May 15, 2007

And now the phoney war on cash (a.k.a., give us another subsidy, ma!)

Dave commented on the "war on cash" ... and Adam picked up on that. Now, that sounds like FC! For someone who once had something to do with the Financial Cryptography community, Adam has a strange comment:

Having the government provide a means for a reasonable functioning economy, and removing the costs of worrying about the gold content of a coin, or the solvency of DavidBucks adds huge efficiencies. There's quite a few things that I'd take the government out of before I took them out of coining currency. (Know thy customer regulations, for example.)

Well... to separate out some issues. Private issuance of money has a long and powerful history. Although the evidence is not entirely a slam dunk, for the most part the jury is in on this question. The envelope, please:

Where private money fails as an industry, it is because of government interference.

The US free banking tradition is the clearest example, in that several different areas had different results. Scottish free banking tradition has the best history, with a century or more of solid gains, only to be finally destroyed by the English, which had already lost free banking to the long, dark and dismal history of the Bank of England.

There is, while we are engaged in this old pub topic, one flaw to free banking that no-one can figure out: it and government currencies backed by gold reserves tend to fail in the face of total war. There are approximately 3 of these, being the US civil war of independence, WWI, and WWII, and each resulted in destroyed financial systems as governments raided them for value.

On to MkKinsey's comments on Dave's blog:

Cash needs to be priced appropriately. The fact is that, today, the pricing of cash is not in line with its costs. Consumers and merchants in most countries do not pay the real cost of cash, and so merchants and consumers have no reason to reduce their use of cash. One problem is that there is no clear ownership of cash. Another is that governments often position cash as a public good -- to be offered free by banks -- thereby inhibiting an economic debate on cash versus other instruments.

Adam is right to be skeptical. Basically, it easy to champion their case against cash, as cash is indeed subsidised competition. But there is an easy retort:

Let's strip both sides of their subsidies!

Like it? I sure do ... just as surely, every warrior against cash will run for the hills when they figure out how naked they'd be.

Henry Moore's Fallen Warrior

Start with the issuance of cash. Make it free to any operator. Leave them their know thy customer regulations, and see what happens.

(Oops, maybe we already know!)

Posted by iang at May 15, 2007 12:34 PM | TrackBack

Why would the government do a better job than private issuers?
Almost 10 years ago, a network of private businesses started issuing WebMoney ( In 1998, the Russian financial system crashed, the government defaulted on its internal debt, many banks went bankrupt and the national currency got devalued five-fold.
Webmoney weathered the storm unaffected. Ever since, WebMoney is the favorite medium of exchange in Russian-speaking e-commerce. Go figure...

Posted by: Daniel A. Nagy at May 16, 2007 04:52 AM

A great example of the government raiding its supports for its money is Spain. its amazing but still most people dont realize what is even happening until it is too late.

Posted by: Adam Morgan at May 24, 2007 10:45 AM
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