From: "FRank O. Trotter, III" <fotiii@crl.com>
Date: Thu, 4 Apr 1996 18:47:21 +0800
To: cypherpunks@toad.com
Subject: Re: What backs up digital money?
Message-ID: <199604040402.AA10457@mail.crl.com>
MIME-Version: 1.0
Content-Type: text/plain


> 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>
> > 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.
> 
> > 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).

> 
> > 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
--------------------------------------------