Re: the value of money

[nelson@crynwr.com (Russell Nelson)]

   Date: Mon, 2 May 1994 13:55:34 -0700
   From: Hal <hfinney@shell.portal.com>

   Why don't we brainstorm a bit to see if we could come up with a way
   to take this digital cash software and do something useful and interesting
   with it.  It seems like too good an opportunity to just let it sit there and
   do nothing.  I know there has been some abstract discussion about cash
   systems in the past, but now we have something concrete and we should be
   to discuss it more specifically.

There have been several private-currancies in the recent past.  One of
them was written up in Utne Reader, quoting the Whole Earth Review.
I've got the information squirreled away somewhere.  That one was
interesting because it had a zero-sum money supply.  There was no
scrip -- all trades were registered with a central authority.  If I
traded a thing of value to you, my balance went up and yours went
down.  Debt was repudiatable only by leaving the system, and your
balance and trading rate was explicitly public information.  No one
could be forced to trade with anyone else, and trading with someone
(or not) based on their balance and trading rate was encouraged.
Inflation was not a problem because the money supply remained at zero.

The most telling remark from the originator (a Canadian) was that the
system worked best when you had someone with deep pockets who was
willing to run up a big positive balance by trading away things of
value for the private currancy.

So to get digital cash going, (IMHO) we need someone willing to risk a
bunch of bucks to get people in debt to the system.  Maybe someone
with some spare cash could print up a hundred Digital Cash T-shirts
(maybe a bit-mapped image of Johnny Cash? :) worth, say, $7, and sell
them for $10 bucks in digital cash.  The profit that would
(eventually, hopefully) bring would be their return on their risk.

There are other schemes that would work.

-russ <nelson@crynwr.com>      ftp.msen.com:pub/vendor/crynwr/crynwr.wav
Crynwr Software   | Crynwr Software sells packet driver support | ask4 PGP key
11 Grant St.      | +1 315 268 1925 (9201 FAX)    | Quakers do it in the light
Potsdam, NY 13676 | LPF member - ask me about the harm software patents do.

en $729, as the
   money makes it's way through the economy. 

Right.  Banks have to balance liquidity against uncertainty.

   So the money went around, and around, growing and growing, until
   it slowly became worthless.  The only thing that keeps money
   growth in check is market discipline and faith.  The whole house
   of cards doesn't come tumbling down, because Alice has faith that
   she has $1000.  In reality the emperor has no clothes.

In reality Alice's investment is nowhere near as liquid as she thought
it was.  Hers is only liquid if no one else's is.

   No, most major currencies are not on the Gold Standard.  They
   float purely in relation to other currencies.  So what gives
   money it's value?  Purely, the loans which back it up.  This is
   why it is practically impossible to stop, eco-disasters from
   continuing.  If the countries that have "borrowed" this money
   default, the whole thing collapses.  It collapses everywhere,
   simultaneously.

Well, no.  As long as banks can keep collecting and paying interest
and *some* of the principal, they're mostly okay.  They can rebuild
the lost principal through lower profits.  The place where the "faith"
comes in is the confidence investors have that their investment in the
bank is as liquid as they thought it was when they made it.

   Now we get to the problem with digital money. It's a stand alone
   system with no "faith" in it and with no growth built in.  Faith
   is the only thing that keeps things working, that and legislating
   paper as legal tender, so people are forced to accept it.

Not really, not at all.  I can start issuing my own wealth receipts
(digitally or not) as long as I can show people that I actually have
the wealth that I'm issuing the receipts for.  And yes, I'm subject to
keeping a reserve, otherwise how would people trust me?

   Obviously, legislating digital money as legal tender is outside
   our power.  Putting growth into the system without destroying
   faith is also very difficult.  The only logical step is to make
   digital money repesent something.  It must be convertable into
   something that people already have faith in.  Otherwise I fear,
   that digital money may not fly.

In the end, you have the right of it.  Digital cash must be
convertible to be accepted.

-russ <nelson@crynwr.com>      ftp.msen.com:pub/vendor/crynwr/crynwr.wav
Crynwr Software   | Crynwr Software sells packet driver support | ask4 PGP key
11 Grant St.      | +1 315 268 1925 (9201 FAX)    | Quakers do it in the light
Potsdam, NY 13676 | LPF member - ask me about the harm software patents do.