I doubt many of my readers are familiar with CSGO (Counter-Strike Global Offensive) and the phenomenon of "skins" and gambling with them, but this topic actually has a surprising applicability to one of my favorite topics, currency.
I won't go into too much detail but here is the basic situation. CSGO is a "First Person Shooter", a game where you see things through the eyes of your character, and try to shoot rivals. In this specific game, the characters are normally terrorists or counter-terrorists, and in most cases, the game is played online between teams of humans.
In the game, you can win "cases", which are basically electronic boxes. You then have to pay around $2 each to buy "keys" to open these cases. Inside there are various "skins", which are bits of computer code that change the way things look. Some are for guns, some for knives. These skins are of varying rarity, with some being quite common and some quite unusual. Players who want to find especially uncommon skins can also buy packages for higher prices (such as $20) which are supposed to give a higher probability of having more rare skins.
What makes these skins interesting are two phenomena. First, because Steam maintains a marketplace where users can trade or sell these skins, they have taken on a monetary value, and in some cases one rivaling the Dutch tulip craze for absurd price inflation. It is not uncommon to hear of uncommon skins selling for hundreds, even thousands of dollars. Now, to a degree this price inflation has been driven by the second phenomenon, but even before the second existed, prices were rising to absurd heights.
And what is the second phenomenon? Simple, gambling. There have arisen sites where teens and others who play CSGO can place skins into a pool. Based on the relative value of their skins, they are given a number of chances to win*. After a set period, the pool is closed, and the winner is selected, getting the entire contents of the pool. As these are run by for profit enterprises, I assume some sort of cut is taken by the "house" (unless, of course, as it is completely unregulated, they simply cheat to turn a profit**), but in general it is a simple winner-takes-all game. In part, it was obviously inspired by the absurd prices being paid for skins, as kids unable to afford to buy them see these games as a chance to win skins they could not otherwise obtain. But, since it is making those skins even more valuable, it is also driving the prices even higher as well, creating a minor price inflation.
But none of those phenomena is what inspired me tot write about this. Instead it was a thought that struck me while I was talking to my son about this issue.
I pointed out to him how absolutely absurd the price being paid were. After all, these "skins" were nothing more than a few image files, a little bit of computer code, and code you did not even hold on your own machine. They were code loaned to you by a company, for a game that could stop tomorrow, with a value based on a rarity the same company could alter in an instant by issuing the same skins more frequently. In short, they were completely arbitrary in value, and the value was completely out of individual control.
Which reminded me of our currency.
When money is gold, or just redeemable in gold, you can convert your dollars into something tangible. Yes, the value of gold may fluctuate, but only because the quantity of gold changes, or people in general found more or less need for gold. It will not suddenly change because someone magically made more gold out of thin air. And, even if the value of gold does change, there is still one truth, if you have an ounce of gold, even if the value of it changes, you still have an ounce of gold. And if you can exchange a certain number of dollars for an ounce of gold, then you can, if you wish, never have to hold dollars, you can hold something of tangible value.
On the other hand, our fiat currency is like these skins. The value depends solely upon our mutual agreement it is worth something, and the Federal Reserve could change that value tomorrow by printing more, or retiring bills. As there is nothing restricting the number of dollars in circulation, since a dollar is no longer defined as anything other than "a dollar is a unit of currency worth a dollar", there is no way to say we are printing too few or too many dollars. There is no risk of exhausting gold reserves, as there are no links to gold. The dollar is just Monopoly money, and the Fed can do what it wants, there is no objective restriction on it.
Which is precisely why I insist the gold standard -- or any commodity standard -- is the only sensible solution to all our monetary woes. Right now, we have a currency redeemable in nothing, with a unit defined in terms of itself, with money having no more intrinsic value than play money in a child's toy cash register. And, because the government thinks this fiat currency allows them to "manage the currency", we also have constant inflation, ranging from 3% to 16% or more. Now, some say low level inflation is acceptable, but think about it. In 24 years, even "very low" 3% inflation will cut the value of savings in half. And that assumes inflation is applied evenly across the economy, which is never true. Inflation eats at our wealth, makes long term planning difficult, if not impossible, forces retirees to save more and more, and even then they often end up too poor to truly retire. Is this what we want in a currency?
And for what reason?
The supposed purpose of leaving the gold standard was that a managed currency and central bank would insure continuous growth and end the supposed "boom-bust cycle"***. Of course, European central banks had done nothing of the kind, but our money managers were arrogant enough to think they knew better. And so, base don the premise that bankers and individuals could not manage money, but government bureaucrats could, we created our managed currency.
The first result? In less than 15 years from the creation of the Federal Reserve, the worst depression in our history, one made worse and prolonged by continual government meddling. And since? An ever accelerating cycle of boom and bust, made worse once we completely left the gold standard. As well as inflation often rising into double digits. And yet, supposedly, if we abandon this system to return to the "anachronism" of gold, it will be a disaster.
But I ask those who make such a claim, exactly what could be worse?
* I am not sure of all the specifics, as I never visited one of these sites. I have seen a lot of discussion of them, but I am not sure how those managing the games extract a profit.
** I am not meaning to suggest there is corruption, simply pointing out that a game run by computers, with winners determined by an opaque algorithm, with all participants visible to one another only by aliases visible on screen, it would be easy enough to have every few games award the pot to a non-existent individual, allowing the company to sell off the winnings for a healthy return.
*** The "boom-bust cycle" is actually a phenomenon of centralized banking, rather than the free market. Banks run individually do not inflate at a single rate, and thus this cycle could not occur. By under the post-Civil War "state banking system" local banks had to have deposits in certain "reserve banks" in New York City, which then had to put part of their reserves in one of a few top tier banks. This allow banks to issue currency several times using the same gold reserves, and also created a system which favored a single rate of inflation. Unlike private banks, where some reckless actions by a few would not take down the whole system, the state banking system was custom made to create general panics, and it did. And it only got worse when we went tot he Federal Reserve and later left the gold standard.
For those who are interested, my earlier writing on currency can be found at "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "Bad Economics Part 19","Fiscal Discipline", "Putting the Bull in Bull Market" and "Why Gold?". The history of banks is included (along with many other topics) in my more historical essays "A Timeline Part One" ,"A Timeline Part Two", "A Timeline Part Three", "The Political Spectrum", "Mistaken Perceptions of the Industrial Age", "Four Elections", "A Passing Thought", "The Best Historical Example", "Ordered Liberty and Our Modern Mindset", "Child Labor and the Industrial Revolution" and "Rethinking the Scopes Trial".