Saturday, February 27, 2016

21st Century Money

On Google+, I wrote:

Nick Szabo argues, convincingly, that commodities (like gold, oil, and even real estate) become (in part) money, when people use them to store value rather than entirely for their immediate practical value. He then shows how this leads to big swings in commodity prices as people change their mind about which things will be the best place to store value. His belief in gold and silver as a good single store of value didn't convince me. He also fails to note that it is a good thing if people store things which will be more valuable in the future than they are now. That has the effect of driving prices, and hence supply, up sooner rather than leaving it to the last minute. Speculators and hoarders provide a useful service! Information technology allows us to manage multiple currencies simultaneously allowing a more coherent attack on the issue than just hoping gold will do the job.

To expand on that last sentence: Banks should make it easy for their customers to hold their balances in a mix of currencies. When payments are made then conversion is done into the agreed exchange currency (such as the local central currency) according to a prescription provided by the customer. And inversely for incoming payments. Presumably banks will compete to cover the currencies that customers want and to provide reasonable conversion rates. 

Banks or governments could provide a currency that covers a (slowly changing) basket of valuable commodities. It would be important to do this in a very open and transparent way, so that there is confidence that the backing commodities do exist and can all be recovered by the currency owners (given large enough amounts of the currency). But banks should also allow customers to keep a balance of commodities according to the customer's prescribed ratios.