> However, I wonder if a physical currency can be backed by Bitcoins, just as > most physical currencies today are backed by fiat and used to be backed by > the value of the metal in them (or for paper, metal stored en masse > elsewhere).
It's a neat question Arlo. I would add along-side it the question whether credit markets denominated in bitcoins can be introduced and made stable. I know that all positions on what I am about to say have wide divergences in opinion, but I think an argument can be made -- most particularly for a national currency that is the only legally recognized medium of exchange -- that problems of supply and distribution can cause the exchange economy to either impose unwanted shocks on the real-goods sector, or transmit them between real-goods sectors in ways that one would consider non-ideal. It is surely hard, and may be impossible, for a central bank to regulate total money supply with the flexibility needed to respond to the constant demand fluctuations in the real-goods (and services, etc.) sectors for levels of trade. Even if they could regulate total supply, there probably is no way to provide for shocks in the distribution of money and the need for it. Presumably whatever regulatory mechanisms are used for bitcoin mining (which I have not made any adequate effort to understand) will have the same difficulties, even under good management. This seems to be the best argument for a decentralized (but as transparent and regulated as possible) credit market, the contracts of which inherit legal protection from the money in which it is denominated: it can respond to local needs and local evaluation problems, varying the effective money supply in ways that the total supply cannot be varied. But then one introduces a whole host of problems of design and regulation of that system, which bring us the constant problem of credit bubbles and crashes. They become catastrophes when most of the money that people are taking for granted in the process of planning their activities is private credit that can suddenly dry up, even if the underlying government money remains sound, because then one gets huge fluctuations in the money supply which the government has very little power to buffer. Maybe as long as bitcoin is a discretionary currency and not exclusive to some geographic region and its laws, there isn't so much advantage to adding a private credit layer on top of it. If some group wanted to go to it exclusively, though, I assume these questions would come back as they have for sovereign national currencies. Don't know what to do with this question to move toward any insight. Eric
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