Another interesting contribution on the open money debates, by Gregory Rader, who we also featured yesterday in a long post about asymmetric accounting:

Excerpt:

“The conventional wisdom regarding money is that privacy should be respected. People don’t like to talk about how much money they make or how much monetary wealth they possess. This shyness goes beyond mere reluctance to be boastful; there is an added taboo when talking about money.

Someone on quora recently asked “Why is wanting to make money so stigmatized?” The majority of the answers boiled down to:

Many people question whether excessive wealth can be honestly earned, or doubt whether excessive wealth can be earned without coming at the expense of others People who pursue wealth for its own sake are seen as shallow, superficial, materialistic or otherwise as having misplaced their priorities This attitude presents an interesting contrast to attitudes about other sorts of attainment. You rarely hear anyone bitterly note that someone has too many friends, or is too respected by her peers. I want to propose that this contrast in attitudes derives from lack of transparency in the monetary system. We tend to be suspicious of monetary wealth because we are suspicious of the means and motives driving its accumulation…and those suspicions persist because our monetary system is designed for privacy rather than transparency. We are not suspicious of social popularity in the same way because social information is not restricted.

Implied by this claim is that transparency encourages more transparency and privacy encourages more privacy. Therefore, accepted notions about privacy may not ultimately derive from our preferences but might instead derive from a small tendency towards privacy that encouraged more privacy until complete financial privacy became the accepted norm.

Such a feedback mechanism could be inferred from Gresham’s Law, from wikipedia:

Gresham’s law is commonly stated: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions. The artificially overvalued money tends to drive an artificially undervalued money out of circulation [1] and is a consequence of price control.

The textbook example applies to commodity backed money but we might extrapolate the principle further to state:

– Currency with a tangible or transparent source of value will be preferred to money without transparent value. Therefore people will prefer to hold (hoard) the currency with transparent value and transact in the currency without tangible value.

Restated in this way we come upon an apt description of our current monetary system. We have many securitized assets available to us that could be exchanged just as easily and ubiquitously as money. Why do these alternative assets not replace Federal Reserve Notes? Precisely because the value of investment assets is tangible and transparent, and therefore preferred as a store value rather than a medium of exchange. The fundamental value of Federal Reserve Notes is impossible to determine, therefore this “bad money” crowds the good out of circulation.

How does this present an opportunity for alternative currency, if better options will simply be hoarded and crowded out of circulation? The opportunity exists in disrupting the currency model that Gresham’s Law applies to – the transactional model. In a transactional market we prefer to give up (exchange) the asset without transparent value, and yet we prefer transparency in almost all other contexts. Market participants will avoid transacting in assets with transparent value, but they will embrace value metrics that rely on transparent measurements. Moving away from measuring transactions, shifting instead towards measuring value, therefore sidesteps Gresham’s Law.

Currency alternatives that make this shift will gain mindshare while avoiding explicit competition with traditional currencies. They will win through leapfrog innovation rather than direct competition. Alternative currencies that persist with the traditional transactional model will continue to be crowded out and marginalized as a medium of exchange.”