Re: What backs up digital money?

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

I have to disagree somewhat with a few points Mike made.  I would say
that gold and diamonds do have intrinsic value, based on their beauty
and the desire of people to own them.  I think it is too simplistic to
denigrate these desires as the product of advertising.  The feelings that
people have which make them desire these things are as legitimate as
other forms of desire.

Along these lines, I think one of the factors which made gold and
silver coins accepted as money was their intrinsic value.  Even without
being certain that another person would take the coin, a person might
accept payment in such a coin because of its inherent value to him.
Other early forms of money, such as beads or tobacco, also had
intrinsic value in their time and place.

One area I would agree with Mike is that these items may not always
retain their value, since part of it is psychological.  And as with any
other commodity, if new supplies became available their value would
fall.  This might be especially pronounced with gold and diamonds since
part of their value is due to their intrinsic rarity.  Diamonds as
common as glass would not be worth much more.  (Of course, government
money as common as paper is worth the same as well, as hard experience
has taught us.)

A particular issue of "digital cash" could be denominated or backed by
anything the issuer thinks there is a market for.  Gold backed digital
currency would have certain advantages and disadvantages.  Currency could
be backed by a basket of commodities, or a synthetic average of several
countries' currencies.  You would not exchange your dcash for a bushel of
wheat and a barrel of oil, but rather for dollars or pounds equal to the
market value of these commodities.  These and more elaborate possibilites
are no more difficult to imagine than mutual funds or stock market
index futures, not to mention the more complex synthetic investments.

Hal