I’ve been jotting down some notes on this for a couple of reasons: first of all because of my talk at the London Futures Symposium (and I’ve been invited to talk OpenTech in London in July on a similar topic) and second of all because when I was pottering around the World Bank bookshop in Washington I came across The Future of Money by Benjamin Cohen of University of California, Santa Barbara. I’ve been reading through it over the last few days and reflecting on some of the key issues around currency areas that he sets out very clearly. One of the key questions that the book addresses is whether the dynamic of monetary evolution is a tendency to one currency (the galactic credit beloved of science fiction authors) because the minimisation of global transaction costs is driving factor or an explosion of currencies because new technology minimises transaction costs in other ways? He concludes that “the power of scale economies notwithstanding, monetary geography is set to become more, not less, complex” and he compares the future to the “heterogenous, multiform mosaic that existed prior to the era of territorial money”. Setting to one side the fact that he knows fantastically more about the topic than I do, I disagree slightly with his conclusion here. As a technologist, I suspect that there will be more different kinds of money, not just more currencies, than ever before. At the end of the transition to e-money, the marginal cost of introducing another currency will be approximately zero. So we will be in the “let a thousand flowers bloom” mode and might reasonably expect a rash of experimentation. At the end of this period, who knows whether dollar bills or Bill’s dollars (an old joke, beloved of us e-cash types) will be more successful?
There are a couple of other things I disagree with him about. One is the issue of anonymity: Cohen says that one of factors that may make it difficult for e-money to substitute for physical notes and coins (“p-money”) is that e-money cannot reproduce the anonymity of p-money. I think I’ll set that aside for a future post, but suffice to say that I think that technology can offer more than he thinks in that area. The other is geography, which I’ll go into below.
What might the far future really look like? It’s hard to say, except that it won’t be like the past. There won’t, probably, be widespread barter for example despite the ability of networks to reduce the associated transaction costs. As Nick Szabo says
mental transaction costs are a problem even if there are no commodities like fish with storage costs. A world of pure barter has O(N^2) prices for N commodities, and the mental transaction costs in such a world are correspondingly much higher than a world with a single currency and O(N) prices. So even a market with no transport or storage costs for any commodity whatsoever, but with sufficiently high mental transaction costs, will converge on a single currency.[From Unenumerated: Logical emergence of money from barter]
Hold on. Doesn’t Nick’s argument here extend from the trading of salted cod in Newfoundland to the trading of Xenodollars in Frankfurt? Won’t mental transaction costs take over once financial transaction costs have fallen to a particular level? I’m not to sure about this: as Hayek pointed out a generation ago, people who lived in “border areas” in days of old seemed perfectly capable of understanding multiple monies (and surely we are all on the border now: the border between the physical world and cyberspace) so there’s no reason to think that they couldn’t do again. More importantly, however, the exchange of medieval moolah took place without mobile phones and 24/7 F/X markets.
If I’ve already told my mobile phone that I want to collect U.S. dollars because I’m going to go on holiday to New York as well as World of Warcraft gold pieces because I feel like a relaxing weekend of Orc slaughter, then my mental transaction cost subsequently falls to zero. My mobile phone is perfectly capable of negotiating with yours…
- Have you got any WoW gold?
- No, will you take British Airways miles?
- Yes, but as they are worthless junk (*) it will be at a 95% discount
- Alright, fair enough, here you go…
Cohen’s cogent analysis of direction forced me to reassess some of my own fairly superficial thoughts on the topic, with the result that I firmed up on one axis of the projection. I think his view of geography is wrong: perhaps in the future, all money will be local, it just that local will mean something different in the connected world. Reed’s Law readies will all be local to someone, so perhaps community currency might be the best description. Whether the community is Totnes or World of Warcraft won’t matter, but the shared desire to minimise transactions costs for “us” at the possible expense of transactions costs from “them”, will. Since the overwhelming majority of retail transactions are local, most people’s transactions most of the time will be in their local currency with minimal transaction costs. A small number of transactions will be in “foreign” currencies (ie, someone else’s local currency).
There’s another refinement to this vision. Going back to Nick Szabo again, these currencies may not be money in the conventional sense at all but what might be termed “near money”. Cohen refers to the cross-elasticity of demand between currencies but if the cost of using near money is low enough (because of new technology) then just as tally sticks switched from being a mechanism for deferred payment into a temporary store of value and then a means of exchange, so technology might go down the same path again but with some more modern implementation. Back to Nick again:
Commodity prices now reflect more the value of commodities as stores of value and hedges or media of exchange, i.e. their values as money substitutes or hedges, than they reflect demand for their industrial consumption.[From Unenumerated: The “hoarding” and “speculation” in commodities]
So what does this mean? Nick goes on to develop a bigger context:
Speaking perhaps a bit metaphorically, we are witnessing the rise of new and privately issued fractional reserve currencies. They need not and effectively cannot legally be called “money” by their “issuers”, nor can they effectively be used directly in most contracts for payments. But they can be used indirectly to hedge payment terms or investments denominated in flawed, that is in inflating or otherwise unstable, government currencies in which normal contracts and instruments are generally denominated. The results are synthetic “currencies” that, in their economic behavior, may be almost indistinguishable from a tradtional commodity-backed and privately issued fractional reserve currency.[From Unenumerated: Commodity derivatives: the new currencies]
Cohen’s conclusions (I paraphrase) are that a new era of monetary competition will mean that monetary policy will become even less effective than it is now and that governments will need new kinds of fiscal policy to “manage” the economy seems right, but I’m not qualified to comment. My conclusions are that the long-term outcome will surely be that technology is not used to develop replicants — electronic means of exchange that simulate, as perfectly as possible, physical means of exchange — but to develop new means of exchange that are better for society as a whole. Thus e-money as a vehicle for synthetic currencies that could be used directly in contracts as payments ought to be the science fiction writers’ new monetary paradigm. No more “that will be ten galactic credits, thank you”, more “you owe me a return trip to Uranus and a kilogram of platinum for delivery in 12 months”. Well, that’s what my payments autodroid bot (ie, mobile phone) and your payments autodroid bot will agree between themselves anyway.
(*) British Airways miles are indeed worthless junk. I have loads of them and when I tried to book a flight to the States for a family holiday earlier this year, there was not a single flight available in the whole of July or August (ie, when the kids are off school). If you’re after a wet Wednesday in Hamburg in the middile of next February, they may have some seats left, so book now to avoid disappointment.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]