Re: The Economy Of Plenty

Hal Finney (
Fri, 19 Sep 1997 10:33:54 -0700

[First attempt at posting]

Keith Elis writes:
> Yes, some fiat tender is backed by real property. But loans in general
> need not be granted based upon bank assets. This is why you can
> *negotiate* with a bank for a mortgage and recieve a credit card.
> [...]
> But, as banks loan more and more money (to buyers, investors,
> entrepreneurs, etc.) the supply of disposable dollars increases. What
> does this do? It lowers the value of a dollar -- or more simply, it
> causes inflation of prices. Where at one point 1 dollar could buy 1
> widget, inflation makes 1 widget cost $1.05 (or whatever).

For loans which are backed by real property, the growth in the
money supply roughly matches the growth in the value of all property.
(The total value of property continually grows due to increased population
and productivity. People are constantly building new and better things.)
This does not lead to inflation because the two grow roughly in step.

> So, my point is, after that annoying review of U.S. econ (which was more
> for my own amusement than anyone else's), money is created by way of
> bank loans. The process of "creating" money is in no way dependent on a
> "standard." Given real property, gold, or comic books, a bank needs
> nothing to create money out of thin air (except a charter from the Fed,
> or something like that). Interestingly, this is why a bank can offer you
> a credit card. True, this is type II money, but it is still money. A
> credit card offers people dollars at a very high price, and may have
> been a partial cause of inflation within the past two decades.
> The short of it is, I'm missing your point about the sum of mortgages
> being approximately equal to the money supply.

I believe that the amount of money loaned which is backed by real
property, mostly mortgages, is much larger than the amount loaned
unsecured, like credit cards. When I looked this up a few years ago, it
was true. And it is unsurprising; most people live in housing worth
much more than the value of their credit cards. (Not many people could
buy their house with their credit cards.)

Furthermore, as I have said, the total amount of mortgages was
approximately equal to the total money supply. I'm sorry, I don't have
the figures on hand now so I can't be more precise. This was based on
information in the Statistical Abstract of the U.S. If you really need
it I can spend a few hours and get you more accurate figures.

> I disagree. The most important thing to a currency is how easily it can
> be counterfeited. Wood chips carved with a big "C" for currency will
> never be money. Wood is too common, and a currency based upon it is
> prone to easy counterfeit. This is why transmutation was such an
> intriguing thing. Wouldn't it be nice to be able to take a lump of lead
> and turn it into gold? Not because I like gold at all, but because it
> cannot be counterfeited -- gold is gold is gold. When Archimedes figured
> out how to determine how much gold composes a certain alloy ("Eureka!")
> he changed the world forever. (Okay, for a good long time at least.)
> Gold has a specific mass per volume. Mix in other metals and this mass
> per volume changes. The short of it is that gold turned out to be
> difficult to counterfeit. Even with nanotech one cannot counterfeit gold
> (picotech?).

This is a good point, but inability to counterfeit will not be enough.
There has to be some value. Otherwise, what will determine how much the
currency is worth relative to other currencies? Simple rarity? We can
see that is not the case. There are many rare and unreproducible things
which have low value, works of bad art for example.

> My point is that no item will become currency unless it is difficult to
> replicate. Who cares if it has value or not? As long as it can represent
> value, that's all that matters. I don't see what the hubbub is over
> money.

So does that mean I can give you some rarity, no matter how unpleasant,
in payment for a debt I owe you, and as long as it cannot be replicated
you will accept it? If the item is so rare that, say, only 100 of them
ever exist, can I claim that it is therefore worth 1/100 of the total
amount of property in the world?

> Clearly, allowing local scrips is inflationary. Or, at the very least,
> creates money where money would not have been. This is of course very,
> very bad for central fiscal policy. No matter what the Fed does to
> reduce inflation, anyone with poker chips (or the capacity to make poker
> chips) may add to the money supply at will.
> In short, I'm not surprised they hate new currencies.

Actually there are reasons to expect competing currencies to be much
*less* inflationary than monopoly currencies. An inflating currency
becomes unpopular and people shift to the competition. That's why
countries in the grip of hyper inflation try to prevent people from
using other currencies, and a black market in strong currencies develops.

So you're right that the Fed would not want this, since it loses the
ability to inflate at will. Still, the decision should be made not on
the basis of what is good for the Fed, but of what is good for the
citizenry. As understanding of this relationship spreads, pressure may
grow to allow some experiments along these lines.

Alternatively, the growth of the net may facilitate "international
trade" on a small scale, people living in one country, telecommuting to
a company in another, and getting paid in the currency of a third.
This could allow currency competition to develop on a wider scale.