What is money?
That’s a curious question to pose to an audience made up of people who handle money as a means of payment, medium of credit, and store of value in deposits and other assets. Bankers’ computer systems contain trillions and trillions of entries representing “money.” Nearly every American banking office contains a vault or other secure container stuffed with bricks of greenbacks.
Yet, how would you, as a banker, define money?
It’s a more central question than many would think, today. U.S. currency is effectively backed by an assortment of public debt held as collateral for Federal Reserve Notes put into circulation. I doubt 1 in 10,000 knows that or would understand that.
As author David Birch notes, “People believe, by and large, that money is anchored in something, even though they are not sure what that something might be…”
So again there’s that nagging question, made unavoidable by disruptive technologies, what is money?
Finding an answer for tomorrow
In Before Babylon, Beyond Bitcoin, British consultant and academic Birch looks at this question in the past, present, and future. The history and the recap of what you think you already know about today prove necessary because Birch isn’t trotting out a cabinet of curiosities but a sequence of evolutionary concepts whose essence remains with us. More than once I found myself thinking, “Where was this guy when I was taking ‘Money & Banking’ in college?”
More to the point, reading Birch’s book will help you make more sense of what is going on with “money” today. He doesn’t just stuff a lot of recapping between the covers. Instead, with a storyteller’s eye for history and a dry British wit, Birch makes a convincing case that what most of us think of money being is really something of a historical blink.
What we call money is “fiat money.” This basically comprises physical items, and even moreso, data entries, that are “money” because some governmental entity says so. We all accept that, and thus the economic merry-go-round keeps turning (usually).
As Birch puts it, “… talk of ‘virtual currency’ is misplaced. All currency is now virtual (i.e. bits): there is no gold in the Bank of England to back my £5 note, and the $100 bill in my wallet has no claim over the gold in Fort Knox.”
Much as central banks would maintain that fiat currency is money as we know it and will always know it. Birch contends that money is going to go through an upheaval. At the far end, this will wind up far beyond what we think of as being leading edge in today’s digital currencies, in his view.
A major catalyst in this: cheap and portable computing power, significantly in the form of the smart phone, in Birch’s view. However, he makes a clear distinction between new payment methods—such as Zelle and Venmo, which still transact in mainstream currencies—and new “money,” which goes beyond channels.
In fact, where Birch thinks money is going will blow the minds of most of us who have spent our business lives focused on centrally issued American dollars.
Of the status quo, he writes, “This kind of money [fiat money] is now middle aged and its midlife crisis is just beginning.” Birch’s advisory firm, Consult Hyperion, specializes in payments and worked on the early chip-based wallet called “Mondex” of the 1990s (which is now a stored-value card under the Mastercard brand).
This is part of the case that Birch builds through history, and even a dash of science fiction. But for a foretaste of how omnipresent computing will change money, consider this from the book:
“Trying to imagine a wallet with a hundred currencies in it and a Coke machine with a hundred slots for those currencies is nuts, of course, but your phone and the Coke machine can negotiate and agree on currencies (or, more importantly, currency markets) in a fraction of a second: the time it takes to ‘tap and go’ with your iPhone, Samsung MST or Microsoft HCE wallet.”
Birch has written a plain-English appreciation of where money is going. This is no casual read. However, the banker who devotes the time to the book, and to thinking over the implications of what Birch writes, will come away with a better idea on where money is headed.
Future through the past
Birch makes the interesting point that money, as a replacement for barter, has always been a form of technology. He does not do the usual recitation of how goldsmiths lending out bills drawn on the gold in their vault created the idea of fractional reserves and all that. Nor is there a discussion of wampum or Yap Islanders’ huge stone money (except toward the end in fresh way).
While he does discuss “coffee bean money” of the Aztecs, more interesting is his recounting of a very early form of “distributed ledger”—the tally sticks of England of the middle ages.
Tax assessments were recorded on wooden twigs with notches. These were split into matching halves. The local sheriff kept one half to use at tax time and the Crown kept the other half, to keep tabs on the local sheriffs.
Through much of this period, and later, the monarchy was perennially cash short. Before long the sticks were sold before tax time at a discount, much as governments sell bonds today. When the payment was due, the buyer-investor could cash in for face value.
At times the sticks circulated as a form of currency until they became due. This system functioned for several hundred years—indeed, they existed as a backup system until 1834 when they were all burned, and accidentally consumed Parliament. For most of their history, the sticks were the only records—which is pretty much the idea behind Bitcoin.
As he moves through the book’s historical section, Birch makes short excursions into the issues of the Pony Express, Western Union and the movement of money by wire, Nazi counterfeiting plots, and even the old Danny Kaye movie, “The Man From The Diners’ Club,” filmed when paying with cards like Diners Club—made of cardboard, initially—was novel.
Today’s evolving money
Some might peg the beginnings of “new money” to the advent of the iPhone in 2007, in line with the reference earlier to the computing power of smart devices. But Birch goes much further back, to a decidedly low-tech event. He points instead to the policy decision regarding the de-linking of the dollar and gold in 1971, as mentioned earlier, as the pivotal date. This finalized the separation of money itself from strict value, transforming it into something more of a symbol. After all, when U.S. currency is backed ultimately by the “full faith and credit” of the nation, the value actually comes from the faith of the users in the latter.
Birch makes a point now and then about how traditional banks have not always been part of this evolution. As he portrays it, the explosive rise in financial inclusion through adoption in Africa of M-Pesa, the mobile-based money transfer system, had more to do initially with telco firms than banks.
Making his case against cash
As he discusses the latest stages of the evolution of money, Birch spends much of a chapter and more on arguing against the continued existence of anonymous cash, what many of us still think of as “money,” at the end of the day.
A key part of Birch’s argument in favor of electronic money over physical money is that much of the paper currency in the world, especially in large denomination bills, serves as the medium of exchange of “bad guys.” He argues at length that by continuing to print currency governments actually cut the cost of being criminals—drug lords, heads of prostitution rings, and more. The costs of printing paper money, in this line of reasoning, subsidizes the cost of concealment.
Along with identity as an economic basis, Birch believes strongly in “community”—the definition of which continues to evolve away from a physical reference. You might think this discussion would begin in one of the new “communities” of social media, but Birch instead looks at something most American bankers have never heard of: Irish bank strikes.
From 1966 to 1976, the clearing banks of the Republic of Ireland were shut down three times for a number of months each by labor strife among their own employees. People couldn’t reach their deposits.
“When the strikes hit, around four-fifths of the money supply disappeared and the public were left with the notes and coins in their pockets and nothing else,” Birch writes. “Since people could not go to the bank and draw out more money, they developed their own currency substitutes: while some people began to use sterling, it was the cheque that kept the economy going.” [In reading quotations from the book, recall that Birch’s grammar and spelling are British.]
How this liquidity was maintained was interesting. As checks and IOUs circulated, the new, temporary clearinghouses were the country’s pubs and other shops.
It’s a whole ‘nother dimension in KYC. “The owners of the shops and pubs knew their customers well and were therefore perfectly capable of deciding whether to accept cheques (or just IOUs) from those customers,” Birch writes. “And since the customers also knew each other very well, they too could make sensible decisions about which paper to accept.”
This might seem merely an interesting historical footnote—whoever heard of a bank strike?—but it instead becomes part of Birch’s speculations regarding the future of money.
Where modern money is heading
Early in Part 3 of Birch’s book, “The Future: Money That Understands Us,” he presents a handy table that defines the various forms of money of the past and money of the future. The portion of the chart dealing with the future is especially interesting because it makes distinctions among three terms that many people tend to use interchangeably: virtual currency, digital currency, and cryptocurrency.
As Birch defines them:
“Virtual currency: Electronic money that is a unit of account but only in a virtual world.
“Digital currency: Electronic money that is a unit of account in mundane and virtual transactions.
“Cryptocurrency: Money without an issuer: a currency whose value is maintained by cryptography.”
The book dwells at length on Bitcoin’s pros and cons and summarizes research indicating that it is not yet really “money.” For a variety of reasons—especially little proof it is being used for much more than speculation—Birch considers it, at most, at present, a “digital commodity.”
Birch is no Bitcoin enthusiast. “Bitcoin is not the future of money and the future of money is not Bitcoin,” he writes.
Instead, he thinks Bitcoin has stirred up an underlying demand for change. For bankers, his conclusion at this point may be unsettling:
“The post-industrial economy needs a new kind of money, not one devised by representatives of the status quo, and it won’t be the single galactic currency of science fiction imagination (we can’t even make a single currency work between Germany and Greece, let alone between Ganymede and Gamma Centauri) but thousands, even millions, of currencies.”
After surveying a sample of what’s out there now (Ethereum, Ripple), Birch discusses the speculation that governments will issue digital fiat currency. Birch doesn’t see any “Britcoin” or “Fedcoin” on the horizon, certainly not something that the public will be using. Among the reasons: “I feel that, as I live in a society, I would like society to have some control over money.”
Money of “community”
One of the alternative futures that Birch considers is a time when “community”—defined by place or multiple alternatives—could become the basis for a non-fiat form of currency. In some ways, those with shared values would agree to a mechanism for sharing value.
“Communities rather than countries will be the natural currency issuers in the future,” writes Birch.
Other than cash—which Birch is against, as explained—today’s money, in the form of card and other such payments, is, in Birch’s terms, “money that observes us.”
The privacy we like to think we have isn’t there, really, not in the age of Big Data and Data Science.
This “community currency,” as Birch describes it, has elements of the familiar and the strange. Money’s basic functions won’t change, but how it works could in time seem very different.
• The familiar: “We no longer have money that the normal, typical member of society can understand. The public don’t understand how this crucial economic technology works, and they don’t care. The debate about what happens when we go from dumb £5 notes with no memory to Bitcoins on a blockchain that know where they have been, and then on to more sophisticated, more intelligent, more connected forms of money, is of the greatest importance and it needs to be opened up so that the public can take part.”
• The strange: Birch sees the depth of information known by Visa, Mastercard, and Amazon being gained by our social networks, too: “We will have multiple monies that embody different values, and in a world of shared ledgers and ‘smart contracts’ it might well mean a type of money that won’t allow you to use it unless you have a track record of upholding its values!”
With a new take on “local,” through evolving definitions of “community,” and the Irish pub phenomenon on an electronic stage, the fragmentation of “money” into more subsets than ever would seem to promise some kind of financial Babel. However, going back to the smartphone wallet and the hundred-slot Coke machine idea of Birch’s, that technological edge would seem to make it more manageable.
Far-fetched? It might seem so.
Desirable? Hard to say.
But think back 20 years ago and consider what you would have made of an article about the President tweeting.
You just never know.
- Look Before You Leap: Key Considerations for Moving to a Digital-Only Model
- Disruptions Past, Present and Future Raise the Existential Question: “What Are Banks For?”
- Study Links Credit Card Offer to Bank Choice
- What Banks Can Learn From the United Capital Acquisition
- What the Win-Win Partnership Between Apple and Goldman Sachs Means for Payments