David Birch13

David Birch

David Birch is a Director of Consult Hyperion, which he helped to found. Described by The Independent newspaper in 2004 as a ‘grade-A geek’, and by the Centre for the Study of Financial Innovation in 2005 as ‘one of the most user-friendly of the UK’s uber-techies’, Dave is a member of the advisory board for European Business Review and UK correspondent to the Journal of Internet Banking and Commerce.

www.chyp.com

Articles

Le quantitative easing

[Dave Birch] In John Cooley's book Currency Wars, he says at one point that ther...

The crazy cost of cash

[Dave Birch] I interviewed Professor Leo van Hove from the Free University of Br...

Reaction and revolution

[Dave Birch] On 27 June 1693, the French Admiral Tourville’s combined Brest an...

Le quantitative easing

by David Birch

[Dave Birch] In John Cooley’s book Currency Wars, he says at one point that there is a grey area actual counterfeiting and the deliberate over-issue of fiat currency. The quantitative easing policy of the British government is likely to be reduce (by inflation) the value of the pound Sterling far more effectively than Hitler’s plans to bring Britain to its knee through counterfeiting in the Second World War:

Operation Bernhard was the name of a secret German plan devised during the Second World War to destabilise the British economy by flooding the country with forged Bank of England £5, £10, £20, and £50 notes. It is the largest counterfeiting operation in history.

[From Operation Bernhard - Wikipedia, the free encyclopedia]

As an aside, one of my sons went on a school trip to Germany earlier in the year and actually visiting the scene of this attempt to sabotage Sterling, the Sachsenhausen concentration camp. If you are at all interested in this story, there’s an excellent film about it, The Counterfeiters.

Now, think what the electronic version of Operation Bernhard might look like in the future. Not creating counterfeits, but creating clones. While it’s fashionable to talk about cyberwar, surely the most effective way to destroy a 21st century society is to destroy its money.

There is, as we all know, nothing new under the sun. After the French revolution, the revolutionary (economically-incompetent) government issued a new currency called “assignats”.

The assignats were issued after the confiscation of church properties in 1790 because the government was bankrupt. The government thought that the financial problems could be solved by printing certificates representing the value of church properties. These church lands became known as biens nationaux. Assignats were used to successfully retire a significant portion of the national debt as they were accepted as legitimate payment by domestic and international creditors.

[From Assignat - Wikipedia, the free encyclopedia]

Unfortunately, and who could imagine a similar thing happening today, the government thought that printing money was the same thing as creating wealth. They adopted a new policy, le quantitative easing, with entirely predictable results.

Certain precautions not taken concerning their excessive reissue and comingling with general currency in circulation caused hyperinflation.

[From Assignat - Wikipedia, the free encyclopedia]

The French National Convention came up with an interesting way to force people to accept the debased currency in payment for goods and services: they made it illegal (and subject to the death penalty) to ask someone how they intended to pay for a transaction before entering in to it. So if someone asked you to sell them loaf of bread, you couldn’t say “well it’s one sou in gold or ten thousand sous in assignats”, it would be off to the guillotine with you. Naturally, under such conditions (of a forced exchange rate), goods disappear from the market just like in Zimbabwe today, where the benighted populace are forced to use Zim$ while their leaders hoard gold and diamonds):

The Vice-President of Zimbabwe has been accused of trying to sell millions of dollars in gold nuggets and diamonds in defiance of international sanctions. Joyce Mujuru used her daughter as a go-between to seek a deal for the gold, according to Firstar, a commodities trader based in Britain… Firstar claims that Mrs Mujuru’s daughter and Spanish son-in-law, Nyasha and Pedro del Campo, offered to sell 3,700kg of gold for $90 million to Firstar Europe Ltd, a precious metal dealer.

[From Zimbabwe's vice-president foiled in 3,600kg gold deal - Times Online]

Who would have thought that a life in public service could be so rewarding.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

The crazy cost of cash

by David Birch

[Dave Birch] I interviewed Professor Leo van Hove from the Free University of Brussles (VUB) for a podcast today. He’s starting work on a project trying to obtain a systematic and accurate estimate for the social cost of cash in the European Union. As always, his depth of knowledge and informed assessment of the situation were second to none. He set me thinking, again, about the dynamics around cash. It’s crazy to carry on using it. The high social costs, the market-distorting cross-subsidies and sheer inconvenience mean that it ought to be vanishing, even though it’s actually gaining market in share in the U.K. I found some figures from the Bank of Portugal in European Card Review for something I was writing for the Digital Money Forum blog. Portugal has the highest ATM penetration in Europe, which is one of the reasons why cash is very expensive there, as these figures show. The only payment instruments that pay their own way in that market are direct debits and credit cards. All other payment instruments lose money and cash costs about 25 times as much as it brings in. In other words, there is a massive cross-subsidy to cash from other parts of the banking business, which loses about €1.77 every time someone deposits cash in a bank branch (or withdraws it). No wonder it seems inexpensive to the retailers, who bear none of this cost. The big picture is that payments cost 0.77% of Portugal’s GDP (against the 0.5% average for Europe as a whole) and revenues only bring in about two-thirds of the costs. Isn’t there an old saying about holes and digging? When is cash going to be priced correctly?

I can’t see how the pricing problem is going to be resolved. Telling consumers that they will have to start paying more at the ATM because they will gain more overall will never work because the costs are immediate and visible but the benefits are diffuse and invisible. Perhaps use e-money fans should refocus. As Leo pointed out to me, almost two-thirds of the euros in circulation are in high denomination notes: these are not used for everyday transactional purposes but as stores of value in the less-regulated parts of the economy. Could be then achieve the goal of reducing total social costs and boosting the net welfare by explaining to our elected representatives that cash is not simply expensive, but dangerous?

Physical money is disappearing and we are moving towards a cashless society where hard cash only exists to avoid taxes or to buy illegal services and goods.

[From chris woebken I selected projects]

A friend told me that an MP in Belgium decided to integrate these two approaches and suggested that the government should reduce VAT on restaurant meals from 21% to 6% to stimulate the local economy in these difficult times. Restaurant owners were enthusiastic. He further suggested that it should be illegal for customers to pay in cash for meals above a certain limit (20 euros or something, I can’t find the figure) on the grounds that honest restaurant owners would gain as much business as dishonest ones who did not declare income for tax. By boosting their businesses, but raising greater tax revenues, the economic stimulus could be self-funding. The plan crashed: apparently there are not enough honest restaurant owners (in Belgium, at least).

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

Reaction and revolution

by David Birch

[Dave Birch] On 27 June 1693, the French Admiral Tourville’s combined Brest and Toulon squadrons ambushed the Smyrna convoy (a fleet of between 200–400 English and allied merchant vessels travelling under escort to the Mediterranean) as it rounded Cape St Vincent. The English and their allies lost nearly a hundred ships with a value of some 30 million livres, the equivalent of total French military spending on the Navy, tens of billions of euros in today’s money. The City of London judged it the worst financial disaster since the Great Fire, 27 years previously, and the financial sector was thrown into turmoil. The responses to this crisis resonate to this day. On the one hand, the government leapt into action and charged a committee to look into the problem of maintaining English sea trade routes in times of war. In 1696, William III set up a body of eight paid Commissioners “for promoting the trade of our Kingdom and for inspecting and improving our plantations in America and elsewhere”. This body was “The Lords Commissioners of Trade and Foreign Plantations” , commonly known as the Board of Trade, which did not constitute a part of the long standing Privy Council “Committee of Privy Council for Trade and Foreign Plantations”‘ , but was set up as a separate body, because that’s how governments do things. Incidentally, the “The Lords Commissioners of Trade and Foreign Plantations” existed until 1970, when it became part of the Department of Trade and Industry (DTI). In contrast, the private sector formed the Bank of England and the bank issued paper money.

Suppose you worked for a financial institution in 1692. You have accurate charts of the Mediterranean, detailed records of the cargoes moving between England and what is now Turkey, a good working knowledge of English and French naval tonnage and tactics, excellent relationships with local goldsmiths, friends at Court and a keen brain. You would never have predicted the arrival of the five pound note and you would certainly never have predicted that the trade would continue to use five pound notes even when you could no longer go to the bank of England and get five pound in gold for your note.

So here’s my reason for wanting to think about this exercise in paleo-futurism. We’re in the same place again. The credit crisis means that, in essence, the Smyrna fleet has just been sunk again: the financial system is in crisis. I’m sure the G20 will sprout some new committees, but… Someone, somewhere is creating a new institution that will revolutionise money. And it will be a group of private businessmen, coming together to create something big enough to help the state to “reboot” the financial system. Any suggestions?

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

In reserve

by David Birch

[Dave Birch] As is clear from the agenda for the Digital Money Forum from its earliest days, I’ve been interested in the subject of alternative currencies for a very long time. In fact, since the days of the Mondex project, when we (Consult Hyperion) were approached by people who wanted to store their own currencies on the cards. I always thought this was a really interesting idea, but no-one else did, and nothing much happened. After a while, I began to realise the ‘alternative’ currency spectrum covered a pretty wide range of topics, concepts, ideas and concerns. The recent discussion on my “Good as Gold” post shows that one of the principal categories — local currency — means different things to different people. My concept of a local currency is a currency that is highly valued highly by members of a community but hardly valued by others. The historic example of wampum in the United States illustrates this neatly.

How would you trade local monies between groups, then? Well, presumably some reserve currencies would spring up (to fill the same role in relation to local currencies as the beaver pelts did to the wampum in the “Super Powers” post) and I imagine it would be inevitable that there would be some that would become privileged, in the sense that some would attract an exchange premium for “irrational” reasons (a belief in long-term stability that could not be proven by spreadsheets, that kind of thing). Having a privileged reserve currency is a very powerful position.

Why am I thinking about something as apparently esoteric as reserve currencies? Well, you might be surprised to learn that the world of reserve currencies, so apparently simple (do we hold dollars or euros? do we hold gold or fiat currencies?) is changing, and at times of change there are always opportunities.

The allocation pattern of central banks suggests that the world has run out of feasible reserve assets to provide sufficient scope for liquidation in the event of globalised distress. Central banks should consider whether holding the same securities remains the optimal investment strategy, and may have to look beyond the US dollar and other G7 currencies to attain a reasonable diversification.

[From Why central banks need more reserve currencies - The Banker]

It’s not completely clear to me why the reserve assets can’t include gold, land, bandwidth or anything else, but it’s certainly worth a note in the margins. If the “conventional” money system is genuinely running out of reserve currencies, that there might be an appetite to do something wholly new in the world of money because technology can monetise so may assets in useful ways. Once again, recession may well prove to be an engine of opportunity.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

Super powers

by David Birch

[Dave Birch] A superpower is bogged down in a distant guerrilla war. The superpower must resupply its army, victorious for a generation, thousands of miles away from home and it’s become a very costly endeavour indeed. Support for the war at home is tentative, and is dividing both the people and the political leadership. The guerrillas are supported by the superpower’s greatest enemy, a nation that is providing both financial and military assistance. The war drags on and the casualties mount. Generals are disgraced. The rebels continue to gain momentum, even though they are occasionally beaten. Afghanistan? No. Vietnam? No, this is historian Kenneth Davis’ marvelous description of British North America in 1782.

The American colonies at the turn of the 18th century: a time when bullion for coins was scarce because Britain wouldn’t export any. The colonists used sea shells (known as wampum) for their medium of exchange, a form of cash borrowed from the native Americans. The indigenous people were, in effect, the central bankers of this monetary system, converting the shells into animal pelts which were used to store wealth and for external trade (since, outside the colonies, the wampum were worthless but beaver pelts — in particular — weren’t). Interestingly, contracts between buyers and sellers were denominated in Sterling (which many of the colonists might never have actually seen) and quoted in gold or silver (which they didn’t have). When contracts fell due, the gold payment in Sterling was commuted into some equivalent payment in wampum, or some other acceptable medium. Technically speaking, the means of exchange, store of value, unit of account and mechanism for deferred payment were distinct.

The shortage of bullion for coins led the colonies into the forefront of the last great revolution in money: the issuing of banknotes not as a means of substituting for some otherwise inconvenient means of exchange but as a means of creating money. There’s a very great difference between the issuing of banknotes as a claim on a bar of gold in a vault somewhere (because banknotes are more convenient for trade than bars of gold) and the issuing of banknotes because there isn’t any gold in the vault at all. Starting with the Massachusetts Bay Colony in 1690, banknotes were issued by impoverished authorities to avoid the high costs and uncertainties associated with borrowing and the need to impose taxation.

Why should we ponder these colonial experiments? Well, I think that since the entry level barriers to virtual financial businesses are very low, we might expect to see monetary experimentation on par with the young United States and it’s therefore quite likely that the most revolutionary impact of digital money might come from its ability to create new stores of value rather than its ability to act as a more convenient means of exchange.

What would it mean to create new stores of value? On the frontier and in the colonies the store of value was related to some physical good such as gold, or whatever: the United States was on a tobacco standard for twice as long as it was on a gold standard since tobacco was made legal tender in Virginia in 1642 (by the interesting device of outlawing contracts calling for payments made in gold or silver) and remained so for two centuries. The US gold standard, by contrast, lasted only from 1879 to 1971. Who would bet against a new standard emerging in cyberspace — the mobile talk minute standard, for example — that is not related to some commodity but instead represents a claim against future production?

If the colony analogy is to hold, we would indeed expect just such a development and the emergence of a whole new virtual finance industry as different from our existing finance industry as fractional reserve banking is from the striking of electrum coins in Lydia. Of course, if we stick with the analogy it tells us something even more interesting: that inappropriate taxation and unenforceable unfair legislation will lead to secession.

Secession? Well, while I wholly agree with Francis Fukuyama that the Founding Fathers did not have economic efficiency as their primary motivation, it’s easy to see economics in the roots of the disputes that emerged: a distant colony where conditions are different, politicians taking actions they feel constrained to implement even while they are being advised that they are acting against the nation’s best interests (on, for example, copyright!). Will this mean more innovation?

[Please note: this is an extract from a book I am developing on the history of the technology of money. Any comments, criticisms or suggestions would be gratefully received and will, of course, be credited.]

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

Good as gold

by David Birch

[Dave Birch] Suppose that one of the longer-term results of the current economic crisis is that people begin to lose faith in government money (ie, national fiat currency) and start to search for alternatives. Then what (and who) will be best placed to provide the alternative? What I mean by this is that if a combination of technological advance and dissatisfaction with economic arrangement reinforce each other, then we may find ourselves not only replacing the medium of exchange (ie, notes and coins) but also the store of value that it animates (ie, Sterling). One of the principal categories of alternative currency, that has been attracting a lot of attention recently, is local currency. I’ve offer 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.

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 Totnes pound, are wrong. They’re wrong because their notions of locality are too backward-looking. So while I buy the idea that some form of localisation of money it might be part of an overall trend, a reaction against globalisation and so on, I think that localisation in the coming online world means something different from the slightly romantic, slightly unworldly, geographic notion of locality that is at the heart of many 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. There are reasons for thinking that this is already true. People don’t seem to have a problem holding World of Warcraft money, or iTunes’ money, in addition to money in their bank accounts. Given a free (or, at least, vanishingly small marginal cost) choice, what would they prefer? We’ve already touched on gold in the earlier discussion about alternative currencies and the price of oil. But I’m curious about other non-commodity suggestions: telecommunications bandwidth, mobile minutes… any more obvious ideas out there?

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

Copying cash

by David Birch

[Dave Birch] I’m a big fan of podcasts, and listen to quite a variety. One that I enjoy is Skepticality. I’ve just been listening to the recent episode about the American TV show “Numb3rs“. I don’t know if you’ve seen it, but it’s a not-terribly-interesting drama about an FBI agent who solves crimes with the help of his Mathematics Professor brother. Anyway, on the podcast a couple of the producers (?) of the show were discussing making the show and they made a comment in passing that I couldn’t help but note. They said that they had been researching a show about counterfeiting and during the course of the research they had copied a $20 bill on a photocopier to see how well it came out. Shortly thereafter they got a phone call from the US Treasury. The photocopier was online, and phones home when someone tries to copy money! And the Treasury guys weren’t very happy to hear about the proposed plotline, about the FBI investigating some counterfeiters because, as all money nerds know, it’s the Secret Service (a branch of the Treasury until 2002, when it was moved to Homeland Security) who take care of that.

I thought the people on the show might have been exaggerating, but it turns out that not only do photocopiers have this feature built in to them, there are many printer drivers that won’t print scanned bills!! What’s more, this capability is widespread. Perhaps everyone knew about this except me.

Adobe and other makers of image-manipulation programs have, at the behest of a little-known group of national banks, inserted secret technology into their programs to foil counterfeiting, the companies acknowledged this week.

[From Adobe, others slip anticounterfeiting code into apps - CNET News]

I immediately started to wonder: how do they do this? What is it about money that is sufficiently distinctive for a scanner, copier, image manipulation software or printer to spot it amongst other pictures of Her Majesty the Queen, sinister-looking pyramids, stylised bridges or fine wavy lines?

Photoshop and other programs will no longer be able to open files containing images of several nations’ currencies, said Kevin Connor, director of product management for Adobe. The code to detect such images came from the Central Bank Counterfeit Deterrence Group, a low-profile association representing the national banks from Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.

[From Adobe, others slip anticounterfeiting code into apps - CNET News]

But what is this code? I have no idea, but when I mentioned this on the Digital Money Blog, Stephen Murdoch from Cambridge helpfully posted a link to some more details here. Fascinating stuff, and not only for those of us obsessed with the technology of money. It’s not an Adobe thing, by the way. There are many companies involved

Not surprisingly, that’s unsettling to a company like HP. That’s why researchers at HP Labs and experts from the company’s printing and imaging business got together at the request of U.S. and international officials to help clamp down on counterfeiting.

[From HP Labs : News : HP Helps U.S. Clamp Down on Counterfeiting]

From a digital money perspective, this looks like a failing old technology relying on a form of coercion to perpetuate it, doesn’t it? Yet another hidden cost of cash.

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


Money mashed-up

by David Birch

[Dave Birch] One of the functions of banks that has been changed forever by the Internet is what economists call the information function. People used to rely on banks to provide certain kinds of information into the market (eg, credit ratings) but a combination of technology-enabled business change and vanishing delivery costs has meant that they are themselves consumers of exactly the same information as non-banks. This is hardly new thinking — I can remember discussions a decade ago pointing out that some kinds of information were out of bank’s hands and that (given all sorts of constraints to do with data protection, competition law and so on) the operators of payment networks could use the “data exhaust” from their transaction networks to create information to “turbocharge” other businesses (it was the 1990s, remember). Indeed, I worked on a project for SWIFT to look at his kind of thing in (if I remember correctly) the late 1980s. The advent of web 2.0 means that this turbocharging is both technically trivial and incredibly powerful, providing ways to create new kinds of information that would never have been generated by banks internally nor made available to the market as a whole. A favourite example of mine, that I originally found thanks to our friends at Payments News, is that courtesy of the New York Fed you can see U.S. bank card delinquency by county, and thus get yourself a real-time map of the credit crunch sweeping across the nation, like bad weather.

The ability of the new technologies to “mash up” data sources must be one of the routes to genuine innovation. Visa and MasterCard must have “weather maps” just like the NY Feds: perhaps the Chancellor of the Exchequer should wake up each morning to a weather forecast from the payment processors instead of Claire Nasir. I say processors because, looking forward, they are the ones who will actually know how money is moving around the economy at the retail level. The consolidation of processors, in Europe as well as in the US, together with the steady shift from cash to e-payments means that some organisations will be in possession of pretty valuable information that simply does not exist in a cash economy.

It reminds me of one of my favourite case studies in contactless, Manchester City’s installation of the UK’s first all-contactless ticketing system at their Eastlands (now universally known as Middle Eastlands) ground. When paper went away, one of the major and unexpected benefits of the new system was that it produced information that did not exist before and this information translated directly into increased revenue (as Duncan Martin, head of retail at Manchester City, explains in that indispensable volume, Digital Identity Management).

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

Technology is progressive, finance is cyclical

by David Birch

[Dave Birch] You might be familiar with the demise of Northern Rock (or Northern Crock as it is now known the length and breadth of the UK), the collapse that marked the start of the current financial crisis so far as the British were concerned. But you may be less familiar with the story of Benjamin and Abraham Goldsmid who formed a partnership in London at the turn of the nineteenth century. They started off as brokers and as foreign exchange dealers but, as told in E. Victor Morgan’s splendid “A History of Money” (Penguin, revised edition 1969), they moved on and began trading on their own account.

Aaron, the second son of Benedict Goldsmid, of Hamburg, settled in Leman Street, Goodman’s Fields, near Whitechapel Church, as a merchant… His son George was the father of two sons, Abraham and Benjamin Goldsmid, who, by their splendid capacities for business, strict integrity, and singular good fortune, succeeded in raising their firm from competitive obscurity to be the head and front of Change Alley.

[From The Rise of the House of Goldsmid]

They became well known as financiers and philanthropists who, as associates of the British prime minister William Pitt the Younger, provided financial support to the admirable cause of campaigns against the French during the Revolutionary Wars of 1792–99.

They were the first members of the Stock Exchange who competed with the bankers for the favors of the Chancellor of the Exchequer, and succeed in diverting into more legitimate sources the profits hitherto absorbed by the bankers.

[From The Rise of the House of Goldsmid]

I absolutely love that Victorian turn of phrase “diverting into more legitimate sources the profits hitherto absorbed by the bankers” and intend to use it on every occasion possible from now on. Anyway, the Goldsmids began to use short-term bank credit to fund long-term loans, a business that was splendid for some years, until the value of their assets fell in the market (their assets were government bonds) and the partnership collapsed in 1808 with massive debts. Rather than get paid off with a massive golden parachute and a huge pension, as is the fashion today, Benjamin adopted the more honourable exit strategy and hanged himself. His brother Abraham took over the business but then shot himself at Morden Lodge two years later in 1810. One parallel with modern times is that the government were big losers: the partnership owed nearly half a million pounds to the Exchequer (and this was back in the days when half a million pounds was serious money) as well as large amounts to other banks and creditors.

Note that this case of the Goldsmids is not “similar” to that of the Crock, nor is it “analagous” to it, nor is it a “metaphor” for it. It was exactly the same. In every respect. Except that the Goldsmid’s shareholders got most of their money back.

The Goldsmid firm subsequently made great efforts to discharge their liabilities. By 1816 they had paid fully fifteen shillings on the pound; and in 1820 Parliament, on the petition of the creditors, annulled the remaining portion of the debts.

[From JewishEncyclopedia.com - GOLDSMID:]

The case of the Goldsmids would suggest to a casual observer that it’s as if no-one in the business of money had learned a single thing in the last two hundred years. The same cannot be said of the technology of money. In that world, no-one has forgotten how to use a magnetic stripe to make a credit card or how to print a cheque book. When cheques go away, it will be because we don’t want them any more, not because we can’t figure out how they work. Therefore, innovation in money has an unpredictable course, as the step-by-step evolution of technology interconnects with the with cycle of finance. There’s a relationship, which I don’t pretend to understand, between the size of the evolutionary steps and where in the cycle the interconnection occurs.

Of current interest, naturally, is what happens when a large evolutionary step (to mobile phones) intersects with the business cycle in an extreme downturn. An article in The Economist suggests that recession is a stimulus for innovation because large organisations (eg, banks) retreat to their core businesses, leaving the exploitation of new technologies to new entrants staffed by their now ex- employees.

It will be no surprise if some of the talented people now unable to find work in an investment bank or other big company are to direct their energies towards creating a new generation of successful start-ups.

[From Start-ups and slow-downs | Start-ups and slow-downs | The Economist]

This argument suggests to me that wise bankers might be looking to invest in mobile finance initiatives started by out-of-work bankers rather than spend the money on their own R&D. If I have interpreted these fragments at all intelligently.

Incidentally, I came across a picture of Abraham Goldsmid in the National Portrait Gallery. I’d show it to you here but their web site has some twaddle about licensing that I couldn’t be bothered to read. So here’s the link, I’ll leave it to you to wonder if their licensing scheme helps or hinders the arts, sciences or commerce.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

New money

by David Birch

[Dave Birch] National currencies are (like nations) a relatively recent invention. And fiat national currencies are an even more recent invention. We tend to see them as a physical law, much like the speed of light, but in reality current monetary arrangements are of human making. And they are transient: money didn’t use to work this way, and there’s no obvious reason for it work this way in the future. So what are the alternatives?

There are a few people out there beginning to wonder if the Totnes Pound (or, more likely in my opinion, the Tesco Pound) mightn’t be a good alternative for the weekly shop and a better long-term hedge than Sterling (which dropped like a stone after a recent speech by the Governor of the Bank of England — not because of any change in the real economy, but because of a speech). There seem to be proto-alternative currencies popping up all over the place at the moment, so there are a few people out there who are doing more than just moan about the fiat currency:

An East Sussex town is introducing its own currency in an effort to encourage shoppers to support the local economy.

[From BBC NEWS | England | Sussex | Lewes launches its own currency]

Personally, I’m unconvinced about these “think global, act local” currency initiatives, but they do deserve study.

One alternative that always crops up in these kinds of discussions is gold. There was an interesting discussion about this on Samizdata the other day, beginning with the obligatory reference to the Austrian school:

As an admirer of the writings of the Austrian economics school, I have a great deal of sympathy with this argument, although I do not think that gold per se needs to be the anchor of a currency. Given the vast gyrations in the price of gold in recent years, I do not see it as a very practical option for man

[From The enduring appeal of gold-backed money | Samizdata.net]

The gyrations in the price of gold, though, are surely more properly understood as gyration in the price of money. The price of a barrel of oil in gold more stable than the price of a barrel of oil in dollars. In fact, this chart shows, the price of oil in gold is remarkably stable.

I would imagine that price stability is a goal of monetary policy, which makes this chart rather interesting, since it suggests that price stability is essentially impossible given fiat currency (Hayek’s argument for private currency, again).

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

E pluribus pluribus

by David Birch

Will there be a world currency, a universal currency? is the “universal credit” beloved of science fiction writers even remotely plausible when some people think that a single currency for Europe is unworkable (and when some people — eg, me — think that a single currency for the UK is economically sub-optimal). In science fiction, the assumption appears to be that some kind of universal single currency represent not only progress but an implicit goal in itself.

Why? Perhaps it’s because creative people (eg, science fiction authors) don’t really think about money because it’ is just (as Bruce Sterling pointed out to me in a podcast I made with him) boring. Maybe it’s something more though. I have a vague memory, which may well be wrong, that the author Brian Aldiss in his Billion Year Spree, a history of science fiction that I can’t find online to search an can’t be bothered to go and look for in my loft, said that it’s because science fiction and heroic fantasy are written for teenage boys and the one commodity that they do not have is money. This may well be part of the explanation, but it seems to me just a likely that it’s because many people don’t really understand what money is or how it works, so speculating on where it might go is outside their envelope. I’m the other way round: I find it hard to imagine time travel (if it does get invented in the future, where are they?) but easy to imagine Google issuing its own currency.

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. One of the key questions that the book addresses is whether the dynamic of monetary evolution is a tendency to the one currency 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 but 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]

To paraphrase Cohen’s conclusions, a new era of monetary competition will mean that monetary policy will become even less effective than it is now and governments will need new kinds of fiscal policy to “manage” the economy. 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.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

Mind your language

by David Birch

[Dave Birch] We might often think about the impact of digital money on the economy and business, and indeed society, but what about it’s impact on our language. Here’s an example. I’m going to have to stop using the time-worn vernacular “as bent as a nine-bob note”. Up until decimalisation in 1973, the British shilling of twelve pennies was known as the “bob”. Hence the ten shilling note was the ten bob note. For some odd reason, and I really can’t remember why, I never saw the replacement 5p piece as a bob, nor have I ever referred to a 10p piece as two bob, but for a long time I called a 50p piece a “ten bob piece” (in fact I can distinctly remember once asking my younger brother for ten bob and being genuinely surprised when he had no idea what I was talking about). So ten bob was a sizable amount of coin of the realm whereas nine bob meant something that was clearly fraudulent (as in “the Enron P&L statement was as bent as nine bob note”). But there was in fact at least one nine bob note: the Irish “Newports Bank” issued a nine shilling note in 1799, and a specimen was sold at auction in the U.K. for three thousand euros. So what is to be our post-cash alternative: as bent as a… what? As bent as a card with a magnetic stripe on it… no, wait… as bent as an IBAN with an invalid check digit… as bent as an SDA clone with an invalid digital signature… they don’t seem to have the ring to them, do they?

Our children will surely miss the rich language of cash once it evaporates into cyberspace. No more greenbacks or dimes, no more fivers or farthings. No appropriate slang term has yet arisen to mean — specifically — electronic cash. We need to put our thinking caps on: what is the 21st century addition to beans, bread, bucks, cabbage, chips, dough, lucre, loot, mazuma, moolah, wad or spondoolicks that will make its way into the thesaurus? I’ve always liked wonga, so I was thinking “vonga” (constructed from virtual + wonga) or perhaps “wenga” (I don’t know why, I just like the “e” in there). I also think it would be nice to have new verb to indicate payment by reputation transfer (”to rep” doesn’t seem good enough) but that’s a personal whim.

Or perhaps our children will keep the language of cash, dissociated from the technology. Thus, to draw on a commonly-used example, when I ask my kids “can you dial grandma for me” while I’m driving they know what the verb “to dial” means despite the fact that neither of them have ever seen, much less used, a telephone dial. Soon, the etymology of the verb will be opaque, and kids will come across it only in games of Trivial Pursuit. It’s just like the way many of us talk about making a buck many times a day without having the slightest idea what the origin of “buck” is.

Creating money is easy. The hard part is getting it accepted.” — Economist Hyam Minsky (1986).
[posted with ecto]