Spain turns to Bitcoin, prompting incoherent discussion on Today

There are problems with the currency. But not those problems.

Wired's Ian Steadman reported yesterday about the surge in downloads of Bitcoin apps in Spain, noting that:

Three iOS apps – Bitcoin Gold, Bitcoin Ticker and Bitcoin App – each jumped up the App Store charts in Spain, all on the same day, as the news broke from Cyprus. Compare their download histories to those from a country like the UK and it's clear that the upward trend is more pronounced in the more at-risk nation. Bitcoin Gold's all-time high ranking of 83 in Spain came on 17 March; for Bitcoin Ticker, 68 on 17 March; Bitcoin App reached a high of 147 on 19 March. The highest rankings for those apps in the UK are lower – 293, 201 and 48 –and they were all records set months or even years ago.

That surge has been noticed by others, too – including Radio 4's Today Programme, which had a little interview with an economist about the fledgling currency. Sadly, they didn't really do themselves proud. A choice excerpt:

INTERVIEWER: A currency supply has to be limited, otherwise it can be devalued and copied. Who limits it? Who controls it, if there's no central bank?

INTERVIEWEE: Well, it's all controLled by users of the bitcoin community, and that's the reason why it has become so popular in recent years.

INTERVIEWER: What, they're all unbelievably virtuous, they all control it? What's the mechanism?

INTERVIEWEE: Any currency, and any asset class, is basically predicated on trust. We trust the central bank, we have full faith in credit, so we go into a shop and we trust that our £20 note is freely exchangeable for £20 of goods.

Now, heaven knows I'm not the biggest fan of the digital currency, but this is doing it an enormous disservice.

The reason why gets a bit technical, but if you want to know more about the currency, it's worth learning how it works. If not, skip the next five paragraphs.

The heart of bitcoin is based on something called public-key cryptography. This technique – used throughout the web, whenever security is needed – uses very large prime numbers to create a form of encryption where the key used to lock data is different from, but related to, the key used to unlock it. What that means is that you can send copies of the first key far and wide, and so long as you keep the second key hidden, other people can encrypt information which only you can then decrypt.

But there's a second thing the technology allows. If you use your private key to lock the data, then anyone can unlock it with your – and only your – public key. That lets you sign messages in a way which, so long as people are certain that it really is your public key they have, proves it was you who wrote it.

A bitcoin is, in its purest form, a list of past transactions signed with private keys and verified with public keys. So long as you keep your private key secret, it is impossible for other people to "spend" bitcoins which the network knows are held by you, because those transactions wouldn't be accepted.

It bitcoin were a centralised currency, that would be that. But it's decentralised, and that means that there's a second problem to overcome. I could send one bitcoin to Alice with her key added to the end, and the same bitcoin to Bob with his added on. Until the two of them spoke, they wouldn't know who had the "real" coin and who had the fake one.

The way bitcoin solves this is the really clever part of the whole thing. All transactions are broadcast throughout the network, and then certain computers – called "miners", analogously to gold – work to group them into a timestamped block every ten minutes. Multiple computers do this at once, because the calculations required to make a new block are, deliberately, very difficult. Honesty is therefore enforced by the fact that the easiest group to co-ordinate is the one telling the truth about which transactions came first.

OK, back to the non-tech stuff. How is this linked to inflation? Well, if your computer is the one which solves the puzzle and makes the block, you get some free bitcoins. Currently, it's 25 every block, but that number halves every four years until it drops to 0.00 in the year 2140.

And that's it. That's the only way new coins are created, and there's just over 1.25 million made each year. So there's nothing to do with "trust" in the whole system: low inflation is inherent to the entire idea. In fact, that's actually one of the things used to attack bitcoin; orthodox economics holds that a low level of inflation is good, because it encourages people to spend rather than horde. If there was a bitcoin economy the size of a nation, it would be in a permanent state of recession, and there would be no possiblity of monetary policy saving the day.

The worst thing is, the interviewee apparently knew this, because later on in the segment, he said:

They're so popular because they offer a little bit of something new, a little bit of security, an anti-inflation side of things, as well, because they've built something into the trading algorithm which means that it actually deflates over the cause of the lifetime.

Bitcoin might or might not work as a currency – you can tell what side I come on – but if Today is going to cover it, they ought to cover it well.

Of course, none of what Today actually discussed helps address the real question: are the panicky Spanish savers doing the smart thing by moving their money into bitcoin? (That's assuming they actually are; as Steadman points out, iOS is small fry in Spain, and three apps increasing their sales figures does not an exodus make.) It depends what they are fleeing.

If the fear is that the Spanish banks might implement a Cypriot-style deposit tax, then bitcoin would help. As a potentially anonymous currency, it's a tax avoider's – and tax evader's – dream, but only insofar as taking money out of the bank and keeping it in cash under the bed is. You can keep your money hidden from the tax man, but when you come to spend it, you're going to raise questions. In fact, the whole thing comes back full circle, because with Cyprus on lock-down, money laundering got a bit harder to do.

If your fear instead is Spain exiting the euro and devaluing, then bitcoin is a slightly better choice – but again, only so good as holding your money in dollars in a safe. But the exchange rate matters here. If I'm right, it's actually considerably worse than holding dollars in a safe. The bubble will burst, the exchange rate will plummet, and your bitcoins, measured in a currency you can actually use to buy food in, will lose all their value.

If I'm wrong, and the 100 per cent month-on-month increase continues, or even just levels off, then moving all your money into it could leave you rich. Who knows? That's the gamble you're taking

But fundamentally, the reason for switching to bitcoin from any other currency is that you have lost trust in the very concept of governments looking after money. If you are sitting in the eurozone at the moment, that might be an understandable belief. But I still have very little hope that switching from a currency with bad monetary policy to a currency where monetary policy is deliberately impossible will help matters to any great deal.

Spaincoin! Bitspain? Spitcoin. Image: Wikimedia Commons/Alex Hern

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Neville Chamberlain returns from meeting Hitler in September 1938. Credit: DAILY HERALD ARCHIVE/SSPL/GETTY IMAGES
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Did Neville Chamberlain create the conditions for the RAF to win the Battle of Britain?

The wartime prime minister has long been reviled as the arch appeaser of Hitler and Nazism.

Flying through blue sky towards London, the Luftwaffe crews were in a confident mood. It was 15 September 1940 and their commanders had told them that, after weeks of intensive combat, the RAF was all but beaten. Even when the first British fighter planes appeared on the horizon, they remained dismissive of the threat. “Here come those last 50 Spitfires,” sneered one pilot of a Dornier DO-17 bomber. But complacency soon turned to fear. Badly misled about the strength of Britain’s defences, the Luftwaffe suffered heavy losses at the hands of Fighter Command. That day marked a decisive defeat for Germany. Hopes of achieving air superiority were extinguished. On 17 September Hitler issued a formal directive postponing indefinitely his plan to mount an invasion of Britain.

The resonance of the Battle of Britain is all the more powerful today, given that this month marks the centenary of the RAF’s foundation. Created in April 1918 through a merger of the Royal Flying Corps and the Royal Naval Air Service, the force came into being largely as a result of political pressure for an effective response to German bomber and Zeppelin attacks on southern England. More than two decades later, against a much deadlier aerial threat from Germany, the RAF had its “finest hour”, as Winston Churchill famously said. The name of Churchill will feature heavily in the RAF centenary commemorations. But in contrast, that of his predecessor in No 10, Neville Chamberlain, is likely to be either ignored or disparaged. Where Churchill is seen as the architect of salvation, Chamberlain is considered to have brought Britain to the brink of disaster.

According to the conventional narrative, his cowardly policy of appeasement emboldened Hitler, while his mix of parochialism and thrift left the country ill-prepared for war. In the memorable insult of Lloyd George, he saw “every problem through the wrong end of a municipal drainpipe”.

But this portrayal does Chamberlain a gross historical injustice. For all his undoubted flaws, including his vanity and self-delusion about Hitler, he deserves a large amount of credit for the RAF’s success in 1940. Far from leaving our defences ill-equipped, he was the leader responsible for ensuring that Britain had the planes ready for the titanic struggle against the Luftwaffe. For most of the 1930s, while he was prime minister and chancellor, his decisions provided the funds for the RAF’s expansion and ensured the money was focused on fighters. As he wrote to his sister Ida in July 1940: “If I am personally responsible for deficiencies in tanks and guns, I must equally be responsible for the efficiency of the RAF.”

In the 1930s, Chamberlain had a crucial impact on air policy because he challenged the RAF orthodoxy, which held that its central purpose was to deter a continental enemy by the threat of devastation through strategic bombing. This theory of the so-called knockout blow was known as the “Trenchard doctrine” after the first head of the RAF, Hugh Trenchard, who put all his faith in bombers and believed that fighters were an irrelevance. “The aeroplane is no defence against the aeroplane,” he once said. Even after he departed in 1930, Trenchardism remained in the ascendant until Chamberlain broke its grip.

It must be admitted that he did so partly for fiscal reasons, since one bomber cost as much as four fighters. But he also saw that new technology, particularly the introduction of radar and fast, single-seater, forward-firing monoplanes like the Spitfire and the Hurricane from the mid-1930s, had the potential to transform aerial combat by making bombers far more vulnerable.

Contrary to his quasi-pacifist image, Chamberlain showed a keen interest in the technical details of the new fighters, telling the House of Commons in May 1938 about their record-breaking speeds and their advanced features, such as “engines of unprecedented efficiency” and “variable pitch airscrews”. Indeed, in his enthusiasm for the Spitfire and Hurricane, Chamberlain showed more insight than Churchill, who, as a Tory backbencher, felt that the RAF should be concentrating production on two-seater fighters with rearward-firing turrets. In 1938 Churchill explained: “The urgency for action arises from the fact that the Germans must know we have banked on the forward-shooting, plunging Spitfire, whose attack must most likely resolve itself into a pursuit which, if not instantly effective, exposes the pursuer to destruction.”

Exactly such a plane was being made, though not in the quantities that Churchill wanted. It was called the Boulton-Paul Defiant and proved a disaster in the war, offering little more than target practice for the Luftwaffe.

Fortunately for the RAF, Chamberlain prevailed. Under his leadership, the entire focus of the government’s rearmament programme was on fighter defence. “I have won all along the line,” he wrote triumphantly in 1934 when still chancellor, after he persuaded the RAF and cabinet colleagues to agree an increase in the number of home squadrons.

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Contradicting his reputation for parsimony, Chamberlain poured money into a succession of 13 RAF expansion programmes, while, as prime minister, he approved the construction of a series of aircraft factories, most notably the world’s largest plant at Castle Bromwich in Birmingham, which was meant to produce 1,000 Spitfires by June 1940. By 1939, rearmament was swallowing 21.4 per cent of Britain’s gross national product, a figure that reached 51.7 per cent by 1940. When Chamberlain finally declared war in September 1939, Britain’s aircraft output had overtaken that of Germany’s.

During the war, Labour liked to portray Chamberlain as one of the “guilty men” whose folly had almost resulted in national humiliation. Yet much of his air force rearmament was accomplished in the teeth of ferocious Labour opposition, especially before 1938. As Labour leader between 1932 and 1935, George Lansbury, who was a Christian pacifist, said he would “disband the army and dismiss the RAF”.

The 1938 Munich Agreement was central to the “guilty men” charge sheet against Chamberlain. That is understandable. But apart from the cold reality that there was little public appetite for conflict at the time of Munich, Chamberlain understood that Britain’s aerial defences were still too weak for war. Just before he left Heston airport on 29 September, he received a letter from Sir Charles Bruce-Gardener, the chairman of the Society of British Aircraft Constructors, who privately warned that “if war was declared, the equipment available for the RAF, both in types and numbers, was far below that of the German air force”.

Munich undoubtedly bought Britain time for the RAF to modernise dramatically over the next two years. In autumn 1938 Fighter Command had just 25 squadrons, mostly made up of obsolete biplanes. By the eve of the Battle of Britain, there were 58, most of them Spitfires and Hurricanes. Denis Webb, a manager at the Supermarine company that built the Spitfire, wrote, “Chamberlain’s despised scrap of paper gave us a good return”.

Chamberlain died from cancer in November 1940, but lived long enough to see the victory in the Battle of Britain. 

Leo McKinstry is a biographer and historian

This article first appeared in the 18 April 2018 issue of the New Statesman, Enoch Powell’s revenge