Bitcoin Forum

Here I do not try to give hints or modify current bitcoin implementation. Just some ideas for the currency in digital world which, according to my IMHO, are interesting.

According to some sources, the currency is not like other commodities, the money is just a media for exchange the commodities. In current economy the banks provide this media as credits and get payed for that. The difference between a regular commodities and the credits is that the money backed upped by credits do not have a real value. The money makes sense only as an exchange media and do not have own value. That means the banks sells an air (in some sense) for the real price, forcing the economy to grow infinitely.

I think it would be a good idea if any digital currency agent would be able to behave as a bank for himself. I mean it can be a good idea if an agent could request the network for a credit under condition that this credit will be returned back after some period of time without interest rate. I.e. I want to pay for a service or the goods, but I do not have money on my account. But still I can do it, having by the end a negative account on my balance. The negative balance must be turned to positive, or at least zero after some period of time. The system (the network) must be able to evaluate my previous history in order to limit my possible negative balance to some amount to prevent abuse. How to do it? I do not know.

 With this strategy the banks can be excluded from the economy with their interest rate. As a consequence the economy will not be forced to grow infinitely.

Sorry for possible gibberish. I'm not an economist :)

What is the procedure for someone who borrows and does not return the currency? If there is to be any procedure at all then identity will have to be verified (presumably by some special authority).

The same procedure that is followed when someone borrows hard currency, and does not return it...  Up to the lender to set the level of security.

not really. There is no lender in this scenario: an agent "borrows" the money from the air (like banks do). The system must just evaluate the trust level of this agent to set the limits. Somehow, I do not know exactly how. Maybe based on the previous transactions (i.e. the more successful  payments were made from the different agents, the better reputation is). Of course, the identity will be disclosed (or partially disclosed). But this is needed to avoid abuse. This system can be coupled with the anonymous cash like bitcoins to enable anonymous transfers for those who care.
If someone do not return the money to the system his ability to borrow more is just blocked. If the account is coupled with a person (i.e. by a trusted certification center which emits the key for individuals (and organisations). Like digital passport. AFAIK in some countries this is done by state authorities. I remember we had such initiative in Russia, but this does not work yet, just a project. Or commercial CA like VeriSign or Thawte ), a wise behavior is to avoid this situation, or the person will not be able to make new purchases anymore. 

Do people really think that banks generate or borrow money from the air? That is just uninformed.

Banks borrow money from each other and from the Fed/Central banks at interest. The Fed/Central banks set interest rates (and make other monetary policy decisions) to keep the currency relatively stable. Stable meaning $1 buys 1 loaf of cheap bread. (It has for the better part of a decade now.)

In general the Fed/Central banks guard vigorously against a price deflation. They also guard against rapid inflation. This means the fluctuations are NOT zero centered. Value fluctuations tend to stay on the slightly inflated side of zero. This is all by design.

Getting a 3% pay raise is a little nice. Getting a 3% pay cut sucks really bad.

Here I meant fractional reserve policy banks usually use to generate credits. In some sense it's making the money from air :)


Agree, but I am talking about improving the bitcoing model only. I think zero centered model must be just *better* the current one, but not ultimate, for sure. Also, I think smart taxation can perform the same regulation as interest rate does. Not sure however.

I'm really not picking on you. :-)

It's just that a lot of the "fractional reserve" discussions on this site are hooey. Everyone just nodding at each other doesn't re-enforce validity of a fallacious argument.

If I loan the bank 100 gold coins, then the bank promises to repay me 100 gold coins. It doesn't promise me to keep 100 gold coins on hand incase I bang on the door and want to see them.

We have such deposits but they are called "safe deposit boxes" you pay the bank for the privilege of them keeping your hoard safe. They pay you nothing, because they are in business to make money. What you hoard has zero benefit to them. It could be gold, could be comic books. They are just renting really expensive cubic inches to you. If you wanted the bank to keep a 100% reserve of the money you deposit with them, you simply have to pay them for their services. You can't expect them to pay you for it.

Now back to my gold coins, they didn't appear out of thin air. I loaned them to the banker and they are hard and metal. If a home buyer wants a loan, the bank spend my gold coins on a real world house. The coins don't disappear, they go to the previous owner of the house, or pays the builder for creating the new commodity.

Now if I want my gold coins back they don't appear from thin air. The bank gets coins from another bank by simply selling them the house. If you have every mortgaged a house, you would have seen your mortgage change hands several times during the life of your loan. There is no magic involved.

If you do responsible banking, the system works well. If you suck at banking, your bank fails. This can only happen if you give money to someone who won't pay it back AND you didn't take the proper collateral to guarantee zero loss.

That is the problem with depreciation. The collateral for loans no longer provides the value needed to back a default on the loan. That is why NO ONE loans in a depreciating environment.

it would be true if we were talking about gold coins. But the gold is not used as money anymore. So, If a home buyer wants a loan, a bank may to give it to him even if it does not have enough deposits. Basically, what it does is just giving you a sort of bill of a debt, not the gold money. This bill is backed upped by the the loan-certificates it got from borrower mostly, not the gold money it loaned from other banks or had before (partially yes, but not 100%).

I also have some ideas about bitcoin generation policy. I think it's bad that total amount of money is limited. Sellers are interested in money supply: the more goods are available the more money are needed to buy them. What I would do I would change the rules how BCs are generated: the more money are generated, the higher difficulty level is. The more money are received (that means more goods are sold out), the lower the difficulty level shall be adjusted to stimulate new coins generation.
 

Everything I wrote is accurate whether you do good banking with gold coins, dollars, or BTC. Banks never give you money without borrowing it first. That is called forgery. You don't have to care where the banks borrowed the money from. You don't even have to care if they pay their loans back. The person the bank borrowed from has to care. And in turn the bank has to care whether you pay your debt. Banking is inherently a trust enterprise. Or as Ronald Regan would say, "trust but verify". That is where collateral comes in.

In your example, your "sort of bill of a debt" is actually an interbank loan. When you say "This bill is backed upped by the the loan-certificates it got from borrower mostly" I'm assuming you mean the loan is secured by the property/collateral taken from the consumer borrower. Yes, both of those things are sound rational banking practices.

If the consumer defaults on the debt, the collateral is sold and used to pay back the interbank loan. If the bank didn't hold proper collateral, then they suck at banking and deserve to fail. So does the bank that trusted them with interbank loans.


I disagree about bitcoin monetary policy too, to it is the bitcoin way. The system and policy will likely rise or fall together. Don't expect drastic change unless you start a competing network.

Red you have it wrong about banks.   If they didn't create money/credit from nothing then there would be slow steady deflation.  If you think that the federal reserve is really "managing" the economy through "price fixing" then I have a bridge to sell you.  The only way they can "price fix" is to print money from nothing and thus steel from the current owners of money. 

You deposit your 100 gold coins, the bank can lend out 1000 gold coin notes and still have 10% backing in real gold.  Of course the bank wants interest on "gold notes created from nothing" and ultimately the interest exceeds the real supply of gold.  Then you get into a situation where more new money must be lent into existence or everyone defaults for lack of money in the system.  Also, today the reserve requirement is practically 0 because of games they can play.

If you deposit 100 gold coins and the bank promises you that you can withdraw them at ANY TIME.  And the bank promises 10 other people that they can withdraw 100 gold coins at any other time then they are COMMITTING FRAUD because it is impossible for them to make good on their promises.   

Now if you put money in a CD for 1 year then the bank can lend it out to someone else for up to 1 year.   The problem is when banks borrow short term money to lend long term, this is also a fraud.  They are lending money they do not have legitimate claim to for the duration of the loan. 

The great thing about bitcoin is that it prevents FRAUD in the money system.   Sure someone could create a "bit bank" and then issue their own "bit notes", but the value of the "bit note" would be different than the value of a "bit coin" because the "bit note" is a non-interest bearing IOU from a 3rd party whom you are required to trust where as a bit coin is not an IOU and you need not trust anyone. 

I know you really want what you say to be true but it doesn't match with any reality that I know of.

Bitcoin does absolutely nothing to prevent fraud in banking. Any commodity can be stolen with clever fraud.
Bitcoin does absolutely nothing to improve responsible banking. Banking can be done using any commodity.

Banks never create money however, they really do increase the velocity of money. That makes it look like there is more money, but responsible banking backs everything with outside commodities.

Are you saying the FED creates money and the banks just help hand it out? I completely agree that separate "banks" are just office fronts of the FED.

If you don't think the FED creates money then where does it come from at all?

Really now, this is all getting quite silly. Isn't this on wikipedia?

The Bureau of Engraving and Printing (http://www.moneyfactory.gov/) makes the bills. The U.S. Mint (http://www.usmint.gov) makes the coins. The Federal Reserve (http://www.federalreserve.gov) orders the money from the BEP and acts as HOARD. That is why it's called "reserve". The hoard is used to replace worn out money. And more importantly, it serves as a central bank that operates on principles similar to most other banks. It loans money from the hoard at interest to other banks. That is what "the prime rate" and "the fed rate" are all about.

The Fed never prints money and willy nilly sends the money out to citizens, politician or even other banks.

The thing that makes the Fed special and the part that you seem preoccupied is the fact that they The Fed (http://www.federalreserve.gov/monetarypolicy/fomc.htm) is responsible for setting the interest rates, and rules for other banks.

Feel free to read about it. It's all public information.

If you find an instance of someone who got to benefit first from newly printed money please let me know. I want to go stand next to that guy.

Note that even with "the bank bailout" the Fed didn't just print money and give it to the failing banks. The money was budgeted and loan terms were set by congress. Most of the banks repayed the loans with interest.

Hi, bytemaster, Red.

I think you are both right. In some sense :)

Yes, but partially. I meant the bill is secured by the loan-certificates it got from BORROWERS before and after. Not real money/gold coins. In turn they are backed upped by  the property/collateral. Or, being more accurate, EXPECTED PRICE for this property. When you get a loan from a bank, you actually exchange the certificates, one you get from the bank can be exchanged to the money at any time (your account balance), the second - your promise to return the money to bank after some period of time. The bank certificate is usually seen as "real money", because it can be exchanged at any time. And it's not our business how a bank does it. If bank gives away the credits without smart analysis then it will fail to exchange it to the money and this is the way to the default.

The way bytemaster describe the situation is not wrong. But he described not a situation, but just a view to the situation. I would call it "a conspiratorial view" :) The other view is the banks just serve growing market by selling the credits. Their work is to feed the system with money, but in an accurate way. They shall not give more money to the system then economy grows. If they do, they will fail to get them back and the penalty is loosing their money, or, in the worst case the default. And they are payed for their job with interest they get for the loans. They sell the credits just like others sell their goods.

The real problem here that this scenario is defined ONLY while the economy grows. If for any reason the economy stops growing, the system will fail (IMHO). And the banks are not interested in it at all. While this situation is just a hypothetical, it's still worth to think on it. It's very carelessly way of thinking that economy will grow forever. If the economy of the future will be based on renewable resources it won't be able to grow as it does right now (IMHO).

Hi falkenberg,

I agree with you. If anyone does banking badly they can crash the system.

In the US the banking system did Real Estate really badly. In California the decided it was sensible to lend people 9 times their annual salary with no money down! They also didn't require people to pay even the interest on their loans as part of their regular payment. The excess unpaid interest just rolled into the growing principle.

The could only do this because there was a market of EVEN STUPIDER investors to sell these idiotic loans to.

What happened? Well house prices spiked of course!

BECAUSE, houses don't cost what people can afford. Houses cost what banks will LOAN! That is how supply and demand work in real estate.

The key question to ask is "do the banks have privileges citizens do not". 

If I lend you a house and then charge you rent and then turn around and rent the house to yet someone else at the same time that would be considered FRAUD.  If neither party ever tries to visit the house at the same time then the fraud is successful. 

If I give you give me gold, and in exchange I give you a note promising to return it "on demand" then all is well.   If I then "rent" 9 other notes payable on demand then I have 10% reserve "lending".  The other notes are a fraud.   

Anyone can issue credit without limit.  The fraud occurs when a credit is passed off as a claim and then price fixed to be equal by the state.   With bitcoin someone could create a bank and practice fractional reserve bitcoin lending, but it would not work because there would be a clear difference between a bitcoin and what ever digital note the "bank" issued.  The bitcoins would be just as easy to use as the notes and so no store would ever accept an IOU from a bank over a real bitcoin. 

When the government says that a debt payable in gold can be paid off with an IOU gold from the bank and then that same government then says that bankers are no longer obligated to honor the contracts stipulating gold-on-demand then that is FRAUD. 

If you give me 10 coins and I lend out 9 of them, that is a 10% reserve. If you loan out 90 coins that is fraud. Math is important.

Fraud happens when you can't meet your obligations. If you do it doesn't matter what banking magic or collateral swaps you use.


A one dollar silver certificate is worth exactly the same as a one dollar fed reserve note.

A one dollar of lead would be worth just as much. I fail to see any significance.

Red,
  When you deposit a FRN into a bank the "reverse reserve rule" applies and 100 FRN results in $10 of new reserves.
  When you deposit 100 oz of gold it serves as enough reserves for 1000 FRN.   The gold is the asset, the notes are the debt.  The debt is backed by 10% real assets.

  The process is so crazy that the the mind is repulsed.   

Checkout Money as Debt for a complete history of banking.   While there are some issues with their proposed solutions, it does a great job explaining how the current system works.

http://www.youtube.com/watch?v=vVkFb26u9g8

Watched the silly video. It explains much of the bantering.

I'll leave you to your notions, because if that is your authoritative source there is no further point in discussion.

bytemaster,

Money as debts cartoon is a classical conspiracy theory movie. There are many others about politics, religion, whatever. It is a simplest explanation for everything, but simplest does not mean a correct one. It tells you true, but not all true, making you feel you got the point.
As I already told, your (their) vision is just a view to the situation, but not the explanation. I gave you other view, not worse then yours. Other accents and there is no more "evil banks". Banks are not evil, they are serving growing economy.

A regular people work in the banks. THEY ARE regular citizens.

The money is not like houses. Who ever told you that an account you have in a bank shall be 1=1 mapped to the gold or money someone deposited there? The account is just a product banks sell, according to the agreement you have with a bank the bank shall exchange your "digital money" on the account to the real banknotes by your request. I agree with Red, as soon as a bank does it there is no fraud. This system will work fine while the economy grows. These endless loans do not mean anything else except PAYMENT TO THE BANKS they force the economy to pay them for analysis of the economy and taking the responsibility for money making (credit making). If they do it wrong they answer for that by their money. The system works (shall work) so that the failure of one bank will not fail the whole system. I do not think that the system is a ultimate one (economy shall grow forever), but others are much worse. If you have an idea of a better system, let us know please :)

I like the idea of generation the credits bypassing the banks. But I do not know how to do it properly. If the system would give all the agents the power to generate the credits without checks, everybody would take the loans and would never give it back. Then the economy would stop. Too bad for everybody.

Note my disclaimer about the conclusion at the end of the movie which I did not agree with.

That video is not my only source.  In fact the Federal Reserve even admits that they create FRN out of thin air to buy treasuries or other assets.  A court case has even been won where the defendant demonstrated that the bank put up no "consideration" when it issued new money based upon them signing an IOU.  If the bank was not creating "money from air" then how do you explain the increase in the money supply?  If every claim payable on demand were possible to fulfill then there would be no "bank runs" and thus no fraud.   How do you explain a bank run unless each individual *thought* their money was payable on demand?   If their money was lent for a specific period of time then they could not RUN to the bank because the debt was not yet due.   Finally, if a bank note represents the debt of a bank then why in the world does it not pay any interest like all other negotiable debt instruments?  Are people really stupid enough to give the bank a 0% loan by holding a FRN and not immediately taking it to the bank to get the supposed gold that the note promises to pay?

Let us assume for a second that the Federal Reserve *was* gold backed like when it started.  Initial depositors are given 1 FRN per 1/20 oz of gold.  Then the bank issues 10x the FRN while maintaing their reserve ratio.  All of this credit money requires payment at (lets say) 5% interest because it was created based on loan demand.   Thus if the bank issued 1000 FRN and 900 of them were not backed then after one year the bank would need to collect 945 FRN from a system with only 1000 notes.  Net result is that the bank (which started with 0 capital of its own, all capital came from the initial depositors) would gross 45 FRN in interest.  Lets say the bank was generous and paid depositors 5% interest  (no spread) at a cost of 5 FRN.  The bank made 40 FRN from nothing.  Note that 40 FRN represents a supposed claim to 40% of all gold in existence! 

If there was NO FRAUD in the current banking system then why did the banks default on their promises to pay gold?  How can there be more gold notes than actual gold if there are only 90 notes for every 100 oz deposited? 

Where bank promises to pay you gold?? Gold is just like any other goods, the price for the gold is set by market. Money is the money, their role is to represent the value of the total economic and be exchange media for making the deals.

Gold *was* money initially.  The original FRN note promised to pay gold "on demand".  Then they "outlawed" owning gold in 1933 (a bank bailout essentially making it illegal to cash your promise) and in 197? they stopped redeeming FRN for gold for foreign central banks.   So yes, the *system* defaulted on promised gold.

We are left with FRNs which are in demand because people had debts and taxes to pay.  But the fundamental scam is still growing until it all crashes in hyperinflation.

I think what people fail to consider is that US silver and gold certificates were always denominated in DOLLARS not ounces. See for yourself.

http://dollardaze.org/blog/posts/2006/November/12/1/usdollarcomparison.jpg

A one dollar silver certificate is worth exactly the same amount of silver or gold as a one dollar federal reserve note. Always has been. Always will be.

By the way which weighs more a pound of lead or a pound of feathers? 

There were silver dollars made from silver, also some dimes and quarters. And $50 gold pieces made from gold. You can still buy some gold and silver commemorative coins. They are still denominated in dollars but cost more than their gold value. Those are what you want.

The coins are no longer made from these metals because the metal value is worth more than the denomination value.

Even pennies are no longer made of copper, because people were melting them for their copper value.

----

You should take this up with the British whose money IS called Pound Sterling!!  Go try changing their coins for a pound if silver.

This is all a mistaken notion.  Yes, the U.S. Mint coins the money and the Bureau of Printing and Engraving prints up the actual bills, but that doesn't describe where the money comes from in the first place.

When a local bank wants to get some money, they place an order to the local Federal Reserve branch bank (there is one in nearly every state in the USA) based upon the funds they have "electronically" deposited with the Fed.  They also ship money back from time to time, which either goes back into circulation or gets destroyed (with the bills being too old or having other problems).

That still doesn't deal with where the value of the money came from in the first place.  With fiat currencies like the U.S. Dollar, it comes quite literally out of nothing, where "The Fed" controls the money supply in a most direct manner.  The number of dollars that you or I have in a local bank is irrelevant in terms of how much money is actually on hand at that bank in a physical form, and frankly most transactions done today rarely even use physical money any more.  For ordinary consumers they use things like credit or debit cards, or make some other kind of electronic purchase (like a gift card, etc.).  Those federal agencies involved with making the physical money have absolutely nothing to do with these "virtual" money exchanges.

"The Fed" can and does create large amounts of money out of whole cloth that they in turn "lend" to member banks.  The amount they will lend varies proportionally by the amount of money that bank has "in reserve" with "The Fed", but it can and usually does exceed by more than 100% of the deposits in that bank.

For example, there has been a whole bunch of complaints about the $1 trillion USD that went to banks in the form of TARP funds and the additional trillion or so in "economic stimulus funds" that all came from the U.S. Congress.  What hasn't been widely reported (but it has been reported on sources like 60 Minutes and other "mainstream" news outlets) is that "The Fed" has created approximately $15-$20 trillion USD and offered that money to its member banks.... over the past year and a half alone.  How do you think the U.S. government is able to afford these kind of programs?

The really "cool" trick here is that "The Fed" is "loaning" out money to major banks at insanely low rates.... something like about 1% APR right now.  The banks are then buying up federal treasury bills, earning interest at 3%-4%.... pocketing the difference with basically no risk at all except for the potential that the United States of America is not going to exist due to foreign invasion or a coup d'etat.  At that point U.S. dollars would be worthless anyway, so it is a moot issue, and even that isn't 100% certain in that extreme situation.  Frankly I'd love to get in on a deal like that myself and make a few billion dollars "financing" the U.S. federal debt with play money that somebody else gave me.  None of that involved physical money, but rather just a few electronic transfers with some keyboard strokes and "The Fed" making an accounting of the whole thing in their server farm.

BTW, follow the money trail and note that more than a few members of congress are in on that money train too.  Who do you think finances most of the elections for federal office?  I'm talking mainly incumbents here.

Supposedly from time to time "The Fed" does take money back from all of these banks that they've lent money to, and have made attempts to "buy back" (in dollars of course) the money they've lent out.  In the meantime they've hyperinflated the currency and have caused other huge problems.

Originally the dollar was defined as so many grains of silver, in minted form.  Silver certificates were obtained from banks that took those silver dollars of that specific weight and value and issued the certificate.... where most people who received those certificates presumed that they would get the silver coins back at a future date if they requested them.  Yes, they were denominated in dollars, because dollars were denominated in silver.

The problem came when the law passed that debased the currency and removed the silver==dollar conversion rate, and instead replaced that with Federal Reserve Notes.  Even now, if you have a silver certificate, you can go to any bank and exchange the silver certificate.... for a federal reserve note.  BTW, don't do that..... the silver certificates are worth more as collector items than as real money or by people who feel that the debasing of the currency was unconstitutional or illegal.

Yes, the silver certificates issued in the 1930's looked almost identical to the Federal Reserve Notes.  That was by design as the Fed notes wouldn't have been recognized or accepted otherwise.  The difference is that a Federal Reserve Note doesn't require the bank to give you anything other than another Federal Reserve Note.  A Silver Certificate in theory could require the bank to give you a hunk of silver worth a dollar.... a dollar as defined by federal law and not the commodity metal market.

Things have changed since this time, RHorning. I just wonder why do you think the gold/silver based currency is better then the one used right now? I still did not get the point, why? The value of money shall reflect the current status of the economy IMHO. The more economy grows the more money are needed. Isn't it?

if money is perfectly divisible then as the economy grows the size of the units shrinks.  Thus you get more "parts" instead of increasing the size of the pie.   

=> deflation. And deflation is BAD.

Woot!  LOL!  :-)

Beautifully argued...  Here's some counterarguments:

http://mises.org/daily/1583 (http://mises.org/daily/1583)

http://mises.org/books/deflationandliberty.pdf (http://mises.org/books/deflationandliberty.pdf)

Interesting. Thanks for the references. But anyway, even if they are completely right, the deflation makes the growth speed lower. And this is worse then a faster speed, isn't it? So, why do we need deflation? if the inflationary economy works better?

Is it better for me to work this hour or to take a break? Working might grow the economy, but that doesn't mean it's better. And there's no way to know if working this hour will even grow the economy more over a long time period than taking a break. If I work straight from this point until I collapse, short term growth will be larger, long term  will suffer very much.

You could prop me up for a while by paying $100/hr, then $200/hr, eventually 10k/hr, then bust. Your goal ought not be too keep me working constantly, but to determine how much my labor is worth to you and offer no more than that. That gives me accurate info about how needed my work is and I'll determine the best amount to allocate.

So no, more growth now is not always better. EVEN IF all you care about is growth, because of long term consequences of cramming growth into the current period.

It makes sense. Thanks for your view. But anyway, this is just a hypotheses that deflation is not so bad for the economy. To be on the safe side the monetary system shall reflect the total value of the economy and stimulate trading. IMHO

To the extent that inflation or deflation is predictable, willingness to loan or spend in the present should not be affected since then relating the value of money at different times is trivial, all other things being equal.

I think having a central authority attempt to fix some arbitrary price level only adds an extra layer of uncertainty.  If they have some sort of secret knowledge (AFAIK they don't, aside from their planned market manipulations), then why not simply publish it and let everyone act accordingly?

One must also consider the negative effects of arbitrary purchasing power redistribution and interest rate manipulation that most monetary management schemes entail.  This is why ideally I prefer a fixed money supply over even some kind of predictable monetary inflation or deflation.

I didn't say that one particular kind of currency was any better or worse, but it is merely mis-representing the facts that the currency issued by the U.S. Treasury has always been "dollar-backed" without reference to metals and based on a "hard currency".

And no, the "more the economy grows" more money isn't always needed.  A real question that should be asked..... who gets to decide where the allocation of "new money" comes from if such a move is in theory needed?

Metal-backed currencies are for various reasons influenced by external events that may or may not be to the national interests of governments that are involved.  The Comstock Lode in Nevada certainly had a huge influence in the value of the U.S. Dollar for most of the late 19th Century, as did the California and some subsequent "gold rushes" in North America.  Certainly there was some local inflation that got as high as having eggs sell for $2 each and haircuts for $100... in the 1850's.  All of that money did eventually flow into the larger national economy as well over time.

The problem with a currency shortage is what to do when the smallest denomination has a value so large that you can't "make change" with it.  This was a problem with money early on in at least North America, where the local money supply was so tight that people couldn't really use things like metal coins for ordinary trade like for food, clothing, or shelter.  In Quebec, the supply of money was so short in the late 1600's that the government in one province confiscated all of the playing cards, had them signed by the governor and turned into money for day to day transactions.  This is a real issue in regards to a shortage of money, and something that Bitcoins does not suffer from.

As long as there is sufficient divisibility of the currency to be able to pay for ordinary items like a gumball or a single music download, it can be presumed that there is sufficient money supply to take care of basic needs in that society.

+1BTC RHorning.   You hit the nail on the head.

Inflation/deflation is not a concern as long as the currency is divisible and the share of "ownership" remains constant and all contracts adjust as well. 

Whether you have 1 BTC and everyone gets issued a 2 for 1 then you get inflation, but the economy is fine as long as contracts and debts also adjust accordingly.

Divisibility provides a nice automatic way of adjusting the price system.   If the number of goods grows 10 fold then things that use to cost 0.01 will now cost 0.001.  You could "inflate" fairly by giving everyone 10 for 1 and thus the price will return to 0.01 but it wouldn't change a thing!

Always ask the question "who gets the new money".   As long as the answer is "me" then I am all for it.  If the answer is you or anyone else... HELL NO!

OK so you have a point! ;-)  However, in my defense, let me explain what I was alluding to.

The initial silver Dollar was defined as the average amount of silver that is in the equivalent Spanish silver coin at the time. Those were the common trading currency of the time. The dollar needed parity if the coins were going to be interchangeable at that time.

But the common lament is "Oh, if I could take my 2010 FRNs to the Federal Reserve and demand a 1800 Silver coins I'd be rich! They've stolen all that value from me."

But even with the original silver coins, the commodity value of the silver was always less than the monetary value of the coin. That makes perfect sense if you think about it. A silver nugget has to be assayed, smelted, and pressed into coin. Part of the value of the coin is silver. The other part of the value is confidence in the "token" itself.

If the commodity value of the metal is ever more than the monetary value of the coin, it is rapidly taken out of circulation. Not by governments, but by individuals and traders. If I can pay one-dollars worth of corn for a coin, but melt it down into one-dollar and ten cents of silver, poof, they disappear. Simply sell the silver back for another dollar coin and start again. 10 times and you have a free dollar.

The point of the gold and silver standard was for trade between countries. It was less important for intra-country trade.

New money as a credit go to someone who can afford this credit. To the one who satisfy market requirements better then others, the one who can pay back the credit. They are the propelling power of the economy.

I wish this really were the case, but in the case of the current global economy and especially those who have assets in U.S. Dollars or in Euros, that is not really true.

For this latest recession, I'm not really certain who would have been the big losers had the governments simply had a "hands off" approach to monetary policy and let the major banks collapse due to their horrible loans and lack of judgment of credit worthiness.  Certainly many of the collaterallized mortgage obligations that brought about this current world-wide recession were based upon loans that were treated as AAA value loans when they should have recieved "junk" status instead.  There were some very wealthy people who were at the brink of losing all of their money (likely Warren Buffett and a few others) and a few prominent pension funds, but beyond some of those retirement funds it didn't really impact most ordinary people.

I could go on, but the point here is that the government is picking winners and losers all of the time, and doing that through fiscal policies that are allocating money to some individuals as a matter of law and arbitrary whim that has little or nothing at all to do with fiscal capacity or any other metric other than access to those in positions of political power and who gave the most in terms of political campaign donations in the past.  If a politician is given a billion dollars because they were able to in turn give ten billion to some banker or "investor", that doesn't sound like a good kind of monetary allocation system that is healthy in the long run for a representative democracy.  Similar kinds of actions are also happening in Europe, so don't think this is strictly an American or North American issue either.

There have also been numerous examples given regarding people receiving loans to build houses who were not particularly wealthy or with any sort of logic on the basis of credit worthiness but rather using values such as ethnicity and physical location of the property being the more significant factors involved.  When somebody working part-time at minimum wage was able to "afford" a half million dollar home, something was seriously out of whack.  Some sanity has returned to this particular market where it is now much harder to get a home loan (for a good reason), but it is the kind of largess that has been artificially inflating currencies like the Euro and the Dollar in huge ways and handing out "new money" that most ordinary people should object to.

For myself, if there is a need to inflate the currency (and that I'm not entirely certain is ever really true), it is better done by simply putting it in the hands of ordinary people and letting them decide what to do with it.  When the TARP program was originally proposed, it was suggested that perhaps everybody with a home mortgage would get a check from the federal treasury for the amount of approximately $150,000.  In terms of the money spent, it would have been pretty much a wash in terms of its impact on the federal treasury in the USA for the initial outlay.  In terms of economic activity and income returned to the federal government, arguably that sort of program would have caused the U.S. economy to roar back to life in a huge way that the next trillion dollar outlay has only dreamed about doing as well.  It also would have "solved" the CMO crisis in a way that those "junk" loans would have been paid off.  Almost all of that is "new money".  The question that should be asked...... who got it?  I'm talking trillions of dollars in "new money", not merely billions, and it is money that is currently in the global monetary markets right now.

For Bitcoins, I like the idea that at least those who are participating on the network and passing transaction information between one another are also at random intervals getting some of that "new money" from time to time.  It is more like the home owners getting that fat check from the government instead of bank executives.  You don't receive newly generated bitcoins due to political access or even based upon how much money you have... other than in a very loose manner in terms of how much CPU power you are putting into the network.  Any new monetary system does need to define where "new" currency is coming from and who is responsible for it.  This egalitarian and decentralized system of monetary allocation is something I really admire about Bitcoins and for me is one of its major strengths.

I understand this very well, RHorning. I live in Russia where we have an extremely high level of corruption and sometimes the economical laws for free market just do not work because there is no space for them. Still I believe that if there are many corrupters in, i.e. police (we call it "militia" and this is exactly our case), it does not mean the police is not needed at all and must be abolished. I believe that as a model the economical model we use right now is good enough for the time being. But the model is a model, the life is life and they differ.

Thanks for your posts, was very interesting.

A woot! To RHorning for his last post.

I'm not a fan of bad banking either. Those that are bad at their jobs should be fired. Those that scam should be tried and locked up.

I think mortgage brokers, realtors, and even some title companies should be investigated as "scam artists" for their activity during the housing price boom. All of these people convinced ordinary folk (maybe gullible ordinary folk) that obviously overpriced properties were affordable sound investments.

I also think that any bankers that gave out mortgagees during the housing boom should share more than a preponderance of the responsibility for these stupid loans. They are the people holding themselves out as experts on the subject.

Banks should never be allowed to get too big to fail. And if they practice banking they should fail.

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PS: that should say if they practice BAD banking.

Agree. A bank shall be responsible for it's activity, otherwise guiltless people will pay for it's mistakes.

Gold is useless as money today because the government only accepts federal reserve notes as payment for taxes.This creates the demand for them.If the government removed taxes people would realise the notes are actually worthless and use something else. Federal reserve notes keep the men with guns away from you which means it is a protection racket.Try paying your tax with gold and see what happens. :)

I dont really blame the banks for the protection racket as they are profit seeking entities and are doing what is in their nature to do.Without the power of government guns backing the fake money up and forcing people to participate in the system out of fear things would be different.