IM Conversation

[Luxoris]

"Can you explain this business of artificial constraint in more detail? I'm just now learning about all this stuff so I'm not sure I get it yet. Backed currencies don't necessarily have to be backed by only one commodity do they?"

They don't have to be backed by only one, but adding other commodities doesn't solve the problem. A commodity suitable for backing a currency has to be difficult to produce by definition. Once someone learns to extract salt from seawater in virtually limitless quantities, what happens to salt as a basis for exchange? That necessary attribute for a commodity can (and did) lead to constraints on economic production. Multiple backings still must be constrained to be suitable.

"It seems like if there was a demand for more currency and all the gold was already tagged and in circulation the market would produce other types of currency to meet this demand no? Say silver backed currencies, land backed currencies, currencies that are basically stakes in mutual funds, wall-mart could make it's own backed currency that could be exchanged for a certain quantity of goods that it sells, etc. It seems like there are virtually limitless possibilities for backing a currency, so how does a free market get artificially constrained by a backed currency? "

You seem to jump around here between multiple currencies and multiple backing for a single currency. They are similar but each have their own consequences. Multiple currencies are obviously viable...when they are backed by something that the markets trust. They are somewhat inefficient, a problem the Euro tries to address by consolidating the several currencies into a single standard, but ultimately the markets have to trust the underlying issuers, because that is the primary backing..the good faith and credit of the countries.

Silver backed currencies...the Hunt brothers showed how easy it is to manipulate the price of silver and constrain supplies.

Land backed currencies...too illiquid to serve as backing, it really isnt much different than backing by a promise.

Mutual fund currencies...the seemingly most secure investments underlying mutual funds have come and gone. AT&T stock was "as good as gold" (actually better since it appreciated a heck of a lot more steadily and reliably), but if your currency was based on AT&T stock massive devaluation would have occurred. A basket of companies spreads the risk, but also ensure some devaluation.

Wal-bucks is just substituting the good faith and credit of an entity that relies on demand for its products for the good faith and credit for an entity that has the power to tax. Which is more reliable?

http://www.econ.ucla.edu/workingpapers/wp830.pdf