The future of money

[UndercoverElephant]

CLV posted in another thread:

It should be fairly obvious that we need a medium of exchange and a representation of wealth. Bartering is simply not how we can run the planet of 7bn people this Wednesday evening. The question then is what shall we ALL agree on as a medium of exchange / representation of wealth? This is tricky, we can't use leaves as the good folk of the B-Ark suggested. Historically we have used anything that is scarce, long lasting, can't be faked etc... unfortunately these characteristics correlate well with precious metals like gold, also also gemstones etc. Land is also fairly good as a store of wealth for similar reasons - however, it makes a rubbish medium of exchange.

Arguably a lot of our problems owe their origins to when we stopped using these scarce, long lasting, hard to fake objects and instead moved to a system only slightly better than leaves. Slightly better as we trusted only a few folk to actually grow and hand out the leaves in a controlled way. Well that system is now looking rather dodgy. It's perfectly logical to look back at those tried and tested representations of wealth.

The big dangerous holes and poisonous methods are certainly a negative side effect but we absolutely have no better idea this evening of how to solve this very real problem of how to represent wealth.

I think this is sufficiently important that it needs a thread of its own, and maybe it should end up being stickied.

In the thread it came from, we ended up having a rather pointless ethical argument about the ecological damage caused by mining, specifically mining for gold. While I don't want to underplay the importance of any sort of ecological damage, I think the issue of gold mining is at best peripheral and arguably irrelevant.

It's arguably irrelevant for three reasons:

Firstly, most of the gold ever mined is still owned by some person or organisation as bullion/jewelry, and therefore it is not actually necessary to mine any more of it, because we could just use the gold already in existence (price-adjusted, naturally.)

Secondly, most of the new gold coming onto the market is a by-product of mining for other metals, especially copper and silver, and there's no way that humans are going to stop mining for these any time soon, because both of them are too useful as industrial metals.

Thirdly, regardless of what monetary system is in place, people are always going to want gold for other reasons (it's very pretty, after all), and gold mining is going to continue for this reason.

So hopefully we can avoid getting sidetracked too much on that debate and try to address the question Chris asked. We need a medium of exchange and a means of storing wealth. The fiat money system is doomed (I hope we can all agree on that one), and while a gold-based system may have worked reasonably well in the past, there is no reason to assume it is the best way forward, because there are so many major ways in which the world we are heading towards is different to the world that existed last time there was a proper gold-based monetary system (total number of people, new era of declining availability of natural resources (especially energy-related), globalised nature of economy, electronic/instant nature of financial transactions, and all the rest.)

These questions are precisely the sort that this forum was put here to try to find answers to, I think.

[UndercoverElephant]

NB: Should have included in opening post:

There is a direct link with peak oil, insomuch as the last remnant of the previous metal-based monetary system - the gold-backed US dollar - ceased to exist at precisely the same time that the US passed its own internal peak oil (1971/1972). This was not a co-incidence, although it wasn't the whole story either. The US was losing the war in Vietnam, and this combined with the peaking of their internal oil supply prompted other nations, starting with the French, to exchange their dollars for gold. The US could not keep up with all the demands for physical gold, so Nixon "closed the gold window." It was claimed at the time that this was a temporary measure, but was actually permanent, and ultimately this is what led to the current unstable/unsustainable monetary situation.

[Little John]

Two options.

1) We go back to a fully commodity backed medium of exchange. Te obvious choice is gold and other precious metals for all of the obvious reasons of fungibility, portability, physical stability, divisibility, rarity.

2) We allow a fully free market of money whereby anybody can offer a money service to the market. This may be commodity backed or it may be backed by nothing at all. It may be lent into existence or not. People will then choose where to store their wealth for themselves. some will chose to store it in high interest lent into existence credit, with all of the risks attached. some will choose to put it into solid commodities with little risk but little by way of potential profit. And there will be any number of products lying somewhere between those two extremes.

No banks are bailed out. No one's deposits are protected, at least not at the state level. Where fraud is shown to have occurred, then the usual legal rights of redress apply as they would in any other area of property law and criminal law.

I actually find the second approach the most philosophically satisfying, but I strongly suspect it would be complete chaos. So, the first is what I would go for, with all of its risks of state manipulations.

[Blue Peter]

and while a gold-based system may have worked reasonably well in the past,

Did it? How do we judge?


Peter.

[biffvernon]

Good. No now we've established the downsides of gold mining, lets get practical.

To make the money system worked, backed by gold, we don't actually need any more gold. Just imagine, for the sake of discussion, that we had alredy mined all the gold there is - every last atom is sitting in a bank vault or dangling off a pretty earlobe.

The gold that we have in enough to be a store of value and means of exchange. Over time there might be a little less dusting to do in bank vaults and a little more polishing of earrings if the global population's wealth gets distributed more evenly. The up-side is that fewer people would fall down holes in ground or play with mercury. But otherwise its business almost as usual.

Of course the reality is that there is still lots left in the rocks. But we could have a global environmental agreement to close all gold mines and impose swingeing environmental protection legislation on other mines where gold is a by-product. We should do that anyway. We need better health and safety legislation everywhere.

And meanwhile, and here we come back to the start of the argument, we should not buy gold because it only encourages miners, at least until adequate environmental legislation is in place and effective.

Anyone who actually holds gold at the moment will be supportive of this plan - think about it. People who resist anti-mining legislation are those who intend to buy gold in the future, and hope for a lower price when they are ready to buy, which actually defeats the object of their exercise.

[UndercoverElephant]

Good. No now we've established the downsides of gold mining, lets get practical.

To make the money system worked, backed by gold, we don't actually need any more gold. Just imagine, for the sake of discussion, that we had alredy mined all the gold there is - every last atom is sitting in a bank vault or dangling off a pretty earlobe.

The gold that we have in enough to be a store of value and means of exchange. Over time there might be a little less dusting to do in bank vaults and a little more polishing of earrings if the global population's wealth gets distributed more evenly. The up-side is that fewer people would fall down holes in ground or play with mercury. But otherwise its business almost as usual.

Of course the reality is that there is still lots left in the rocks. But we could have a global environmental agreement to close all gold mines and impose swingeing environmental protection legislation on other mines where gold is a by-product. We should do that anyway. We need better health and safety legislation everywhere.

And meanwhile, and here we come back to the start of the argument, we should not buy gold because it only encourages miners, at least until adequate environmental legislation is in place and effective.

Anyone who actually holds gold at the moment will be supportive of this plan - think about it. People who resist anti-mining legislation are those who intend to buy gold in the future, and hope for a lower price when they are ready to buy, which actually defeats the object of their exercise.

With the greatest respect, this thread is supposed to be about what is an appropriate form of money for the future of civilisation, NOT about gold mining. I understand your concerns, but you are concentrating on what is at best a side-issue and ignoring the main point of the thread, as explained in the opening post.

We need a monetary system that actually works in the future, taking into account our perspective as powerswitchers. There are far bigger problems to deal with regarding this question than the localised, and relatively small-scale ecological problems caused by mines specifically created to produce gold.

I think we need to concentrate on what "works" means in the above context. Please try to forget about the side-effect of gold-mining, and instead think about what we actually want our monetary system to do. A good/relevant answer to the question "what is a monetary system that works?" is NOT "one that leads to less gold mining." You're missing the point, big-time. "Works" has to mean something like "contributes to an economic system which is ecologically sustainable" or "...which is fair." If it is ecologically sustainable, or fair, but also means that a few gold mines still exist, then that is a price worth paying. Please try to focus on the bigger picture, instead of obsessing about what is actually a minor side-issue, for reasons explained in the opening post (unless you want to challenge those reasons, of course.)

[UndercoverElephant]

and while a gold-based system may have worked reasonably well in the past,

Did it? How do we judge?

Peter.

It worked better than fiat money systems, and the standard by which this is judged is that the metals-backed systems lasted much longer. Purely fiat money systems have had an average life-span of about 40 years before the temptation to print as a response to debt problems led to something along the lines of what is happening now.

Metal-backed money systems haven't been immune to collapsing either, but the manner in which they collapsed generally involved physical debasement - in other words, when the debt problems got out of control, the metal-backed money was slowly but surely turned into fiat money (by reducing the precious metal content of the coins and replacing it with non-precious metal), and then the fiat money went poop like ours is now.

It's a slippery slope. Or rather, two slippery slopes. The first is the physical debasement of metal-based money, and the second is the unrestricted production of the resulting fiat money.

[UndercoverElephant]

Two options.

1) We go back to a fully commodity backed medium of exchange. Te obvious choice is gold and other precious metals for all of the obvious reasons of fungibility, portability, physical stability, divisibility, rarity.

2) We allow a fully free market of money whereby anybody can offer a money service to the market. This may be commodity backed or it may be backed by nothing at all. It may be lent into existence or not. People will then choose where to store their wealth for themselves. some will chose to store it in high interest lent into existence credit, with all of the risks attached. some will choose to put it into solid commodities with little risk but little by way of potential profit. And there will be any number of products lying somewhere between those two extremes.

No banks are bailed out. No one's deposits are protected, at least not at the state level. Where fraud is shown to have occurred, then the usual legal rights of redress apply as they would in any other area of property law and criminal law.

I actually find the second approach the most philosophically satisfying, but I strongly suspect it would be complete chaos. So, the first is what I would go for, with all of its risks of state manipulations.

I think I'm in the same ballpark as you, but I'm kind of hoping we can collectively come up with some additional options.

Is there, for example, some sort of way we can combine a re-invented monetary system with the future energy-supply issues we're primarily concerned with at Powerswitch? Or is this a non-starter for some reason?

[Little John]

and while a gold-based system may have worked reasonably well in the past,

Did it? How do we judge?

Peter.

It worked better than fiat money systems, and the standard by which this is judged is that the metals-backed systems lasted much longer. Purely fiat money systems have had an average life-span of about 40 years before the temptation to print as a response to debt problems led to something along the lines of what is happening now.

Metal-backed money systems haven't been immune to collapsing either, but the manner in which they collapsed generally involved physical debasement - in other words, when the debt problems got out of control, the metal-backed money was slowly but surely turned into fiat money (by reducing the precious metal content of the coins and replacing it with non-precious metal), and then the fiat money went poop like ours is now.

It's a slippery slope. Or rather, two slippery slopes. The first is the physical debasement of metal-based money, and the second is the unrestricted production of the resulting fiat money.

Physically un-backed FIAT is and always has been the problem because it relies on its administrators being saints and, as we know, there are no saints. There are only humans.

[AndySir]

http://en.wikipedia.org/wiki/Great_Debasement

Unfortunately all systems rely on the administrators being saints. The prescription is rule of law / distribution of power, not simply changing the nature of the (arbitrary) rules. All systems can be exploited.

[stumuzz]

Have a look in the films, books section where I posted a short film 'the wizard of oz' a couple of years ago.

It will answer all your questions.

[biffvernon]

With the greatest respect, this thread is supposed to be about what is an appropriate form of money for the future of civilisation, NOT about gold mining. I understand your concerns, but you are concentrating on what is at best a side-issue and ignoring the main point of the thread, as explained in the opening post.

Ok but the thread title is the future of money, and I'd like to see future money based not an a metal that is more ornament than use, is dangerous to find and that we already have tonnes of that is being used for nothing practical. We've moved on from the Bronze Age and have become smart enough to invent Bitcoins that don't even involve anyone cutting so much as a piece of turf.

Let's talk about how virtual money can be made a safe and secure store of value and medium of exchange.

[RenewableCandy]

Have a look in the films, books section where I posted a short film 'the wizard of oz' a couple of years ago.

It will answer all your questions.

I do remember that: didn't they suggest using Silver? If I remember correctly, the Chinese characters for "Money" and "silver" are the same, as indeed all the Romance languages (that ( know bits of) are. There are also various metaphors about rivers, implying that silver/money should move around and change hands, rather than accumulate in great heaps.

Meanwhile, I remember also reading in the news about a (well-established Canadian) shop's vouchers being treated as a form of currency somewhere. It has also occurred to me that our City Council could use "council's service" vouchers in part-payment to its staff...after all, everybody has to pay council tax. Thus, anybody who produces anything universally used (energy, municipal services, etc) could, in theory, issue "money" that would have a "sound" value and not collapse.

[Little John]

http://en.wikipedia.org/wiki/Great_Debasement

Unfortunately all systems rely on the administrators being saints. The prescription is rule of law / distribution of power, not simply changing the nature of the (arbitrary) rules. All systems can be exploited.

Yes, of course, they all require that their administrators are saintly. But, some require that they are more saintly than others. Unbacked FIAT the most of all.

And yes, I agree it is all about distribution of power, in the end. However, those unequal distributions are helped or hindered by the monetary system that is used. Unbacked, debt-based FIAT helps those in charge to stay in charge better than any other system of money ever devised. That's why they are prepared to do absolutely anything necessary to keep this stinking, corrupt system of money going, even to the extent of condemning future generation of southern Europeans (and the rest of us, if and when our time comes) to penury on its altar.

[Little John]

With the greatest respect, this thread is supposed to be about what is an appropriate form of money for the future of civilisation, NOT about gold mining. I understand your concerns, but you are concentrating on what is at best a side-issue and ignoring the main point of the thread, as explained in the opening post.

Ok but the thread title is the future of money, and I'd like to see future money based not an a metal that is more ornament than use, is dangerous to find and that we already have tonnes of that is being used for nothing practical. We've moved on from the Bronze Age and have become smart enough to invent Bitcoins that don't even involve anyone cutting so much as a piece of turf.

Let's talk about how virtual money can be made a safe and secure store of value and medium of exchange.

Virtual money cannot be made safe. It could, in theory, though, be made transparent and subject to a free market. If both of those qualities pertained, it would work in the sense that, over time, economic Darwinism would weed out those money providers who were crap. In order for the process to fully work, there would have to be no bailouts of banks or depositors so as not to create moral hazard. The trouble is, there would need to be all kinds of regulatory safeguards in place to stop one particular service provider from gaining a monopoly. As such, it would probably be unworkable.

The above being the case, the safest system that could operate is one of IOUs backed by a physical commodity.

We're back to gold, or some equivalent, whether you like it or not