Another look at ideal money

Thursday 03 March 2016

A recent conversation made me revisit the idea of ideal money, and conclude that there’s no such thing - but that virtual currencies could come pretty close.

A while back I explored the idea of Positive Money, as described by the British campaign of the same name. In a nutshell, these guys are concerned that commercial banks create 97% of our money, and that every pound they create requires a pound of debt to balance it out. Thus there is always a cost to money to the end user (us), because the banks charge interest on what they lend/create. The upshot is that the very way that money is created means funds are siphoned out of the real economy and into the banking sector. Their solution: let the state create all money, severing the connection with debt, and make sure the banks are no more than the curators of this.

Read also: Is bitcoin really Positive Money? 

It’s a good start, though it has its problems, continued centralisation being one of them. Recently, I revisited the idea of ‘perfect money’ and what we look for from our currencies.

It’s important to remember that money is simply what people agree is money, whether that’s numbers in a fiat bank account, gold, bitcoin, cowrie shells, cigarettes or 4-ton limestone disks. People talk a lot about ‘intrinsic value’ as an argument for currency based on precious metals. (It even has some adherents among bitcoin fans, who claim that the energy sunk into mining gives bitcoin some kind of intrinsic value.)

Rai stone

Rai stones: money, yes, but a form that falls some way short of ideal

I'm not fond of the intrinsic value argument. Things are worth what people pay for them - bitcoin being a good example of that. And what constitutes useful ‘money’ is heavily conditioned by the circumstances. If the lunatic North Korean starts lobbing nukes over here, I'm going to favour tinned goods over either gold or paper money, which are not very tasty or nutritious. Right now, though, gold is probably a better store of value than tinned food.

Context is king. If you're in a context where cigarettes make the best currency (the big house), that's what you use. If you're somewhere people value gold more, cigarettes aren't much good. There's no one-size-fits-all Platonic ideal currency.

So where does bitcoin fit into all this?

No currency is perfect, bitcoin included. But there are contexts in which a bitcoin-like currency might be near-perfect. In the internet age, blockchain-based currencies certainly have a lot to offer. If we were starting from scratch, a different version of bitcoin might be preferable. One with faster block times, for example; one with larger blocks to accommodate more transactions; one that more more resistant to DDoS attacks; one that didn’t require infrastructure-heavy and environmentally-unfriendly proof-of-work mining. But something bitcoin-y nonetheless.

What bitcoin does have right now is network effect, and that’s not something you can create overnight. I don’t think bitcoin can compete well in all contexts, especially many offline ones; but in terms of e-commerce, it’s very good. All told, though, bitcoin represents a tiny, tiny fraction of the overall global money supply. It wouldn’t surprise me in the least to see alternatives creeping up on it over the coming months and years.

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