I think I can answer some of these objections. Keep in mind, though, that I'm not entirely sold on the idea myself, but it has some story-telling potential and I'd like to know how far I can go with it
Salmoneus wrote: ↑Wed Nov 21, 2018 11:15 am
But the two bigger problems are: it's a backed currency, so inherently bad; and why on earth would anyone do that? What would be gained?
I think I'll start with that
The main appeal in a backed currency is to keep currency independent from bad political decisions. The gold standard doesn't work, because as it turns out it's naturally deflationary, and we find a currency works best when inflation more or less tracks economic growth.
(Plus, on Mars, a gold standard would be inflationary instead).
But what if the supply of a commodity actually was a pretty good predictor of economic growth?
At least in early stages of colonization, that would be the case of water on Mars. I believe that later on as settlements grow and the economy mature, that would no longer be the case and they would have to ditch the system.
Let's consider smallish settlements, a few thousand people, transitioning from the planned economy of outposts to a market economy... What would they pick as currency?
Terrestrial currencies wouldn't really be usable; gold is out of the question.
Rationally, they'd try to do more or less what we do right now, which is measure prices on a selection on goods and index the currency on that, with a margin for inflation. Now, let's suppose colonial government gets it wrong somehow (not unlikely!). What would colonist turn to?
Alternatively, you can think of it as a fixed price for water. That would have some political appeal!
That answer doesn't work, because you're conflating different senses of "money". Do you mean money as in currency, or money as in wealth, or money as in coinage? In the case of money as in coinage - no, coins (notes, bank statements, etc) aren't necessary in their own right, but only because they symbolise money. In the case of money as in currency, no, currency is not necessary to live, only to have an efficient national economy (hyperinflation and deflation can kill people, but they don't immediately cause mass starvation). "Money" is only a necessity when you're talking about wealth, and wealth is not a finite resource (well, I guess technically finite, because universe, but not bounded within the limits of current economic scales). What's more, wealth isn't the parallel to water here, because you're not talking about replacing wealth with water, but replacing (notional) coins with water.
What I mean is money as wealth. From the standpoint of my hypothetical Mars settlement, water is technically finite, but there's water on Mars well beyond the economic scale of a few thousand colonists.
Salmoneus wrote: ↑Wed Nov 21, 2018 11:15 am
The key difference is that with water-currency, there's a conflict between water's value as water, and the value water would have as wealth - whereas coins only have value as wealth. The closest parallel here would be the gold standard, where coins had value both as currency and as commodity. The result was that gold was gradually taken out of the system by hoarders, producing deflation, encouraging further hoarding. Making the same commodity essential to two different markets (metalwork and coinage) diminished its availability to both.
Fair point about hoarders. Though there are two differences:
- Hoarding water is a great deal more difficult than hoarding gold. If you build a huge reservoir the people are bound to notice...
- If you managed to hoard water, why not do something economic useful while you're at it? Cycle it through a farm, or grow algae and sell the oxygen!
But if you increase the asking price of your water, I end up having to hand over every last one of my possessions to you, because there is never a point where I can just say I'll do without water.
Yes, but there is a point where it's just more useful, economically speaking to go check out the water ice in the next crater over!
The only way to avoid that is with a free market in water, but you can't have a free market in water on Mars - because the barriers to entry into that market (the cost of acquiring more water) is immense,
If there is a Mars colony at all, the cost of acquiring more water can't be too great, or you can't have a Mars colony at all. If it takes enormous resources to go get some water, there's no way for the population to grow.
This stops being the case when acquiring water is cheap enough, but then what's so special about water in that case? Then we're just back on Earth! If water is a tightly limited resource, water allocation is a major problem, but it is a problem that can only be resolved politically, not economically.
Water has to be cheap enough -- otherwise you have no colony to speak of.
The key difference with Earth is that all water is recycled; it's not perishable as on Earth: the total quantity of water is precisely accounted for.
So if I have no money, how can I aquire water? And if I have water, what's my incentive to give any of it away, since it can't be in exchange for money?
Well, in exchange of labour, which you do need. Also, carbone dioxide, phosphates, and so on.
Conversely, imagine if there weren't constrictive hoarding - you'd have periodic explosive inflation when new water resources arrived!
You get that issue with gold because it's not that useful, economically speaking. Whereas new water resources would mean more opportunity for water-expensive industry, or settlement expansion. Plus the process would likely be predictable -- the water resources would be mapped.
So I guess it's a purely notional currency indeed, only representing how much water, that is not in your vault, you theoretically have a right to. In which case, what makes it the case that "water is a currency", rather than just "the price of water is legally fixed"?
Yes, indeed, that's pretty much the idea. The Martian dollar is defined as the price of a cubic meter of water, or alternatively the Central Bank of Mars will buy a cubic meter of water at a fixed rate of one Martian dollar.
And then how do you keep the price of water fixed? If the true market value of a litre is greater than the true market value of a water-chit, people will trade water directly at the true price (or hoard it), and the water-chit will cease to be used as currency.
Let's one day's work of an average labourer is one Martian dollar, that is one cubic meter. The water supply of the colony increases by 10 percent. So the same day's worth gets you 1.1 cubic meter now, that is 1.1 Martian dollar. In other words, you have 10% inflation; meanwhile the 10% extra water gets run through greenhouses, thereby increasing agricultural production by 10%. Which means you have 10% economic growth.
For clarity, there are usually two different types of commodity backing: a water specie standard would mean actually paying via jugs of water; a water bullion standard would mean the government (central bank, etc) agreeing to give you water at a fixed price in exchange for your cash. The former is impractical because of the difficulties of transporting and storing water; the latter is impractical because it would require the government to hold huge, inactive water reserves that it was willing to give away, which is an inefficient way of dealing with a scarce and vital resource. It also involves the government fighting against the market prices, which costs money, and drives inflation/deflation. And the more you reduce the reserves, the more vulnerable you are to bank runs, and the more you resemble an ordinary fiat currency and the idea of a link to water becomes purely conceptual
I think you've guessed at this stage that it's the latter I meant
It certainly would drive inflation, but inflation correlated with economic growth. (Which a Keynesian would approve, I suppose.)
Holding water reserves, in any case, would be a sound policy. Bank runs could be a concern, but wouldn't a significant bank run require an awful lot of plumbing?