Better Money

The trademarked slogan "Better Money" is displayed on the homepage of the e-gold site. As best I recall, I came up with that one myself.  In making this claim my intent was (and is) to stimulate thinking and discourse along the lines of "In what way(s) can one brand of money be better than another?"

Thinking back, the logic for what I'm going to say next derived from an essay I read in '97 or '98 by Antal Fekete. I just now tracked it down again and it is still online. I haven't re-read it again in detail so I don't want to imply I agree with everything it says though on a quick scan it still looks pretty worthwhile.

Fekete described money as "a transmitter of value through space and time…with the least possible loss".  Transmission of value through time correlates to money's role as a store of value. Transmission through space is a reference to money's usefulness as a medium of indirect exchange, that is, a means of effecting payment. It looks to me like he meant or was emphasizing physical space, distance.

I prefer to think of the space part as transaction space, where value is conveyed from a payer to the recipient of payment, a change of ownership or entitlement.

So how can one brand of money be better than another?

Money that does not lose its exchange value over time - relative to goods and services, relative to other brands of money - would generally be better than money that did. I say generally because, as with most propositions, there are exceptions -circumstances where some participants in a money economy stand to gain from a decline in exchange value. There are also circumstances where an increase in exchange value can be disruptive, creating winners and losers. At some point I hope to expand on this. It ties into (among other topics) discussions on balance of payments, an area where e-gold or any globally oriented and designed currency can alter or invalidate existing paradigms in an interesting way.

e-gold's performance as a store of value perfectly mirrors physical gold since it is backed at all times by a 100% reserve. For present discussion purposes, suffice it to say that gold has a long track record of being ascribed exchange value and is unlikely to become worthless pending very significant advances in physics. [There is, by the way, a provision in the e-gold Account User Agreement that could be triggered in a circumstance where gold is no longer scarce in an economically meaningful way.]

How about the other dimension - preservation of value across transaction space?

In the long run, which I define as the post-transitional phase after e-gold has been embraced by mainstream institutions and is fully integrated into banking/payments/financial arrangements, many payment mechanisms will be unaffected. A credit card transaction will be a credit card transaction regardless of whether the payables or receivables are due in GBP, USD or AUG.

There are two payment scenarios though where e-gold can offer unique advantages, something better,  than what is possible with legacy brands or money.

The first case is direct acceptance of e-gold, as it currently exists, for payments over the Internet.There is not a single entity that currently accepts payment online who would not stand to reduce their costs and extend their market reach by adding e-gold as an alternative, additional option. e-gold is the only truly global payment platform. An online retail merchant can accept e-gold from anyone anywhere at extreme low direct cost, with immediate settlement and no risk of payment reversal (chargeback) even if the payer has no plastic, no credit history, even if they are unbanked altogether.

The direct cost issue is significant. Imagine a large retailer selling computers online and accepting plastic. The fee for accepting a credit card payment for a $2,000 computer may be higher than $20. The fee for receiving the same value in e-gold would be e-gold's maximum Spend fee - 5 gold cents, that is, 5 cg of e-gold, equivalent at current exchange rates to less than $1.20.

For the recipient of payments using a credit card intermediary such as PayPal or Neteller, the differential is even wider. The payment processing fees for these services must incorporate the full credit card fee (since that is how a payment is usually "funded") and add a further markup to cover their costs of adjudicating disputes such as when (as is not uncommon) they suck payments back from recipients. For every $1 million of payments processed via PayPal [eBay/PayPal uses the term Total Payment Volume or "TPV"], PayPal extracts over $38,000 in revenue. PayPal's revenue, of course, constitutes the expense of their users. With e-gold, in contrast, for every $1 million worth of velocity, the system deducts Spend fees totaling about $2,000 worth - one nineteenth as much. Both of these pale, though, compared to the vig that Neteller extracts,  $138,000 per every $1 million "receipted", more than 65 times the fees e-gold charges. Youch!

The second case where e-gold can afford benefits unachievable with any other currency relates to its function as a settlement platform. The truly unique and unprecedented characteristic of e-gold is not that it is digital, or tied to gold, or online. It is the fact that end users can directly access the settlement platform... without going through any financial intermediary. To tell this story though requires a clear understanding of the role of liability in monetary arrangements.

Comments

[Jon Matonis]

Hi Sameer, while your comments are correct in a money economy where issuer trust is not an issue, the fact that an appreciating metal asset is providing a "medium of exchange" function in addition to the "store of value" function should not necessarily be seen as a negative. A stable money is indeed desireable, but stable against what benchmark - a gallon of petrol, a man's suit, the Dollar or Euro? The "better money" is the one that retains its stability in an environment where issuer trust is not an issue. Of course, we have to trust digital gold issuers to maintain reserves and to publish regular vault audits, but we do not have to trust them to avoid the temptation of seigniorage (http://en.wikipedia.org/wiki/Seigniorage), which is the prerogative of kings!

[Sameer Parekh]

Hi, Doug, nice to see your blog. I would argue that a "good money" is not just one whose value does not decline over time, but one whose value remains stable over time. You do allude to that in saying that 'in some circumstances' an increase in value is disruptive, but I think that is inadequate. The ideal money, the platonic money, I suppose you could say, is solely a store of value. (which can be readily transferred to facilitate commerce) It is nothing more. It is not an investment. If a money gains value over time, then it begins to resemble an investment rather than a mere store of value. In the real world, no money can meet the platonic ideal, as its value will increase and decrease over time due to the complexities of the market, but the best money, in my view, will have the most stable value. If you want your assets to increase in value over time to account for the time value of money, then you should not hold money, you should hold investments. Thus a money that increases in value 3% per year is not as good a money as one which decreases in value 0.5% per year, contrary to your assertion that the better money is the one that does not lose value.

[Jim Davidson]

Doug - congratulations on your new blog! It is excellent, and good to see. I am glad to see you making your case. Best wishes for a full recovery from the awful behavior of the government. Standing for value and honesty is tough work, but it is all the more important for the difficulties. Good luck and God bless you.