Properties of money that effect the quality of money.

[wizardwatson]

I've been thinking how to condense the ideas I have about how we could
be looking at the problem to better understand the possible
solutions.

Most understand the commodity nature of money. As a commodity it is
subject to price fluctuations just like everything else. Also, money
is universal amongst a particular set of users, which also means
controlling the money supply is important due to inflationary/
deflationary tendencies, but you also need 'extra' equity in the
system to allow for the expansion of credit and to allow for new
capital to be added ( unless you subscribe to the deflation=liberty
libertarian view ).

So there are 3 primary properties of money that effect its quality
'as' money.

1. Price of Money - If the price of money fluctuates sufficiently
between cooperative agents, opportunities for free-riding via various
forms of price arbitrage will arise.

2. Relative Volume Stability - Amount of money vs amount of goods
over time. Linked to inflation/deflation.

3. Upper Volume Bound - If the commodity backing used has an upper
bound and/or doesn't provide some mechanism to allow the volume of
money to follow the pace of the economy, you'll get deflation.

There are certainly more 'conditions' that must be met for a new money
to take off. If needs to be marketed, you probably need a large test
group to start one, etc. But from a mechanistic viewpoint, if you're
going to design a replacement for the common currency, solving these
three issues should suffice to build the thing.

I've been trying to come up with a good word problem that helps people
understand how to view the problem. Here's another crack:

Imagine three people meeting on an island that they've been living on
for as long as they can remember. No one knows or remembers of life
before the island. These three people are the leaders of three
entirely different cultures of people that have grown up on this
island. They each have there own governments and simply would like
some kind of agreement/arrangement as to what is the best possible way
to have a universal money between them. One leader's people use gold
and silver as money. Another uses silver and tree bark. And the last
uses tree bark and gold. The first leader says his people experience
too much deflation. The second leader says his people experience too
much instability in the market. The third leader says his people
experience too much inflation. What is a good solution for the people
of the island?

-David