The discussions around digital currency continue. I had an interesting sort-of-argument with someone about this recently, and I mentioned in passing the dynamics of the shift from specie to token money during the industrial revolution. I think it’s worth expanding on this here, as to my mind it informs the debates about central bank digital currency vs. private digital money, an important debate for our times. There’s lots more about this on the blog and there’s a podcast about it too if you are interested in learning more.

Forum friend George Selgin gave an excellent talk on this at [Consult Hyperion’s 2010 Forum], exploring the transition to industrial-age money.

[From The problem of change | Consult Hyperion]

The essence of George’s talk was that industrialing Britain saw unexpected changes in the way that money worked as it strove to re-invent money for its new economy. As the nature of that economy had changed, so the nature of money had needed to change too, but there is a lag and a tension between the needs of the economy and the money that the economy has inherited from an earlier age. At the time, it was not clear exactly what needed doing. People could see that there were problems, but not what do to about them.

Naturally I refer to this time because the Internet, mobile phones and online commerce are creating a vortex that is sucking in monetary innovation at an accelerating rate. My point is that we have been there before and can learn from those distant times. Consider the relationship between private and public provision of small change (coins, essentially) that has been brought back into focus by discussions about micropayments in an online world before. When that industrial revolution caused an explosion in population and commerce in Georgian England, the lack of small change shifted from being an annoyance to being a major national problem, holding back growth and development. Factories had no coins to pay their workers, workers had no coins buy their essentials and the economy was suffering. Josset’s description from “Money in Britain” (1962) is lovely:

Rarely was any transaction made without an argument. No trader would sell goods without stipulating the weight of the coins in which he was to be paid. Quarrels over money values were continuous; market days and fairs were regularly scenes of brawls. Wages paid by employers to their workers were the cause of many Saturday night disputes regarding the value of their money. Such was the result of the apathy and ignorance of the government in so neglecting the currency.

Essentially, as I wrote before, it was Main Street vs. Wall Street as usual (there you go brining class into it again):

What happened in that case was that there was money for the wealthy (bank notes and gold and silver coins) but there was no money for the masses. You couldn’t by a loaf of bread or pint of beer with the banknote or a silver coin, so private industry stepped in to mint copper token money, and this money circulated particularly in industrial centres in order to (very successfully) facilitate wage payments and retail spending.

[From Up a gum tree | Consult Hyperion]

By the end of the eighteenth century, most of the coins in circulation in the Britain were counterfeits. Gresham’s Law meant that there was widespread acceptance of counterfeits because there were no legal coins in circulation and that the good counterfeits served a useful economic purpose. A shopkeeper might have four copper trays in his till: pennies, ha’pennies, good counterfeits of same and “raps”, or counterfeits that could not easily be passed on.

The government did nothing about it. The people who did do something about were technologists: those at the centre of the industrialisation storm, largely from Birmingham, which was the Georgian Silicon Valley. The nascent metal-bashing industry there, the emergence of organised production (Matthew Boulton’s factory) and the expanding skill base meant that the skills, techniques and supply chain for medals, buttons (and the machines to make them) could be readily adapted to coins. The industrialists used the latest technology of steam presses whereas the government did not. At the same time, the supply of copper (the world’s largest copper mine was in Anglesey in those days) meant that the right raw material was in the right place at the right time.

What was the result of this technological change? It was that coins changed from commodity money (ie, gold and silver to the face value) to token money (ie, base metals and alloys worth a fraction of the face value). And it was, crucially, the private sector that caused the shift, with the public happy to accept the token money that, presumably, no-one in the government would. (As an aside, George Selgin asks in his splendid book why the private mints put so much effort and invention into creating such good quality tokens and suggests that part of it was marketing: good-quality tokens were good publicity and advert for the skills of the companies.)

These tokens gained rapid acceptance and by the end of the 18th century  the problem of small change was almost solved with the official (or “Tower”) coins trading at a discount against the private alternatives. What happened then? Well around two decades later, the official government mint adopted token currency and began issuing modern coins. This is, I think, a marker for our age and one of the reasons why I am so certain that, at some point in the future, the government will adopt a digital money that is in widespread use in the private sector (let us set aside exactly which technology for the time being) as a national digital currency and make the final shift of cash from atoms to bits.

The reason that I am so interested in this particular case study is that I think it has tremendous resonance in the current day. We are living through the post-industrial revolution but we are still using the money of a different age. Just as people in the early 17th century couldn’t have imagined the Bank of England, paper money and the Gold Standard that were just around the corner, so we can’t imagine the money of the near future.

Bank of England Charter sealing 1694

Somewhere out there, private enterprise (a student in a garage or a researcher in a regtech) is working on the money for the post-industrial age but we don’t yet know what it is. I’m pretty sure it’s not Bitcoin, and I’m pretty sure it will have something more to do with the communities that it serves than the fiat currencies of the nation-state do, but I don’t know what it is any more than anyone else does. However, it is interesting to speculate that the trajectory might replay. There will be competition to produce the money that the new economy needs and then when that competition means it’s no longer possible to make a living from the means of exchange because the transactions fees are driven down to zero, it will become some form of public good (even if the definition of public is more limited to “public within multiple overlapping communities”).

In which case, the world’s central banks might at well starting providing digital money as a public good now! Seriously, how much would it cost to set up Bank of England PESA? They might even look at some form of shared ledger solution, where copies of the “national ledger” are maintain by regulated financial institutions (e.g., banks – whereby taking part in the consensus-forming process would be a condition of a banking licence) and the entries in those ledgers related to transfers between pseudonymous accounts (i.e., your bank would know who you are but the central bank, other banks and auditors would not). I think this is just the sort of topic that we should explore at the twentieth annual Consult Hyperion “Tomorrow’s Transactions Forum” in London on the 26th and 27th April 2017, so you should probably block those days out in your diary right now…

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