Think local, act…

[Dave Birch] Larry White — perhaps known to some of you as Lawrence H. White, the F. A. Hayek Professor of Economic History at the University of Missouri, St. Louis — wrote the book on competition and currency. Literally. It’s called “Competition and Currency” and I have a well-thumbed copy of this splendid tome on my desk. (Once again, I must say that I am absolutely delighted that Larry has agreed to give the kick-off talk at this year’s Digital Money Forum.) One of the reasons why the book is so interesting to me is that when I first began to look into the idea of using electronic payment systems to transfer value other than fiat currency I thought it was a really radical idea and it was only once I started to trawl through some of the literature that I realised that it was something that “serious” economists talk about. From there on, the inter-related issues of private and alternative currencies became, as far as I am concerned, part of the future roadmap for electronic money.

One of the principal categories of alternative currency that has been attracting a lot of attention recently is local currency. I’ve often looked at the subject of local currencies and had the general opinion that there is something going on there that will at some point be interesting, but it’s been difficult to identify any specific areas where they can intersect with the payments mainstream. So while it’s one thing to look at the differences between physical dollars and electronic dollars being sent by PayPal, it’s an entirely different thing to look at the differences between US Dollars and Microsoft Dollars or Guildford Groats or Sainsbury’s Shillings. I think all of these have a future, but to the manager of as credit card portfolio who wants new technology to deliver leverage in the next quarter, they seem too far-fetched (I long since learned that when customers in the financial services sector ask you to “think outside the box”, what they really mean is “think slightly closer to the edge of the box that we did before, but not much”). However, in these dark economic times, as is often the case in recessions, there may be a case for more radical innovation since the returns on the core businesses can be improved only marginally, if at all.

Going back to a key reason why I originally began looking at the topic — the realisation that the marginal cost of supporting additional currencies on electronic platform is very low therefore one of the areas of experimentation that we might expect to see in an all electronic payment world would be in the kinds of money that are in use — there’s no reason to suppose that in any local area one currency might dominate since most people live, work and play in overlapping, different kinds of localities. Now while it’s not the topic of this discussion, there are good economic reasons for thinking that the local currency people, such as the Lewes pound, are wrong. They’re wrong because their notions of localities are too backward looking. So while I buy the idea that’s some form of localisation of money might be part of an overall trend, a reaction against globalisation and so on, I think that localisation in the today’s online world means something different to the slightly romantic (some might even say slightly unworldly) geographic notion of localities at the heart of current schemes. But let’s put that to one side and focus on the idea that consumers might like to have different kinds of money. This some data to suggest that this is already true. People don’t seem to have a problem holding World of Warcraft money, or iTunes money, in addition to coin of the realm. In China the use of electronic coins is, in fact, is so widespread that the government has been trying to regulate it.

Let’s look at the edge to see where the future is being formed. There are one or two minor schemes in the US which I think offer us a clue. They bring together local currencies and prepaid cards to create schemes that are at one level only local loyalty schemes but at a deeper level something a little more important, a window into the “jam jar” world of pre-paid but one in which each jam jar holds a different currency that is specific to a locality. Providers might compete to get customers to hold their currency, so that they could benefit from the float. That way, the local currency guys what they want, the consumers get choice, and the pre-paid card guys get an interesting new business case. A virtuous circle.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]