In this post I mention more specific errors that the Monetary Reform sector makes, and of course provide my explanatory commentary. I cover conceptual issues relating to the backing of a currency; I address the impossibility of managing a currency; explain how usage doesn’t influence the function of a true currency; and warn against establishing networks.
7. Trying to Back a Currency [with Something Physical]
At the end of the day all currencies are only ever backed by one thing – trust. Nothing more, nothing less.
At the fundamental level a currency is chosen for use when trust is extended by two people (traders) engaging in trade, specifically trusting that the chosen currency can be converted into goods or services in a reasonably reliably manner at some stage in the future.
That’s it. A currency is only ever backed by TRUST. Period!
It’s a ‘touchy’ subject in the Monetary Reform sector, this one of ‘backing’ with many impassioned pleas to trust various THINGS (sometimes abstracts) but it always comes back to trust, and missing this point is a big Mistake. Most Monetary Reformers make this Mistake too. It’s not the THING that is used to back a currency that matters (no matter the precedent, no matter how impressive or smart or tempting that thing may be) it is always the TRUST that matters.
The cryto-currency boys are hot on this trust thing but go the wrong way assuming that we can never and should never trust people. “You can’t trust anybody!” they say, “So trust us with our system. This algorithm thing we’ve got is so revolutionary . . . it’s the way of the future!” etc etc etc but the tree they cannot see for the woods, is that they actually say “Trust our algorithm!” which is pushing trust away from where it naturally sits in the real world – between people. As one who has spent thirty years in the IT industry I can assure you that I DO NOT and never will trust anything digital, except that something will eventually break, go wrong or that some security function will be cracked and need to be ‘updated’ or ‘revised’!
For the record, and I’ve been on the record from their start, “Bitcoin = Tulips”.
Goldbugs of course say with a great deal of passion – and not without evidence I might add – that gold (and to a limited extent silver) has been the only reliable backing of currencies for centuries.
This is true to a point. The vast majority of communities across the globe have indeed historically seen precious metals as a secure storage of value. It is true that TPTB pegged the USD (and others) to an ounce of the stuff for a long time. Thus you have the well-known bullion storage facilities in Fort Knox and governments proudly talking about their ‘secure’ gold stores and thus implying solid backing.
What is usually missed though is that it’s actually only peoples’ TRUST that gold (and silver) will be a reliable source of backing of that currency that provides the confidence for that currency to have perceived value.
All that needs to happen for that trust to evaporate and the supposedly solid backing to dissolve is for one little voice to ask the question, “So who owns the gold mines?” and for this to ‘get out’. If it be found that it is the same people who issue the currency who control the gold mines then that trust will be immediately questionable, because according to human nature, they will then control the supply of both gold AND the currency for benefit!
Duh! And it won’t be for our benefit of course.
I know the answer to the aforementioned question BTW. I don’t want concrete boots and a watery grave so I won’t mention it here, but do the research and connect the dots. There is nothing new under the sun. It’s the way it’s always been – TPTB ensure that they have, protect, defend and increase, you guessed it – the power! When you find the answer to this little ‘provocative’ question, I can assure you that you will revisit your perceptions of gold backing once and for all. Be careful though, you can’t undo knowledge!
I’ll phrase this ‘delicate’ subject a different way. If I wanted to own the world and ethical considerations were [how shall we say it . . . ] ‘flexible’ then I would find all the primary resources [gold etc] and attempt to first control them and then in due course own them – all of them. I’d then also do that with services and systems [technology]. I would then find all the people in positions of power, do deals with them so that they got what they wanted [prestige for example] and then create a monetary system by which they used my assets as backing, oh and paid me for that privilege of course [that’s the Interest]. Now ask yourself who owns and controls the gold and compare those people with the ones who own and control the stuff it was backing. ‘Nuff said.
Trusting in a commodity (such as gold) as a form of backing for a measurement (which is all that true money is) is also a conceptual mismatch. It is akin to saying “Trust us . . . we’re the world’s most popular Airways company!” when the only thing that really matters is whether the plane that you’re flying in today, now, has been serviced properly, has capable & clued-up pilots and is loaded with enough fuel to get us to the next airport safely.
‘Stories’ and marketing spiels are all fine in their right place but trusting in them only works when they match REALITY. The rubber hits the road though when one trader does not trust a currency recommendation from another trader. When that trust breaks down (as it is starting to happen increasingly with the current reserve currency of the world, the USD, which will eventually spread to all others including the BRIC) then you will have a serious change to the status quo. This will be either a problem or an opportunity, depending on how you look at it. More on this topic later.
I repeat, it’s always TRUST that backs a currency – baskets of currencies or commodities, precious metals, mathematical algorithms (such as the crypto-currencies rely on), measurements of land or any physical objects, even abstracts are not real backing – they are simply used to encourage a trader’s TRUST in the currency.
Let’s return to the airline example before we move on . . . You are waiting to board a flight. You watch the plane get pulled into position before you board and see the wing clip another plane and there’s now a dirty great big hole in the wing that nobody else seems to notice. You think that it might fly OK, but maybe not. Out of the corner of your eye, you catch sight of the pilots sneaking across the tarmac and onto your plane, clearly drunk. This might not be a big problem because if they could walk (just) then hopefully they can push the right buttons to get the autopilot working. You also watch the guys refuel the plane and they spill half the fuel, look around and carry on as if nothing had happened. You may be worried about nothing and the plane has enough excess fuel to get you there – hopefully. The guys next to you awaiting to board are talking ‘Jihad talk’ and laughing at how they managed to get their bombs through security and how they can’t wait to meet their virgins! You hope like hell that they’re joking and/or their bombs don’t work . . . you get the picture. It’s all about TRUST.
It matters not what backing that plane/currency has (the biggest or best Airline in the world be damned!), YOU as a trader will not board it or use it unless you TRUST that plane/currency. Whether you board that plane is up to you of course, but the point is that the decision to board (or use a currency) is all about TRUST.
Sure we always have to balance risk and we may have little choice whether to board and take our chances or not but the point remains – the backing of a currency is only ever TRUST.
Accepting this, we should then consider how to establish, build and develop trust.
This raises the subject of management . . . how do you manage a currency? Is it even possible, or desirable? I answer . . . you DON’T because you CAN’T and we SHOULDN’T.
8. Management of a True Currency is an Oxymoron
A true currency can never be managed – it’s like trying to control the wind. Sure you can redirect some of the wind into a certain direction and use it and control bits of it but the only way you can control a currency is by converting it from a measurement system into a commodity, which of course is not true money, it’s a perception.
I’ll repeat this because it’s a Mistake that many Monetary Reformers make . . . you cannot control, or manage true money (i.e. a true currency).
Once a currency becomes a commodity then of course you can control aspects of it, and even then you have to deceive in order to do this. This is what TPTB do with the commodity monies of the world – they cut off and hide one side of the currency (the debt side) and play with [control] the other side of it with legislation, policy affecting interest rates, monetary supply, marketing etc.
This then is the “business of fiscal management” that becomes so incredibly confusing and complicated. They call this foolishness “economics” and some of the biggest talkers in this space ‘control’ large portions of that commodity money for their own purposes. Just like bank robbers can’t ‘agree’ on which charity they should be giving all their ill-gotten gains to, economists too cannot agree on which deception is the real one!
A true currency can never be controlled, for true money is simply only a measurement.
Going back to the example of a litre of water from other posts – of course you can control the water, but not the litre. Likewise with true money, it is simply a measurement of . . . yes, debt. It cannot be controlled by the people nor the system/technology that measures/records that debt.
We, as philosophers, thinkers, Monetary Reformers, programmers or system designers can with effort devise systems that can total or compare that debt alongside of other debits and credits; we can analyse that debt and give commentary on patterns of debt, but when anyone attempts to manage or control money they immediately fall foul of the first deception I mentioned, that is, the faulty idea that true money is a commodity. It’s not.
I’m a truth-seeker. I know from experience that in order to establish truth, one needs to dig deeper and deeper until we get right to the bottom of an issue. Until we’re there and it is no longer possible to dig deeper, there is always the possibility of deception, or misunderstanding*. It is only when you have ALL the components broken down to their lowest common denominator that you can lay them out and be sure that you are seeing reality.
Starting at the top with economic systems and trying to work out what drives those systems (especially with the subject of money) can be really confusing, but when you realise that true money is only ever a record of a half-completed transaction THEN you can exercise wisdom when analysing or trying to devise alternative systems (This is the case with Monetary Reformers and Alternative Currency advocates of course).
There are consequences to this, basically true money needs to have systems, preferably the absolute thinnest management possible as well as minimal costs, and there are philosophical factors that come into the design of a system that enables true money to work in the real world but these are all secondary issues. Most people simply can’t and therefore haven’t differentiated them.
The significance of separating the technologies from the currency is profound, for if a currency is an abstract, simply a measurement, then the next mistake is clear – it simply doesn’t matter how much it is used.
Ouch . . . !
9. Usage Doesn’t Determine Function
Let’s dive into this misconception about the concept that is variously called the tipping point or critical mass. I hear this all the time in business and Monetary Reform circles. It’s often expressed like this, “Dennis you need to get to critical mass . . . [enter lots of experience and great ideas here] or “Dennis, we have to get to this [“point, or volume, or numbers, or coverage here] . . . then we’ll [enter desire, goals here] and be able to retire”. This is commodity-based thinking.
Closely associated with this insistence on some form of performance is the concept of velocity (the usage of the currency). Commercial trade exchange operators are coached to ensure a desirable velocity in order to avoid certain currency pitfalls such as stagnant memberships. In some circles the positive impact of introducing systems of demurrage are highlighted. In others the health of a trade exchange is measured through velocity – happy punters using the system, or profits to the exchange operators. Velocity (essentially a measurement of usage) doesn’t always directly affect the underlying currency itself and it’s certainly not a direct mathematical correlation.
If we are in the business of trying to achieve something (global Monetary Reform; social benefit to a particular community and/or personal benefit) then sure, of course such thinking is important. You will need XXX number of people or XXX percentage of the target market to use your alternative. Or you may need XXX units to trade to achieve those purposes. Or you may need XXX velocity to avoid stagnation. These are secondary issues and are all granted . . .
But usage does not determine function in a true currency. Considering a measurement unit, it matters not how many litres of water you have. How many times you measure a litre does not determine how valuable or how much the unit of measure is. A litre is a litre and is as valuable as people want it to be. It’s useless of course if you understand only quarts BTW but that’s a related issue.
Sure, you can only use your measuring device a certain number of times per hour but the function of the unit of measure (in our example here, a litre) remains unaffected.
This is why it is so important to comprehend the correct definition of true money (that it is only ever a record of a half-completed transaction), and distance the essence of money from the peripheral matters such as storage of value, the method by which it is being used and in this case the usage patterns, volumes, popularity, perceived value and consequences of all of this.
Now when you DON’T need or want to change the world (or whatever goal it is that you have in mind) you are now free to have, use, recommend and appreciate a Perfect Traders’ Currency and that does not need to have any more than two traders completing one trade, just once, to exist and function perfectly. No tipping point or critical mass is required. Velocity is totally irrelevant.
Velocity matters not in the slightest to the FUNCTION of the currency. One trade with two traders in two years OR a half a million trades from a hundred thousand traders in an hour doesn’t affect the core function of a currency in the slightest.
Of course the peripheral factors such as logistics, profit in a commercial currency, perception and human relationships are definitely affected positively and negatively as usage changes but these are SECONDARY to the function of the currency.
Don’t worry or panic about HOW this can work in the real world for the moment – we’re getting there – there ARE simple solutions I promise. Just imbibe the truths I’ve shared and let them ‘settle for a little’.
10. Creating Networks Solves a Non-Existent Problem
The standard thinking behind Alternative/Community Currency advocates is this . . .
‘fiat’ money is wrong so therefore we need to create our own ‘good’ money. In order to get people to use our money we need to build a network of people [traders], then promote our network so that more people will use our currency/network.
This is at its core, a faulty paradigm that causes people to provide a solution to a problem that in the main, simply doesn’t exist. People don’t want to join a network – they simply want a solution to their problems, or a better currency, or a more efficient or easier way to trade, engage with others or live better.
Business failure always results when we develop a solution to a non-existent problem – with Alt. Money or with anything. You typically see it when someone with skills, and idea and opportunity does something cool but inappropriate and then tries to sell it to others without success. They may get a few punters on the line by chance or through sympathy or who are convinced by a clever sales process but if the solution doesn’t match the problem then the business will stagnate and/or die.
Most Alt. Currencies do exactly this.
You typically see the reverse however where successful businesses solve a pre-existing problem then go crazy as people want to buy, rather than the business having to pro-actively sell what they have.
Networks for trading already exist. Everyone knows and deals with others – so there ARE the networks – right across the globe! There is no business in the world who doesn’t already have a network of some sort simply because everyone has their own centre-of-influence.
Alt. Money people who try to develop networks (technical, financial or human) to reproduce trading platforms, currencies, brands, relationships and systems that are already in existence, are doomed to mediocrity at best and failure very likely. And even the best will set themselves up as a prime target when a better currency becomes available!
Now why would I, for example want to trade in a currency established in another country, with “members” who have joined the network overseas, when it’s the people around me in my country that I wish to trade with?
The answer is simple, “I wouldn’t”.
Developing networks is not a solution to our problems. We already have those networks!
Furthermore any solution to real problems will never need to be sold. Just like the flowers know full well that if they have honey and pollen in season that the bees will tell the bees where the goods are, so too will real solutions be bought and used, not requiring a selling and marketing process.
As they say,
Money talks, bullshit walks, that is how life goes.
Talk is cheap, but if the solution matches the problem then things happen. TPTB know this very well and have a solution that ‘talks’. Money Reformers need to understand that their solutions must solve the problems BETTER than the current systems in all regards or they will be, as the saying above makes clear . . . ‘walking’.
11. The Trap of Networking of Currencies
Some believe that networking of local or regional currencies is the best or only solution.
This is a trap, mainly because all the basic problems experienced in the cash economy and experienced by users of minority Mutual Credit currencies remain AND new problems are introduced in the networking process. Cross-currency valuations, measuring trust across different cultures, cross-jurisdictional challenges, credit management, technical integration etc etc.
This field of endeavour is doomed – on the surface, it may appear a great idea – but that’s only theoretically. Practically it’s a dead-end with an impossible array of complexity. Strategically, it’s simply not a real solution to the big problems.
Again, a few starfish will get saved from the sun, but the beach is still full of them and more are arriving with each wave.
You can’t ‘back’ a currency with anything other than trust. Yes, you can use trust IN something to build trust bu tit is always trust between traders that backs a currency.
A true currency can never be managed or controlled because it is a measurement not a commodity. It therefore simply doesn’t matter how much it is used.
Creating Networks and/or networking Alternative Currencies are dead-ends. Trading networks already exist and we introduce more, not less problems.
I continue this series Mistakes of the Monetary Reformers, moving into more philosophical matters. I touch on the concept of ownership, explaining that the paradigm shift that is best described as ‘Open Source thinking’ has affected many industries but not yet the financial sector. It’s niggling around the edges at the moment but it surely will eventually go mainstream, so stay tuned for a ‘wild ride’!
I also get into the issue of credit management showing how true money should always be managed by the people for the people. I discuss confidentiality issues and take a stab at WHY deceptions occur . . . whew!
Thanks for joining me, we’re making good progress.
* While a little different from fiscal matters, an example of this idea of getting down to the bottom in all aspects, is the heart-breaking story of [the late] John Britten, a Kiwi ‘dyslexic-genius’ engineer who designed and built one of the greatest motorbikes ever (essentially all in his garage) in Christchurch, New Zealand. The bike itself is on display in the Te Papa Museum in Wellington. The guts of it is that he designed and built the whole thing from scratch, every component on the bike he made himself to incredible design & quality standards – even to the point of mixing and pouring his own engine blocks. He ‘took on’ the big boys and totally blitzed the field, amazing the world and essentially single-handedly redesigning the way racing bikes were built. On one key race, his bike’s performance was so far ahead of the others that the rider essentially played with them all, doing wheelstands down the front straight to show off, but . . . the bike broke down and they lost the race. The reason was that one component that he DIDN’T design and build himself (a rectifier) failed. I’m a Kiwi too, so forgive me if there’s a little ‘passion’ in the recounting please! The lesson? We only properly understand things when we fully unpack a system to its components allowing us to rebuild it better. A YouTube Documentary about John Britten (7 mins)
The Mistakes in a Nutshell:
- Money is NOT and can never be a commodity. It is simply a record of debt.
- Pegging to a mainstream, manipulated, inflating currency dooms any alternative currency to the same destruction as the one its pegged to.
- It is traders alone who value a currency, at the point of each trade.
- Interest may compound, de-stabilise, be immoral etc but it works, consolidating wealth and power.
- Failing to adequately address the "WIIFM factor" cripples a currency from the outset.
- Ego [self-interest] kills goodwill.
- The backing of a currency is always TRUST, not a commodity itself.
- It is impossible to manage a pure currency.
- Usage doesn't determine the function of a true currency.
- Creating networks solves a non-existent problem.
- Networking currencies introduces more problems than it solves.
- Open Source thinking will only replace current systems when they implode.
- Everyone thinks they're right.
- The seller should be the one determining credit terms.
- Credit management from the top will always fail.
- Confidentiality is conditional - it's not a binary issue.
- Zero-cost money is a pipedream.
- Shallow and partial thinking limits our vision.
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