[Dave Birch] In the LSE debate on Keynes vs. Hayek broadcast on BBC radio earlier this year, featuring Professor George Selgin (who spoke at our 2011 Digital Money Forum), the participants never touched on Hayek’s key idea about competition in currency. Writing in the 1970s, in a pamphlet for the Institute of Economic Affairs (IEA) called “The Denationalisation of Money—The Argument Refined” he said that the provision of private currency would be more likely to result in sound money than the provision of public (state) currency because the issuers of that private currency would have to compete with each other in order to keep the value of their currency up. Now that inflation is beginning to creep up once again and, as James Mackintosh says in today’s FT, the real zero yield of gold is looking attractive, this proposition deserves to be reconsidered, this time in a technological environment (our world of the interweb and SIMs) that is more than capable of making it a reality.

What I mean by this is that when Hayek was writing in 1976, walking into a shop and paying with one of a number of competing private currencies, however economically desirable, would have been practically impossible. This is still true today. The costs of the issuing of the notes and coins, managing them in circulation, handling them at point of sale (retailers would have needed enormous tills and cash boxes to store all of the different kinds of money) and mentally calculating the exchange rates were just too great. It was an interesting thought experiment, but it was difficult to see it as anything more. Hayek himself discussed the practical difficulties, noting the problem of “cash registers” or “vending machines”, where issuers might mint coins of differing denominations, size or weight, and where in any case their relative values would fluctuate. But genius that we was, Hayek foresaw that:

Another possible development would be the replacement of the present coins by plastic or similar tokens with electronic markings which every cash register and slot machine would be able to sort out, and the ‘signature’ of which would be legally protected against forgery as any other document of value.

We now have the digital money and digital identity technologies to make this vision both real, cost-effective and desirable and evidence that the “tokens with electronic markings” that Hayek predicted are not (as we used to think) smart cards, but mobile phones. I’ve explained before why this is. It’s because cards are good for paying retailers, but not for paying each other. To replace cash, we have to have a person-to-person alternative mechanism and this is what mobile phones provide. A mobile phone is a means of being paid, as well as a means of paying.

There is no clearer demonstration of this than in Kenya, where Safaricom’s M-PESA (“peas” is the Swahili for “pay”) scheme has achieved astonishing scale by allowing people to send money to each other via the mobile phones. The latest official M-PESA statistics, released in May, show continuing growth. There are almost 14m people using the scheme today and 28,000 “cash in/out” agents. (As an aside, it is a business school case study to observe how a new means of payment has led to new markets, new job opportunities and new services.)

If the mobile phone is, indeed, Hayek’s token then what will happen? The answer is that I’m not smart enough to know. When I can choose between Sterling and euros by selecting a menu on my handset then I think the thought experiment is easy to set out: one can imagine John Major’s “hard e-euro” working properly while regional economic blocs get rid of national (nation state) currencies as vestiges of industrial revolution. You don’t have to be a Jane Jacobs groupie to see that her ideas about cities and their hinterlands might drive the evolution of currencies in more economically-sensible and people-friendly ways. But the idea that there will be state currencies—whether national, supranational or subnational—still suggests that the future will be similar to the past, and this doesn’t seem right to me. Money fashioned on a more local scale will be different to nation state money and it will lead to new institutions as well as a new economy.

perhaps in the future, all money will be local, it just that local will mean something different in the connected world.

[From Digital Money: A single currency? Illogical, Captain!]

This is why local currencies, although I don’t believe they will take over the world in their current form, might the best place to start constructing thought experiments about the future of money. One such local currency is Bernal Bucks, operating in the Bernal Heights are of San Francisco. It strikes me as a genuinely interesting experiment.

While most local currencies are physical – either printed scrip or minted coins – Bernal Bucks rely on plastic, which gives them more purchasing power than having to haul around bills or change. They’re Visa debit cards based on bank accounts at the local credit union.

The cards can be used anywhere that debit cards are accepted, but when they’re spent at participating Bernal Heights merchants, consumers get 5 percent back on their purchases to be applied to future neighborhood shopping trips – just like a frequent flier or rewards card. So for every $200 in Bernal Bucks they spend at Big Dipper Baby Food or Bernal Cutlery, they earn $10 to spend at any other participating local merchant.

[From Communities issue currency, promote local spending]

The merchants who participate in the program accept Bernal Bucks in payment. But here’s the thing: they can then spend those Bernal Bucks themselves, making them money not merely loyalty points. The idea behind the scheme is to incentivise the use of local, neighbourhood merchants and small businesses but its impact might well be to give us a window into a world of competing private currencies and help our financial services clients to construct innovative strategies founded on locality.

I feel that neither Bernal Bucks nor Bitcoin are the future, but they do help us to begin to picture what the future might be, and it is interesting to observe that the pressure for alternatives to the current money system is coming from so many different directions.

These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers


  1. There is scope for applicable law to be defined by the choice of currency, but also scope for perverse incentives in establishing competitive tax havens.

  2. True, but then the existence of the euro dollar system provides for the same incentives within the existing system to. I doubt HMRC, or the IRS, would allow philosophical considerations to sit between them and untaxed wealth in any form!

  3. ..and that is why you are not the prime miesitnr. Do you have any idea of the effect dropping the US dollar simultaneously around the world would have? There are smarter approaches.. ones that would preferably not cause an global economic meltdown.

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