From: mpd@netcom.com (Mike Duvos)
Date: Thu, 28 Mar 1996 18:39:28 +0800
To: cypherpunks@toad.com
Subject: Re: What backs up digital money?
In-Reply-To: <ad7ede961f02100418d5@[205.199.118.202]>
Message-ID: <199603280239.SAA15391@netcom17.netcom.com>
MIME-Version: 1.0
Content-Type: text/plain


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.                      $