wizardwatson
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A New Theory and Practice of Money
Introduction
It's been a while since I wrote anything on this subject (8 months). But I feel that although my ability to articulate my case is far from perfect, it has progressed far enough beyond my initial attempt that I now feel, once again, that I should try to communicate it. Basically, I believe I have discovered, a property or 'theory' of money. Or at least I feel I've 'learned' something about money that appears to imply a theory or law of some sort. The theory itself is quite easy enough to understand even for someone only mildly familiar with the subject, while explanation of how I arrived at the conclusion is a little more difficult. But this might not even be relevant, as I'm hoping the idea generates enough of a buzz that people's individual understanding can be hashed out in a deliberative process rather than me writing some kind of book or thesis which I really do not see as necessary, and would probably even be counterproductive since there are a lot of different ways you can come at and attack the idea (many of which I've already done in my head) which all have to be dealt with from different perspectives. Although I've tried to frame the theory in somewhat of a praxeological manner, I fear its very weak in that regard, and I'm hoping the real-world applicability (the practice of the theory) is taken more seriously than my attempts to formulate it into a scientific assertion.
I've tried to keep this whole document concise and short. I want to do four things in this order: explain my objective, present the theory, show how the theory could be put into practice, show the implications of the theory (and of the implementation(s) or 'practice' of the theory). Lastly I'll give a little background on myself for anyone who's wondering why I've come out of left field all the sudden.
Objective
First objective is to try to validate the truthfulness of the theory. Second and more important objective is to implement the practice of money, in the manner that the theory implies. Even if we don't 'practice' it in the real world initially, the concept is simple enough that people can do thought experiments in their own head and see if they believe it would work. If you and say 100 other people can't see why it wouldn't work, then hey, maybe it would work. Now there are three main groups I think its proper to focus on initially in order to get a consensus on the Theory's validity, or at least enough of a consensus to get people interested in at least experimenting with the idea: the community currency advocates, the Austrian economists, and the Ron Paul movement. At the very least I hope to stir up some debate. I am also interested to see if this theory gains any traction within the Austrian community, more specifically, if someone from the Austrian economic community can come up with a plausible argument as to whether or not the theory is valid or invalid, since I haven't been able to find where my flaw is from the Austrian perspective.
The Theory of Money
Within a free market the money reserves tend towards even distribution amongst all actors regardless of the individual actors claims on those reserves.
Now, if that doesn't make a whole lot of sense (and I'm open to rewording it) it basically says, even though my balance of 'money substitutes' might be different from my peers and other people I interact with, there is a tendency for the reserves (gold) to evenly distribute between all parties or peers. So if we have Alice, Bob and Carol together in a monetary system, they might each have a claim of $6, $2, and $1 respectively. The amount they would each hold in reserve however would tend towards $3 per person (6+2+1/3). In effect, every actor becomes a 'trustee' or a 'steward' of an equal share of the physical money, irrespective of their contractual claims on that money.
It seems there is a clear demonstrated preference by all actors for the use of money as a medium rather than a value store. This in turn creates a demand for money substitutes as opposed to physical money which we can recognize as a 'demand for banking'. But this 'demand for banking' is one-directional. There is no corresponding 'supply of banking' that this force equalizes with, only the frictional effects of reserve centralization that sort of acts as a communication mechanism to the actor. The 'strength' of the demand is proportional to the difficulty of use for that monetary medium. This constant effort to perfect the medium of exchange solely from the individuals standpoint ultimately leads to centralization and then, given enough time, to outright corruption. To be clear, when I say there is no corresponding 'supply of banking' I don't mean there is no fulfillment of banking services by banks for a fee. I mean that the 'demand for banking' is never fully satisfied. The bank only exchanges the medium and the actor always conceives of a more optimal medium.
So it isn't that the marginal utility of money is constant. It is that the demand for banking is potentially limitless since all actors in a free market prefer bank money to physical money. All actors have a higher ordinal ranking (on their marginal utility scale) of bank money to physical money.
So in order for a true 'free market' to exist, their should not be a free market in banking. It is necessary, if a free market is to last, for actors to understand the limitless banking demand, and neutralize it by distributing physical money reserves evenly within their peer group, and to use a system of contracts (interpersonal peer 2 peer banking) in order to establish claims on the reserves. This doesn't complete exclude the concept of a community bank being a possibility, but the actor needs to realize that the delegation of more physical mediums for more ethereal ones increases the risk of bank centralization caused by limitless bank demand. But there are other reasons, though, that I think make decentralized reserves an optimal arrangement which I discuss in the next section.
We think in terms of sound money. We believe everyone should be fair to everyone else, and that no one should mess with the social measure. But we act contrarily by constantly demanding less sound money for ease of use. I believe this can be remedied by decentralizing the physical reserves in the absolute sense.
I'm no expert in Austrian economics by any stretch of the imagination, but I have been digging into the works of Mises, Rothbard, Hoppe and others in order to try to find some clue as to whether any link or lack of link was ever established between 'money substitutes' (claims on money) held by an actor and reserves (physical money) held by an actor. It seems that Mises makes no real distinction (from what little I've read anyway), except to say that 'money substitutes' are used much more pervasively. I'm open to anyone's input in this regard.
So that's the basics of the theory. I'm sure some people will find all fallacies and faults with it, and I would be glad to address them. I'm hoping, though, that my explanation of how this optimal monetary system could be implemented (next section) will help clear up some of the concepts and hopefully cut me some slack on my deficiencies in laying out the theory.
Putting Theory Into Practice
Now I'm assuming here that the reader has a basic understanding of how the internet, social networking websites, and online banking websites work. I'm going to describe the service that would implement this hypothetical banking system in terms of a singular website (web application) when ideally it would likely be multiple websites on a peer 2 peer backbone, but this is mostly a difference of form, not function.
In real world scenarios you'll have to get your friends and family to sign up but we'll assume for the sake of argument that everyone involved is willing to get an account. Every account will have a certain amount of reserves ( 0+ ), a cash balance ( 0+ ), and zero or more connections with peers. In real world applications some people might prefer different privacy options as the system develops, but we'll assume for now, that everyone can see everyone's balances, reserves, and connections on the system. We'll also assume for simplicity that everyone is only using $15, 1 ounce silver coins and that the $15/oz rate is unchanging.
The systems logic is primarily concerned with two functions; moving cash balances (some weight in silver) from one account holder to the other, and handling and responding to modifications to the reserve levels. The first function is straightforward and merely involves an action on the part of the payer to transfer the cash balance to some specified account. Moving reserves, however, is a little more involved. Lets say you have 1oz of silver and that's the current average. Three of your peers also have one but there's a fourth peer who doesn't have any. One of your peers gives you a second ounce. You then distribute that ounce to your peer with zero. This is transferring an old reserve, and does not change your cash balance. If however you introduce a new reserve into the system, your cash balance would increase by that weight. In both cases, a transfer request is made by the originator and validated by the acceptor of the reserve. Another aspect of the system logic concerned with the moving of reserves are the equalization rules. Rather than each account holder trying to always examine the peer network and moving any excess reserves he has in relation to them accordingly, the system can simply have a set of rules established that prompt the user as to what the best decision would be. But this is simply a suggestion on the part of the system. The user could override the decision if their are some factors unaccounted for. For instance, that peer might be under investigation for fraud within the system, and the user doesn't currently trust them with any more reserves.
This brings me to another point. Even though you may trust A less than B within your peer group, you don't know who is in their peer group. Therefore, they'll probably end up being trusted differently and eventually it will all even out, as someone will end up having enough trust in that actor that they have no problem running reserves through them. Because, it is hard to imagine a peer group of an individual where all his friends trust him less than he trusts them. And even if this was the case, he or she can simply buy his own reserves, or rather have someone accept his reserves and return it to him. The point is, eventually the system will equalize into a binary trust situation. Either a person is in the system or they are not.
All this then pretty much sums up the system. Everyone carries the same amount of physical reserves. This is initiated by distributing the reserves to your peers when you are carrying more than them. If you are the originator of the reserve this increases your cash balance. The system merely keeps track of relative balances and makes suggestions as to which peer you should transfer your excess reserves to. It does this based on rules, for instance: If A has a cash balance greater than B then give excess reserve to A.
Outside Assailants
First I want to consider forces outside the system participants and how they might view or interact when confronted with the system. The first thing that probably comes to mind is that the government would try to shut it down. Maybe, but to what end? Everyone has the same amount of reserves, so either they have to outlaw holding reserves, or they have to try to shut down the website. It wouldn't be difficult to shut down the website but this doesn't destroy the sytem as everyone still has their reserves and if backups are performed their balances would be trackable, and another one would probably pop up in its place. Now if the website was based on something like a gnutella P2P backbone with an identity system similar to OpenID, then fighting it would be nearly pointless unless the government intends to have a command and control internet. As far as outlawing holding money for someone else, this would probably have the opposite effect the government is aiming at. It would be highly publicized within the network and would probably encourage more people to participate. Another thing the government could do would be to manipulate the reserve price in relation to FRN's (Federal Reserve Notes, otherwise known as 'money' to the uneducated). Now the participants within the system already know this game, but knowledge of this attempt would also spread within the network, and the actual effect would probably be the opposite. Silver (in our example) would be cheaper encouraging more people to liquidate FRN's which would increase average reserves.
Since there is no center, there is no way to attack the system except by intimidating or aggressing against the individuals who are particpating, but these attempts will cause a like response from the network. Take the case of music file sharing. Napster failed because the servers were centralized. So Gnutella took its place. Now it is nearly useless monetarily for copyright holders to attack every individual, so who do they target? They target the nodes with the highest concentration of songs. But then what happens? The system further evolves into a torrent system which is, in the practical sense, unassailable. It would cost the record companies more in legal fees against a torrent participant than they could possibly 'gain' in record sales. The only way the intimidation works is if the punishment is disproportionate enough to the crime in order to frighten others from participating (incidentally we're seeing this very thing happening). But it never seems to really work.
The Shell Game Weakness
Now how about malevolent actors from within the system. This has long been an unsolvable problem for the community currency advocates. Eventually someone will find a weakness in the system and exploit it. With simple mutual credit systems, an actor can simply go into the negative and never participate again, and try to repeat this act by constantly rejoining the system as a different person.
Within our distributed reserves system there are no negative cash balances, so no actor could simply sign up and spend without someone transferring their cash balance to them, or by introducing new silver into the system themselves. There is no issue with those who remove reserves, because no one can remove reserves unless they have a corresponding cash balance, and if they do it is simply stealing, and dealt with accordingly.
So the question becomes, what do we do about persons who would defraud the system, alone or in collusion with others in order to defraud the system. Whether its one person alone reselling the silver, or someone with multiple identities (sockpuppets) or multiple individuals participating in a ponzi scheme or shell game, it is practically a certainty that there will be fraud. We could set up requirements to minimize this risk, like occasional auditing, or making sure everyone presents receipts for the silver and tracing it to minimize black market activity, or serialize all the coins, etc. But here's my grand idea: Do Nothing.
Now before you hit the back button or turn the page, here me out. Let's consider what actually happens when someone, either an individual or a group of individuals reintroduces reserves. It increases their cash balances, and thus increases inflation. But since actual reserves aren't increasing by this method the effect diminshed over time. For instance, assume 10% of everyone is so criminally minded. Lets say there are 100,000 units of reserve and 100 people. Therefore each actor has 1,000 units. So if those 10 people (the criminal 10%) reintroduce those units as new money, then suddenly the system thinks there are 110,000 units and redistributes accordingly. Now regardless of what could deduce about whether or not this would positively affect the criminals purchasing power, I merely want to point out that the criminal can only steal up to the average amount of reserve units, and that there is a diminshed effect.
When I say do nothing I don't mean ignore it. If someone is aware of the fraud, they should definitely act on it, and demand legal action. What I'm saying is that the network costs of trying to make sure every actor has not stolen and reintroduced reserves would outweight the benefits. Plus, there is something in this model that is easy to miss. Apart from the inflationary effects, and the malinvestment created by the swindle there is actually one positive effect. The system still holds the actor legally accountable for the reserve units stolen, AND the real reserve units are now in the hands of someone else. In other words, if we are to consider 'real' reserves, those where the actor is actually holding what he says, and 'imaginary' reserves, those where the actor is lying, we can come up with this:
The Law of Distributed Reserves
Within a distributed and decentralized monetary system, real reserves move away from malevolent actors.
Now a 'malevolent' actor is simply someone who is trying to act contrary to the system by defrauding it. Or, more concretely, anyone in posession of 'imaginary' reserves. And we know two things. He can never make himself accountable for more than the average reserves (except in the case of sock puppets) and that the inflationary effects of malevolent actors are diminishing.
So the shell game weakness is real, but I've shown that criminal activity within a evenly distributed reserve system is diminishing and has the positive effect of distributing the 'real' reserves away from malevolent actors, while still holding malevolent actors physically accountable for their imaginary reserves. In other words there is no 'legal' loss to the system as a whole, by individual actors attempting to defraud the system.
It would be much better for the system to focus efforts on minimizing introduction of black market reserves (ones with no paper trail), thwarting the efforts of single actors with undeclared multiple identities (sock puppets) and dealing with those who try to leave the system while having a reserve to cash balance ratio greater than 1.
One last point I want to make is that if you understand the limitations of the shell game weakness, then you also can see that the negative effects of the shell game weakness are amplified by centralization of reserves. So in a world where no clear distinction is made between physical money and money subsitutes, the exposure to the negative effects of the shell game weakness increase, because physical reserves will not tend to move away from malevolent actors, at best they would be unrelated, at worst, the physical reserves would tend towards them.
Conclusion
Now that pretty much covers all the important points. Now it might seem that this idea is just too simple to be true. If it is this simple why hasn't someone thought about it? I think it is because of our dualistic comprehension of money as a medium and a value store, and the system described above treats these two aspects independently, whereas most current monetary systems and theories are constantly trying to combine the two into some concrete mental model. In other words, humans basically do not have a practical grasp of money and the problems it causes. We intuitively grasp its benefits, but we do not intuitively grasp its pitfalls.
The point of all this, is that I think I may have finally come across the optimal solution to the community currency dilemma and the free-market banking dilemma. Now I know many will disagree so I'm ready and hoping people have some questions I can clear up. But if you understand all at once, that's great too.
I would also like help from anyone in the scientific community (Austrian economists) who can help me formulate this better into some kind of economic law or theory, because I feel that part is lacking.
How to Reach Me
I'm going to post this in quite a few places, but I'm going to answer questions on www.ronpaulforums.com in the "Economics and Sound Money" section. I'll call the thread, "A New Theory of Money" (ANTOM). My backup places should that site go away is wizardwatson.blogspot.com, and www.wizardwatson.com. I'm usually on ronpaulforums every day so if you have a question you probably won't have to wait very long.
My Background
My names David, I'm from Kansas (Illinois originally), 30 yr old, programmer (as a career, used to do web developing on the side), married, 1-child, Ron Paulite, community currency advocate (asset-backed only). Spent approx. 3 or 4 years off and on studying community currencies, money systems, and economics. Schooling included some mechanical engineering, some music, some programming, though less than 3 years, post-high school in all. Hobbies include studying whatever interests me at the moment (very holistic in this regard), playing guitar, and spending time with the family, and unfortunately, over the last three years, literally torturing myself trying to figure out this money problem.
Original Breakthrough
Now I said above that I haven't really written anything in like eight months. But eight months ago (April 11th, 2008 at approx. 1pm CT) is the day I attribute to having the real breakthrough. I personally believe this system is very powerful and will take off, and at the time when I first realized what I had come across it had, shall we say, a 'systemic' effect on my brain. Now, I could go through and explain every detail of what happened, but its really pointless because it mostly has meaning only to me. The problem is, I talked and talked about this to everyone around me (and posted my crazy babbling on the internet), but I was nowhere near being able to articulate it as I have done above. For instance, orginally I had described it as a 'pay it forward' like gifting system (even though I was trying to develop a money system, not a gift system). Again, trying to explain why exactly I was interpreting it this way is hard to explain. The point is, the whole process of realizing it basically made me temporarily cuckoo for about 10 days, and its taken me about 8 months to finally recover and get around to actually putting the information in the form I originally intended it. Anyway, if anyone says, hey don't listen, he's crazy, well, I was. I lost my focus back in April (understatement). The force of what I discovered (from my perspective) scrambled my marbles and knocked them all over the floor. But I've picked them up, stuck 'em back in my head and I'm ready for round two.
-wizardwatson
Introduction
It's been a while since I wrote anything on this subject (8 months). But I feel that although my ability to articulate my case is far from perfect, it has progressed far enough beyond my initial attempt that I now feel, once again, that I should try to communicate it. Basically, I believe I have discovered, a property or 'theory' of money. Or at least I feel I've 'learned' something about money that appears to imply a theory or law of some sort. The theory itself is quite easy enough to understand even for someone only mildly familiar with the subject, while explanation of how I arrived at the conclusion is a little more difficult. But this might not even be relevant, as I'm hoping the idea generates enough of a buzz that people's individual understanding can be hashed out in a deliberative process rather than me writing some kind of book or thesis which I really do not see as necessary, and would probably even be counterproductive since there are a lot of different ways you can come at and attack the idea (many of which I've already done in my head) which all have to be dealt with from different perspectives. Although I've tried to frame the theory in somewhat of a praxeological manner, I fear its very weak in that regard, and I'm hoping the real-world applicability (the practice of the theory) is taken more seriously than my attempts to formulate it into a scientific assertion.
I've tried to keep this whole document concise and short. I want to do four things in this order: explain my objective, present the theory, show how the theory could be put into practice, show the implications of the theory (and of the implementation(s) or 'practice' of the theory). Lastly I'll give a little background on myself for anyone who's wondering why I've come out of left field all the sudden.
Objective
First objective is to try to validate the truthfulness of the theory. Second and more important objective is to implement the practice of money, in the manner that the theory implies. Even if we don't 'practice' it in the real world initially, the concept is simple enough that people can do thought experiments in their own head and see if they believe it would work. If you and say 100 other people can't see why it wouldn't work, then hey, maybe it would work. Now there are three main groups I think its proper to focus on initially in order to get a consensus on the Theory's validity, or at least enough of a consensus to get people interested in at least experimenting with the idea: the community currency advocates, the Austrian economists, and the Ron Paul movement. At the very least I hope to stir up some debate. I am also interested to see if this theory gains any traction within the Austrian community, more specifically, if someone from the Austrian economic community can come up with a plausible argument as to whether or not the theory is valid or invalid, since I haven't been able to find where my flaw is from the Austrian perspective.
The Theory of Money
Within a free market the money reserves tend towards even distribution amongst all actors regardless of the individual actors claims on those reserves.
Now, if that doesn't make a whole lot of sense (and I'm open to rewording it) it basically says, even though my balance of 'money substitutes' might be different from my peers and other people I interact with, there is a tendency for the reserves (gold) to evenly distribute between all parties or peers. So if we have Alice, Bob and Carol together in a monetary system, they might each have a claim of $6, $2, and $1 respectively. The amount they would each hold in reserve however would tend towards $3 per person (6+2+1/3). In effect, every actor becomes a 'trustee' or a 'steward' of an equal share of the physical money, irrespective of their contractual claims on that money.
It seems there is a clear demonstrated preference by all actors for the use of money as a medium rather than a value store. This in turn creates a demand for money substitutes as opposed to physical money which we can recognize as a 'demand for banking'. But this 'demand for banking' is one-directional. There is no corresponding 'supply of banking' that this force equalizes with, only the frictional effects of reserve centralization that sort of acts as a communication mechanism to the actor. The 'strength' of the demand is proportional to the difficulty of use for that monetary medium. This constant effort to perfect the medium of exchange solely from the individuals standpoint ultimately leads to centralization and then, given enough time, to outright corruption. To be clear, when I say there is no corresponding 'supply of banking' I don't mean there is no fulfillment of banking services by banks for a fee. I mean that the 'demand for banking' is never fully satisfied. The bank only exchanges the medium and the actor always conceives of a more optimal medium.
So it isn't that the marginal utility of money is constant. It is that the demand for banking is potentially limitless since all actors in a free market prefer bank money to physical money. All actors have a higher ordinal ranking (on their marginal utility scale) of bank money to physical money.
So in order for a true 'free market' to exist, their should not be a free market in banking. It is necessary, if a free market is to last, for actors to understand the limitless banking demand, and neutralize it by distributing physical money reserves evenly within their peer group, and to use a system of contracts (interpersonal peer 2 peer banking) in order to establish claims on the reserves. This doesn't complete exclude the concept of a community bank being a possibility, but the actor needs to realize that the delegation of more physical mediums for more ethereal ones increases the risk of bank centralization caused by limitless bank demand. But there are other reasons, though, that I think make decentralized reserves an optimal arrangement which I discuss in the next section.
We think in terms of sound money. We believe everyone should be fair to everyone else, and that no one should mess with the social measure. But we act contrarily by constantly demanding less sound money for ease of use. I believe this can be remedied by decentralizing the physical reserves in the absolute sense.
I'm no expert in Austrian economics by any stretch of the imagination, but I have been digging into the works of Mises, Rothbard, Hoppe and others in order to try to find some clue as to whether any link or lack of link was ever established between 'money substitutes' (claims on money) held by an actor and reserves (physical money) held by an actor. It seems that Mises makes no real distinction (from what little I've read anyway), except to say that 'money substitutes' are used much more pervasively. I'm open to anyone's input in this regard.
So that's the basics of the theory. I'm sure some people will find all fallacies and faults with it, and I would be glad to address them. I'm hoping, though, that my explanation of how this optimal monetary system could be implemented (next section) will help clear up some of the concepts and hopefully cut me some slack on my deficiencies in laying out the theory.
Putting Theory Into Practice
Now I'm assuming here that the reader has a basic understanding of how the internet, social networking websites, and online banking websites work. I'm going to describe the service that would implement this hypothetical banking system in terms of a singular website (web application) when ideally it would likely be multiple websites on a peer 2 peer backbone, but this is mostly a difference of form, not function.
In real world scenarios you'll have to get your friends and family to sign up but we'll assume for the sake of argument that everyone involved is willing to get an account. Every account will have a certain amount of reserves ( 0+ ), a cash balance ( 0+ ), and zero or more connections with peers. In real world applications some people might prefer different privacy options as the system develops, but we'll assume for now, that everyone can see everyone's balances, reserves, and connections on the system. We'll also assume for simplicity that everyone is only using $15, 1 ounce silver coins and that the $15/oz rate is unchanging.
The systems logic is primarily concerned with two functions; moving cash balances (some weight in silver) from one account holder to the other, and handling and responding to modifications to the reserve levels. The first function is straightforward and merely involves an action on the part of the payer to transfer the cash balance to some specified account. Moving reserves, however, is a little more involved. Lets say you have 1oz of silver and that's the current average. Three of your peers also have one but there's a fourth peer who doesn't have any. One of your peers gives you a second ounce. You then distribute that ounce to your peer with zero. This is transferring an old reserve, and does not change your cash balance. If however you introduce a new reserve into the system, your cash balance would increase by that weight. In both cases, a transfer request is made by the originator and validated by the acceptor of the reserve. Another aspect of the system logic concerned with the moving of reserves are the equalization rules. Rather than each account holder trying to always examine the peer network and moving any excess reserves he has in relation to them accordingly, the system can simply have a set of rules established that prompt the user as to what the best decision would be. But this is simply a suggestion on the part of the system. The user could override the decision if their are some factors unaccounted for. For instance, that peer might be under investigation for fraud within the system, and the user doesn't currently trust them with any more reserves.
This brings me to another point. Even though you may trust A less than B within your peer group, you don't know who is in their peer group. Therefore, they'll probably end up being trusted differently and eventually it will all even out, as someone will end up having enough trust in that actor that they have no problem running reserves through them. Because, it is hard to imagine a peer group of an individual where all his friends trust him less than he trusts them. And even if this was the case, he or she can simply buy his own reserves, or rather have someone accept his reserves and return it to him. The point is, eventually the system will equalize into a binary trust situation. Either a person is in the system or they are not.
All this then pretty much sums up the system. Everyone carries the same amount of physical reserves. This is initiated by distributing the reserves to your peers when you are carrying more than them. If you are the originator of the reserve this increases your cash balance. The system merely keeps track of relative balances and makes suggestions as to which peer you should transfer your excess reserves to. It does this based on rules, for instance: If A has a cash balance greater than B then give excess reserve to A.
Outside Assailants
First I want to consider forces outside the system participants and how they might view or interact when confronted with the system. The first thing that probably comes to mind is that the government would try to shut it down. Maybe, but to what end? Everyone has the same amount of reserves, so either they have to outlaw holding reserves, or they have to try to shut down the website. It wouldn't be difficult to shut down the website but this doesn't destroy the sytem as everyone still has their reserves and if backups are performed their balances would be trackable, and another one would probably pop up in its place. Now if the website was based on something like a gnutella P2P backbone with an identity system similar to OpenID, then fighting it would be nearly pointless unless the government intends to have a command and control internet. As far as outlawing holding money for someone else, this would probably have the opposite effect the government is aiming at. It would be highly publicized within the network and would probably encourage more people to participate. Another thing the government could do would be to manipulate the reserve price in relation to FRN's (Federal Reserve Notes, otherwise known as 'money' to the uneducated). Now the participants within the system already know this game, but knowledge of this attempt would also spread within the network, and the actual effect would probably be the opposite. Silver (in our example) would be cheaper encouraging more people to liquidate FRN's which would increase average reserves.
Since there is no center, there is no way to attack the system except by intimidating or aggressing against the individuals who are particpating, but these attempts will cause a like response from the network. Take the case of music file sharing. Napster failed because the servers were centralized. So Gnutella took its place. Now it is nearly useless monetarily for copyright holders to attack every individual, so who do they target? They target the nodes with the highest concentration of songs. But then what happens? The system further evolves into a torrent system which is, in the practical sense, unassailable. It would cost the record companies more in legal fees against a torrent participant than they could possibly 'gain' in record sales. The only way the intimidation works is if the punishment is disproportionate enough to the crime in order to frighten others from participating (incidentally we're seeing this very thing happening). But it never seems to really work.
The Shell Game Weakness
Now how about malevolent actors from within the system. This has long been an unsolvable problem for the community currency advocates. Eventually someone will find a weakness in the system and exploit it. With simple mutual credit systems, an actor can simply go into the negative and never participate again, and try to repeat this act by constantly rejoining the system as a different person.
Within our distributed reserves system there are no negative cash balances, so no actor could simply sign up and spend without someone transferring their cash balance to them, or by introducing new silver into the system themselves. There is no issue with those who remove reserves, because no one can remove reserves unless they have a corresponding cash balance, and if they do it is simply stealing, and dealt with accordingly.
So the question becomes, what do we do about persons who would defraud the system, alone or in collusion with others in order to defraud the system. Whether its one person alone reselling the silver, or someone with multiple identities (sockpuppets) or multiple individuals participating in a ponzi scheme or shell game, it is practically a certainty that there will be fraud. We could set up requirements to minimize this risk, like occasional auditing, or making sure everyone presents receipts for the silver and tracing it to minimize black market activity, or serialize all the coins, etc. But here's my grand idea: Do Nothing.
Now before you hit the back button or turn the page, here me out. Let's consider what actually happens when someone, either an individual or a group of individuals reintroduces reserves. It increases their cash balances, and thus increases inflation. But since actual reserves aren't increasing by this method the effect diminshed over time. For instance, assume 10% of everyone is so criminally minded. Lets say there are 100,000 units of reserve and 100 people. Therefore each actor has 1,000 units. So if those 10 people (the criminal 10%) reintroduce those units as new money, then suddenly the system thinks there are 110,000 units and redistributes accordingly. Now regardless of what could deduce about whether or not this would positively affect the criminals purchasing power, I merely want to point out that the criminal can only steal up to the average amount of reserve units, and that there is a diminshed effect.
When I say do nothing I don't mean ignore it. If someone is aware of the fraud, they should definitely act on it, and demand legal action. What I'm saying is that the network costs of trying to make sure every actor has not stolen and reintroduced reserves would outweight the benefits. Plus, there is something in this model that is easy to miss. Apart from the inflationary effects, and the malinvestment created by the swindle there is actually one positive effect. The system still holds the actor legally accountable for the reserve units stolen, AND the real reserve units are now in the hands of someone else. In other words, if we are to consider 'real' reserves, those where the actor is actually holding what he says, and 'imaginary' reserves, those where the actor is lying, we can come up with this:
The Law of Distributed Reserves
Within a distributed and decentralized monetary system, real reserves move away from malevolent actors.
Now a 'malevolent' actor is simply someone who is trying to act contrary to the system by defrauding it. Or, more concretely, anyone in posession of 'imaginary' reserves. And we know two things. He can never make himself accountable for more than the average reserves (except in the case of sock puppets) and that the inflationary effects of malevolent actors are diminishing.
So the shell game weakness is real, but I've shown that criminal activity within a evenly distributed reserve system is diminishing and has the positive effect of distributing the 'real' reserves away from malevolent actors, while still holding malevolent actors physically accountable for their imaginary reserves. In other words there is no 'legal' loss to the system as a whole, by individual actors attempting to defraud the system.
It would be much better for the system to focus efforts on minimizing introduction of black market reserves (ones with no paper trail), thwarting the efforts of single actors with undeclared multiple identities (sock puppets) and dealing with those who try to leave the system while having a reserve to cash balance ratio greater than 1.
One last point I want to make is that if you understand the limitations of the shell game weakness, then you also can see that the negative effects of the shell game weakness are amplified by centralization of reserves. So in a world where no clear distinction is made between physical money and money subsitutes, the exposure to the negative effects of the shell game weakness increase, because physical reserves will not tend to move away from malevolent actors, at best they would be unrelated, at worst, the physical reserves would tend towards them.
Conclusion
Now that pretty much covers all the important points. Now it might seem that this idea is just too simple to be true. If it is this simple why hasn't someone thought about it? I think it is because of our dualistic comprehension of money as a medium and a value store, and the system described above treats these two aspects independently, whereas most current monetary systems and theories are constantly trying to combine the two into some concrete mental model. In other words, humans basically do not have a practical grasp of money and the problems it causes. We intuitively grasp its benefits, but we do not intuitively grasp its pitfalls.
The point of all this, is that I think I may have finally come across the optimal solution to the community currency dilemma and the free-market banking dilemma. Now I know many will disagree so I'm ready and hoping people have some questions I can clear up. But if you understand all at once, that's great too.
I would also like help from anyone in the scientific community (Austrian economists) who can help me formulate this better into some kind of economic law or theory, because I feel that part is lacking.
How to Reach Me
I'm going to post this in quite a few places, but I'm going to answer questions on www.ronpaulforums.com in the "Economics and Sound Money" section. I'll call the thread, "A New Theory of Money" (ANTOM). My backup places should that site go away is wizardwatson.blogspot.com, and www.wizardwatson.com. I'm usually on ronpaulforums every day so if you have a question you probably won't have to wait very long.
My Background
My names David, I'm from Kansas (Illinois originally), 30 yr old, programmer (as a career, used to do web developing on the side), married, 1-child, Ron Paulite, community currency advocate (asset-backed only). Spent approx. 3 or 4 years off and on studying community currencies, money systems, and economics. Schooling included some mechanical engineering, some music, some programming, though less than 3 years, post-high school in all. Hobbies include studying whatever interests me at the moment (very holistic in this regard), playing guitar, and spending time with the family, and unfortunately, over the last three years, literally torturing myself trying to figure out this money problem.
Original Breakthrough
Now I said above that I haven't really written anything in like eight months. But eight months ago (April 11th, 2008 at approx. 1pm CT) is the day I attribute to having the real breakthrough. I personally believe this system is very powerful and will take off, and at the time when I first realized what I had come across it had, shall we say, a 'systemic' effect on my brain. Now, I could go through and explain every detail of what happened, but its really pointless because it mostly has meaning only to me. The problem is, I talked and talked about this to everyone around me (and posted my crazy babbling on the internet), but I was nowhere near being able to articulate it as I have done above. For instance, orginally I had described it as a 'pay it forward' like gifting system (even though I was trying to develop a money system, not a gift system). Again, trying to explain why exactly I was interpreting it this way is hard to explain. The point is, the whole process of realizing it basically made me temporarily cuckoo for about 10 days, and its taken me about 8 months to finally recover and get around to actually putting the information in the form I originally intended it. Anyway, if anyone says, hey don't listen, he's crazy, well, I was. I lost my focus back in April (understatement). The force of what I discovered (from my perspective) scrambled my marbles and knocked them all over the floor. But I've picked them up, stuck 'em back in my head and I'm ready for round two.
-wizardwatson
