Here’s the question. I said something referring to the seigniorage income in developing countries (this was in my head because I happened to be reading — for other purposes — an old paper on the seigniorage income in Kenya and some other African countries). The journalist asked me what I meant, so I held up a ten pound note and said something offhand along the lines of “well, where’s the ten pounds” then.

“Well,” the journalist said, “there’s some gold in the Bank of England, isn’t there?”

Actually, there hasn’t been a gold reserve for the currency in Britain since 1931. If you go down to the Bank of England with a twenty and ask for payment, they’ll give you two tens. That’s it. I was surprised that the journalist, and educated and intelligent person, didn’t know this but later on I began to wonder if that means something. Perhaps the idea of gold as the ultimate store of value and mechanism for deferred payment is so deeply ingrained in us that we have to work hard to convince ourselves that our money isn’t actually based on anything, and most people aren’t prepared to put in the effort. Or perhaps gold is just seductive in some way.

Gold hasn’t lost any of its attraction over the centuries and continues to exert fascination in the context of money. I am always surprised by the continued focus on it in the digital age though. For example, I was very surprised to read about the German ATMs that dispense gold. I thought it was some kind of novelty or promotion, but it appears to be a serious business plan.

All you have to do to buy your gold is insert your euros in the slot and a prettily wrapped bar of the world’s favourite precious metal thuds into the dispenser. It’s very convenient — no waiting time — you just put in your cash and a minute later you are an investor in gold.

[From Now, an ATM for gold! | 18 June 2009 | www.commodityonline.com]

Not the most 21st-century idea I’ve seen recently. That’s not to say that there might not be some opportunities around gold. I did try and get a couple of our customers interested in launching a gold card, but they didn’t share my vision (!) of the past and the future working togethe rin harmony. Not this kind of gold card — as shown here by Alec Baldwin in 30Rock — but the kind of gold card I’ve blogged about before:

Given the desire to transact with the convenience of a card but in a non-interest bearing currency, it would seem to be a straightforward proposition to offer a gold card that is actually denominated in gold.

[From Digital Money Forum: Islamic e-payments]

I rather like the idea of having a payment card that sits on a commodity store — gold, platinum, orange juice or whatever — for use at point of sale. So you pay twenty quid in Tesco with your card and it shows up on your statement as deducting 0.5 grams of gold from your gold store. I would think that if this were offered to the public, a great many of them would choose gold (out of habit?). But it’s fun to speculate on what other commodities might work in this context. Mobile minutes? Bandwidth? Oil? When choosing whether to use up your gold or oil because as simple as selecting from a menu on your mobile phone, surely that must change our relationship to the commodities?

Annalee Newitz, writing in Conde Nast’s Portfolio, says that all of the elements are in place for mobile phones able to transact in “many different microcurrencies”. I think she’s probably right. She points out that

Futurist Douglas Rushkoff, famous for correctly predicting the rise of social media, is trying to convince Craigslist’s Craig Newmark to create “craigbucks.”

[From DIY Currencies - Dual Perspectives - Portfolio.com]

Since she wrote this piece, Facebook has entered the micropayments space as well. Although Annalee is wrong to call me a “leading financial pundit”, since I know virtually nothing about finance, and wrong to call M-PESA an “underground currency” since it’s not underground (it’s operated by Kenya’s largest mobile phone service provider) and it transacts in Kenyan shillings, she’s right to quote me pointing out the link between cash and trust. If people trust some fungible commodity, whether it’s gold or Vodafone minutes, then it will become money as soon as the technology allows it to be transferred from person to person. This has been true since time immemorial (remember the tally sticks!) and there’s no reason to suspect that things will change with new technology.

Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank… Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I agree with him that we could move to e-payments without a problem, because of technological advances made in the last couple of decades, and I’ll come back to this point later on as it is my focus here. But I think it is worth reflecting on a couple of other well-informed perspectives that Willem illuminates in his article, because he illustrates some characteristics of cash that may not be obvious to people who don’t spend their time thinking about the transition from physical to virtual money (ie, almost everyone). He notes, for example, the odd conspiracy between the Chancellor of the Exchequer (Scottish marxist and solicitor Alastair Darling, at the time of writing, previously the Scottish marxist journalist Gordon Brown), the Bank of England and organised crime.

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies. There is no economic justification for $50 and $100 bank notes, let alone for the €200 and €500 bank notes issued by the ECB. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

The euro example is particularly noteworthy. Two-thirds of the euros in “circulation” (they are not actually circulating, of course, they are stuffed under mattresses in Eastern Europe) are in the form of these 100, 200 and 500 euro notes that I am pretty sure I have never seen. ATMs only give you 20 and 50 euro notes and I would imagine that many retailers would be reluctant to accept 200 and 500 euro notes (as noted monetary scholar Andy Warhol once said, if you try to use a $100 in the supermarket, they call the manager). Those notes, as Ian Grigg pointed out on the Digital Money Blog, do however provide some form of competition.

For foreigners in developing countries and emerging markets with high-inflation-prone monetary systems, the disappearance of the US dollar notes and the euro notes could be a setback, as these provide welcome stores of value when domestic inflation rages. It has been estimated that as much as 70 percent of all US dollar bills (by value) are held outside the USA (not all by people wanting to hedge against hyperinflation at home, of course) and that up to 50 percent of all euro notes (by value) are held outside the Euro Area. To those people I would say, I feel your pain, but this is the time to replace exit with voice. Go and create a polity that will support a government that does not abuse the printing presses.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Easier said than done, but you can’t help feeling that if Zimbabwe’s ruling elite had had to keep their money in Zim Dollars rather than US Dollars, they may have made some different decisions on quantitative easing. Let’s imagine that Willem’s plan is adopted though. What would the retail payments landscape look like? Well, not entirely unfamiliar, because ee suggests not getting rid of all cash entirely.

As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation… The carry costs (safe-keeping, insurance and storage) for large amounts of cash are likely to become prohibitive if you have to do it all in fivers.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

This doesn’t seem right to me. Cash isn’t a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Personally, I think it might make more sense to simply switch off cash the way we are switching off analogue TV. Then, if the market decides that it what low-value currency in circulation, then the market can provide it (I’m reading George Selgin’s book The Button Makers which describes just how this happened in industrial age Britain) or, just as some governments subsidise digital TV boxes, so they could subsidise the issuing of pre-paid payment cards (or, far better in my opinion, pre-paid mobile money accounts rather like M-PESA). So Willem may be underestimating what technology can do here: replacing cash in this way isn’t a problem. Getting people to accept the idea might be though:

My good friend and colleague Charles Goodhart responded to an earlier proposal of mine that currency (negotiable bearer bonds with legal tender status) be abolished that this proposal was “appallingly illiberal”. I concur with him that anonymity/invisibility of the citizen vis-a-vis the state is often desirable, given the irrepressible tendency of the state to infringe on our fundamental rights and liberties and given the state’s ever-expanding capacity to do so.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Charles is right to raise this point, although I think that the public may be less attached to anonymity then he might think. Other than the privacy taleban, most people — other than, say, drug dealers or sex workers — don’t care and my experiences back in the days of Mondex and VisaCash (and Oyster, for that matter) suggest to me that people would rather register their cards or accounts so that they can get their money back if they lose the card than remain genuinely anonymous. I think Willem underestimates the ability of technology to deliver anonymity (or better still, well-managed pseudonymity) here, and I’ll also come back to this below when discussing the technological advances that we could use to deliver on Willem’s vision. Finally, Willem summarises thus:

Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed [...] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Do we really want to retain cash? I don’t.

WIllem is not the first economist to think about getting rid of cash. But he may be one of the first to think about getting rid of cash in a technological era that actually makes it entirely feasible. It wasn’t feasible when Hayek was thinking about it in 1970s, or when I was thinking about in the 1990s, but it is entirely feasible in the 2010s. Why? Well, there are two key technological developments that make Willem’s vision more than science fiction: in fact, some might say, make it more likely than not. These developments mean that we can overcome two key barriers to cashlessness — POS density and anonymity — in ways that can deliver more functionality than Willem might expect.

Let’s rehearse the key barriers pulled from the piece above (we are not going to look at the seigniorage revenue lost to government as a barrier). To make something “cash like” then you have to be able to use it pretty much everywhere (you need a high POS density) and you need to be able to make small transactions in private, without being tracked, traced and monitored. There are two ways in which the technological developments of the last two decades have addressed these key objections and now put us in a position to be able to take Willem’s ideas and implement them.

The first is the mobile phone. We are already seeing the launch of mobile phones that can replace payment cards (there are 40 million of them in Japan already) and provide prepaid “e-money” accounts (M-PESA in Kenya, provided by mobile operator Safaricom, has over six million users already). But the strategic impact of mobile phones in the payment space is yet to come. Yes, mobile phones can be payment cards and that’s great. But mobile phones can be also be payment terminals. Or to put it another way, you can use a chip and PIN card to pay, but you can use a mobile phone to both pay and get paid. Since we live in a country where, essentially, everyone has a mobile phone this means that it is absolutely feasible to eliminate cash altogether. In this coming world, if I want to pay you a pound, I will do it by text message or mobile Internet and you will know immediately that you have the cash.

The second objection is that losing the anonymity of cash would change the relationship between citizen and state (and bank) in an undesirable way. I used to think that this was true, but now I’m not so sure.

Thinking about anonymity again, my experience back in the day was that, for different reasons, neither the consumers, nor the banks, nor the retailers, nor anyone else actually valued anonymity at all. So if you put it in a tick-box, some people will tick it, but that’s because they haven’t really thought about it. Once they had though about it, their interest in anonymity plummeted.

[From Digital Money Forum: Nymity vs. anonymity]

However, as noted, advances in cryptography mean that the apparent paradox of security and privacy is easily resolved. We can use cryptographic blinding, virtual identities and so on to achieve the desired goals: it seems a paradox, but we can make secure e-payment systems that are mathematically incapable of revealing the identity of the user, systems that will mathematically disclose ownership in the event of misuse and a variety of other options. E-cash can do things that notes and coins can’t.

Whatever economists decide is the best way to handle cash, we already have the technology to deliver.

If this is true, then what the academics would call “the narrative” is missing. What is the Kashklash narrative?

It’s one thing to say that it is place to discuss the possible future ecosystem of exchange, but that’s not a “story” for the man in the street, if you see what I mean. Shouldn’t the story begin with a big issue, something understandable, something that merely by being posed suggests new ways of thinking? I probably have a very specific perspective, but I think the “future of money” is a good place to start.

The debate about the future of money is not about inflation or deflation, fixed or flexible exchange rates, gold or paper standards; it is about the kind of society in which money is to operate.

[Herbert Frankel of Oxford University]

When it comes to payments I have, over the years, developed a clearer picture of the narrative. I think there is a story, and the story is that the goal of the payments system is to minimise the total social costs of payments within the economy. That’s short and sweet, and I can defend it. But what is the goal of money? A few years ago I would probably have said something along the lines of money being about economic growth. Now, I might say its goal should be, what? Price stability? I’m not sure if I can reconcile the goal of stability with the implementation of either government control or a complete free market.

I came back to thinking about these things because I happened across a debate on the ethics of money production over at the Mises Institute. The blog discussion concerns the book of the same name by Jorg Hulsman that you can download from the same place, and it will certainly provide you with an interesting (albeit perhaps a little polemical) perspective on the topic. Have a look at “Dead End of the World Paper-Money Union” on page 235.

Nursultan Nazarbayev, Kazakhstan’s leader [called] for every member of the United Nations to adopt the “acmetal”. The president said the name of his proposed currency was an amalgamation of the Greek work “acme”, meaning “the best”, and capital. So confident is he in the success of his new currency that Mr Nazarbayev predicted that the world would soon be talking of “acmetalism” instead of “capitalism”.

[From Global currency 'could save world economy' - Telegraph]

President Nazarbayev is not the only world leader to be experimenting with new forms of money, albeit for different reasons.

Cimarrones, or the Cimarron, joins 10 other alternative currencies currently in operation across Venezuela. They are circular cardboard tokens with a picture of a runaway slave on them. Supported by Hugo Chavez, the country’s president, the new currencies are aimed at tackling poverty and establishing new economies. The currencies can’t be exchanged for the Venezuelan currency, the bolivar.

[From Venezuela’s Currencies Promote Cooperation Not Competition | NowPublic News Coverage]

These currencies are used to mediate barter in “prosumer” markets: you can’t get the currency in order to buy things without producing things. And I doubt that they will turn Venezuela’s social economy into an economic powerhouse. But imagine something along these lines at Internet scale: currencies that are specific to particular markets, that you can’t obtain without bringing things to the market.

Using currencies to make barter work more efficiently, however, might well change the game. There are some parts of the world where barter is a recognised part of the B2B marketplace, and you can’t help but wonder if these markets were made more efficient by the introduction of barter currencies.

Advertisements are beginning to appear in newspapers and online, like one that offered “2,500,000 rubles’ worth of premium underwear for any automobile,” and another promising “lumber in Krasnoyarsk for food or medicine.” A crane manufacturer in Yekaterinburg is paying its debtors with excavators.

[From Have Car, Need Briefs? In Russia, Barter Is Back - NYTimes.com]

Perhaps there’s something special about the Russian market, because barter was a an entrenched payment system in Soviet times so it has proved easy to resuscitate in a time when money is in short supply, or perhaps there’s a tradition of ad hoc solutions to economic stagnation and this tradition has settled on barter as an effective solution.

Russia’s liquidity crisis is so bad that giant factories and regional governments are conducting commerce using barter — trading underwear for cars, food for construction work, etc. The ruble’s in short supply, first because the government’s bought up a ton of money to keep it from collapsing, and second, because there is so little confidence in banks that many people keep their savings in safe-deposit boxes or mattresses, rather than savings accounts.

[From Russian heavy industry gives up rubles, takes payment in barter-goods - Boing Boing]

Whatever the reason for the lack of money to support a market, I think there is a link between more sophisticated, e-enabled barter currencies and local marketplaces of the future. “Local” means something different in the future, remember. It might even be defined by the community of prosumers who share a particular barter currency.

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.

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).

Jolly conversationalist at Lift09

Over the last few months, Franco and I have been thinking about what makes a project – a design or service design project, for instance -  fall into the camp of social and ethical design. From that we ended up thinking that those categories needed to be enriched further to consider the actual outcome of the thing that is being designed and launched on the world.

Franco met up with the Kashklash crew at Lift09 and a jolly conversation started about how the ideas we were playing with could interact with Kashklash. At the core of the conversation was the nature of value co-creation, both in social enterprise and in a world beyond a monetary economy. During our discussions we found that new ideas of value and relationship are the starting point for defining a shared perspective on how society could evolve through initiatives and action outside of established institutions.

To invite further discussion, we are posting below the initial thinking we have done on a set of principles and guidelines to support the formation of ethical / sustainable social enterprise services. (With contributions from Heather, Irene and Mark..thanks!)

1. Does the initiative help people use time to their best advantage?
2. Does it strengthen relationships between people?
3. Does it have a clear socially* beneficial mission (or in the absence of clarity, a positive trajectory in a socially beneficial direction)?
4. Does it produce more for a community/society/environment than it takes, including balance of profit distribution v. social reinvestment?
5. Is the initiative and its outcome sustainable in the long term?
6. Are the workings transparent, including products, processes, consequences? Are there processes in place to protect and steward the socially beneficial intent and outcomes?
7. Is it at least neutral for people who don’t use it? (i.e. doesn’t permanently reduce resources for non-users)
8. Is the result of any accumulation process socially positive?
9. Does it reduce barriers to access? Does it make things easier? Is it accessible in the broad sense of the word?
10. Is there no unjustified and/or artificial barrier to entry or exit?
11. Does it respect human rights and the culture it is in? (Although these may be in opposition, in which case, we believe, human rights should prevail.) Does it value diversity?
12. Does it build and substantiate trust and collaboration?
13. Does it foster socially positive, sustainable use of the data/information it generates?
14. Does it provide/use a means of value exchange that is appropriate to the context?

Further elements to be considered include:

1. Does it leverage and / or facilitate local ownership and economic development?
2. Is it scalable?
3. Is it applicable in different contexts/sectors?
4. Is it culturally adaptable?
5. Does if follow best practice in user-centric design?

*social used to indicate social / environmental throughout

We started this project focusing on the way social enterprise services can be designed to “create sustainable business-driven solutions to societal problems” (Paraphrased from http://www.goodcap.net/faqs.php), but we feel that the framework can be applied to all projects that aim to benefit society at large.

In application to a given initiative, we realise there will be specific additional principles, such as those that could be appended in relation to the creation of a digital exchange framework. We offer this to the discussion of the future of digital value co-creation and exchange. Further comments welcome.

-Franco Papeschi & Tory Dunn

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?

Get a digital copy of the kashklash booklet. If you need the high resolution version, just ask, we’ll be happy to send it to you.

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.