it would prevent a significant drop in the value of the currency. The central bank could also intervene by changing the interest rates on commercial loans and deposits. These actions would collectively have a dramatic impact on the functioning of the economy.
Even more drastic measures may be deemed necessary by the Austrian government, if inflation continues to threaten to cause the economy to contract. Inflation is the increase in the general price level over time. This can be caused by a number of factors including the global financial crisis and the policy decisions of the central banks of various nations. Inflation can become a problem when the economy contracts due to a fall in the level of domestic demand. A sudden rise in the price level, caused by the intervention of the central banks, would result in hyperinflation and a breakdown of the economic system.
If the Austrian government believes that a decline in the level of the national currency will result in hyperinflation, there are several different routes that it can take to intervene in the economy. One of these interventions involves conducting direct intervention in the money markets to lower the interest rates paid by banks to commercial borrowers. This can affect the money supply and cause the balance of currency to change dramatically. Direct interventions would force commercial banks to foreclose on their assets and reissue their currency.
Another method that the Austrian government could use to intervene in the economy through the interest rates charged on loans is through the printing of counterfeit notes. Such counterfeits could then be circulated throughout the economy in an attempt to reverse the effects of deflation. Although this would effectively reduce the amount of money in the market, it would do little to reduce the amount of debt created by commercial banks. Whether or not the government thinks that a strategy of these types is justified in the present is open to debate.