On Wed, 27 Mar 1996, Mike Duvos wrote:

tcmay@got.net (Timothy C. May) writes:

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At 1:46 PM 3/27/96, Scott Schryvers wrote:

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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

[Excellent points about gold's practical use, good timing, and industrial value countered by the current lack of industrial value.]

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.

I was with you until this. In fact diamonds are anything but rare. Their value is the result of the most exceptional marketing by DeBeers, and the very tight restrictions on supply. I might note that the restrictions on supply are even somewhat tangential. DeBeers has created one of the most historic, long standing and impressive market distortions anyone has ever seen. Of course this only goes to further the argument (which I think you are adopting) that it is fairly simple to estlablish a commodity of "value" regardless of intrinsic worth)

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.

Even gem quality stones are relatively abundant believe it or not.

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.

Again, even absent the intrinsic value of the substance it seems that marketing and perception will dictate "effective value."

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.

This is precisely the point, and why, while I agree with your comments about gold today, I think the most important issue is the long term solvency of a commodity. As you have noted, anyone can make a substance worth something in the short term. (Tulips) The challenge, and the goal in my view, is to create a currency based on a backing which endures the long term, and the unthinkable (collapse of a major government or some such).

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.

When the value of the intrinsic worth of a commodity in question does become apparent is in periods of transition, flux, disorder, or strife. The security of a currency is going to be a major factor, especially immediately following introduction, to its popularity- except in unusual circumstances (tulips, market distortions, etc.)

Indeed, US government backed e-cash would be a far more trusted and reliable currency than gold backed currency printed by DigiCash BV.

I'm not sure this is precisely true. While gold itself might not be the best choice, the general principal that a commodity based currency is less secure or trustworthy than a government backed one (even a powerful and imposing government) is not one I'm prepared to endorse without reservation.

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.

I believe this correct.

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.

Just like diamonds. Again, while the commodity itself (gold) may not be appropriate, I don't believe this ends the argument.

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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."

Which suggests that private currencys must utilize e-cash (if at all) merely as monetary instruments which continue to look much like what exists today. (e.g., drafts, checks, bonds...)

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.

I concur.

Until then, the "check" model of digital money is, as Tim points out, the correct one.

I concur again.

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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.

Yet here I must differ. I'm still not convinced that a legitimate commodity somewhat resistant to the market distortions you cite does not exist. Don't ask me what it is yet, I'll have to give it some thought.

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