Comment by eah13 | Hacker News Reader

Comment by eah13 | Hacker News Reader

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The interesting thing to me is currency's role in providing certainty. In this case, about the total amount of something, and whether what you're encountering is a valid instance of it. Check out some examples and how Bitcoin compares:

Gold has chemical properties that ensure its finite scarcity (though supplies can fluctuate) and allow you to identify it as ture gold (through, e.g. density measurements). Gold-backed paper currency has a scarcity determined by the trustworthiness of its issuer and a validity linked to the difficulty of its reproduction. Fiat paper currency has a feature of allowing a fractional reserve system, which allows a central body to control its scarcity (and perceptions thereof), with validity again linked to difficulty of reproduction. Open-source cryptographic currencies have a well-defined scarcity and easily verifiable validity.

Cryptography provides certainty better than a physical alternative like gold or paper, but governments traditionally have had control over currency and don't have control over Bitcoin. I think it's unlikely they'll give this up without a fight. I'm not sure that the token system you propose really gives them back that control unless it supports fiat: the arbitrary issuance or discontinuation of currency. But, the idea of Bitcoin as specie is a great one. If it is adopted it as such it becomes open to confiscation like FDR did with gold in 1933, which is an interesting prospect: http://en.wikipedia.org/wiki/Executive_Order_6102

I wonder confiscation is even possible? If it's not this is a seriously revolutionary tech: property without government.

Fiat paper currency and fractional reserve are basically independent concepts. Fractional reserve is practiced by the banks, and was done under gold-backed currency just as much as today. A really interesting thing is the period of "Free Banking"[0] -- in Scotland in the 1700s/1800s where banks were essentially unregulated; State banks in the US were loosely regulated in much of the 1800s as well.

All that's required to do fractional reserve is the ability to distinguish "money on account" from notes. Either issue private notes, or maintain ledgers of balances.

You could conceivably have a 100% reserved bank (doing bailment of physical fiat notes -- a $100 note in the vault for every $100 in a savings account balance) even under fiat currency. Or you could have something with only one entity allowed to increase the money supply (deposit with the central bank, but a 100% central bank reserve requirement, but the central bank allowed to do loans).

[0] http://en.wikipedia.org/wiki/Free_banking

You're right that I conflated the two above but the relevant feature of each is that they're a form of money creation. With a fractional reserve, the amount of money created (through leveraging the reserve) is inversely related to the size of the reserve. With fiat currency the 'reserve' the government has is nonexistent, allowing for unlimited money creation. The government or a bank's ability to engage in money creation are both limited by the certainty that those using the currency have in its future value. If a bank loses it, we get a run. If a government loses it, we get hyperinflation.

Thanks for the distinction between the two concepts though. You're exactly right and gave a great explanation of them. I'll take a look at the free banking period. It does sound very interesting. Talking about the money and valuation sometimes it seems like all we have to measure things with is a rubber ruler, especially when the amount and value of currencies can be manipulated.

It goes even beyond that. It could be the first time in history where wealth can't be taken by force.

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