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Source link: http://archive.mises.org/7006/and-thus-it-came-to-pass/

And Thus It Came to Pass

August 19, 2007 by

August 2 saw Matthew Beller’s Daily Article “The Coming Second Life Business Cycle,” which sounded at first blush like yet another announcement of the coming Rapture. But it described the fiat money (Linden Dollars) of the fiat world of the Internet, known as Second Life. And sure enough, just like the First Life (this one?), the creation of money out of thin electrons would produce a business cycle.

In the August 16 issue of The Economist appears the article (subscription required, I believe) “Trouble in Paradise” describing the first bank run in Second Life and the bank of that world, Ginko Financial, freezing deposits and refusing redemption of deposits in the “real” dollars that were paid for them.

So, whether in real life or the virtual one, the creation of money by fiat produces booms and busts, and this even in a world in which the “government” can and does create (all) value (the virtual money is spent on virtual land created by the site, and on more-attractive attributes for participants’ “avatars,” which are the pictorial representations of themselves on the site).

The article seems largely to overlook how this totally controlled laboratory experiment proves the Austrians’ main contentions regarding fiat money.

{ 8 comments }

Stéphane August 19, 2007 at 11:57 am

It is fascinating to see this happening a few weeks only after the first warnings were made. But it is too early to know what the Ginko affair “proves”. Here are a few questions that I guess remain unanswered :

- Does SL own the “Linden dollar” brand and how does it control the way it is being used by private banks (if it does indeed)?

- Could an entrepreneur create a sound currency (e.g. the New Linden pegged to the US dollar) in order to compete with the overinflated old one? That is, is the L$ the only currency with legal tender in SL?

- How are contracts enforced in SL? In case a fraudulent bank rips off its customers, is there a court they can go to? Will they try to go to a real world court and seize real assets?

- Does reputation mean anything in SL where you can change identity? In real life, it gives corporations an incentive to behave well in order to have repeat customers.

- What will the reaction of the other banks be after the Ginko crash? Will they self-discipline as the black sheep get wiped out, or will they go on with their Ponzi schemes?

- Was the gambling ban a mere trigger, or the major factor in the crisis?

Mathieu Bédard August 19, 2007 at 5:23 pm

I’m not very familiar with Second Life, isn’t all that’s sold through that thing created out of “thin electrons” in the first place? I have a hard time figuring out how could shifting the non-structure of the non-production cycle toward the beginning or the end of it’s time phase could make any difference..?

Nasikabatrachus August 19, 2007 at 8:28 pm

To answer one of Stephane’s questions,

- Could an entrepreneur create a sound currency (e.g. the New Linden pegged to the US dollar) in order to compete with the overinflated old one? That is, is the L$ the only currency with legal tender in SL?

I’m not up to date with this, but one SL entrepeneur named Anshe Chung has talked about creating her own currency (I believe it would be called the !Chung, but like I said I am not up to date with this idea). It’s very possible to create such a currency: I am familiar with one practice which gives one’s avatar a certain number of “credits” per unit of time spent doing activity X, with which one can buy products affiliated with the currency dispenser.

For those interested, there is a user group for Anarcho-Capitalists in the game.

Nasikabatrachus August 19, 2007 at 8:50 pm

Also, in regard to dispute resolution and enforcement of contracts, here’s an interesting proposal:

http://tinyurl.com/create.php

Nasikabatrachus August 19, 2007 at 8:52 pm

Sorry, bad url:

http://tinyurl.com/3bbzoj

TLWP Sam August 20, 2007 at 2:07 am

Considering there were bank runs in the good ol’ days of the gold standard means the only solution is trading in hard currency (gold and silver chips) and I don’t think many people are that desperate yet.

Hugo August 22, 2007 at 3:35 am

It’s not only a matter of a commodity standard for money. It is also required that banks do not inflate credit; so the runs were produced by less-than-100% reserve banking.

In an economy with 100% reserve banking, a bank run does not precipitate a crisis, as the bank will honor its debt and deposits. Maybe only this particular bank will go out of business.

xchange4ls.com December 19, 2010 at 6:58 pm

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