Milton Friedman Never Predicted Virtual Currency

Nobel Prize-winning economist Milton Friedman, who died last month at 94, believed that if that if one controlled the printing of money, one would then be able to control inflation. But according to this op-ed article from China's state-controlled Oriental Morning Post, virtual online currency may soon relegate this rule to the history books.

By Hongman Ma

Translated By Mark Klingman

November 21, 2006
China - Oriental Morning Post - Original Article (Chinese)

On November 16, "master monetarist" Milton Friedman passed away. On the occasion of the death of a master, let us consider how one of his famous theses, "The only cause of inflation is the excessive printing of money," has been challenged by the impact of the virtual world. Nowadays, "virtual" currency and "real" currency are nearing equivalence, in the sense that both will soon be able to circulate freely [online and offline]. In such a case, inflation is likely to spread from the word of "real" currency to the virtual world, which may in turn influence real-world currency stability.

This might have surprised Friedman.

Online gamers know of many kinds of virtual currency: Tencent Q money, Sina U money, Shengda currency, Netease POPO coins, Baidu currency, etc. Online, these have almost the same usefulness as real-world currency (renminbi), are used to pay for virtual "commodities" and are directly linked to the holder's identity.

Not satisfied with the virtual world alone, proponents of these currencies are seeking to move into more traditional areas, for example purchasing real-world merchandise, MP3 files and even the right to vote for the "Super Girls" (Chinese equivalent of American Idol). At the same time, online games allow players to conduct virtual property transfers that allow speculation on virtual real-estate. Anyone can acquire property with any of several virtual currencies at a low price and then sell it later at a profit. If virtual currency had real-would buying power, this would bring the process full circle and create real-world profits.

So it follows that the unconstrained issuance and real-world use of virtual currency has become a hidden danger ti the financial system. It is worth reminding ourselves that serious inflation of virtual currency often occurs, and that this could influence the renminbi through the two-way process of purchasing and selling virtual currency. According to reports, in the city of Wenzhou alone there are seven or eight "virtual mints" that employ up to 4,500 employees. Because these "mints" operate independently, gaming operators are unable to control the issuance if virtual currency, leading ultimately to unchecked inflation. Perhaps the virtual money you use online to by a Megafortress today will only get you a virtual wood-axe tomorrow.

As a liberal economist, Friedman believed that the government should strictly control the issuance of currency and that the market would automatically adjust accordingly. According to Friedman, the government should avoid intervening with the newly-emerging virtual currencies, which he would say, are a natural outcome of the growth of free markets, free technology, and free lifestyles – and are not the responsibility of government.

But the two-way flow of currency between the real and virtual worlds, though it may break with the monetarist theory that "the inflation rate is tied to rate of monetary supply and GDP growth," leads to the same conclusion: junk virtual currencies which are a result of over-issuance will have an indirect impact on actual inflation rates. Traditional monetarist theory does not explain this phenomenon.

Recently, Central Bank officials have said that although no plan has yet been formulated, official monitoring of virtual currency is in the works. It seems that in the new era, the government is obligated to regulate not only real-world currency, but virtual currencies as well.

Chinese Version Below

弗里德曼奈何不了虚拟货币

马红漫 2006-11-21 03:06

11月16日，"货币主义大师"弗里德曼逝世。就在大师辞世之际，他的著名论断之一"通货膨胀的唯一原因来自印刷厂"却受到来自网络虚拟世界的冲击：虚拟 货币与现实货币之间的双向流通浮出水面，虚拟世界的通货膨胀可能随时波及到现实世界的货币稳定。这可能是弗里德曼所始料未及的。

对于置身网游世界的人士而言，腾讯Q币、新浪U币、盛大元宝、网易POPO币、百度币等等与人民币的效用几乎无异，它们充当着虚拟世界"商品"的交易媒 介、体现了持有人的身份。目前，虚拟货币已经不满足于"虚拟"世界，逐渐进入到传统商业领域：可以购买商品、下载MP3，甚至购买"超女"投票权。与此同 时，网络游戏允许玩家进行虚拟财产的转让，使投机者有机可乘。他们通过多种形式以低价收购虚拟货币，然后再以高价卖出牟利，从而形成了由虚拟货币到现实货 币的回流。

无约束的发行以及与人民币双向流通的状况，已经使这些虚拟货币成为影响现实金融体系的一大现实隐患。更为值得警醒的是，虚拟货币世界充斥着严重的"通货膨 胀"问题，并可能通过与人民币双向流通渠道传导至金融体系。据报道，仅温州地区，就有七八家"虚拟造币工厂"，从业者达到四五百人。这些因素的存在，使游 戏运营商无力控制虚拟货币的发行，最终导致"通货膨胀"现象泛滥。也许今天能够购买一座"城堡"的虚拟货币，到明天就只够买一只"战斧"了。

弗里德曼是一位自由主义经济学家，他认为政府只要严格控制货币的发行，社会经济便会在自动调节机制下运行。从虚拟货币的诞生过程来看，它是经济、科技、生 活观念自由发展的结果。按照弗里德曼的观点，对于虚拟货币这一新生事物，政府不应给予过多的干预，这不属于政府的职责范围。然而，由于虚拟货币与现实货币 双向流通机制的存在，打破了货币主义"货币供给率与GDP增长率、通货膨胀率"应当保持一致的论断，虚拟货币的滥发也会间接影响到现实的通货膨胀水平，这 是货币学派传统理论所无法解释的。

日前，央行有关负责人表示，虽然目前还没有成形的计划，但是对虚拟货币的监管政策已经在酝酿之中。看来，在新的时代，政府除了要严格控制现实货币，还有监管虚拟货币的义务。