Re: What backs up digital money?

[Hal <hfinney@shell.portal.com>]

From: "FRank O. Trotter, III" <fotiii@crl.com>
> Ecash is a means of transferring value, currently USD at Mark Twain,
> betweeen parties.  Ecash, however denominated, is not a currency in
> itself.

I am curious to know why you say that ecash is not a currency.  One of
the main points of my original posting was to challenge this view.

Do you simply mean that this is a matter of definitions, that ecash isn't
a currency because it lacks some property X that, by definition, a
currency must have (such as, it must be issued by a national government)?

Or are you saying that there is an important functional difference, that
ecash cannot be used as we normally use currency (that is, the dollar
bills and coins in our pockets) because of reason X?  If so I would like
to hear what you think that reason is.  The one I have seen mentioned
previously is transferrability, so I discussed this in my original
message.

> The value unit or currency has value because people agree it has
> value.  CyberBucks were (and still are) somewhat convertable to
> tangible goods - they are for sure convertable to intrinsic goods as
> demonstrated by the CyberBucks trial.  USD and DEM have value only
> because we all accept them as payment - as fiat currencies there is no
> formal backing.  Gold has value because ...

The whole issue of why dollars have value is one which is poorly
understood, IMO.  There are several reasons, which are inter-related.
One of the big ones is that they are legal tender.  This term does not
mean what a lot of people think it does, but at least it means that
your dollars carry certain legal weight if you have a debt that you
need to pay off.  Another reason dollars are accepted is because you
know you can pay your taxes with them.  This is something that most
people have to do, and dollars are something they can do it with.

Another factor is that there are long term contracts, such as
mortgages, which are denominated in dollars.  You can use your dollars
to pay off your debt at the bank, and the bank is contractually bound
to accept them (even apart from legal tender considerations), and grant
you title to tangible property in return.  Interestingly, the volume of
outstanding mortgages is of the same order of magnitude as the
circulating money supply.  I know someone who claims that this is the
most important factor in giving dollars value.

And finally, the reason that most people think of, the fact that
everyone around them accepts dollars, and presumably will do so in the
future.  I don't actually think this is as strong as the others, since
there is no guarantee that people won't change their minds, and in fact
there have been historical situations where due to hyper inflation
merchants have come to view government money as almost worthless.  So
since these people haven't committed to accept the money, this
grounding is not that strong.  I think the earlier examples are more
important as an ultimate grounding, although they are not cited as
frequently.

> Ecash puts banks back into the business of being banks - acting as a
> storehouse of value, and as a means to transfer this value, all for a
> fee.  The early bank models were exclusively along these lines, with
> the various lending and investing functions added later.

I would expect that an ecash issuing bank would make ecash loans just as
it makes other forms of loans.  So I don't see ecash as making this
kind of difference in a bank.  Just because a bank issues ecash it's
not going to roll back the clock to the 18th century.

One of the big advantages of multiple ecash currencies is that it turns
out that there is automatic control of inflation.  A bank which issues
too much currency (relative to its reserves) will find it becoming worth
less because it is trusted less.  There is an automatic balancing act.

We see the same thing in the international currency markets with
government currencies.  In the olden days, when international trade was
less important, a government could inflate without feeling much pain.
But today its currency will lose value, which will hurt its balance of
trade and make it hard to acquire foreign goods.  So this puts a brake on
the ability of governments to play games with the money supply.  The same
factor would be expected to occur with private currencies.

Hal