Backing

[hughes@ah.com (Eric Hughes)]

I have only one small quibble with Perry's recent comments.

>Why not just have people use a normal currency? Seems like you have
>some bizarre idea that the poor won't be able to afford the real
>currency, which is silly.

The question is not a bald one of access or no access, but one of
quantity obtainable in aggregate and timeliness of such accrual.

Experiments with LETS systems have shown that local economic activity
does improve in depressed cities when a barter currency is introduced
to supplement a paucity of the nominal national currency.  The city I
seem to remember is Manchester, England.

LETS (I forget the acronym expansion) is a barter system with a
virtual fiat currency.  Originally it used just a ledger; later, PC's
were used to keep the books.  The currency was zero-sum; all accounts
added to zero.  Reputation was provided by making all aggregate
balances public to the members of the system; you could decide not to
provide services to anybody, particularly if they had a large negative
balance.

Another example of how a dearth of transfer instruments affects an
economy was 16th/17th century Venice.  Coin hoarding did become
somewhat of a problem, and it affected the speed at which business
could be done.  This era was that of the rise of 'book-gold', or in
modern parlance, fractional reserves.

Perry is certainly correct that any commodity can be used as a
backing.  Recall, however, that promises are a commodity like any
other.  This is the unification of fiat currencies and gold
currencies.  It is also a basis for understanding that multiply
backed currencies can and do coexist stably.

Promises are not as fungible as gold is of course, which is one reason
that LETS systems do not scale well, since the characteristic effort
and communication needed to evaluate the worth of such a promise (even
an averaged promise as in a LETS system) is far greater.  One can
understand the rise of options markets as an effort to increase the
fungibility of the option promise, given that these markets are not
merely communications systems but also have some capacities as
guarantors and insurers (broadly construed).

Digital money has two characteristics that pertain to these issues:
denomination size and access.  The smallest denominable amount is not
limited in any virtual system (bank books included), whereas when in a
strict commodity system the unit of transactability may be too high
and cannot be infinitely subdivided.

For example, gold Spanish doubloons (from which the English 'dollar'
is a corruption) were too large for many transactions, so people made
them small by cutting them into eight 'bits', whence the equation of
'two bits' with a quarter.  But gold is not infinitely subdivisible,
but representations are.

The question of access arises as well.  Just as a LETS system is a
very econopunk system, digital money can be issued by any one person
or any group.  If no other backing is available, they can back it with
their own time and talent.  When these currencies can be easily traded
with other currencies, the problem of access to a more dominant
currency is alleviated.  These promises, being limited to a particular
geographic locale, are not fungible, but then lack of fungibility does
not so much prevent exchange as present some market-priced impediment
to it.

Eric