From an Interview with Doug Jackson, founder of e-gold. Interviewed by Mark Herpel.
http://themonetaryfuture.blogspot.com/2012/01/final-days-of-e-gold-interview-with.htmlLet’s say they spend a million of these whatevers into circulation. Perhaps an exchange market even emerges. The public sends real money to the exchangers. As long as demand is such as to support growth in circulation the exchangers have incoming real money, some of which can be paid out to the occasional customers who want to sell their whatevers. At some point though aggregate demand for whatevers declines and the exchangers are deluged with whatevers from people wanting to exchange them for real money. Their trading balances are now chock full of whatevers but running low on real money. At some point the exchangers – possibly the only entities that
have been holding value (in the form of trading balances of real money) to offset the whatevers – repudiate pending exchanges [that had been locked/committed at now inconvenient-to-honor exchange rates] and everyone is shocked.
What is that "real money" that he refers to? Is it fiat money? Value is decided by supply and demand, if there is no demand, even the gold will lose its value, but demand only comes from properties that can satisfy people's desire, there is no fundamental differences between many kind of currency
OK, now let’s contrast with an issuer of real money. The techie parts for moving the bits may be roughly similar. But these bits are recognized by their issuers as constituting the embodiment of liabilities, obligations against which they must hold an equal portfolio of suitable assets, set aside expressly for their redemption. The difference between “virtual” and real money becomes evident if and when demand for the real money declines. No problema. Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation.
This concept only applies to issuing money with a hard asset backing, typically gold. But what decide gold's value? It's still supply and demand to its root
People who fall for the numbers-that-are-money fallacy tend to also say things “after all, the Fed creates money out of thin air” - which is simply incorrect. The Fed creates money by buying up (and holding) the ever-mounting debts of the US Treasury, and, these days, the mortgage backed and other securities that were recently regarded as so scary as to call into question the solvency of the banks that had been holding them.
FED first create money, and then buy government bonds and MBS. You can also first create bitcoin, and then buy government bonds and MBS. You can also mine gold and buy government bonds and MBS. No difference at all
