Rethinking Money

money-symbolsFor any of you who are too busy trying to make it to notice, we have a world-wide problem with government-issued (fiat) money. This article offers an interesting new conceptualization of virtual currencies that might weaken governments and strengthen individual freedoms world-wide. That should get the statists all in a tizzy.

From the WSJ:

Free-Market Money, Courtesy of the Web

Bitcoin was just the start for virtual currencies. Cloud-computing certificates, anyone?


The digital currency called Bitcoin may or may not survive long-term, but it has already succeeded on one front: making people think seriously about alternative forms of money. More such alternatives to traditional currency will likely emerge.

The attraction of the Bitcoin is not just the anonymity it provides to users (an anonymity that the U.S. government has alleged some users have employed for money laundering). Bitcoin is also secure against traditional forms of counterfeiting. More important, the Bitcoin is designed to be scarce and thus immune to inflation. There is a limit to the number of Bitcoins—21 million—that is determined by a transparent rule and not by the whim of a central banker.

Gold used to serve this purpose. It was a commodity that was relatively scarce and not easily mined, thus reducing the risk of inflation. That valuable function has been superseded by today’s paper moneys. In this sense, Bitcoin is an electronic version of gold.

In the future, it is likely that other digital alternatives to currency will emerge, each one competing in the market to satisfy the needs of users. The possibilities are limited only by the imagination. Here is one:

Cloud-computing companies could issue certificates convertible into an hour of premium computing. Prices for other services could be quoted in terms of these certificates. The analogy is to traditional gold-backed currency, which was redeemable into physical gold at the option of the owner. While the dollar price of an hour of premium computing would vary with market conditions, the certificate would be guaranteed to always convert into one hour of premium computing. The maxim “time is money” would take on a new meaning.

Computing has become a fundamental element of virtually every technology, a common currency, so to speak, of doing business in today’s economy. Cloud-computing companies provide on-demand storage and computing at a price that varies with market conditions and the computing speed required. They compete on price and the quality and reliability of their cloud, which can be accessed from anywhere in the world at any time. Competition forces the companies to continually upgrade to the latest generation of computers and data-storage facilities.

Cloud-computing certificates could be redeemed at any time. The owner of a one-hour certificate, for example, could convert the certificate today or wait 18 months when presumably an hour of computing time would be able to do twice as much because of the increased computing speed that comes from Moore’s Law.

The certificates would never expire, so the owner need never convert them. Unlike gift certificates, they would not be fixed in price to a certain dollar value but to a fixed amount of computing time. If the public gained confidence that the cloud-computing companies were not flooding the market with certificates, the certificates might be viewed as stable and liquid enough to circulate as money. If the certificates were freely transferrable, they could come to be used to buy any product or service, or be saved as a stable store of value.

As confidence and familiarity in the certificates grew, the certificates could even be used as a basis for credit or any other thing that dollars are used for. Certificates would have an advantage over Federal Reserve-produced dollars as their supply and price would be completely dictated by the market.

During slow economic times, cloud-computing companies would have less incentive to expand their clouds and would reduce the number of certificates they issued. The reverse would happen in better economic times. The certificates would have an advantage over the Bitcoin: They could be converted into something of value, instead of just being based on relative scarcity.

It is impossible to predict what kinds of money a truly free market will create in an increasingly digitized world. But we can be confident in predicting that just as markets improve the quality of all products, they will do the same for money.