The Re-Solution of the Orientation of George Selgin’s Ruritania and John Nash’s Ideal Money: Addressing the Problem of Bitcoin’s Finite and Inelastic Supply

Here I did a summary of George Selgin’s A Tour Through Ruritania: A Freebanking Thought Experiment

Selgin is relevant as he was cited by Hal Finney one of the number one suspects for being Satoshi Nakamoto creator of bitcoin.

His writing about Ruritania is a thought experiment that considers how the advent of a commodity money would arise through barter and and how the banking system would evolve in a world without government enforced monopolies over the money policies (aka central banks).

I want to explain a little about the insights Selgin reveals and then explain their relation to Nash’s Ideal Money.

If the writing seems too long, you can consider it an overview of Selgin’s reasoning, and simply skip to the last section for my insight.

From Bailments to Fractional Reserve Banking

Selgin divides his writing into four parts and the first three go from the “storing” of people's wealth for safekeeping to the CONSENSUAL lending of the savings in return of interest to be earned:

The lending of deposits is (expected to be) a mutually favorable and defined contract:

The receipts for the warehoused savings (commodity money) evolve:

Fungibility then is created and the process can sustain as long as there is continued savings (commodity money) for investments:

Where Fractional Reserve Banking Becomes Possible

Such a system evolves to have transferable receipts:

This evolved system creates the possibility for a new type of efficiency gain:

The efficiency gained is significant:

Thinking about Bitcoin

This section is a little tricky but I can explain it if we think about bitcoin as the commodity money. If the economy and population grows there would be an increase for the new paper money that has evolved (to represent claims to the underlying stored bitcoin or commodity money). This becomes a service to be filled in regard to matchmaking people’s savings to investments through loans etc.

Under a banking system without this “paper money” an increase in the demand for money puts pressure on the production and supply of the commodity money (ie gold if gold coins are the commodity money):

The next part would be relevant if Bitcoin was the commodity money:

Efficiency is gained:

What is Fractional Reserve Banking?

That is the benefit of fractional reserve banking:

Fractional reserve banking allows the money supply to grow in response to the demand WITHOUT implying or relying on an increase in the base money:

The difference in Selgin’s story and our real global economy is that we have central banks they have a monopoly on influencing the (inside or privately created) money supply through monetary policy and/or the reserve requirements of the (ie private) banks they serve:

From Commodity Money to Paper Money to Clearing Houses

The commodity money births an evolution in transferable receipts creating a greater efficiency and this efficiency evolves again. Competition and the usefulness of banks accepting rival banks paper notes inspires the birth of a real “paper money” standard.

Now commodity money (ie gold or bitcoin) can be used simply in large value settlement between banks while the more cheaper easier convenient money can flow in the public:

The fractional reserve banking aspect is kept in check by competition:

The benefits of multilateral clearing is clearly explained (less transactions and less cost):

“From Clearinghouses to an Ideal Money Equilibrium”

George defines an ideal money equilibrium with two conditions (on the assumption that ”free-bank liability issues run up against increasing marginal costs” which he means to show later):

Once the first condition is met the second condition is self-discovered through the fractional reserve process:

Thus the system cannot be considered mature until this equilibrium is met:

Another Consideration Relevant to Bitcoin

Considering a finite supply of commodity money:

Based on this scenario banks cannot exclusively create cheap money (ie lower interest loans):

A Relevant Side Note

On Say’s Law

This monetary equilibrium is an expression of a money supply which perfectly elastically serves the demand for it:

In Comparison to John Nash’s Ideal Money

The orientation of Nash’s Ideal Money is slightly different but it is because it does not function on the caveat that central banking does not arise or exist. Instead Nash’s argument is built on that premise that it has arisen and does exist.

But there is comparable nature to the two orientations and the parallels and differences can be seen as interesting.

We can think of nations (and perhaps currency commons like the Euro) as already evolved banks that have multilateral clearing already in place if only to some degree (ie settlement among nations).

Each of the nations has their own network of smaller banks and sometimes you can trade the money issued with other nations-although, right now this is limited around the world at least to some extent.

However, there is no base commodity money (gold served as this for a period of time for example on the gold standard) and instead we typically, today consider, only the comparison between the domestic perspective of a single single nations and a Ruritanian free banking setup.

But if we think of Bitcoin as the large value settlement medium between nations and perhaps the central banks as clearing houses for the subset of private banks then we can begin to understand how there could evolve an arrangement in which each of the nations are compelled into the equilibrium, Selgin describes, simply by the natural competition that the Ruritian setup implies.

This speaks to what Selgin describes as:

This orientation addresses any perceived problems in the shortcomings of Bitcoin’s limited and inelastic money supply.