Wildcat Currencies

"Wildcat Currencies" by Edward Castronova.
Yale University Press, 2014.

Millions of people spend a significant part of their life behind computer screens that keep them in one fantasy world or another. Examples are "Magic the Gathering" and EVE. To those, like myself, who cannot imagine this: imagine the board game of Monopoly blown up to computer and internet proportions. That is, not confined to space or time: partners can be found at any of time of day or night from among thousands looking for partners at any one time. The game can be paused at any time to be resumed at any later time with any partners. A player going broke may be so deeply involved and resolved not to repeat this or that dumb move, that he is prepared to cheat. Such cheating takes to form of buying game money for US dollars paid from his VISA account. Lately Facebook has entered the business by hosting third parties with their own games for Facebook clients to play among each other. Facebook provides the servers and the financial infrastructure in return for a generous percentage of the US dollars involved.

In 2012 Facebook clients spent 800 million US dollars on play money. Older forms of virtual currencies, such as airmiles and similar credits in customer-loyalty currencies, are estimated by the European Central Bank to exceed the amount circulating in notes and coins of state-sanctioned currencies.

I expected BitCoin to play a prominent role in this book. It is mentioned and dismissed in passing. Now I realize why I was excited about BitCoin: it is a technological marvel and I wish I had the technical insight and programming acumen to bring something like this about. But in the larger scheme of things it is insignificant, as it represents a step back in the evolution of mediums of exchange. It manages to simulate gold with advanced technologies of cryptography and network protocols. Technologically advanced, but backward from the point of view of economics and markets.

I have contrasted "real" money in the form of US dollars or Euro's with the play money created in online games. But how real is this "real money" anyway? In the course of the 19th century most money migrated from notes and coins to become entries in ledgers of banks; in the course of the 20th century these entries became tiny quivers of electricity in computers. It is a sophisticated art to keep the value of this virtual stuff reasonably stable so as not to wreck the economy. This is the task of central banks and it is made harder by political pressure and legislative legacy.

Since the play money of computer games can be exchanged with official currencies, play money has a value outside the games. Managers of computer games find it in their interest to keep this value stable. Through programming errors and errors of judgment spectacular instabilities have occurred. As these are corrected, and insofar as the games survive them, valuable experience is gained. Knowledge about currency management is established worthy of the attention of a John Maynard Keynes. Experience and knowledge accumulates in the form of mechanisms called "faucets" (money creation) and "sinks" (ways of removing money from circulation). Here the game world is touching economics bedrock.

Having reached bedrock, Castronova reviews the official characterization of money:

  1. It is a medium of exchange.
  2. It is unit of account.
  3. It is a store of value.

For this reader at least, it was useful to be reminded of this piece of Economics 101. I had always been puzzled why The Economist (the newspaper) was in recent years frequently raising the spectre of deflation. As a pensioner, zero inflation seemed to me a worthy goal for central bankers and an occasional bit of deflation to offset the inevitable occasional excursion to the other side seemed perfectly OK.

This is wrong because deflation rewards keeping money uninvested. Because of this even the German-dominated European Central Bank aims at a bit of inflation: a disincentive to holding on to cash is needed to ensure that money is used as store of value only in the short term.

So far some useful economics instruction from Castronova. I now venture beyond and speculate about the drastic measures needed to get the world, our part at least, out of its economic doldrums. In a general way what is needed is a simplification of all flavours of banking, central and otherwise. Specifically, now that we are reminded of the above characteristics of money, the thought arises that number 3, Store of Value, is the cause of much damage. This uncertain business of aiming at just the right amount of inflation leading to expedients like quantitative easing and its ruinous effects can be finished with a single stroke: drop Store of Value as a role for money.

This does not mean I advocate galloping inflation: on the contrary I advocate zero inflation (and zero deflation). I propose to prevent deflation by making it impossible for banks to offer savings accounts. In the proposed situation, clients can use a bank for safekeeping of their cash, but will be charged for whatever it costs. The only alternative is to invest.

This is not the place to elaborate on the evils of government-backed deposit insurance or the moral hazard for banks that are "too big to fail". Suffice it to say that a mere critical examination of the Holy Trinity of economics points the way a drastic cleaning up of the financial and economic mess that we have worked ourselves into. Kudo's to the crazies of the computer gaming world and Edward Castronova to show a way out of the deadlock.