Date: Tue, 2 Apr 1996 08:11:21 -0800 From: Hal <hfinney@shell.portal.com> To: cypherpunks@toad.com Subject: Re: What backs up digital money?

From: "Frank O. Trotter, III" <fotiii@crl.com>

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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)?

===== I think I tried to cover too many bases at once. Ecash _is_ currency, it is not _a_ currency. This means that outside of the formal definition acording to BSA which says that currency is the stuff we carry around and nothing else, that ecash generated coins function as a currency in that one can make purchases on a peer to peer basis, and appears to have the migration path necessary to exist in an offline world as well. To me this makes it currency. It is not a currency. One sees many articles and posts (not yours) that refer to ecash as though it were not USD or some other store of value. In this case I mean that ecash is the software that moves and stores money like a check, or more precisely like a money order, but is not in itself _a_ currency.

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.

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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.

Exactly - I agree. Take a look at contracts like loans until Roosevelt closed the gold window in the early thirties. They said things like "you owe $100 or the equivalent of X.xx ounces of gold. With the revaluation of the US currency in terms of gold in the 30s there was a specific potion of the bill that disallowed these terms in contracts since the devaluation could not effectively take place otherwise (ref - Jim Grant).

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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.

No quarrel here - but I think it is easier to build a competing lending institution where the business gives you money and you promise toi give it back, than it is to build confidence in a deposit institution where you give money and hope to get it back. I take my original commnet as a positive.

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.

Sure, this is like free banking in the 1800 - Fed KC traded at a discount to Fed NY or vice versa depending on attitude at the time.

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.

In the old days there was an automatic balance when a government inflated - the metal standard attached. If inflation got out of hand people would show up at the window with bills asking for the gold or silver equivalent - when the government gave out too much metal it had to behave. I would like to note that I am a big supported of private currencies. We have had many discussions on the topic and I have had the academic side covered by folks who wrote papers as far back as the 50s on how to do it. As ecash is accepted in the mainstream by multi-issuing interoperable banks I expect to spend more time on this topic - for now I need to get on with the conventional version. Great ideas! Frank

Hal

Frank O. Trotter, III - fotiii@crl.com www.marktwain.com - Fax: +1 314 569-4906 --------------------------------------------