“I published a comment on Ng’s piece pointing that out, received a message from Ng that he had used a spirit medium to consult with Ricardo and been told he didn’t mind.”
I do believe most of this problem with limited supply of the currency is solved with bitcoin, that as a limited and predictable supply, the book Bitcoin Standard reviews this historic process of currency competition. Any thoughts on this?
Bitcoin has a mechanism to establish a maximum price, the cost of the power for mining, although one that changes over time. It has nothing to determine a minimum price, since you can't convert coins back into power. That makes it poorly suited to be a unit of value, although it can still work for transactions in a system where people use something else to contract in.
My ideal ecash would be a fully anonymous stablecoin, which I do not think yet exists.
No mechanism, asset or basket of assets can determine a minimum price. The value of every asset is subjective, and has to be compared to another asset to have a meaning.
The historic success of gold as a unit (and storage) of value is more linked to it's stock-to-flow relation, since gold is hard to mine, the supply of new gold has been somewhat stable compared to the total stock through time, that's what made gold better than silver, whose production has more elasticity, and made silver better than copper, whose production quickly answered price increases, it has a limited inflation.
Unfortunately, factors like metal detectors, border controls and new metal alloys that mimic gold made lose its advantage over fiat currencies.
Bitcoin is the end game of that historic process. It has a predictable and decreasing inflation - no matter how much power miners throw into the system -,immunity against capital and border controls, great level of anonymity (with the right OPSEC)...
A short-term transition could be made with stablecoins based on a basket of dollars, gold and bitcoin, but, ultimately, bitcoin should be the ultimate collateral
I think you may be missing the point about "minimum price" here. What is being said is not that certain assets have some god mandated market at some sufficiently low "minimum price". The point is that some people at the end of the day are interested in a bushel of wheat because it can be eaten. That is the bushel of wheat has some useful ends. You are right in describing the value of assets as subjective to market participants, we just happen to operate in markets where bushels of wheat are useful to feeding market participants and cryptographic codes that represent the conversion of useful energy into heat have no intrinsic use to market participants. It is in that sense that wheat has a "minimum price" and BTC does not.
I think this piece sums up the distinction here quite nicely and asks the right questions:
> Bitcoin has a mechanism to establish a maximum price, the cost of the power for mining, although one that changes over time.
No, I don't think so.
You can see bitcoin mining as an auction (repeated every few minutes) where everyone pays their bid (in electricity and capex), and the auctioned off good is a bunch of new bitcoins.
(OK, in reality it's more like a raffle: each miner gets tickets proportional to hashing work done. There is one winning ticket per block, all other tickets become worthless. You also have a 'mining difficulty' that adjusts over time to balance supply and demand, so that blocks always take roughly the same amount of time to produce.)
I don't see how that mechanism caps the maximum price of bitcoin. Perhaps I am missing something?
The number of new bitcoins created everyday is pretty much fixed, no matter how many or how few miners there are.
The minimum price of gold coins is determined by the price of gold, since if the coin costs less than the gold in it coins get melted down. The minimum price of gold is determined by the demand for it in all uses, not just as money. It the only use of gold was as money, like the only use of bitcoin, it would have no minimum price.
Bitcoin could in theory work as 'digital gold' that you can build a fractional reserve system on top of. Just like the Scottish banks build a fractional reserve system on top of physical gold.
The fractional reserve part is important, so that the amount of money in circulation can adjust to people's demand.
> while diamonds could be valued only by their price, there is no reason why they have to be
TBH *natural* diamonds *are* pretty much a pure Veblen good nowadays -- for no other purpose is there any sensible reason anymore not to use synthetic diamonds instead if you can get the latter for cheaper.
The value of a diamond depends on a number of different things, including whether it is natural, how large, clear, flawless it is, and its price. There is no reason why it couldn't vary with any of them, all else held fixed, and it probably does. If people valued diamonds only for their brilliance they would buy CZ instead but they could still value them in part for their brilliance, size, etc.
Another problem with Mr. Ng's diamond-based commodity system is that diamonds are just carbon that has been tremendously heated and compressed. Carbon is a common elements and it was always possible to duplicate this process in a laboratory.
But now it has become possible to duplicate that process affordably, creating diamonds that are indistinguishable from mined diamonds. Diamond markets are collapsing worldwide because of this, and the world is lucky that the commodity support of the world's money supply isn't collapsing with it because Mr. Ng's theory was adopted. But unless alchemy returns, it will never be possible to make more gold.
Ng said nothing at all about diamonds as money — you are back-projecting Ricardo's argument, which Ng didn't know about, on his article.
We have had good, inexpensive, synthetic corundum for a long time — it's used for class rings. Natural rubies and sapphires are still very expensive. Spinel too.
Synthetic gem diamonds seem to have become significantly less expensive than natural about 2016, less and less expensive thereafter. Diamond prices peaked about 2022, have been falling since then, but in 2023 (wikipedia article) synthetic gem diamonds were still only 17% of the market. So my guess is the pattern will be the same as with corundum, that although the price of natural diamonds may fall further they will continue to be valued much more than synthetics.
Gold is just protons and neutrons and electrons. They are abundant, and it's possible to assemble new gold from these raw materials in a laboratory. The process would be pretty similar to how new minute traces of synthetic elements are produced.
Of course, this is utterly impractical. Just like it used to be rather impractical to make diamonds, until fairly recently.
A basket-of-goods currency was probably the best we could do before Bitcoin. But now that Bitcoin exists, it blows any representative money or fiat money out of the water. It is the first pure money. While gold, oil, and wheat, and steel have actual physical uses, bitcoin's only use is as a trustless, easily auditable, easily storable, easily transactable non-perishable non-inflatable money. It's value can only fluctuate with the demand for money, not with the demand for oil, wheat, steel, etc. This makes it a far better (ie more efficient) price signal, because higher oil or steel prices don't then translate directly into higher vegetable prices.
Fair enough. I suppose my unspoken premise is that bitcoin becomes the primary world currency, given that there's no reason it would be limited to a particular country like currencies that rely on government regulation or operation.
It's trivially easy for me to take the bitcoin code, and launch a bitcoin clone (with its own name).
I can perhaps believe that in future, everyone will use crypto-currency, but I don't see why it has to be bitcoin and not any of the others?
Thus even in the setting where everyone uses only crypto-currency, and the total demand for crypto-currencies is stable, we don't know whether the demand for bitcoin in particular will be stable.
Sure, maybe it'll be some other cryptocurrency other than Bitcoin. But there are strong network effects for a currency, and so you would expect that a single currency would eventually dominate world trade. The dollar does this to some degree today, and the only reason more countries aren't using the dollar internally (some do) is because of government regulation that favors their own currency (eg legal tender law, and those benefiting from seigniorage promote it's use).
Regarding Bitcoin tho, Bitcoin is more than code. It is a network of people. And the culture around Bitcoin also keeps it in check. The code can easily be changed to monetarily inflate the supply. What keeps that from happening is the culture around the coin. That's something that can't be copied.
I don't agree about network effects. There is a benefit to everyone defining prices in the same units but using a currency to define prices isn't demand — I can state a price in dollars without holding any. Demand is for making transactions. And if most transactions occur through computers, there is no need for the currency used in transactions to be the same as the currency used to define prices or for all transaction currencies to be the same. My computer links to a bank that has exchange rates among BitcoinA, BitcoinB, Ethereum, ... and automatically tells me the price in my currency of something priced in yours, with the bank doing the conversion if I want to buy.
I discussed this in Chapter 6 of my _Future Imperfect_:
I live in the United States; you live in India. You have goods to sell, displayed on a web page, with prices in rupees. I view that page through my brand new browser – Firefox v 9.0. One feature of the new browser is that it is currency transparent. You post your prices in rupees but I see them in dollars. The browser does the conversion on the fly, using exchange rates read, minute by minute, from my bank’s web page. If I want to buy your goods, I pay in dollar-denominated ecash; my browser sends it to my bank, which sends rupee-denominated ecash to you. I neither know nor care what country you are in or what money you use – it’s all dollars to me.
> I can state a price in dollars without holding any.
I totally agree. In fact in the middle ages, many places in Europe used currency from the roman empire as the unit of account for hundreds of years after the corresponding coin fell out of use as a medium of exchange.
The network effects are in other things. While you're right computers can make currency exchanges invisible and automatic, there is still a cost that needs to be paid to middle men for that. And for cryptocurrency, the security of a coin is largely dependant on the size of its network (bigger network = higher value = more mining in PoW or more stakers in PoS). Also, one would expect the volatility of the coin's market value to decrease with the size of the network. The last two can't be abstracted away by computers.
I once asked Larry White about the commodity bundle idea, and he said he didn't think it would work. I don't recall why, though. I have a vague and fuzzy memory that he said something about it being important for money holders to be able to easily claim the commodities on which the money was based, which works well for silver or gold, but not so well when a currency represents silver AND gold AND a bushel of wheat AND...
I also don't remember why he thought that was important.
The value of FRB is not that it economises gold, a minor benefit indeed. The value is that it's the only system so far proven (with others proposed, among which my own) that directly translates changes in the demand for money into changes in supply in an emergent manner.
Increased demand for money pulls gold out of other uses into coinage, increasing the money supply. It also pushes up the price of gold measured in other things, which increases the amount of money measured in purchasing power.
A fractional reserve system amplifies the effect, since an ounce of bullion is converted into (say) four ounces of coinage instead of one ounce. But the effect exists without it, since gold has other uses and can be mined. And even a system with a fixed supply of money has "enough" money, since growing demand causes declining prices, which means that the purchasing power of the fixed supply is increasing.
Relying on prices adjusting makes long-term planning impossible, a soft version of the socialist calculation problem.
True that the gold specie standard also feedbacks off changes in demand, but this is slow and cannot deal with seasonal ramp-ups or downs in demand, hence these causing panics.
Only FRB can adjust to daily changes without anyone telling the banks to, as per Selgin and gang's work.
You, and perhaps Selgin, are assuming that the demand for money is proportional to the number of transactions. That's a mistake — transactions are a flow, not a stock. Total quantity of money demanded is the sum of everyone's desired cash balance. Increasing velocity need not increase that and it can be increased by changes that don't increase transactions.
Suppose that something makes the environment more uncertain, makes it less clear when you will be able to find a trading partner to buy from or sell to. You will try to increase your cash balance to have a bigger shock absorber. The increased uncertainty probably means reserve requirements go up, not down.
I don't think so, IIRC the whole point of the fractional reserve bit is to accommodate changes in velocity.
I had to ask my LLM friend for a refresher on Selgin's views on the scenario you brought. The following is a mix of what I remember, what I read the here that makes sense, and me filling in the gaps.
The scenario you mentioned is not one of increased demand/ lower velocity, but one where the banking systems reputation is in peril. In that case, the money supply will crash.
A normal increase in the demand for money balances will not have people redeeming, as they view notes as perfectly adequate substitutes. Indeed some will attempt to increase their balances by way of borrowing. This, combined with the allegedly more muted level of interbank clearances that would otherwise hold loans back, will allow the system as a whole to increase the supply of credit.
I said nothing about the banking system's reputation — that's a different problem.
I didn't say that an increased demand for cash balances would have people redeeming. I said that it wouldn't automatically change the reserve ratio. It would increase the demand for money, pushing the value of money up and prices down, hence be the sort of instability that the automatic stabilization you were arguing for wouldn't deal with.
I don't think your LLM friend understands the relevant economics very well.
I would just let different issuers compete. Including letting them compete on what they offer in redemption for their currency (if anything). Be that gold, or fiat dollar, or your bundle of goods.
But one can predict which form is likely to win out, and there will be market pressure for multiple firms to coordinate on a single standard, as happens in other markets.
On the other hand, one can use one money as a unit of value, for long-term contracts and similar uses, and a different one for payments. If most payments are made by credit card or similar mechanism, you can have multiple currencies with no great inconvenience, since currency conversion is arithmetic, which computers do fast and cheap. When traveling in Europe I pay bills denominated in Euros or Pounds or Lari from a dollar denominated account via a debit card.
I think I may do another post on money discussing this and ecash, including Chaumian vs blockchain
How does more stable prices from a currency based on a commodity bundle lead to better quality of life for people than inflationary prices from fiat currency?
Predictable prices enable long-term contracting. Prices that are unstable in the short-run make it harder to use your memory of transactions in the recent past to evaluate present transaction opportunities.
I would suggest to stabilise nominal GDP instead of the price level.
George Selgin explained how fractional reserve (free) banking over a roughly fixed money supply (like gold or even bitcoin) can stabilise total spending.
Let me quickly explain how that worked in something like the old Scottish free banking system.
Banks have a well established procedure for dealing with redemption requests by individuals: the bank can choose whether to give you your gold right away, or to pay you some really high penalty rate of interest to give you the gold at some later date. (That provision is so that the bank has enough time quickly to liquidate assets, if necessary.)
How much of your balance sheets to keep around in gold reserves vs how much to invest in other assets is an optimisation problem for the bank: redemption requests are a random process, and they want to be able to meet most requests that happen day to day, but they don't mind a small probability of having to pay the penalty rate, if that drastically cuts down on the amount of unproductive reserves they need on the balance sheet.
In practice, normal people basically never ask for redemption. What happens instead is that banks use reserves to settle remaining differences after netting out customer transfers with each other.
Now here comes the nice part:
For simplicity we assume that customer transfers are basically random. Sometimes the guy you want to send money banks with the same bank as you, sometimes with another. (Eg you typically don't pick your landlord by who he's banking with.) Similarly, it's pretty much random where you get money from when you receive a transfer. On average, a bank receives as much money as they take in.
But each day, they might get more or receive more. That difference is roughly normal distributed. The bank wants to keep enough reserves on hand to cover most of that distribution, but doesn't care about covering all of it.
If there's more total spending happening in the economy (GDP above target), the banks need more reserves to cover their fluctuating redemption requests.
But the total amount of reserves is roughly fixed (we assume we can't create gold).
Thus as a whole, the banking system will tend to produce less fiduciary money instead, dropping total spending as a result.
(I didn't explain it very well. I'll try to find George Selgin's original description.)
That's cute, but doesn't the law of large numbers imply that the reserve requirement increases less than proportionally to the growth in total spending?
Why do you want to stabilize nominal GDP? Stabilizing prices has the advantage that you can use your memory, or record, of past transactions to evaluate future transactions without having to adjust for changes in the price level. It also makes it easier to spot price signals, know what is getting relatively more or less expensive and adjust your plans accordingly.
David, this is a really hard problem that is near-and-dear to my heart. I spent two years on a solution and wrote a 16 page whitepaper on it. You may be interested to read it -- compto.com/whitepaper. It could be thought of as a fractional money based on the fundamental 21st century commodity: computation (and thus energy). I've only just finished it and now I'm building a company around it. As someone who has thought deeply about this problem, your first impressions would be invaluable (and those of your highly intelligent reader base for that matter)!
Your white paper is very interesting. I study computation more than I study monetary systems but I don't understand why it is useful to use computations as currencies instead of just directly trading joules. You cite in your paper that carrying batteries around to pay people is infeasible. I agree but we have a technology that resolved that problem, credit and debit cards. I don't understand why those wouldn't be sufficient. To make joules workable by themselves
Thank you for your kind words. I read your post, and I sympathize greatly with the theoretically pure and beautiful ideal of simply using joules, and I did touch on this briefly in the paper. Ultimately it's a problem of practicality. In the messy real world, jules are not directly fungible (a necessity for a currency). Jules at 8PM are more expensive than 2PM or 2AM jules. (Most utility bills charging a flat kWh rate hide this fact.) Jules are more expensive in California than Alabama, etc. So there needs to be one extra layer of abstraction. Also, an issued (debit) card must have an issuer. That issuer will very quickly become the weak link, suceptible to political pressure, and institutional failure. As an aside, in your post you wisely point out the wastefulness of the energy "destructive" nature of computation. I describe the same problem in control system terms in section 5.1.1. And the solution in 6.1. Search "distribution factor". Please reach out if you're interested or have questions. It's kind of insane how close your thinking in that post is now to what I was thinking ~2 years ago when I started down this rabbit hole. I've since decided to dedicate my life to making this a reality. I figure most people don't even get one chance to change the course of history. For me, this is probably my one and only chance.
A few months ago I read Friedrich A. Hayek's book, "The Denationalisation of Money: The Argument Refined", which is available on the Mises Institute's website. In it he advocates for competing private currencies based on a standardized basket of commodities.
I agree with Hayek that using a basket of commodities, such as the 25 most commonly used raw industrial inputs, sounds like a very good basis for anchoring the value of currency, but I'm not clear on how this would be implemented. He offers several illustrative example in the book but they are not fully developed.
I assume that you've read the book, but I don't know how much of it you remember, so here is my summary:
1.) Governments surrender their monopoly power of money creation and allow any financial institution to issue their own currency: No more Federal Reserve, no legal tender laws, and no restrictions on which banks can operate within the country.
2.) Multiple banks issue their own name-branded currency based on some basket of commodity or other asset values (like the S&P 500, for example) which they promise to redeem their currency for at any future time in terms of any other currency. This is sort of like "Pay to the bearer on demand x amount of Gold" but instead of gold the payment is based on a widely balanced (for stability) basket of commodities as they are currently being traded on global markets.
3.) Banks will do this in a competitive environment where the most stable currency will be favored by customers and thus the banks will profit by providing a valuable service: the long-term stable value of their money.
4.) Hayek was not a fan of central banks or the gold standard. He believed that free markets in money would do a better job because of profit seeking by banks and competition between them to attract and keep investors and customers.
The problems I see, or the parts I don't understand, are:
1.) How exactly do banks profit from providing a currency? Why would they want to do this?
2.) Without a government mandated currency (such as dollars) in what unit of account would people, companies, and governments keep their books? If as Hayek envisions, there would be many competing private currencies, all based on differing baskets of asset values, no single unit name or price would apply to any purchase or financial transaction. So every store, gas station, and restaurant menu would have to display dozens of prices for each product depending on which currencies were the most popular at that time and in that region. And their relative values would be constantly changing! And how on earth would you keep track of your purchases (personal accounting) if they were made using 6 or 20 different currencies?
3.) What happens when some of these banks fail and their currencies become worthless? What about contracts that were based on one of these failed currencies? Does that mean the borrower is off the hook? Courts would be overflowing with messy to impossible disputes to try to sort out.
4.) It seems to me that it wouldn't take long for people to clamor for government intervention and a return to one nationally mandated currency.
1. The banks are fractional reserve banks with a small reserve ratio, like the ones I describe, so collect interest in the interest bearing assets bought with money issue. Since it is a competitive system they compete away the excess profits, probably by issuing money in the form of checking accounts and paying interest on them.
2. People can use any unit of account they like. Banks might well converge on a common market basket to get the advantage of standardization, but they don't have to. Currency exchange is arithmetic and computers do arithmetic fast and cheap — I can put a card in a money machine abroad and draw pounds or euros out of a dollar account or pay a restaurant bill in Euros from the same account.
3. People can contract in whatever currency they think is most reliable. If I lend you money in a currency that becomes worthless, and the contract specifies repayment in that currency, you owe me nothing.
I think that the unit of account problem is more significant than your number 2 response acknowledges. Yes, computers are good at mathematical conversions but humans are not.
Take, for example, a typical human conversation about the weather: I say "It sure is hot today, the temperature is 35°!" and you think, "Wow, that's actually pretty cold." The problem is that I'm measuring in Celsius and you're measuring in Fahrenheit. Fortunately, we only have two common units of everyday temperature measure, but with competing monetary units we could easily have 6 or 20 currencies available for everyday use. As a result, we humans couldn't even talk about the value of things, or keep comprehensible records, or engage in economic thinking. Without specifying an agreed upon unit of measure, we can't even talk meaningfully about the weather!
For this reason, I think that there will need to be a standardized unit of human/market /economic value, at least regionally, probably specified by the government of that region, just like the government now specifies units of weight, length, and which side of the road people drive on. There could still be many competing currencies, but the unit of measure and account that everybody uses would be determined by some sort of government dictate.
For simplicity's sake and continuity, in the USA this unit of account could remain "the dollar" but it's definition would change to some objective quantity that was continuously measurable. For example: One US Dollar is defined as the US GDP divided by the US population. Since human value is that which one works to gain or keep, the societal norm or average measure of value could be approximated by taking the total production (work) and dividing it by the total number of workers (population). One can imagine many ways to refine this calculation, but here I am simply trying to lay out the logic and underlying principles involved.
I agree that standard units are valuable. My guess is that one unit of value, probably a standard many but not all banks coordinated on, would be used for stating prices and long term contracts. But it doesn't have to be set by government.
Consider language. We solve a much more complicated standardization problem than temperature units entirely by private action. If we didn't we couldn't understand each other.
Everyone I interact with speaks English, at least when speaking to me. When they interact with others they might use other languages, but I wouldn't understand what they were saying.
My point was that speaking and understanding English requires people to standardize the meaning of sounds, a much more complicated problem than standardizing units of temperature. Yet we do it without government interference (except in France).
That depends how good the mechanisms are for evaluating an issuer, in particular for making sure it has substantial net positive assets. A 100% reserve issuer is at risk of failing as well if it can't be trusted, at which point you discover that most of the gold in its vaults is gilded lead.
“I published a comment on Ng’s piece pointing that out, received a message from Ng that he had used a spirit medium to consult with Ricardo and been told he didn’t mind.”
Thank you for my best chuckle of the day. 😄
I do believe most of this problem with limited supply of the currency is solved with bitcoin, that as a limited and predictable supply, the book Bitcoin Standard reviews this historic process of currency competition. Any thoughts on this?
Bitcoin has a mechanism to establish a maximum price, the cost of the power for mining, although one that changes over time. It has nothing to determine a minimum price, since you can't convert coins back into power. That makes it poorly suited to be a unit of value, although it can still work for transactions in a system where people use something else to contract in.
My ideal ecash would be a fully anonymous stablecoin, which I do not think yet exists.
No mechanism, asset or basket of assets can determine a minimum price. The value of every asset is subjective, and has to be compared to another asset to have a meaning.
The historic success of gold as a unit (and storage) of value is more linked to it's stock-to-flow relation, since gold is hard to mine, the supply of new gold has been somewhat stable compared to the total stock through time, that's what made gold better than silver, whose production has more elasticity, and made silver better than copper, whose production quickly answered price increases, it has a limited inflation.
Unfortunately, factors like metal detectors, border controls and new metal alloys that mimic gold made lose its advantage over fiat currencies.
Bitcoin is the end game of that historic process. It has a predictable and decreasing inflation - no matter how much power miners throw into the system -,immunity against capital and border controls, great level of anonymity (with the right OPSEC)...
A short-term transition could be made with stablecoins based on a basket of dollars, gold and bitcoin, but, ultimately, bitcoin should be the ultimate collateral
I think you may be missing the point about "minimum price" here. What is being said is not that certain assets have some god mandated market at some sufficiently low "minimum price". The point is that some people at the end of the day are interested in a bushel of wheat because it can be eaten. That is the bushel of wheat has some useful ends. You are right in describing the value of assets as subjective to market participants, we just happen to operate in markets where bushels of wheat are useful to feeding market participants and cryptographic codes that represent the conversion of useful energy into heat have no intrinsic use to market participants. It is in that sense that wheat has a "minimum price" and BTC does not.
I think this piece sums up the distinction here quite nicely and asks the right questions:
https://wp.josh.com/2025/02/02/the-hard-problem-of-bitcoin/
If you read it and feel like you understand a way to resolve the crisis it points to I would be very grateful to hear the solution!
> Bitcoin has a mechanism to establish a maximum price, the cost of the power for mining, although one that changes over time.
No, I don't think so.
You can see bitcoin mining as an auction (repeated every few minutes) where everyone pays their bid (in electricity and capex), and the auctioned off good is a bunch of new bitcoins.
(OK, in reality it's more like a raffle: each miner gets tickets proportional to hashing work done. There is one winning ticket per block, all other tickets become worthless. You also have a 'mining difficulty' that adjusts over time to balance supply and demand, so that blocks always take roughly the same amount of time to produce.)
I don't see how that mechanism caps the maximum price of bitcoin. Perhaps I am missing something?
The number of new bitcoins created everyday is pretty much fixed, no matter how many or how few miners there are.
I didn't realize that. What if there are no miners?
> It has nothing to determine a minimum price, since you can't convert coins back into power.
What determines the minimum price of gold?
The minimum price of gold coins is determined by the price of gold, since if the coin costs less than the gold in it coins get melted down. The minimum price of gold is determined by the demand for it in all uses, not just as money. It the only use of gold was as money, like the only use of bitcoin, it would have no minimum price.
For most of history the only other use for gold was decorating Veblen goods.
Bitcoin could in theory work as 'digital gold' that you can build a fractional reserve system on top of. Just like the Scottish banks build a fractional reserve system on top of physical gold.
The fractional reserve part is important, so that the amount of money in circulation can adjust to people's demand.
1000% agree
> while diamonds could be valued only by their price, there is no reason why they have to be
TBH *natural* diamonds *are* pretty much a pure Veblen good nowadays -- for no other purpose is there any sensible reason anymore not to use synthetic diamonds instead if you can get the latter for cheaper.
The value of a diamond depends on a number of different things, including whether it is natural, how large, clear, flawless it is, and its price. There is no reason why it couldn't vary with any of them, all else held fixed, and it probably does. If people valued diamonds only for their brilliance they would buy CZ instead but they could still value them in part for their brilliance, size, etc.
Another problem with Mr. Ng's diamond-based commodity system is that diamonds are just carbon that has been tremendously heated and compressed. Carbon is a common elements and it was always possible to duplicate this process in a laboratory.
But now it has become possible to duplicate that process affordably, creating diamonds that are indistinguishable from mined diamonds. Diamond markets are collapsing worldwide because of this, and the world is lucky that the commodity support of the world's money supply isn't collapsing with it because Mr. Ng's theory was adopted. But unless alchemy returns, it will never be possible to make more gold.
Ng said nothing at all about diamonds as money — you are back-projecting Ricardo's argument, which Ng didn't know about, on his article.
We have had good, inexpensive, synthetic corundum for a long time — it's used for class rings. Natural rubies and sapphires are still very expensive. Spinel too.
Synthetic gem diamonds seem to have become significantly less expensive than natural about 2016, less and less expensive thereafter. Diamond prices peaked about 2022, have been falling since then, but in 2023 (wikipedia article) synthetic gem diamonds were still only 17% of the market. So my guess is the pattern will be the same as with corundum, that although the price of natural diamonds may fall further they will continue to be valued much more than synthetics.
Gold is just protons and neutrons and electrons. They are abundant, and it's possible to assemble new gold from these raw materials in a laboratory. The process would be pretty similar to how new minute traces of synthetic elements are produced.
Of course, this is utterly impractical. Just like it used to be rather impractical to make diamonds, until fairly recently.
Synthetic diamonds go back seventy years or so, but synthetic gem diamonds that can be produced for less than natural only about ten years.
A basket-of-goods currency was probably the best we could do before Bitcoin. But now that Bitcoin exists, it blows any representative money or fiat money out of the water. It is the first pure money. While gold, oil, and wheat, and steel have actual physical uses, bitcoin's only use is as a trustless, easily auditable, easily storable, easily transactable non-perishable non-inflatable money. It's value can only fluctuate with the demand for money, not with the demand for oil, wheat, steel, etc. This makes it a far better (ie more efficient) price signal, because higher oil or steel prices don't then translate directly into higher vegetable prices.
Its price fluctuates with the demand for Bitcoin, not with the demand for money, since people can use other monies.
Fair enough. I suppose my unspoken premise is that bitcoin becomes the primary world currency, given that there's no reason it would be limited to a particular country like currencies that rely on government regulation or operation.
It's trivially easy for me to take the bitcoin code, and launch a bitcoin clone (with its own name).
I can perhaps believe that in future, everyone will use crypto-currency, but I don't see why it has to be bitcoin and not any of the others?
Thus even in the setting where everyone uses only crypto-currency, and the total demand for crypto-currencies is stable, we don't know whether the demand for bitcoin in particular will be stable.
Sure, maybe it'll be some other cryptocurrency other than Bitcoin. But there are strong network effects for a currency, and so you would expect that a single currency would eventually dominate world trade. The dollar does this to some degree today, and the only reason more countries aren't using the dollar internally (some do) is because of government regulation that favors their own currency (eg legal tender law, and those benefiting from seigniorage promote it's use).
Regarding Bitcoin tho, Bitcoin is more than code. It is a network of people. And the culture around Bitcoin also keeps it in check. The code can easily be changed to monetarily inflate the supply. What keeps that from happening is the culture around the coin. That's something that can't be copied.
I don't agree about network effects. There is a benefit to everyone defining prices in the same units but using a currency to define prices isn't demand — I can state a price in dollars without holding any. Demand is for making transactions. And if most transactions occur through computers, there is no need for the currency used in transactions to be the same as the currency used to define prices or for all transaction currencies to be the same. My computer links to a bank that has exchange rates among BitcoinA, BitcoinB, Ethereum, ... and automatically tells me the price in my currency of something priced in yours, with the bank doing the conversion if I want to buy.
I discussed this in Chapter 6 of my _Future Imperfect_:
I live in the United States; you live in India. You have goods to sell, displayed on a web page, with prices in rupees. I view that page through my brand new browser – Firefox v 9.0. One feature of the new browser is that it is currency transparent. You post your prices in rupees but I see them in dollars. The browser does the conversion on the fly, using exchange rates read, minute by minute, from my bank’s web page. If I want to buy your goods, I pay in dollar-denominated ecash; my browser sends it to my bank, which sends rupee-denominated ecash to you. I neither know nor care what country you are in or what money you use – it’s all dollars to me.
> I can state a price in dollars without holding any.
I totally agree. In fact in the middle ages, many places in Europe used currency from the roman empire as the unit of account for hundreds of years after the corresponding coin fell out of use as a medium of exchange.
The network effects are in other things. While you're right computers can make currency exchanges invisible and automatic, there is still a cost that needs to be paid to middle men for that. And for cryptocurrency, the security of a coin is largely dependant on the size of its network (bigger network = higher value = more mining in PoW or more stakers in PoS). Also, one would expect the volatility of the coin's market value to decrease with the size of the network. The last two can't be abstracted away by computers.
I once asked Larry White about the commodity bundle idea, and he said he didn't think it would work. I don't recall why, though. I have a vague and fuzzy memory that he said something about it being important for money holders to be able to easily claim the commodities on which the money was based, which works well for silver or gold, but not so well when a currency represents silver AND gold AND a bushel of wheat AND...
I also don't remember why he thought that was important.
Since otherwise you start slipping into fiat.
Historically the first step in turning gold-backed money into fiat is to "temporarily" suspend convertability.
The value of FRB is not that it economises gold, a minor benefit indeed. The value is that it's the only system so far proven (with others proposed, among which my own) that directly translates changes in the demand for money into changes in supply in an emergent manner.
Increased demand for money pulls gold out of other uses into coinage, increasing the money supply. It also pushes up the price of gold measured in other things, which increases the amount of money measured in purchasing power.
A fractional reserve system amplifies the effect, since an ounce of bullion is converted into (say) four ounces of coinage instead of one ounce. But the effect exists without it, since gold has other uses and can be mined. And even a system with a fixed supply of money has "enough" money, since growing demand causes declining prices, which means that the purchasing power of the fixed supply is increasing.
Relying on prices adjusting makes long-term planning impossible, a soft version of the socialist calculation problem.
True that the gold specie standard also feedbacks off changes in demand, but this is slow and cannot deal with seasonal ramp-ups or downs in demand, hence these causing panics.
Only FRB can adjust to daily changes without anyone telling the banks to, as per Selgin and gang's work.
You, and perhaps Selgin, are assuming that the demand for money is proportional to the number of transactions. That's a mistake — transactions are a flow, not a stock. Total quantity of money demanded is the sum of everyone's desired cash balance. Increasing velocity need not increase that and it can be increased by changes that don't increase transactions.
Suppose that something makes the environment more uncertain, makes it less clear when you will be able to find a trading partner to buy from or sell to. You will try to increase your cash balance to have a bigger shock absorber. The increased uncertainty probably means reserve requirements go up, not down.
I don't think so, IIRC the whole point of the fractional reserve bit is to accommodate changes in velocity.
I had to ask my LLM friend for a refresher on Selgin's views on the scenario you brought. The following is a mix of what I remember, what I read the here that makes sense, and me filling in the gaps.
The scenario you mentioned is not one of increased demand/ lower velocity, but one where the banking systems reputation is in peril. In that case, the money supply will crash.
A normal increase in the demand for money balances will not have people redeeming, as they view notes as perfectly adequate substitutes. Indeed some will attempt to increase their balances by way of borrowing. This, combined with the allegedly more muted level of interbank clearances that would otherwise hold loans back, will allow the system as a whole to increase the supply of credit.
I said nothing about the banking system's reputation — that's a different problem.
I didn't say that an increased demand for cash balances would have people redeeming. I said that it wouldn't automatically change the reserve ratio. It would increase the demand for money, pushing the value of money up and prices down, hence be the sort of instability that the automatic stabilization you were arguing for wouldn't deal with.
I don't think your LLM friend understands the relevant economics very well.
Hey, you leave Gemini out of this!
I made it obvious that I regard the "prices will deal" explanation as cope. If you wait for the price level to adjust, the system has failed.
I also proposed how the reserve ratio would indeed allow for an increase in supply in you scenario. Feel free to reread.
I would just let different issuers compete. Including letting them compete on what they offer in redemption for their currency (if anything). Be that gold, or fiat dollar, or your bundle of goods.
But one can predict which form is likely to win out, and there will be market pressure for multiple firms to coordinate on a single standard, as happens in other markets.
On the other hand, one can use one money as a unit of value, for long-term contracts and similar uses, and a different one for payments. If most payments are made by credit card or similar mechanism, you can have multiple currencies with no great inconvenience, since currency conversion is arithmetic, which computers do fast and cheap. When traveling in Europe I pay bills denominated in Euros or Pounds or Lari from a dollar denominated account via a debit card.
I think I may do another post on money discussing this and ecash, including Chaumian vs blockchain
How does more stable prices from a currency based on a commodity bundle lead to better quality of life for people than inflationary prices from fiat currency?
Predictable prices enable long-term contracting. Prices that are unstable in the short-run make it harder to use your memory of transactions in the recent past to evaluate present transaction opportunities.
I would suggest to stabilise nominal GDP instead of the price level.
George Selgin explained how fractional reserve (free) banking over a roughly fixed money supply (like gold or even bitcoin) can stabilise total spending.
Let me quickly explain how that worked in something like the old Scottish free banking system.
Banks have a well established procedure for dealing with redemption requests by individuals: the bank can choose whether to give you your gold right away, or to pay you some really high penalty rate of interest to give you the gold at some later date. (That provision is so that the bank has enough time quickly to liquidate assets, if necessary.)
How much of your balance sheets to keep around in gold reserves vs how much to invest in other assets is an optimisation problem for the bank: redemption requests are a random process, and they want to be able to meet most requests that happen day to day, but they don't mind a small probability of having to pay the penalty rate, if that drastically cuts down on the amount of unproductive reserves they need on the balance sheet.
In practice, normal people basically never ask for redemption. What happens instead is that banks use reserves to settle remaining differences after netting out customer transfers with each other.
Now here comes the nice part:
For simplicity we assume that customer transfers are basically random. Sometimes the guy you want to send money banks with the same bank as you, sometimes with another. (Eg you typically don't pick your landlord by who he's banking with.) Similarly, it's pretty much random where you get money from when you receive a transfer. On average, a bank receives as much money as they take in.
But each day, they might get more or receive more. That difference is roughly normal distributed. The bank wants to keep enough reserves on hand to cover most of that distribution, but doesn't care about covering all of it.
If there's more total spending happening in the economy (GDP above target), the banks need more reserves to cover their fluctuating redemption requests.
But the total amount of reserves is roughly fixed (we assume we can't create gold).
Thus as a whole, the banking system will tend to produce less fiduciary money instead, dropping total spending as a result.
(I didn't explain it very well. I'll try to find George Selgin's original description.)
That's cute, but doesn't the law of large numbers imply that the reserve requirement increases less than proportionally to the growth in total spending?
Why do you want to stabilize nominal GDP? Stabilizing prices has the advantage that you can use your memory, or record, of past transactions to evaluate future transactions without having to adjust for changes in the price level. It also makes it easier to spot price signals, know what is getting relatively more or less expensive and adjust your plans accordingly.
David, this is a really hard problem that is near-and-dear to my heart. I spent two years on a solution and wrote a 16 page whitepaper on it. You may be interested to read it -- compto.com/whitepaper. It could be thought of as a fractional money based on the fundamental 21st century commodity: computation (and thus energy). I've only just finished it and now I'm building a company around it. As someone who has thought deeply about this problem, your first impressions would be invaluable (and those of your highly intelligent reader base for that matter)!
Hey this is quite cool. I didn't realize all the history of joule money I thought my friend came up with it so I wrote about the idea here:
https://milessegal.com/2025/02/20/joulesdollarsgoldbitcoins/
Your white paper is very interesting. I study computation more than I study monetary systems but I don't understand why it is useful to use computations as currencies instead of just directly trading joules. You cite in your paper that carrying batteries around to pay people is infeasible. I agree but we have a technology that resolved that problem, credit and debit cards. I don't understand why those wouldn't be sufficient. To make joules workable by themselves
Thank you for your kind words. I read your post, and I sympathize greatly with the theoretically pure and beautiful ideal of simply using joules, and I did touch on this briefly in the paper. Ultimately it's a problem of practicality. In the messy real world, jules are not directly fungible (a necessity for a currency). Jules at 8PM are more expensive than 2PM or 2AM jules. (Most utility bills charging a flat kWh rate hide this fact.) Jules are more expensive in California than Alabama, etc. So there needs to be one extra layer of abstraction. Also, an issued (debit) card must have an issuer. That issuer will very quickly become the weak link, suceptible to political pressure, and institutional failure. As an aside, in your post you wisely point out the wastefulness of the energy "destructive" nature of computation. I describe the same problem in control system terms in section 5.1.1. And the solution in 6.1. Search "distribution factor". Please reach out if you're interested or have questions. It's kind of insane how close your thinking in that post is now to what I was thinking ~2 years ago when I started down this rabbit hole. I've since decided to dedicate my life to making this a reality. I figure most people don't even get one chance to change the course of history. For me, this is probably my one and only chance.
A few months ago I read Friedrich A. Hayek's book, "The Denationalisation of Money: The Argument Refined", which is available on the Mises Institute's website. In it he advocates for competing private currencies based on a standardized basket of commodities.
I agree with Hayek that using a basket of commodities, such as the 25 most commonly used raw industrial inputs, sounds like a very good basis for anchoring the value of currency, but I'm not clear on how this would be implemented. He offers several illustrative example in the book but they are not fully developed.
I assume that you've read the book, but I don't know how much of it you remember, so here is my summary:
1.) Governments surrender their monopoly power of money creation and allow any financial institution to issue their own currency: No more Federal Reserve, no legal tender laws, and no restrictions on which banks can operate within the country.
2.) Multiple banks issue their own name-branded currency based on some basket of commodity or other asset values (like the S&P 500, for example) which they promise to redeem their currency for at any future time in terms of any other currency. This is sort of like "Pay to the bearer on demand x amount of Gold" but instead of gold the payment is based on a widely balanced (for stability) basket of commodities as they are currently being traded on global markets.
3.) Banks will do this in a competitive environment where the most stable currency will be favored by customers and thus the banks will profit by providing a valuable service: the long-term stable value of their money.
4.) Hayek was not a fan of central banks or the gold standard. He believed that free markets in money would do a better job because of profit seeking by banks and competition between them to attract and keep investors and customers.
The problems I see, or the parts I don't understand, are:
1.) How exactly do banks profit from providing a currency? Why would they want to do this?
2.) Without a government mandated currency (such as dollars) in what unit of account would people, companies, and governments keep their books? If as Hayek envisions, there would be many competing private currencies, all based on differing baskets of asset values, no single unit name or price would apply to any purchase or financial transaction. So every store, gas station, and restaurant menu would have to display dozens of prices for each product depending on which currencies were the most popular at that time and in that region. And their relative values would be constantly changing! And how on earth would you keep track of your purchases (personal accounting) if they were made using 6 or 20 different currencies?
3.) What happens when some of these banks fail and their currencies become worthless? What about contracts that were based on one of these failed currencies? Does that mean the borrower is off the hook? Courts would be overflowing with messy to impossible disputes to try to sort out.
4.) It seems to me that it wouldn't take long for people to clamor for government intervention and a return to one nationally mandated currency.
What are your thoughts?
1. The banks are fractional reserve banks with a small reserve ratio, like the ones I describe, so collect interest in the interest bearing assets bought with money issue. Since it is a competitive system they compete away the excess profits, probably by issuing money in the form of checking accounts and paying interest on them.
2. People can use any unit of account they like. Banks might well converge on a common market basket to get the advantage of standardization, but they don't have to. Currency exchange is arithmetic and computers do arithmetic fast and cheap — I can put a card in a money machine abroad and draw pounds or euros out of a dollar account or pay a restaurant bill in Euros from the same account.
3. People can contract in whatever currency they think is most reliable. If I lend you money in a currency that becomes worthless, and the contract specifies repayment in that currency, you owe me nothing.
I think that the unit of account problem is more significant than your number 2 response acknowledges. Yes, computers are good at mathematical conversions but humans are not.
Take, for example, a typical human conversation about the weather: I say "It sure is hot today, the temperature is 35°!" and you think, "Wow, that's actually pretty cold." The problem is that I'm measuring in Celsius and you're measuring in Fahrenheit. Fortunately, we only have two common units of everyday temperature measure, but with competing monetary units we could easily have 6 or 20 currencies available for everyday use. As a result, we humans couldn't even talk about the value of things, or keep comprehensible records, or engage in economic thinking. Without specifying an agreed upon unit of measure, we can't even talk meaningfully about the weather!
For this reason, I think that there will need to be a standardized unit of human/market /economic value, at least regionally, probably specified by the government of that region, just like the government now specifies units of weight, length, and which side of the road people drive on. There could still be many competing currencies, but the unit of measure and account that everybody uses would be determined by some sort of government dictate.
For simplicity's sake and continuity, in the USA this unit of account could remain "the dollar" but it's definition would change to some objective quantity that was continuously measurable. For example: One US Dollar is defined as the US GDP divided by the US population. Since human value is that which one works to gain or keep, the societal norm or average measure of value could be approximated by taking the total production (work) and dividing it by the total number of workers (population). One can imagine many ways to refine this calculation, but here I am simply trying to lay out the logic and underlying principles involved.
I agree that standard units are valuable. My guess is that one unit of value, probably a standard many but not all banks coordinated on, would be used for stating prices and long term contracts. But it doesn't have to be set by government.
Consider language. We solve a much more complicated standardization problem than temperature units entirely by private action. If we didn't we couldn't understand each other.
Everyone I interact with speaks English, at least when speaking to me. When they interact with others they might use other languages, but I wouldn't understand what they were saying.
My point was that speaking and understanding English requires people to standardize the meaning of sounds, a much more complicated problem than standardizing units of temperature. Yet we do it without government interference (except in France).
Would this system avoid bank failures? That seems like an inherent risk of sub 100% reserve banks.
That depends how good the mechanisms are for evaluating an issuer, in particular for making sure it has substantial net positive assets. A 100% reserve issuer is at risk of failing as well if it can't be trusted, at which point you discover that most of the gold in its vaults is gilded lead.
Nah, that's not actually that much of a risk. Not more of a risk than any other company going bankrupt.
The Scottish system David mentioned coped with them just fine.
All fractional reserve has that risk.