Sensible Taler is Fully Backed

Sensible Taler currencies are fully backed. This is guaranteed by legal structures that avoid any abuse of the backing values, and makes it possible to always fill a claim to the value.

Early forms of money were valuables themselves. Be they rare shells or bronze and copper coins, but the material held was the value itself, and that served as currency. Paper money was invented in China as an easier form to handle in trading. It helped to pass money more fluently in return for goods trading.

Paper money is in itself far less valuable than its face value, and so there is a need for a depot of valuables. This calls for central infrastructure, for guarding the valuables. And because paper money can be used to represent (and perhaps claim) the underlying value, it is important that the paper money is protected from forgeries. In a way, paper money is more difficult! Digital money sits somewhere half-way.

When the value store is detached from the paper representation, then another risk arises. When people rely sufficiently on the paper form to stash it, then there will always be a fair part in circulation. That part sits in the vault without being claimed, fairly reliably. This has historically inspired the storage facilitators (such as commercial gold smiths) to use the gold that was unlikely to be claimed for their own benefit. Or to create paper money that was not covered by the value stored, which also directly benefited these gold smiths.

What the gold smiths did back then was treacherous. It was possible because of poor auditing practices. Nowadays, balances tend to be public, and subject to financial watchdog auditing. Unfortunately, the old practice still lives; it has been legalised into what we now call a partial reserve system. It tends to be a slippery slope, and inflation is the tool of slippage.

It is lucrative to be the one to bring money into circulation. The blacksmiths simply spent it. Commercial banks charge interest on loans that they create over money that did not exist before, and if this created money and interest does not return they repossess and sell any collateral security backing the loan. Whether it is sensible to place so much enforcement into the hands of strictly commercial parties is a matter of taste.

On the side where banks receive deposits, they maintain a fraction as reserve, for precisely the same reason as the goldsmiths, to cover for people picking up their posessions. This is a reason why banks favour an decrease in cash, because this money cannot be spent many times over. The risk scenario of a "run on the bank" is one where customers drain the fractional reserve too fast and the bank cannot pay back their belongings! Central banks were invented to fill in those gaps, as a "lender of last resort".

Savings in banks generally have a partial reserve, and loans are created out of nothing. That's a lot of money that has no backing in actual value. Money originally was a 1:1 paper replacement for valuable assets, and is now said to be backed by trust in the moneteray system. Whether the system is sensible enough, is a matter of taste. It also depends on the monetary system.

Partial backing is not vile in itself. The underlying idea is maximal fluidity of money, so that a maximum amount of supply meets a maximum amount of demand. This is a reasonable system inasfar as it meets true human needs, or makes those needs cheaper. This property is perhaps not true for all trading, but the structures do not evaluate that and it is good if people can make an individual choice about value storage.

Sensible Taler relies on 100% value-backed currency.

The alternative strategy, followed by Sensible Taler, is to have full reserve. That is, every unit of value in one of the Sensible Taler currencies is backed by its underlying value. This also means that the units used are the same as that backing value. This means that payments in Sensible Taler do nothing but pass the title of ownership on the underlying value.