Free Markets, Free People

Dead Ed, the Collapse, and eBay Saves Us All

My first reaction to Pres. Obama’s speech last night was depression.  Here were the Democrats giving the president standing O’s for completely converting the Republic into a social democracy.  I mentioned that on Facebook, and one of my readers said it reminded him of Amidala’s line from Star Wars Episode III:  “So this is how liberty ends…with thunderous applause.”

But on more careful review, I find that I am not, in fact, depressed over the long-term.  Indeed, last night’s speech seems to me not to herald the beginning of a new era for big government and socialism, but rather the last gasp of a dying ideology.

We are, I think, at the cusp of a new era, but it isn’t the one that Pres. Obama and his acolytes in the Congress are thinking it is.  Neither the Democrats nor the Republicans, it is clear, have any idea about what is happening.  Very few people do.  I am going to try and explain something very complicated, and do so very simply, and as briefly as I can.  So, with the realization that all simplifications are inevitably wrong in some particular, let me explain.

“Ed’s dead, baby.  Ed’s dead.”*

We stand now, I think, in a very historically similar position to the one described by Barbara Tuchman, in the beginning chapter of her monumental work on the outbreak of Word War I, The Guns of August:

20 May 1910:  The past passes in review

20 May 1910: The past passes in review

So gorgeous was the spectacle on the May morning of 1910 when 9 kings rode in the funeral of Edward VII of England that the crowd, waiting in hushed and black-clad awe, could not keep back gasps of admiration. In scarlet and blue and green and purple, 3 by 3 the sovereigns rode though the palace gates, with plumed helmets, gold braid, crimson sashes, and jeweled orders flashing in the sun. After them came 5 heirs apparent, 40 more imperial or royal highnesses, 7 queens, and a scattering of special ambassadors from uncrowned countries. Together they represented 70 nations in the greatest assemblage of royalty and rank ever gathered in one place and, of its kind, the last. The muffled tongue of Big Ben tolled 9 by the clock as the cortege left the palace, but on history’s clock it was sunset, and the sun of the old world was setting in a dying blaze of splendor never to be seen again.

Four years later, the world order of 1815-1914 was drowned in fire and blood.  The Age of Royalty was over, and the Age of Democracy had begun.  I believe that Pres. Obama’s speech of last night may very well be the historical equivalent to Edward VII’s funeral.

Ever since it began in late 2007, a blog called Fabius Maximus has been arguing that we are watching the decline and fall–indeed, collapse–of our current economic and financial system.  A précis of the argument can be found here, and a more comprehensive archive can be found here.  Just as the black-clad crowds lining the streets of the capitol of the British Empire on the morning of May 20, 1910 might have found it inconceivable that their generation would witness the collapse of both the European geopolitical regime, and, ultimately, the British Empire itself, so it may be inconceivable to us that we are witnessing the collapse of the Post-WWII economic and political regime.  But I believe it is nevertheless true.

“MONEY! Doesn’t it make you feel good just to say that, Jerry?”

Let me start by explaining what money is.  Money is a medium of exchange, that is, it is an object of some kind that I can exchange for goods and service, rather than trying to barter with people to obtain what I need.  It may consist of elaborately carved cowry shells, tiny beads painstakingly stitched to strips of leather, round pieces of metal with the image of guys named Julius or Claudius hammered into them, or little pieces of high-quality paper that say “Federal Reserve Note” on them.

But whatever it is, money has certain minimal characteristics.  It must be convertible, i.e., if I do a job for you, I have to be willing to accept it as payment, and whoever I buy bread or clothes from has to be willing to accept it in exchange, too.  It also has to be difficult to replicate, so that when I accept it, I am reasonably assured that it is the genuine article.

Get 'em while they last.

Get 'em while they last.

For nearly all of recorded history “money” has been synonymous with gold or silver.  And right up till the late 18th century, it was more or les the perfect money.  It was intrinsically valuable, in that raw silver or gold was as easily convertible as hammered or minted coins.  It was also practically impossible to counterfeit, the best efforts of alchemist to convert dross into gold notwithstanding.  It was also relatively rare, and it difficult to obtain new supplies of it without intensive–and extremely expensive–mining operations.

Additionally, there simply wasn’t much to buy.  Most people grew their own food, produced their own clothes from flax or wool, and built their own houses by hand.  Money was essentially a luxury, and it bought mainly luxury goods for fat cats.  Kings could raise and equip armies with it.  Merchants could buy nice clothes. But for the most part, money was a tool for use by the rich, and by the relatively few urban dwellers.  And, as such, gold or silver was perfect for that level of economic activity.

By the 19th century, though, there were lots more things to buy, and lots more city dwellers, and that trend was increasing rapidly.  Hard money became…problematic.  The thing about having a hard currency based in gold or silver is that, at the end of the day, whether you run a fully convertible gold standard, or some sort of fractional reserve system, the size of the money supply is always constrained by the amount of gold or silver on hand.

If the economy takes off on a tear, it’s extremely difficult to expand the money supply to meet the demand.  When the supply dries up, the economy just shudders to a quick stop, because nobody has enough spare money to fund more expansion.  So the economy collapses until it reaches equilibrium with the available money supply, and the cycle starts again.  Look at a chart of US economic activity in the 19th century and you see it’s a system of booms and busts, which were far steeper than any we’ve seen since the depression.  So the fundamental problem with a gold standard is that it’s relatively inflexible when used by a vibrant, diverse economy.  When everybody needs gold, and the demand is unpredictable, gold is very difficult to use unless you’re willing to live with severe booms and busts.

The Great Depression was the death knell for the gold-based world economic system.  Those nations that jettisoned gold the fastest, recovered the most.  Of course, WWII intervened in the depression, so it took a decade or so to get back to the business of commerce–as opposed to the business of building things to kill Nazis.   But, by 1944, everyone–on the Allied side, at least–had recovered enough breathing room to meet at Bretton Woods, NH, and hammer out a new economic system.

What they came up with was a system of fiat currencies, all freely convertible in the FOREX market.

Now, governments could adjust their money supplies appropriately by printing more money or less of it, and taxing their populations more leniently or more severely, as needed.  This is the system most of us have grown up with…and it’s dying.

It’s dying because of something innate in human nature that the gold standard was better equipped to deal with:  the urge to loot the system.

It’s an urge that has always been there.  Sometimes it has been the result of intentional government action to cheapen the currency.  If you were, say, the king of Persia, you didn’t need to consult the priests of Ahura Mazda to know that if you changed from using 10 grams of gold per coin, to using only 9 grams per coin, you could stretch your gold supply by 10%.  You could then take the extra gold, and buy yourself a nice hat.  Or use the extra gold to make one.  Whatever.

Of course, people would notice this pretty quickly, and items that used to cost 9 gold pieces would cost 10 pieces–inflation!–but because gold had an intrinsic value, the same weight of gold could be exchanged.  It was still pernicious, of course, but because gold had an intrinsic value–and because the supply of gold was relatively inflexible–it wasn’t usually seriously pernicious.

Sometimes, the urge to loot the system has been done by private individuals, who figured out that if they shaved a bit off the edges of their gold pieces, they could accrue enough gold shavings to buy themselves a nice hat, too.  This, by the way, is why when we began minting coins instead of hammering them out. They were minted with milled edges, making shaving attempts immediately obvious.

By the 19th century, the looting attempts became widespread, populist movements, like the “Free Silver” movement.  At the time, gold was real money.  If you took a bunch of gold to a Minting facility, the mint would return you an equal weight in gold coins–minus a nominal minting fee.  After huge silver deposits were discovered at places like the Comstock Lode, populist agitation began for minting silver in the same way, at a ratio of 20 ounces of silver for 1 ounce of gold.  The massive amount of silver floating around would, of course, have made this an extremely inflationary policy, and the farming and borrowing interests would have benefited by paying off bills for less than they had borrowed…enabling themselves to use the extra saving to buy a nice hat.

But during the First Age of Money, the looting was always constrained by the fact that gold had an intrinsic value, and that the supply of gold was inelastic.  There were, therefore built-in constraints to the looting impulse.

When the Bretton Woods Agreement launched the Second Age of Money, it solved the problem of the inelasticity of the money supply, and enabled monetary authorities to fine-tune the money supply in response to economic activity.  That was a good thing in the sense that it flattened–although did not eliminate–the business cycle fluctuations.

But the bad thing was that it completely removed any physical restraint on the money supply.  It depended on governments and monetary authorities to exercise self-restraint, rather than impersonal, externally imposed constraints.  The result has been 65 years of continually expanding credit, more or less constant inflation to a greater or lesser degree, and unrestrained spending and borrowing.

Governments–and their democratic (small “d”) constituencies quickly learned that they could loot the system.  Social insurance, medical care, military expansion…whatever the Big Idea of the minute was, we could have it.  And if we didn’t want to pay the taxes to the government to pay for it–and, mostly, we didn’t–we could simply borrow it.  We could obtain a whole bunch of little green pieces of paper now in exchange for a promise we’d pay back more little green pieces of paper sometime in the future.  In the meantime, we could buy all the hats we wanted!

But now, we are obligated to pay back various people about fifty trillion pieces of green paper.  Unfortunately, the entire household worth of everyone in the country is worth about forty trillion pieces of green paper.

How can the current economic and financial system possibly be considered solvent at this point?  How will re-expanding the cycle of debt re-invigorate it?

No, we’ve had our fun.  We got to loot the system for 65 years.  Now, the hat bill is coming due.

I suspect we’ll pay the hat bill the same way that Germany repaid their war reparations debt after WWI.  “Hey, you remember that reparations bill for 3 billion marks that we’re supposed to pay next week?  Yeah.  I just wanted to let you know that we’ve sent that order off to the printers, this week, and we should have that printed up for you by Tuesday.”

The result was massive hyperinflation, the collapse of credit, and 5 years of compete economic stagnation, serious economic pain, severe unemployment…and the ability to start over in the mid-20s with a clean balance sheet.  Clean enough, in fact, that by 1936 Germany had more or less completely emerged from the Great Depression, while the employment rate in the United States hovered at around 18%.

What Pres. Obama is proposing may result in nothing more than additional spending that helps bring about the collapse of the Post-WWII economic regime, while at the same time providing–temporarily–a social safety net that will provide some help as we pass through a difficult transitional period.

“I was there at the dawn of the Third Age of Mankind…”

OK.  Maybe it’s not that grandiose, but I think we are seeing the dawn of the Third Age of Money.

No one in the government realizes how the economic world is changing.  So their proposed solutions are likely to be exposed over time as ineffective and, perhaps even counter-productive.  The credibility of governments around the world is now invested in staving off an economic collapse.   When their failures become evident, and their “solutions” are exposed as fantasies, that credibility will collapse.  Who will want to buy government bonds, or use worthless government money?  Who will trust the governments who lead us into the economic abyss?

Unfortunately, rather that realizing that we are entering a transition, and trying to discover how to shepherd us through that transition, they are invested in preserving the dying system of government-regulated money supply and credit.  And even if they realized that we were in a transitional period, they would still do nothing about it because it would require voluntarily releasing their power over the economy.

Governments have always been in charge of money; determining what money is, how it will be exchanged, how new money will be created, etc.  In part, this is traditional, in that only government had the resources and ability to fund and oversee mining and exploration activities, regulate what legal tender consisted of, and all of the other monetary functions.  There simply were no other large organizations in existence to perform those tasks.

It wasn’t until the 17th century that organizations began to emerge that could begin performing those tasks, and not until the 18th century that it became practical.  Private money of various types began to sprout up everywhere.  18th-century America was, for a time, replete every decent-sized bank issuing its own currency based on deposits.

Eventually, the Federal government cracked down on that private money, not so much from jealousy of the government’s role as the issuer of currency, but because private banks suffered from the same tendency to loot the system, issuing more and more inflated currency until it was worthless, and they ended up wiping out their depositors in the collapse as their obligations came due.  There were some solid money banks of course, but the spectacular failures of so many private currency attempts led the government to tax them so heavily that private currency issuance became uneconomic. Governments may not have been perfect, but the constraints of the gold system meant that they didn’t fail as completely and spectacularly as private banks did.

What was missing in private currency of the time, and what has been missing in the current post-WWII financial system is feedback.  Yes, there is some, but it takes a long time to filter into the monetary authority, and is derived indirectly from statistics on economic activity, rather than by any sort of direct observation.  The Fed raises interest rates today, for instance, and it takes around eight months to observe the indirect effects of the monetary policy change.   This is why the role of the Fed, has often been described as steering a car by looking through the rear-view mirror.  Based on seeing where you’ve been, you make decisions about where you must go.  That may be a form a feedback, but it is so separated in time from the inputs that it’s an inherently unstable system.

By the same token, what killed depositors in banks that issued private money was a lack of feedback.  It wasn’t possible to see that bankers were looting the system in time to withdraw your money.

We call this lack of feedback asymmetrical information.  We’ve never been able to even approach the ability to have full information about what a bank or government is doing that may affect the money supply, or economic activity as a whole.  We’ve never been able to see all sides of the story, as it were.  So, we’ve had to more or less leave it in the hands of government, simply because governments have been the only organizations with the size and scope to reduce, even partially, the problem of feedback.

So, it seems pretty hopeless, doesn’t it?  The financial world we’ve grown up with is collapsing under the sheer weight of looting.  If governments can’t do it, and a return to the gold standard can’t do it, then where are we?  At the edge of another dark age?

Not quite.

I foresee the rise of private money once again, and returning in such force as to negate the government’s role in the economy.  In fact, the pieces for creating the Third Age of Money are already there.

Your new ATM

Your new ATM

The Internet will be the platform for the new money.  But it’s just the platform; the communications media.  The actual objects that make up the Third Age of Money will almost be located in cyberspace.

First, there is encryption.  In the not-too-distant future, you will go online with a persona, i.e., an online identity with a unique, highly encrypted digital signature.  No more logging in with different user names and passwords at 100 different web sites.  Your persona will be uniquely identified as you through the use of 4096-bit or 8192-bit public key encryption.  Your persona will be impossible to forge or duplicate.  It will be unique.  Your “bank” and your “money” will be similarly encrypted.

Second, is your ATM/debit card.  It won’t be exactly the same, of course.  It will be far more secure, probably through the use of biological identification systems to verify authorization, such as retinal scans.  It will be linked directly to your persona’s bank account.

Third, is the ability of all the major banks and credit card companies to do online transactions, and to convert one system of private money to another at a publicly known exchange rate.  So, you can pay directly to your account–or withdraw from it–in Discover Dollars, or MasterBucks, or Credit Suisse Francs.  Or perhaps there might even be a universally acknowledged unit of currency–the “Credit”–that all the private companies agree to use.

But, the most important element of creating a reliable private money system that is resistant to looting the system is feedback. The reduction of asymmetrical information.  And that exists, too.  eBay has been using it for years.  Indeed, in no small way, the system implemented by eBay may be a key element of our future.

Imagine a system where, every time I do business with your persona, I rate your reliability, and it doesn’t matter of the persona is an individual or a bank…or a government.  Every day, millions of people who do transactions in MasterCard can rate the reliability and value of the MasterBucks system.  Private companies like Standard and Poors or Moody’s would not only rate MasterBucks, but consumers would rate the reliability of S&P or Moody’s judgments.

And not only are the bank’s persona’s being rated, but your persona is as well, by every one who does business with it.

Put them all together and you have a secure form of private money that’s convertible, impossible to forge, and is subject to constant feedback about its value and performance.  Does MasterBucks have too high a debt ratio or too much exposure to non-performing loans at MasterCard?  No problem.  It’s instantly convertible to Credit Suisse Franks.  And the conversion rate lowers MasterBucks reliability ratings even more, signaling the company to correct its course, or lose its depositors.

Think of the implications this has for taxation, especially income taxation.  Keep all your money in Credit Suisse Francs, say, and the US government will never even be able to see a record of your deposits or withdrawals.  How will they track your income?  And who will want to pay governments that failed to prevent the collapse for…well…anything?  Who will accede to the demand for money by governments that repudiated their debts, and destroyed the life savings of millions?

I can foresee huge implications for the future that are very pro-liberty.  In the long term.  In the short term, though, if I’m right, and the current financial system is collapsing we will be in for a very rough decade or so.  Very rough indeed.


*Apologies to Quentin Tarantino.

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27 Responses to Dead Ed, the Collapse, and eBay Saves Us All

  • Outstanding think piece, Dale.  And of course, with a private system of money immune from government looting, government’s role would be reduced to what it is supposed to do – national defense, and preventing the use of force or fraud.

  • While I feel the same dismay the author felt about the government turning this country into a democracy, he seems to have a weak understanding of monetary history and theory.
    Every single boom and bust cycle was preceded by credit expansion by bankers, including those that happened during the gold standard.

    During the decades of 1880-1900, the USA enjoyed some of the greatest periods of prosperity: increase in industrial output, falling prices, and increasing wages.. This was during a period of relatively flat money supply (gold standard).  

    Here is a book that explains all this monetary history:
    There is a school of economics with a very well developed theory of money, central banking, and the “business cycle” (booms and busts).  It is called the Austrian School of Economics.  One of its fathers, von Mises, argued against Irving Fisher, in 1929, that the country was going to suffer a severe recession due to the massive credit expansion by the Federal Reserve.  He was right, of course.  Fisher was the man who famously said “the stock market is at a permanently high plateau”, then lost his whole fortune.  Fisher is considered one of the “fathers” of “modern economics” (read, Keynesian economics).
    The existence of a central bank is against free market principles.   By manipulating interest rates, and expanding and contracting the money supply, they distort the free market and create an unstable economic system.  The Austrian School teaches this.  The Federal Reserve Act was written by representatives of the biggest banks of 1910 in order to cartelize the Wall St. banks.   This book explains the history of the Fed and its mechanisms:

    Why do governments believe in Keynesianism and central banking?  Because they teach that government can spend as much as it wants, and because central banks give them a blank check.
    Here is a fantastic new book explaining the root cause of our crisis:
    Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
    Anybody who claims to be pro free markets will do themselves a disservice in not studying Austrian School Economics.

    • *sigh*
      I don’t know why ypu Austrians are always such pedants.  I’m trying to explain a number of complicated things tersely, in a blog post.  I already granted that the over-simplification would be somewhat wrong, because it leaves little room for details.

      Then you have the nerve to kite in here and say “You’re wrong!  You don’t know Monetary History!”  What you really mean is, “I am an Austrian, and your explanation doesn’t fully comport with the orthodoxy I’ve received”.  That isn ‘t the same thing.

      Oh, and in case it missed your attention, in the decade from 1879 to 1889 alone there was a 25% increase in labor productivity.  Perhaps that had more to do with the rising wages and lower prices than the gold standard did, hmm?

      • Re:1879-1889 – you are agreeing that prosperity and economic growth can happen despite a constant money supply, negating what you originally wrote that economies come to a standstill if the money supply doesn’t expand.
        Again, may I suggest studying Austrian School theory.
        1) Modern central banking implements a DEBT-based fiat currency system.   They create money which is actually credit; the newly created money has a debt attached, and is destroyed when repaid.  This means that money isn’t actually created, debt is.  Money is only created when a new loan is made.  And when they manipulate interest rates down (against free market principles), they artifically increase the demand for credit.  When this happens, more debt is created.  When there is a slowdown due to any reason, the loan creation rate slows down.  If the loan creation rate drops below the loan repayment rate, the money supply contracts, sharpening the recession.  The system is inherently UNSTABLE.  In addition, the central bank enjoys the interest payments from money loaned created out of nothing.  Very profitable.
        2) Fractional Reserve Banking – the commercial banking system effectively loans out 10x as much money as is deposited with them.  It is very profitable during boom times, but it also means if one out of every 10 loaned dollars defaults, their books go into the red.  This is what is happening in this crisis now.  Why do commercial banks do this high 10:1 leverage ratio?  Because it is the maximum allowed by law, and the central banks bail out banks that suffer a run in day to day operation.  Without a central bank with bailout powers, banks would be fearful of runs and wouldn’t be so overleveraged.  Banks that are overleveraged would go belly up and be bought by the more conservative banks.  We wouldn’t have this crisis caused by overleveraging.
        3) Governments love central banks effectively give them a blank check.  What gov’t wouldn’t like this?  When central banks fund government, it effectively creates inflation, by creating money and diluting the existing money supply.  So government gets its funding without having to raising taxes overtly; inflation is a stealth tax.
        4) The reason gov’t passed legal tender laws, is because people have consistently rejected gov’t fiat money.  Who wouldn’t reject money that is being inflated?  The USD today is worth 4c of what it was in 1913.  An ounce of gold in 1913, and today, will buy a fine handmade suit.
        Just to be clear, the Austrian school economists aren’t pro gold standard per se – they advocate letting people use whatever they want as money, and that gov’t not be in the business of regulating money,  just as you describe in the last few paragraphs. (BTW this is not the same thing as saying the gov’t cannot tax).  Gold historically has been the one most often chosen by people because of its features.  Given the internet, there can be other forms of money, which brings me to…
        I agree with the main point in the article that private money over the internet is a very definite possibility, and will be THE solution for our ills.  The main features needed are that:
        1) the system is secure and private (obviously)
        2) It is NON-INFLATBLE by any central authority with discretionary powers (the temptation for private money issuers to inflate the money is also there in the past, but at least they had to compete)
        BTW here is a NON “austrian” website explaining the mechanisms of our debt-based monetary system and its inherent problems:
        Chapters 6 through 10 are an excellent description of modern money creation and its consequences.

        • *sigh*

          I never wrote–nor even implied–that economic growth can’t happen with the gold standard.  I never even wrote that the gold standard was a money supply that didn’t expand.
          What I wrote was that the money supply under the gold standard is relatively inelastic.
          Try responding to what I actually write, rather than the odd strawmen that exist only in your mind.

      • I typed a long reply and I think it got lost.

        The boom from 1879-1889 despite the flat money supply, negates the implied assertion that money needs to expand. (Keynesian myth).  I didn’t say the gold standard was the reason for the boom, I was saying  economic growth can occur despite a flat money supply. 

        1) This excellent (non Austrian) site explains modern-banking’s debt-based fiat currency system and its inherent problems

        See Chapters 6-10:

        2) debt based currency is inherently unstable – new money is ONLY created on the spot when a loan is made, and when the money is repaid the money disappears. During slowdowns loan repayment exceeds loan creation and thus this shrinks the money supply, sharpening the recession. The system is inherently UNSTABLE

        3) Governments love central banking because it gives them a blank check to spend. When central banks create money for government to spend, they dilute the money supply and create inflation. So government, instead of overtly taxing the people for their expenditure, levy a stealth tax, inflation.

        4) Fractional Reserve Banking effectively lets the commercial banking system loan out 10x as much money as they have deposited (creating it out of nothing).  This is very profitable, but it also means that if 1 out of the 10 dollars loaned defaults, the banks then become insolvent.  The reason banks overleverage like this is because it is the maximum allowed by law, and the central bank bails out banks that suffer a run in day to day operation.  But if the whole *system* goes insolvent, the *taxpayer* bails them out.  Via more money borrowed from the Fed.  Without a central bank to bail them out, banks wouldn’t be so overleveraged for fear of suffering a run.  We therefore wouldn’t have so much of the cheap credit that created the housing bubble.
        5) Legal tender laws were enacted because people consistently preferred hard money (e.g. gold) to paper money that gets inflated. These laws are anti freedom.

        An internet based money system CAN work. Austrian economics isn’t pro gold standard per se, but that people should have the freedom to choose whatever they want as money. (Gold just happens to be what people chose most consistently) Any internet based money system will be fair if it meets 2 criteria:

        1) secure and private
        2) it CANNOT be inflated by a central authority with discretionary powers

        • The boom from 1879-1889 despite the flat money supply, negates the implied assertion that money needs to expand. (Keynesian myth).

          Uh, no, it doesn’t. It imples that increases in productivity can act in a similar fashion to expanding the supply of money by increasing the level of output that can be obtained for the same price.

          Not that it really matters, since the discovery of gold deposits in the Dakotas increased the money supply as well, so the statement that the money supply was flat during that period is simply factually incorrect.

          Strike 2 for you.

          In point of fact, the money supply under the gold standard was continually expanding. Mining operations for gold didn’t mysteriously cease in 200 BC. New sources of gold have been found and added to the money supply continuously through history.

          Indeed, a massive wave of gold inflation hit Europe in the 17th century due to the masses of new gold imported from the New World by Spain, and dumped on the European economy.

  • Keep all your money in Credit Suisse Francs, say, and the US government will never even be able to see a record of your deposits or withdrawals. How will they track your income?

    This is a trememdous piece, but the endgame seems a bit of a pipe dream. Right now even, the government is suing the Swiss banks for the info on Americans using them for their secrecy. 

    How will they track our income? How will they do it? The same way they do now I reckon.  By force of law and regulation.

    I guess the question I’m left with is this-  How do we get from here to there?  Governments unfortunately won’t allow it to get as utopian as you describe in a million years. 

    And who will want to pay governments that failed to prevent the collapse for…well…anything?  Who will accede to the demand for money by governments that repudiated their debts, and destroyed the life savings of millions?

    Those who don’t want to be jailed, that’s who. You’re not just talking a monetary revolution here….

    • Force of law where, shark? If the “money” is a universal electronic monetary unit backed by NGOs and not governments, how does a government enforce laws and regulations?

      • Credit Suisse still needs offices and servers and physical stuff.  It is also going to be run by real people.  That stuff and those people are just as vulnerable to the force of law as they are now.  They may be located in Switzerland – but banks are now, and they still report to the IRS what the IRS wants to know. 

        At the end of the day, governments have always either held or lost power based on their ability to enforce their will within their own physical territory.  Indeed, China has recently demonstrated a disconcerting ability to control what happens on the internet – at least as far as people in China are concerned.  The internet is extraordinary – but it is still anchored in the physical world.  As a person, what I care about ultimately is in the physical world.  If the government can still enforce their will on me in the physical world, they can tell me what to do online, they can tell my internet provider, and they can tell whoever runs the servers that host the data and electronic services I use.

        • And the internet is designed to work around obstacles and provide a level of anonymity. If government no longer controls the currency, i.e. it isn’t that government’s currency, what leverage (obviously other than force of arms) does it bring to a situation like that? How does it punish Switzerland for not cooperating when the Swiss government doesn’t control the currency either?

          The currency in question isn’t a physical entity per se. It’s an electronic and universal instrument of currency that belongs to the issuer. It can be stored on a server anywhere, approved from anywhere, and the company “physical” and fiscal heart can be anywhere. Credit Suisse may have offices in Switzerland and be a nominally Swiss company, but its servers can be anywhere else it so decides.

          Certainly they can tell your internet provider now, if that provider is physically located in the US, but in 10 years? Who knows, given advancements in wireless and satellite communications (and coverage) where your provider will be located? Same with your host, etc.

          • The net is no longer an anonymous net if we all have encrypted keys.  Taxation the government is asking us what our key is and requiring a slice of our virtual income at the tax rate. 

          • But it would have to have access to all of that info, and it won’t. And nothing says my identifying info (key) has to be kept here where they can get the info either. Again, we’re not dealing with their currency or even banks within their jurisdiction (or even banks for that matter). So their job, in terms of trying to capture that info, becomes infinitely harder. My guess is any government would be well behind the power curve in trying to sort this out and act before it evolved again and became exponentially harder than the last time.

            Obviously this is all conjecture and we’d likely learn quickly to what extent governments would go and how ruthless they’d get to try and protect their revenue stream. The question isn’t really how far or how ruthless they’d be – it’s how successful they’d likely be. I’m guess not a successful as they’d think.

          • So we all have jobs, and our employers will presumably transfer “money” into our encrypted accounts every 2 weeks, correct?

            Seems pretty simple to me how the govt will get that income info, and who they’ll get it from. 

            Also, I’m not sure I like the idea of a “currency” backed by “in feedback we trust” .  If the money is backed by NGO’s, where do I go for redress of greviences if something happens?  If MasterBucks rips me off by just deciding to take a thousand or so of my money, now what? I just leave a negative rating and move on? If these currency transfers are totally private and not subject to any govt. taxation or inteference, I doubt I’ll be able to sue MasterBucks in court to get my $$$ back.

          • Which key?  Which persona?  How many personas will you have?  How will the government know which one has the money?

  • Ten years ago, I would’ve said ‘you’re nuts.’  Not so, today.

    How do you see the transition of our income streams to this postulated Third Age?

  • Excellent piece.  Digital gold currency is here today.  Private digital money 100% backed by gold, no bank or credit union needed.


  • Every once in a while on ebay, a seller with mega feedback and a sterling reputation stiffs his customers and walks away with the loot. The same thing will happen with a privatized currency. Human nature hasn’t changed since the 19th century bankers looted their currencies. The man in charge of the piggy bank will always make sure he has a key to open it. Finally, I think you underestimate the power of Government. If they can’t take your money, they will tax your property, unless you have figured out a way to encrypt and hide that in cyberspace as well. Commenter Shark nails it. A pipe dream.

  • The idea has intrinsic appeal. It creates the kind of dynamic ecosystem in which evolutionary processes tend to flourish. As a Complexity Guy, this makes me hop up and down a little. Sometimes a lot.

    But I have some real meatspace concerns here, and they don’t have to do with the Tax Man. An economy which dwells exclusively in the digital realm is always subject to disruptions to the physical substrates in which the data dwell. My nightmare scenario has to do with a few intelligently-targeted EMP devices.

    Now, I know that distributed network architectures are exceedingly robust: they degrade gracefully. However, networks also tend to self-organize into discernible topological configurations (cf. attractors). I speculate that this would create the conditions in which detectable…um… could be identified and targeted, triggering a host of local failures along critical junctions, the damage of which would propagate through the system, ultimately bringing about catastrophic damage.

    I have confidence that, all other things remaining equal, the system could eventually “heal” from such damage. But the stressors would be immense and, if coupled with some very analogue military/terroristic strikes, might very well scuttle the system altogether.

    I don’t know if I have an answer to this, or if it even constitutes enough of a threat to warrant the difficulty of preparing for it (maybe some sort of “dead” physical storage medium, or highly hardened digital repositories…). It has, however, always bothered me…At least since I saw “Escape From L.A.”

    Oh, and as for the issue of the “pounding on the door” phenomenon of governments demanding their pound of flesh, it may prove expedient to boost those pounds of flesh off-planet. Imagine some orbital (or, better still, “L5”) archipelago of free financial entities. Long way to go to kick in the door.

  • Very enjoyable article.

    I remember reading about the original vision for PayPal — how everyone, rich and poor, would be able to cheaply exchange currencies, allowing them to dump currencies quickly, thus disciplining governments and other elites who manipulated or exploited interest and exchange rates.  This article reminded me of that — probably when I reached the word “eBay”.

    Money was essentially a luxury, and it bought mainly luxury goods for fat cats.  Kings could raise and equip armies with it.  Merchants could buy nice clothes.

    Well, merchants could buy nice clothes until kings started to get the idea that certain clothes were above a merchant’s station.  Then the kings passed sumptuary laws.  So merchants built up tons of money that they couldn’t spend on whole categories of nice stuff… until nobles started going broke, and then the merchants started buying titles.  Heh.

    Think of the implications this has for taxation, especially income taxation.  Keep all your money in Credit Suisse Francs, say, and the US government will never even be able to see a record of your deposits or withdrawals.  How will they track your income?

    I’ll put on my technocrat thinking cap for how states will handle it:
    First, they’ll start by shifting taxes over to what is easier/cheaper to track, like property taxes.  You can hide your cash online, but you can’t hide your house and car there.

    , they’ll say you can’t buy or sell anything (including labor) aboveboard in their countries unless you make your dealings transparent, and they’ll justify it with nonsense like making sure everyone’s being paid a minimum wage, as well as smarter stuff like making sure they can enforce against fraud (I’m assuming fraud will still be quite possible).
    And they’ll flat-out threaten any institution that attempts to use strong encryption (in most transactions) without giving government(s) the key.  Encrypted communications present states with a strategic threat in this era.
    Oh, there’ll be a black market… but a lot of stuff (including most types of tangible property) must remain white.  A credit currency, it seems to me, would be easier to track than cash for white market transactions, and potentially harder than cash for black market transactions.

    Third, as long as they’re capable of seizing real and tangible personal property, they’ll be able to seize the medium of transfer, too.  Even if government loses the ability to print currency, they can still do business in a particular currency, and people will be forced to use it.  When you are taxed, or fined, you will have to pay them in that currency, and the prospect of doing business with government will incent others to accept whatever currency the government is offering.  Government is force, less accustomed to finding a way than making a way, but force carries with it full faith and credit.

    What you may be able to do, however, is exchange your money quickly and cheaply whenever you do business with a government, to minimize your exposure to any government hijinks, and stick with a more reliable currency the rest of the time.  That minimizes government’s ability to manipulate interest and exchange rates for their own gain, as I mentioned earlier.  But then, only a small minority of our government’s revenue lately has been seignorage.

    The late Walter Wriston comes to mind, by the way.  A lot of what he said is still great to read.

    So much more to say, but I must get some sleep tonight.

  • I don’t think full faith and credit will necessarialy collapse, although it might.  Their is another way that a government like ours can face it’s many obligations but I doubt the current bunch have a clue on how to do it. 

    This method would be to begin an austerity plan to lessen government spending, (this is important for psychological reasons) and then collect all debts and obligations and convert them into a single long term, low interest, fully mobile bond instrument. This essentially monetizes the debt.

    Reduced spending, a little bit of economic growth, and a tiny bit of inflation and before you know it the debt doesn’t seem that bad anymore.  Of course this is only a viable option if he system has not yet entered into total collapse.

    I further believe that when it comes to social security, we will indeed repudiate some of the debt by raising ages, lowering benefits etc.

    Finally to address the looting of the system.  On that you are correct. I wonder if things would be the same if sound banking practices and balanced budgets were a matter of a constitutional restriction?

  • Can I spend these Suisse Bank Francs or MasterBucks or PayPal bucks at the supermarket or the gas station?  Because, if I can’t, they are no good to me.  And if I’m spending money, the government will want its cut.  How about a 50% sales tax?

    I agree with the skeptics: while some sort of non-governmental currency is very attractive, I don’t think it will work.  The government WILL find some way to continue taxing in order to continue funding all the crap that we’ve asked for / allowed over the past several decades.

    The real solution is to get the government back into box built for it by the Founding Fathers in the Constitution.  A government that can’t be a nanny state and doesn’t try to be is a government that isn’t likely to overspend or otherwise attempt to interfere with the economy; it would have very little power to do so.

    As for the pain we’re probably going to experience… I hope that it doesn’t come to pass.  However, I think that the pain will be worse than anything we’ve ever seen, and it will be compounded by the government’s own efforts to ameliorate it.  Unemployment is high?  Spend more money on unemployment insurance payments and “stimulus” plans that perhaps make some temporary work for a few people.  Where does that money come from?  Taxing the fewer and fewer people who have money, encouraging them to do everything they can to hide it or even ruining them, and borrowing / printing more money.  It’s a viscious cycle with economic collapse at the end.  Meanwhile, the politicians can continue to play their games, blaming each other for the problem that they all have a hand in creating and further balkanizing our country along economic lines.

  • Which key?  Which persona?  How many personas will you have?  How will the government know which one has the money?

    I presumed there would only be one persona.  Additional persona that are anonymous, stateless entities would be bad for the symmetry of information.  I would consider buying into a currency where a large portion of its holders are willfully anonymous a risky proposition.  It would be too easy to have constructed persona telling lies about the worth of the currency. 

  • At the Empire of Jeff bank, anonymity and discretion are the pillars of our committment to you.  Rest assured that your net worth is secure with us.  For your account balance, please call us at 1-800-URF-UCKD.

  • If I am a merchant, I am not about to accept payments in X number of currencies. Pricing alone would be an impractically complicated mess.  I hate to even think how a merchant with multiple stores/factories stocking thousands of items with multiple suppliers in multiple counries  would prepare financial statements.  The reason the Constitution reserves to the Federal gov’t. the power to coin money is precisely because having more than one currency in circulation is impractical in anything other than a local agrarian economy.
    Money is more than a medium of exchange. It is also a unit of account, store of value, and a standard of deferred payment. 

    The reason a gold backed currency works is because everyone wants gold. The reason a fiat currency works is because the government says it does, and will use its power to enforce it.  What makes internet currency work, other than wishful thinking and optimism?

  • I assume employers would still withhold money for taxes.  The government(s) would simply raise the amount withheld, and put the burden of proving you deserve to get some back on the taxpayer.

  • I liked this. It was interesting. I even mostly agreed with the big-picture economics interpretations re the gold standard, etc, and that stuff was reasonably and carefully explained. Where it goes completely bust is the future predictions.

    our persona will be uniquely identified as you through the use of 4096-bit or 8192-bit public key encryption.

    Your entire scenario, from top to bottom, hinges on the ability of the world to fail to solve certain mathematical problems, such as factoring very, very, very large numbers, in reasonable periods of time. That’s a very thin reed. Encryption standards get publicly broken even by academics. Meanwhile, this is a problem in everyday foreign policy, and I am nowhere near plugged in enough to know how the NSA handles it, but the computing power they have down there – read James Bamford – is mindboggling, and not an administration goes by that doesn’t up it 10X.

    Furthermore, they deal with encryption very well, even today, even without cracking it. The methods are pretty simple. They own, or have coerced or bribed parasitic cooperation with, the private companies that own the medium that your elecromagnetic signals go through. They know / obtain the physical location of the transmission point of your encrypted message. They hack your computer and obtain your key, or put in monitoring software and find out where it is. They go uncrack your sh*t.

    Anonymity on the net only happens to the extent public pressure coerces the government into allowing it to happen. They might put up with letting lots of people be sort of anonymous as long as they can find anyone they want to under certain conditions. But losing control? No chance, no how, no way. The trends are all in the opposite direction.

    That’s the first problem.

    The second problem is that there’s no way in heck a private feedback system would constitute an improvement on the current system. The players with the biggest starting net capital would buy lots of television commercials with cute songs telling you to put your money into their currencies, and the morons would obey, and the owners would loot it, and the boom / busts would begin anew. There is no fantasy world of symettrical information in finance. There’s no short-run incentives for the lenders to provide it and all the incentives not to. That’s why government money exists in the first place.