I don't think that a central authority is necessary for money to work, at least not in form of a monopolist. Actually the current systems are rather unsatisfying because a state can loose its credibility and thus the trust in its curreny quite fast, basically as soon as war looms on the horizon or it becomes apparent that it will default on its debt. In the last 25 years over 87 currencies crashed.
And because of the monopoly of the state on money the whole economy is usually going down along. For my part I would therefore abandon the monetary monopoly of the state and allow competition, allow companies to issue money. When they connect their name to the currency and have no legal power to make their money legal tender they will have a much stronger incentive to provide a good and stable money. Hayek wrote a fascinating treatise on the denationalisation of money, and with the ongoing globalisation sooner or later we will get used to juggle with more than one currency in our pockets. Second Life seems to be a step in the direction that companies start to issue private currencies and when states, especially in the developing countries, will fail to keep their currency stable chances are that they will be replaced by private currencies.
Equally interesting and probably easier to believe are gold backed currencies with competing private institutes issuing goldbacked money.
Still, its great to see people thinking about money in another way than just how to get it.
"central authority is necessary for money to work" - No I don't mean "central authority" just some authority that is responsible for "following the rules" in given market. This can be a company that issued virtual money in online game for example. If participants in virtual world do not trust in the fact that the company will play fair game (e.g. that all participants in the virtual game will have equal power to trade, and that the quantity of money and quantity of virtual goods will grow by some known way.), then the virtual money value will decrease.
This article can apply to situations other than real life. Anyone creating a virtual economy may benefit from reading this and other economics articles.
For example, iminlikewithyou's virtual economy. #4 may apply here:
"The size of the market is determined by the number of participants who want to exchange money for goods and goods for money."
So iminlikewithyou's virtual market size is the number of active users, right? Well, not necessarily. If a number of active users have no incentive to bid anymore, for whatever reason, the market size goes down. If it drops below a certain critical point, then people may lose faith in the market due to lack of goods and leave the service. Of course, I feel they're doing an awesome job and I don't expect this to happen. It's just an example.
The best markets are those with the highest number of people wanting to trade.
I think that creating virtual economies inside of a product is interesting because you have to create something people want (the startup's product) and then something people want inside the product (virtual goods, which happen to be cute women and men in iminlikewithyou's case). So if creating something people want is difficult, would creating something people want squared be difficult squared?
Equally interesting and probably easier to believe are gold backed currencies with competing private institutes issuing goldbacked money.
Still, its great to see people thinking about money in another way than just how to get it.