Good Money is Stable in Value

This is something that has been long understood and empirically observed that a money with a stable value is favored as a medium of exchange over volatile equivalent. There are different arguments for either a deflationary trend or an inflationary trend but in general proponents of each side usually call for some amount of predictability in this regard.

There are arguments that call for a changing value per unit of currency over time but and don’t particularly or necessarily call for perfect stability of value but the ultimate end to their inflation targeting is that such practices are a means towards economic stability.

What is Stable Money Stable in Relation to?

Most economists and economic philosophers that come across Nash’s proposal for Ideal Money correctly identify that Nash speaks of an ICPI which is an internationally observed basket of commodities that would serve as a barometer for the issuing of a money that could then be stabilized in relation to the price trends of the underlying commodities chosen for such purposes.

In simple terms, our global economy valuates different commodities at any given time and gives out prices as signal to their respective values. For certain commodities these valuations are fairly stable over time, and can be expected to be based on their scarcity, location, cost of production etc.

The Problem With an ICPI Money Standard

Nash identifies that a money would be more or less perfectly stable if it were to be effectively pegged to an ideally chosen basket of commodities. But Nash’s proposal is not to peg an international currency to such a basket because there is an intrinsic problem with doing so:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI is constructed, it should not be expected to be valid as initially defined for all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve. Here, evidently, politicians in control of the authority behind standards could corrupt the continuity of a good standard…

There is still needed a governing body that would decide what such a basket of commodities would consist of. And so the problem of corruption of money supply is still left unsolved in this regard.

Solving Unsolvable Problems

Nash is known for solving unsolvable problems. He has a special knack for understanding our inability to solve complex problems as a hint towards highlighting an incorrect approach. Often when he arrived at new solutions to significant problems he left other experts in related fields in awe and with an inability to comprehend how he could arrive at what are otherwise seen as complete leaps of logic (yet with provably correct solutions).

A Different Use for a Theoretical ICPI

It seems possible and not unlikely, however, that if two states evolve towards having currencies of more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value. Then the limiting or “asymptotic” result of such an evolutionary trend would be in effect “ideal money” but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.

Nash uses the concept of an ICPI for what could be equated to as mathematical induction. By knowing the trend of what would eventually be Ideal Money (money pegged to an optimal set of commodity prices) Nash extrapolates his solution.

We could also think of this as building a form for a bridge and then removing it once the keystones are in place allowing the bridge to stand on it’s own without the initial form.

Nash’s proposal doesn’t involving pegging at all. Rather he makes the realization that we know what is optimal and therefore we simply need to reverse engineer the path towards it (without political implications).

The concept of the ICPI simply was the basis for his insight, it wasn’t the insight itself:

The ultimately launched concept of “Ideal Money” became possible when I conceived of a practical basis for a standardization of the comparison of the value of the currency with an appropriate standard or ideal.

Bitcoin is Not Ideal Money

Bitcoin has a strong value trend which the markets will be able discern better than any fiat counterpart. It’s inflation schedule is perfectly determined. But it is not ideal. It is good, but not ideal. Nash paints a different picture of how our respective fiat currencies, when put on a stage of competition, will asymptotically evolve towards what would effectively be money pegged to an ICPI (without ever necessarily actually being mandated).

This solution is stable as it invoke no “policies” that must be controlled by any powers or governments: