tcmay@got.net (Timothy C. May) writes:
At 1:46 PM 3/27/96, Scott Schryvers wrote:
Question. If e-cash were backed by gold would that make it more reliable than say the dollar?
Not necessarily. Historically, gold emerged as the primary currency metal because it could be processed using simple technology, didn't wear out, and the world supply from mining it increased at approximately 2% per year, which was a good match to the growth rate of most economies. The current price of gold could hardly be supported by legitimate industrial uses of the metal, and banks in Europe have tons of the stuff in their vaults freed up from the mass departure of the world's currencies from the gold standard a number of years ago. Basically, one can create monetary value for any commodity whose supply can be controlled, usually by the folks wishing to lend it value, by simply making a stable market in it, and having the reputation and power to control that market in perpetuity. The best example of this is probably the diamond market. Here we have a rare but intrinsically worthless material, the gem quality diamond, which has no useful industrial applications at all, since non-gem quality diamonds and substitutes, both synthetic and natural, are in abundance. Gem quality diamonds are extremely valuable, because their supply is carefully controlled, and because of clever marketing designed to convince every male human in North America and most of Europe that shelling out two months salary for one is the unique and true symbol of everlasting love. The diamond industry has even made plans for the holographic fingerprinting of every diamond they release, should synthetic gem-quality diamonds ever hit the market, so that they may continue their control of the supply of their "currency", even in the face of a flood of absolutely identical "unsanctioned" gems. I recall a very clever Science Fiction story I read a number of years ago in which aliens completely destroyed human civilization by manufacturing all the world's goods and services, and accepting payment only in cowpies, which were subject to an arbitrary and complicated grading system similar to that used by modern gemologists. One day, the aliens simply left, and human civilization, consisting mostly by then of PhD Cowflopologists with expertise only in interpreting swirls on lumps of shit, promptly folded. Before I digress to far from your original question, let me state the point I am trying to make here. If a entity, or group of entities, with reputation and power to make a market, decide to demoninate a currency using a rare commodity, it makes little difference whether the rare commodity is near-perfect crystals of carbon found only on land that they own, a vault filled with gold bars, exponentiated random numbers modulo the product of two large but closely guarded primes, or statistically unlikely swirls in wads of digested plant material dropping from the butt of a cow. In all these cases, the important thing is not the commodity, but the entities guaranteeing the market, and the perception of their reputation and ability to support said currency in perpetuity. Absolute control over the supply of the commodity in question doesn't hurt either. Indeed, US government backed e-cash would be a far more trusted and reliable currency than gold backed currency printed by DigiCash BV. One good inflation-resistant indicator of whether gold is a good value is the ratio between gold and silver prices. Both of these metals are mined with similar difficulty, and have similar uses for backing currency and as coinage metals. Historically, there have been times when gold and silver prices were approximately equal. I have no doubt that if the unwashed masses were sold the notion that gold was the single reliable inflation-proof form of wealth they could own, and the holdings of international bankers were sold into the hands of millions of individual citizens, a controlled devaluation would follow, together with much chortling and uncorking of champagne, as gold and silver prices became nearly equal again. As long as people who count have vaults full of the stuff, and wish to carry it on their books as an expensive asset, it will of course continue to have its current inflated value, and nothing will be done to depress the market. In that sense gold is a reliable asset, as long as most of the little people refrain from jumping on the bandwagon.
No form of digital money extant is an actual currency in the conventional sense. Nor does this seem likely. Nor necessary. Nor useful. Nor important.
Actual currency can circulate forever in the economy without eventual conversion into some other kind of money. The requirements of current digital cash systems for centralized clearing to eliminate double spending and to mint new coins tends to preclude the kinds of perpetual peer-to-peer transactions we think of when we conceptualize "currency." Real electronic currency could be invented, but would have to live its life within a population of tamper-proof smart cards communicating with each other through secure protocols. Whether anyone will bother to implement such a system remains to be seen. Until then, the "check" model of digital money is, as Tim points out, the correct one.
The point being that talking about "what backs up digital cash?" is misleading. (What really backs it up is the reputation of the entities, but I digress.)
"The reputation of the entities" is the only important consideration regardless of what the cash is denominated in. In most cases, the valued commodities, if they exist, are simply pretty window-dressing for some unseen but powerful syndicate. -- Mike Duvos $ PGP 2.6 Public Key available $ mpd@netcom.com $ via Finger. $