[12922] in Cypherpunks
RE: The American money capture
daemon@ATHENA.MIT.EDU (Russell Nelson)
Tue May 3 07:10:23 1994
Date: Mon, 2 May 94 23:57 EDT
From: nelson@crynwr.com (Russell Nelson)
To: cypherpunks@toad.com
In-Reply-To: <9405030234.AA33516@acs5.acs.ucalgary.ca> (vkisosza@acs.ucalgary.ca)
Skip to the end for the digital cash stuff. No ob-crypto at all, sorry.
Date: Mon, 2 May 94 20:34:18 MDT
From: "Istvan Oszaraz von Keszi" <vkisosza@acs.ucalgary.ca>
I'm sure I'm not the only one who's going to scream about this one,
but so far I'm the first. Maybe I'll do a good enough job that no one
else will (How'm I doing Perry?)
Blanc Weber wrote:
> Would it be too complex and lengthy an explanation to provide to say
> how the money supply is decided in the first place; that is, how an
> appropriate amount of it is calculated initially? Is this in reference
> to the gold or other backing which gives each dollar its monetary value?
Money supply is an arbitrary thing. We could have a money supply of
one dollar (and billionth cent coins) if we wanted. The Fed
supposedly *tries* to print up new money when new wealth is created,
so that the dollar stays at about the same level. If they didn't,
then cash would constantly increase in value, reflecting the new
wealth creation.
In it's simplest form money is simply debits and credits kept on
certain ledgers. Let me present the most simple example. Alice
has a supply of money. Let's say a $1000. She deposits this in
her favourite bank. The bank then lends the money to Bob. Alice
has $1000, and now Bob has $1000. The supply of money is now
$2000.
Nope. Alice can't spend her money. She's renting it to the bank.
Bob then spends the $1000, he borrowed. The seller deposits this,
which the bank then relends, and on and on. So money grows, and
grows, eventually becoming valueless.
Um, no. Bob spent the $1000, but really, Alice owns the thing that
Bob bought. And, Bob is renting it from Alice.
Central banks try to limit growth by using interest rates to
reduce the demand for money, and by requiring banks to post
reserves with their central bank on their deposits.
Banks would have to do this anyway, because they have to deal with
people coming to get "their" money. They have to keep a certain
amount of liquidity. The term for that is "reserve", but it just
means very liquid investments, e.g. cash.
So if Alice deposits $1000, and there's a reserve rate of 10%,
then only $900 can be lent, and then $810, and then $729, as the
money makes it's way through the economy.
Right. Banks have to balance liquidity against uncertainty.
So the money went around, and around, growing and growing, until
it slowly became worthless. The only thing that keeps money
growth in check is market discipline and faith. The whole house
of cards doesn't come tumbling down, because Alice has faith that
she has $1000. In reality the emperor has no clothes.
In reality Alice's investment is nowhere near as liquid as she thought
it was. Hers is only liquid if no one else's is.
No, most major currencies are not on the Gold Standard. They
float purely in relation to other currencies. So what gives
money it's value? Purely, the loans which back it up. This is
why it is practically impossible to stop, eco-disasters from
continuing. If the countries that have "borrowed" this money
default, the whole thing collapses. It collapses everywhere,
simultaneously.
Well, no. As long as banks can keep collecting and paying interest
and *some* of the principal, they're mostly okay. They can rebuild
the lost principal through lower profits. The place where the "faith"
comes in is the confidence investors have that their investment in the
bank is as liquid as they thought it was when they made it.
Now we get to the problem with digital money. It's a stand alone
system with no "faith" in it and with no growth built in. Faith
is the only thing that keeps things working, that and legislating
paper as legal tender, so people are forced to accept it.
Not really, not at all. I can start issuing my own wealth receipts
(digitally or not) as long as I can show people that I actually have
the wealth that I'm issuing the receipts for. And yes, I'm subject to
keeping a reserve, otherwise how would people trust me?
Obviously, legislating digital money as legal tender is outside
our power. Putting growth into the system without destroying
faith is also very difficult. The only logical step is to make
digital money repesent something. It must be convertable into
something that people already have faith in. Otherwise I fear,
that digital money may not fly.
In the end, you have the right of it. Digital cash must be
convertible to be accepted.
-russ <nelson@crynwr.com> ftp.msen.com:pub/vendor/crynwr/crynwr.wav
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