Ideal money

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John Forbes Nash, Jr.

Ideal Money (to be considered different than defining 'ideal money' without capitals) is a theoretical notion promulgated by John Nash (Nobel Laureate in Economics) to stabilize international currencies. It is a solution to the Triffin dilemma-the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also serving as world reserve currency.

John Nash gave various lectures and written discourses on the subject he called Ideal Money.[1] The first talk was given in 1995 (one year after Nash won the Nobel Prize for economics for his work on equilibrium theory nearly 50 years prior).[2] Nash spent 20 years giving talks, in many different nations around the world, about how Ideal Money could be brought about internationally.

Nash said in an interview the basic idea for Ideal Money came to him in the late 50's and early 60's at a time when when he fled the US to europe in order to try to renounce his US citizenship and exchange his USD for the Swiss Franc (which he believed to be superior in quality from a perspective he describes in Ideal Money).[3]

Ideal Money is John Nash's (hidden) life's work.

What is Ideal Money?[edit]

The simple definition of John Nash's Ideal Money is money that is stable over long periods of time:

Our observation, based on thinking in terms of “the long term” rather than in terms of “short range expediency”, was simply that there is no ideal rate of inflation that should be selected and chosen as the target but rather that the ideal concept would necessarily be that of a zero rate for what is called inflation.[4]

Gresham's Law[edit]

In his writings and lecture Nash's invokes Gresham's Law and a way of observing a type of valuation of money that can either be seen as "good money" or "bad money". He suggests that the current popular political narrative sells the idea that what is called "good money" is actually "bad money" and vice versa:

I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”. Here we can remember the classic ancient economics saying called “Gresham’s law” which was “The bad money drives out the good”. The saying of Gresham’s is mostly of interest here because it illustrates the “old” or “classical” concept of “bad money” and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s.

Gresham's law also refers to how a population would treat the introduction of a good (or bad) money in relation to an already established currency.

The Keynesian Critique[edit]

It is notable that Nash wasn't particularly critical of John Maynard Keynes himself:

The thinking of J. M. Keynes was actually multi- dimensional and consequently there are quite different varieties of persons at the present time who follow, in one way or another, some of the thinking of Keynes. And of course SOME of his thinking was scientifically accurate and thus not disputable. For example, an early book written by Keynes was the mathematical text “A Treatise on Probability”.

He was careful to define "Keynesian" as to strictly point to the evolved and applied methods that spawned from Keynes' philosophies which might be viewed as different from Keynes (intended) philosophies themselves The basic definition is a school of thought which favors inflation and some form of inflation control on a domestic money supply:

The label “Keynesian” is convenient, but to be safe we should have a defined meaning for this as a party that can be criticized and contrasted with other parties. So let us define “Keynesian” to be descriptive of a “school of thought” that originated at the time of the devaluations of the pound and the dollar in the early 30’s of the 20th century. Then, more specifically, a “Keynesian” would favor the existence of a “manipulative” state establishment of central bank and treasury which would continuously seek to achieve “economic welfare” objectives with comparatively little regard for the long term reputation of the national currency and the associated effects of that on the reputation of financial enterprises domestic to the state".

The Keynesian view is in direct contrast to the Austrian view which favors a more "sound" money usually with a fixed supply and a deflationary value trend (ie prices trend down). Nash admits that his views run quite parallel to the Austrian school of economic thought, particularly FA Hayek's works:

(The talk text, just for the “ideal money” topic, originally derives from my outline for the lectures given at various specific locations of the “European School of Economics” in Italy during October 1997. Subsequent to that time, after consulting with some of the economics faculty at Princeton, I learned of the work and publications of Friedrich von Hayek. I must say that my thinking is apparently quite parallel to his thinking in relation to money and particularly with regard to the non-typical viewpoint in relation to the functions of the authorities which in recent times have been the sources of currencies (earlier “coinage”).)

Nash makes a semi-humorous remark that suggests his line of Nashian thinking is very distinct from the Keynesian view:

There can be Keynesians Neo-Keynesians New-Keynesians Post-Keynesians. Even the Post-Keynesians are still Keynesians

Relationship to Gold[edit]

It is noted that the natural throttle that the cost of mining puts on the supply of gold has historically made it optimal for an inflation controlling peg:

It is a coincidental fact that the inherent nature of mining and mining technology makes it possible for the prices of certain commodities that are produced as a result of the devotion of labor and capital to the effort of mining to increase less (or decrease more) than might be expected.  There is a “dimension paradox”: Agricultural products are produced by using the two-dimensional resource of the earth surface, so the “disappearing frontier” creates a limitation. In contrast, some mining, particularly for elemental metals, can essentially be done in three dimensions, although, of course, there are increasing costs for deep digging. So, really there is lots and lots of gold, silver, platinum, tungsten, and so forth out there and more can be found by digging deeper.

Nash's credited much of Britain's historical economic strength to Newton's actions of pegging the British pound to gold:

...the pound was the original currency of “the gold standard”, with its value pegged to gold in 1717 by Isaac Newton who was then Master of the Mint.

Nash considers such a peg to be sound basis for international stability whereas pegging different currencies to a single currency like the USD is considered problematic (as described by the Triffin Dilemma):

Here Argentina and El Salvador can be mentioned. They are adopting (at least temporarily) expedients that put the value of their domestic money on a fixed relation to the U. S. dollar. And of course Panama has had such a situation for a long time previously.

This is not "ideal money" because the U. S. dollar is not an ideal standard for money value.

But if, for example, all of the countries of the world would base the value for their national currencies on the value of the british currency then this situation would appear singular and unstable, while it was not so singular for a lot of countries to base their currency value on gold.

Gold does have its stated drawbacks (which leads to Nash to his concept of an ICPI):

Nowadays, however, few would propose a return to the actual use of simply the metal gold as a standard, for the following reasons:

(i) The cost of mining gold effectively does depend on the technology. Recent cyanide leaching techniques have made it possible again to profitability mind gold at formerly abandoned sites in the U.S. so that it is now a big producer.  However, the unpredictability of the cost is a negative factor.

(ii) The location of potential gold-mining locations may not be “politically appealing.” so it would seem undesirable to make a political choice to enhance the economic importance of those particular areas.

(iii) There is some negative psychology about gold such that even if it were the most logical choice after all, the unpopularity of the idea could be very obstructive.

ICPI-Industrial Consumption Price Index[edit]

A Basis For Stability

In pursuit of a possible apolitical basis for stable value Nash created a concept he calls an ICPI. The ICPI is effectively a basket of optimally chosen commodity prices:

The ultimately launched concept of "Ideal Money" became possible when I conceived of a practical basis for a standardization of the comparison of the value of the currency with an appropriate standard or ideal. And the key to that was the idea of an ICPI or (international) "Industrial Consumption Price Index".[5]

This statistic could be calculated from the international prices of commodities such as copper, silver, tungsten, and so forth that are used in industrial activities.

The Limitation of an ICPI[edit]

Nash remarks that in order to provide the desired stability an ICPI must necessarily be (regularly) adjusted:

We can see that times could change, especially if a "miracle energy source" were found, and thus if a good ICPI is constructed, it should not be expected to be valid as initially defined for all eternity. It would instead be appropriate for it to be regulatory readjusted depending on how the patterns of international trade would actually evolve.

A Political Component[edit]

The need to adjust the ICPI creates a political component which is a problem in regard to the pursuit of an apolitical money. Inflation is a politically favorable strategy as it serves the short term wants of the local population; the problem that needs to be solved is how to entice nations and central banks to make long term internationally favorable decisions and policies. Needing to adjust the ICPI returns us to the problem of invoking stable money in the first place, "...evidently, politicians in control of the authority behind standard could corrupt the continuity of a good standard..."

The Misappropriation of John Nash's ICPI[edit]

Is it is often mistakenly believed that John Nash proposed for Ideal Money to be brought about by "pegging" our national currencies to an optimally chosen basket of commodities (ICPI). However, in Nash's works he quickly abandons this line of thinking because of the political reality:

...one cannot logically feel confident of the adoption internationally of an ideal system of currency or currencies in an achievement analogous to the achievement of the metric system or of "the euro". Such a result would necessarily have a political content since it is the states that control and supply the various currencies that are in use at the present time.

Instead, Nash came up with a solution that brought about the same effect as money pegged to an ICPI but without reliance on political cooperation (bold emphasis added):

It seems possible and not unlikely, however, that if two states evolve towards having currencies of more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value.

Then the limiting or “asymptotic” result of such an evolutionary trend would be in effect “ideal money” but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.

Asymptotically Ideal Money[edit]

Evolution and Currency Competition[edit]

In an interview with Greek ex-finance minister Yanis Varoufakis Nash explains that the role of money has changed and evolves:

...money plays constantly evolving role, despite the continuity from one era to the next. Flux and Continuity. Presently, economists have focused on the theoretical problem of replacing paper money by plastic of electronic money, as well as on the repercussion of such a replacement.[6]

Nash's narration of the evolution of ideal money through the competition of respective national fiat and centrally banked currencies starts with the introduction of a possible international money of good quality:

In the near future there may be a smaller number of major currencies used in the world and these may stand in competitive relations among themselves. There is now the "euro" and the inflationary tradition of the Italian lira seems to be past history now. And there COULD be introduced, for example, a similar international currency for the Islamic world, or for South Asia, or for South America, or here or there.

Asymptotically Ideal Money[edit]

Asymptotically Ideal Money is a concept that extends from the theory, philosophy, and implementation of inflation control:

It was the observation of a new “line” that has become popular with those responsible for “central banking” functions relating to national currencies that gave us the idea for the study of “asymptotically ideal” money.

When put on a stage of international comparison the quality of different currencies is reflect in their market valuation:

Each of the currencies managed thusly would have its officially recognized status in terms of inflation as measured by the domestic index of costs of the state of the managers. But also, and this is what is more significant from an internationally oriented viewpoint, the various currencies would have rates of exchange so that they could be realistically compared in terms of their actual values.

As international stability begins to occur the trend creates a reliable metric for observing the idealness factor of each currency. Currencies that are managed with the best supply ration to their underlying economy they represent are thus favored on the international markets-these would be currencies that would be most comparable to theoretical currencies pegged to an ICPI. An international stage for currency competition would ultimately trend each nation's currency towards perfect stability of value (without the introduction of an ICPI):

So we can imagine the evolutionary possibility of “asymptotically ideal money". Starting with the idea of value stabilization in relation to a domestic price index associated with the territory of one state, beyond that there is the natural and logical concept of internationally based value comparisons. The currencies being compared, like now the euro, the dollar, the yen, the pound, the Swiss franc, the Swedish krona, etc. can be viewed with critical eyes by their users and by those who may have the option of whether or not or how to use one of them. This can lead to pressure for good quality and consequently for a lessened rate of inflationary depreciation in value.

Fear of State Reprisal[edit]

Caution in Regard to the Keynesian Faction[edit]

Nash believed his ideas would not be received well by the political faction that leans towards supporting the Keynesian mandate so he tailored his words and argument in order to fly under the radar of those that might feel threatened by it:

The script or plan for my talk linking the “ideal money” with the choices and actions of “thrift” or “savings” by persons or by “economic agents” was influenced by concerns that it would be wise not to speak too incautionsly of “the Keynesians” when the times are such that massive public opinions maybe supporting actions by which a state administration can act without going through the parliamentary processes to write new legislation.

Therefore, I had arranged for 2012 to talk more cautiously in relation to whatever would impact with “the Keynesians” and with the political interest relating also to the scholarly factions allied with (or forming) “the Keynesians”.

He is explicit in that this caution could be expected to be carried forward:

And this caution carries over naturally to 2013 also.

Conspiracy and Coincidence[edit]

John Nash died suddenly in a taxi cab accident involving him and his wife.[7] Some believe his death to be suspicious and related to Nash's possible involvement in the creation of bitcoin.[8] On the way home from receiving the Abel prize[9], John and his wife were forced to take a taxi cab from the airport when their limousine never arrived. They were both thrown from the cab when the driver lost control and neither were wearing seat belts as it was reported the seat belts weren't working.

Nash (and Alicia) died on the New Jersey turnpike which is coincidental with the abstract opening of the first published version of Ideal Money:

Money can be recognized as a technological development comparable to the wheel and of similar antiquity. Among the more recent developments in the technology that facilitates transfer of utility (in the sense of game theory) are systems like those of EZ Pass, by means of which vehicles traversing toll bridges or toll highways can pay, their toll fees without stopping for the attention of human personnel manning the toll booths. [10]

Possible Relation to Bitcoin and Emerging Crypto-currency Economics[edit]

Is Bitcoin John Nash's Ideal Money?[edit]

It has been asked if bitcoin is an implementation of John Nash's Ideal Money (or Asymptotically Ideal Money). [11] When asked about bitcoin and Ideal Money John Nash responded, "Bitcoin might not be it but..."[12] He went on to explain how once a strong currency is establish another issuer might try to pass off a lesser valuable "counterfeit" for being at par with the honest and well established money:

It becomes possible, once Caesar is minting gold and decides its very well used and accepted and the empire is working well on the gold coins, another Caesar might come along and say ‘Well I can put a little of lead inside these gold coins and pass them out at the same value.’ It would be the Aurelius of so and so….and that sort of thing can happen.

It is an interesting side note to consider the different variations of bitcoin being created at this time (ie bitcoin cash, bitcoin gold, bitcoin classic, bitcoin diamond).[13]

Hal Finney, one of the top contenders for being the person behind the pseudonym Satoshi Nakamoto that created bitcoin, was interested in Nash's story and works as early as 2002 and described Nash as possibly being a proto-extropian.[14]

Can Bitcoin Be Ideal (Stable) Money?[edit]

George Selgin, an expert on free banking theory, expounds on value proposition of bitcoin in regard to the inability to control its supply (ie inflation targeting):

It doesn’t follow, however, that either Bitcoins’ purchasing power or the volume of Bitcoin-denominated payments will be stable enough to make Bitcoins anyone’s idea of a sound money. Because it makes no allowances for changes in the real demand for Bitcoins, whatever their source, the strict “protocol” that regulates the supply of Bitcoins—a protocol that raises Bitcoin “mining” costs in response to changes in mining activity and technology, but without regard to Bitcoins’ purchasing power—would allow fluctuations in the pure transactions demand for Bitcoins to continue to influence their purchasing power. As the number approaches 21 million, mining costs will approach infinity, and Bitcoin output with cease once and for all. The transactions demand for Bitcoins will, in contrast, tend to go on increasing with economic growth. A Bitcoin standard would thus tend to result in a rate of deflation at least equal to the rate of economic growth, with occasional bouts of more severe deflation occurring with every cyclical increase in the demand for money. Although (as I’ve argued elsewhere) deflation needn’t go hand-in-hand with recession or depression so long as the rate of deflation reflects an economy’s (total factor) productivity growth rate, chances are that deflation in a Bitcoin economy would frequently exceed this safe limit.[15]

Because bitcoin's supply was predetermined at inception and considered unchangeable it cannot fluctuate with the demand cycles and thus Selgin suggests it cannot be made very stable in regard to its purchasing power. However, this still leaves the possibility that bitcoin fits Nash's concept of "Asymptotically Ideal Money". Whether Nash was specifically referring to bitcoin or not it still might have the same effect and lead to the intended result of international stability of the existing legacy fiat currencies (and possibly in relation to bitcoin). Although bitcoin might not be Ideal Money Nash would consider it to be "good money" because of its comparability to gold based on its supply restraint and predictability:

To be quite respectable, in a Gresham-advised sense, money needs only to be AS GOOD as other material commodities that might be hoarded.

This makes it an interesting consideration for the basis of Nash's premise suggesting Ideal Money could be an enthymeme for bitcoin:

…intrinsically free of “inflationary decadence”..a true “gold standard”, but the proposed basis for that was not the proposal of a linkage to gold

Ideal Money as Fiat[edit]

The implementation of centrally banked digital currencies, such as many nations and central banks are studying and testing[16], might also give rise to an interesting possibility for the implementation of Ideal Money via a digitally secured peg to a basket of digitally based nationally currencies. This possibility seems to run concurrent to Nash's thinking in Ideal Money and again points to a significant use case for bitcoin as a relatively "good money" from a Gresham's sense.

Fiat is often perceived as being of a dishonest character and of poor quality, perhaps mostly because of the Keynesian movement that took over the political, academic, and banking sectors. However, fiat means "let it be done" in latin and there is the possibility, Nash opines, that there could be a natural evolution inspired by international competition, brought about by the introduction of an international money of good quality, that our global civilization could learn to make Ideal Money "fiat" by making use perhaps of such a basket of digitally issued national currencies (if they were eventually to exist):

...one cannot logically feel confident of the adoption internationally of an ideal system of currency or currencies in an achievement analogous to the achievement of the metric system or of "the euro". Such a result would necessarily have a political content since it is the states that control and supply the various currencies that are in use at the present time.

…my personal view is that a practical global money might most favorably evolve through the development first of a few regional currencies of truly good quality. And then the “integration” or “coordination” of those into a global currency would become just a technical problem. (Here I am thinking of a politically neutral form of a technological utility rather than of a money which might, for example, be used to exert pressures in a conflict situation comparable to “the cold war”.)

   So it occurs to me to think that that which is not achieved by a grand action of establishment by "fiat" may alternatively tend to come into existence as a consequence of a process of evolution. And of course, after a certain degree of progress by "evolution" the rest of the progress could possibly be realized by a convention or a process of "fiat".

Implementations of Ideal Money[edit]

Syscoin is a digital currency that means to implement John Nash's concept of Ideal Money[17]:

The mechanism design closely follows the concept of Ideal Money [Nas02] discussed at a Penn State lecture given by John Nash Jr. If we apply the notion of service transaction rates to facilitate the transfer of utility between network participants we have a metric that is the first of its kind, one that denotes true demand for the currency in circulation as a public utility that is auditable and provides money transfers with transferable utility; in other words, ”quality” money which would be classified as ideal.

It is unclear whether or not Syscoin can or will achieve valuation stabilization.

References[edit]

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