Posted by: Dirk | July 31, 2013

Is “qualified money” an alternative?

Dirk Helbing from ETH Zürich has a paper out in which he describes a thing called “qualified money”. What is it?

One interesting – and somewhat speculative – question is what would happen, if we applied the principles of reputation systems to money itself (Moreton and Twigg, 2003), i.e. if each unit of money could earn a reputation, depending on its origin and transaction history. Then, units of money could be treated as separate stocks. Thus money would be related not just with a quantity, but also with some qualities. This would make money multi-dimensional, akin to feedback and exchange systems in biological and ecological systems, or also social systems (Fiske, 1993). I call this concept “qualified money”.

The idea is interesting. We give a facebook page (or something similar run by the central bank) to each unit of money and depending on whether the money was gained through good or bad transactions. Everybody can define what good and bad mean, and then some code could help you judge the “quality” of money. There are two immediate problems I see with this approach: first, who is recording all the transactions and who will verify? That will take some time, and after selling or buying something I would have to look up the numbers of the notes, log on to my account and describe the transaction. But how can we know that what I wrote is true? Second, money is destroyed by taxation. Then the reputation of the money is all gone, and the government through deficit spending is creating new money with no history at all. By the way, the credit creation in the private sector by banks also creates new money, while the repayment of loans destroys money. However that may be, Helbing continues:

If we had “qualified money”, a conversion factor would apply, which would determine the value of money together with its quantity. The conversion factor would depend on the qualities of the respective money units, which would be given by multiple reputation values. Hence, the conversion factors establish adaptive parameters. Therefore, Euros in a certain country could gain a higher or lower reputation (and value) than in other countries. If a country would suffer from an economic depression, the conversion factor would decrease, and the corresponding devaluation of money would help the country to solve its problems by inflation. In other words, the international financial system would have enough degrees of freedom for self-regulation to work.

What Helbing seems to describe here is not “qualified money” but “sovereign currency”. The conversion factors are what we call exchange rates: “If a country would suffer from an economic depression, the exchange rate would decrease, and the corresponding devaluation of money would help the country to solve its problems by inflation.” This sentence makes perfect sense in international economics and I cannot see the difference between “qualified money” and “sovereign currency”. The one big question here is why “qualified money” should have different values. If it can be used for the payment of debt – including taxes – then there will be arbitrage that drives the value of “qualified money” to one single value.

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