no third solution

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What’s Better Than Mild Inflation?

May 14th, 2009

In response to A Belated Reply on Fractional Reserve Banking, Neverfox asked,

If everyone agrees to trust the third-party (bank) and “subscribe” to the token system (“I’ll accept tokens from you as a wage if you agree to sell me stuff with those tokens later”), where is the fraud and where is the need for a commodity money?

It begs the question to assume that money must be commodity money to be a legitimate medium (consequentialist considerations aside).

Does it really beg the question?  Surely, we should be able to point to historical examples of monetary evolution culminating in irredeemable token substitutes. For starters, this argument assumes money as the intentional product of human design, which suffice to say, is contradicted by the facts of history.

The very notion of token substitutes presumes that they are a substitute for something else, in the same manner that a check, deposit-slip, or warehouse receipt are substitutes for, not replacements for, physical goods. Instead what we see in the history of the world is that, except where governments have been able to intervene, commodity money of some form or another has been pretty much standard.

As to the token-money hypothetical put forth above, what do they say?  If ifs and buts were candy and nuts…  Of course we can frame a hypothetical in such a manner as to preclude the possibility that fraud might occur: “I’m going to define a situation where fraud is inconceivable, and then ask you, ‘where is the fraud?'”, but I’d be tilting at straw men.

My father used to say, “You can ‘what if?’ yourself to death.”  Dealing with “what ifs” is stupid, because the other guy can always pull a “27 Ninjas” on you.  No matter what you say, they can always come up with some fantastic “what if” statement that apparently validates their position.  But what the heck, I suppose I’ll play along for a moment.

Considering that in such a scenario, someone has contributed real, economic-value-added work, in exchange for tokens under an implicit assumption that he would be able to redeem those worthless tokens for something else of real, economic value, sometime in the future, even this cleverly constructed straw-man raises some interesting questions:

  1. What happens when the person who agreed to sell you stuff in exchange for those tokens decides he’s no longer interested in tokens?
  2. What happens when the person who created those tokens mints a Trillion more of them, overnight?
  3. Haven’t you been definitely injured?
  4. Would you have agreed to play the game if you knew the other party could change the rules on a lark?

Under a commodity standard, money is the product of human action but not of human design.

  1. Accordingly, no promises as to future value are made express, or implied.  No matter what happens to the subjective value of the monetary commodity, your banknotes are always redeemable for a fixed quantity.  The token system is a shell game.
  2. With fake money, you get totally screwed.  With commodity money, it’s impossible to mint a trillion dollars overnight to bail out special interests or to pay for imperialism, etc.
  3. Production buys production — and although from time to time a new product will emerge, reducing the market value of some of your assets or skills, it is terribly unlikely to happen with money in the first place, and furthermore can onlyhappen as the result of an actual increase in the total amount of wealth in the world.
  4. The rules are the rules, they can’t be changed, and they can only be circumvented by fraud, counterfeit, or theft — all properly condemnable behaviors.

Whether it takes the form of “debasement” or “coin-clipping” or “seignorage” or “inflation” is beside the point. If you condemn inflation when the government does it, why stand on your head to defend “private” inflation, if for any other reason than to argue that it will be less bad?

News flash: you know what’s even less bad than mild inflation?

No fucking inflation. Period.

Comments

4 Comments

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  • antboy says on: May 19, 2009 at 1:46 am

     

    1. What happens when the person who agreed to sell you stuff in exchange for those tokens decides he’s no longer interested in tokens?
    2. What happens when the person who created those tokens mints a Trillion more of them, overnight?
    3. Haven’t you been definitely injured?
    4. Would you have agreed to play the game if you knew the other party could change the rules on a lark?

    I already participate in many such schemes, involving airline miles or hotel points of uncertain value in which the sponsor explicitly reserves the right to change the rules or discontinue redemption. I do it because I'm willing to accept some risk in exchange for greater value. I rely on their desire to maintain a reputation essential for their survival as a business, and usually, but not always, am right. Such systems are sustainable.

    So, having established that pure token systems exist, do you support the criminalization of business point and miles programs? Can I sue for fraud?

    • nothirdsolution says on: May 19, 2009 at 11:32 am

       

      I think token point/miles programs are dissimilar to money, in that you've technically done nothing at all to earn those points, despite the colorful language in the brochure. Additionally, although you can usually buy (e.g., airline miles) with money, you can't redeem airline miles for money, and they are not always transferrable.

      Most important, however, is the fact that you haven't actually done anything to earn the miles. It's just a clever marketing ruse, designed to make you feel like you're being rewarded, or that you're getting something "for free." It strikes me that a token system, although could be considered some sort of aleatory contract, probably closer to being a zero-interest contract, like when Denny's says they're giving out "Free Grand Slam Breakfasts" — of course you have to hope they don't run out before you get there, but if by chance they do, you have no claim against them.

      In light of this, I think the answers to those questions I posed are:

      1. You feel cheated, because
      2. The value of your tokens diminishes
      3. You haven't really been injured, and
      4. You play along because even rule changes adverse to your interest don't really harm you in any positive way
      • antboy says on: May 21, 2009 at 12:02 am

         

        I did nothing for my airline miles and hotel points? Hmm. I spent large sums of money, in part relying on the value I hoped to receive redeeming those points. I paid more than I would have paid had I not been offered points. In some cases, I PURCHASED POINTS DIRECTLY, to get up to a threshold for redemption.

        I want to stick to the point. I believe I demonstrated that Neverfox is correct, and that a token system tied to nothing specific can arise without government support or fraud. It COULD be expanded into a full monetary system, and some plans are significantly transferable, but I suspect the Federal Reserve System would stop any system that became a complete replacement. Otherwise, I could see a Google Point monetary standard emerge on the free market!

        And why should it be redeemable in Federal Reserve Notes to qualify as a monetary system: wouldn't that be begging the question? You and I are Neverfox are opposed to legal tender laws, so the limited redemption possibilities of points and miles are consistent with free market money: some people may not accept gold or silver in a free market money system of the future.

        By the way, I don't actually predict that the monetary system which will develop on the free market will lack a hook to a commodity: I'm just saying that a consortium of businesses dependent on reputation for survival has proven itself sufficient to create a pure token system within the current society, and such a consortium would have LESS incentive to abuse a fiat system than the government, as it wouldn't have a coercive monopoly linked to legal tender and tax payments.

        • nothirdsolution says on: May 21, 2009 at 12:04 pm

           

          Sounds like a slightly more sophisticated version of "Tip your bartender well, and he'll give you the occasional free drink."

          I still think the points system is just a marketing ruse. Sure, you can purchase some directly but you would rarely (if ever) do that with extra money laying around, like you said, you only do that when you plan to (nearly) immediately redeem. You don't "invest" your paycheck into Delta Sky Miles or Mariott bonus points.

          But these systems are *not* monetary systems. You don't get paid in Sky Miles, you don't write checks on your Sky Miles account, and the *only* organization that accepts them is Delta (except for the occasional circumstances where you might swap/give some to a friend).

          so the limited redemption possibilities of points and miles are consistent with free market money: some people may not accept gold or silver in a free market money system of the future.

          First, one condition of "money" is that it be generally accepted as a medium of exchange. This is the rule, not the exception. All token systems are exceptions rather than the rule, since most people don't accept them in exchange. Furthermore, it's not just that others won't accept your Sky Miles in lieu of money as payment, it's that Delta will not redeem your sky miles for cash. So, it's not anything close to a banking arrangement (as we digress!) that you've got with Delta. It's a quasi-Social credit, just like when you give that bartender a $20 at the beginning of the night, in order to get good service/comped drinks later in the evening.

          What these companies have really done is offered a credit to their better customers, having learned that doing so retains their (better) business. And they offer you these rewards (arguably) from their own capital and property.

          And why should it be redeemable in Federal Reserve Notes to qualify as a monetary system: wouldn't that be begging the question?

          You're correct – where did I say that a token system would have to be redeemable in FRNs? (Did I say that a token system would have to be redeemable in FRNs?)

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