The Future of Money?

In this blog I want to resurrect an idea that I first published in the Financial Times over a decade ago: Off-Planet Banking!

Oh, if only money could talk … would it say goodbye?

We all know what money is, don’t we? Money is the notes and coins that governments print and mint to facilitate economic transactions. Money is a statement of faith in the value of instruments of exchange. Bearers of such instruments believe the promise that, on demand, or soon after, they may exchange amounts of that money for goods and services to the value specified, or for alternative promissory instruments to that value.

Most of us in advanced economies assume that every commercial transaction requires money! But does it? Barter is primitive! Or is it? Surprisingly, spontaneous new forms of barter and exchange are occurring all over the Internet, by-passing money at least in part. House owners swap properties for vacations. Social networks, appearing in games like World of Warcraft or Facebook, leak out into the real world, and on the basis of newfound friendships, exchange advice and barter services. Why bother? The recipients of such ‘favours among friends’ don’t need to dip into their savings, and they avoid the need to pay sales taxes; and the seller was paid with a promise of reciprocation that carries no burden of income tax.

Bartering is just the start. A shared sense of trust is all it takes to create a currency. Local communities have such trust in abundance, so they can issue their own notes of credit that will pay for goods and services in and around the locality. The idea of a Local Exchange Trading Scheme (LETS) was first introduced in Canada to kick-start the local economy of a depressed mining community, which boasted a high degree of internal community trust. They cut right across the vicious circle of untrusting formality that is the banking system. Banks work on credit-worthiness calculated on formal employment status, or ownership of capital goods. When you are not credit-worthy, the cost of borrowing goes up, and you become even less credit-worthy. With LETS the uncredit-worthy get credit.

LETS need trust; trust needs a sense of community; social pressures in a community ensure that all debts are repaid, reinforcing a virtuous circle of communal trust. A closed community can play this non-profit zero-sum game for the mutual benefit of all. Everyone starts at zero, and keeps track of debits and credits by double entry bookkeeping of IOU tokens. Usually measured in hours of work, these tokens assume that an hour’s labour is the same, no matter what the work; baby-sitting, gardening, window cleaning, hair-dressing, consulting. However, as the market for such tokens got more sophisticated, some schemes have introduced agreed differential rates to pay for more highly skilled work like doctoring, accountancy or advice on computing.

The idea of token money is not a new idea. It was the origin of bank notes. Chinese family businesses, which have spread across the globe in many diaspora over the generations, use Fei-Chien (flying money) to bypass the national financial regulations of their host countries. A huge underground banking system based on a code of trust has developed within the worldwide Chinese community. In India the system is called Hawalha (Hindi for trust) Banking. These systems are as old as money itself, and far more ancient that what we would call banking.

How does hawalha work? The basic model is that a person in India (say) hands over a large sum of Rupees, and in return is given half a bus-ticket. He then travels to England where, at a prearranged meeting, he matches his half bus-ticket with the other half sent by mail to his contact. He is then paid in Sterling, a sum equivalent to his original payment – minus a fee. My Indian students tell me they would never bypass Indian Government currency regulations in this way.

This confused situation is becoming even more confused as new technology changes the nature of government money. Such money is becoming electronic information; mere strings of binary bits stored on a smartcard. Using this technology, now Global Exchange Token Schemes (GETS) are possible. What constitutes money will no longer be monopolized by national governments. “Money does not have to be created legal tender by governments. Like law, language and morals it can emerge spontaneously. Such private money has often been preferred to government money, but government has usually soon suppressed it” (Hayek). In the Information Age, in the age of Internet can government keep suppressing it? Hayek’s vision of the Denationalisation of Money can now become a reality.

The LETS (and now GETS) idea can become a mechanism for company money. Then buying and selling goods and services within the company community, employees and customers, becomes a form of transfer pricing, which like the above schemes are invisible to the taxation authorities. In devising loyalty schemes, supermarkets are basically the issuing ‘plastic money’. Companies can go much further. The real issue is not “dollar bills, but Bill’s dollars” {can anyone tell me the origin of this quotation?}; Bill Gates’ dollars. A company can issue a proportion of its equity as digital cash. Instead of the value of money decreasing as governments profit from the hidden tax of inflation, the value of money can actually increase if the company’s shares go up in value. Such alternative currencies can spring up anywhere. With networked tills accepting digital cash, the transaction costs of exchange will become insignificant. It will be of little consequence for traders whether there are one or one thousand currencies in circulation.

Such company schemes can be computerized and they can go global! And why be restricted to the globe? Why shouldn’t information wealth leaves tribal grounds and moves to the deregulated common grounds of space? Although both international law and domestic law are applicable to this 'Global Commons', operators can choose which domestic order is most favourable, convenient, and tax efficient. There “We need banking, not banks” {again can anyone identify the source of this quotation?}, so why not off-planet banking. Satellite companies have spare capacity. A satellite acts as a depository for digital cash, and hand-held PCs linked to ‘transceivers’ move cash anywhere, anytime. It will be secure because customers send not only their digital cash and other information capital, but also the digital safe that secures it – and they hold the only key.

The virtual reality of off-planet commerce beckons: this illegitimate offspring of 'pirate radio' and the 'flag of convenience' is not such a silly idea. Off-planet commerce will service any (information) product that can be dematerialized. Pop-records, films, books, newspapers, sporting events, software, money are all now just strings of binary bits. Payment can be by credit card (or soon digital cash), just like products advertised on CNN are sent by mail from warehouses based in low tax countries to minimize price and cost.

With only the most rudimentary telecommunications infrastructure even poor states can get in on the action – they merely act as tax-havens and data-havens for footloose organizations. There are no barriers to entry; this is hi-tech business by proxy. Previous disadvantages of the Third World, like bribery, corruption, incompetence and political instability, are obstacles no longer; since, except for a brass plate, a company has no physical presence there – business is all off-planet.

The big-boys of the G7 cartel can no longer use their technological superiority to keep the rich pickings for themselves. The Third World no longer has to plead for crumbs, it too can slice the cake. The OECD are already crying foul over the “unfair lowering” of tax rates and a “race to the bottom” that could lead to “fiscal degradation” of the tax base. They “ain’t seen nothing yet.”

These pressures will make a mockery of restrictions on international money transfers. Disintermediation and dematerialization are the key words. Strapped for cash, governments will tax anything in solid form: taxes on physical property will inevitably rise, and property values will fall. Frantic taxmen are even talking of a “bit-tax”: they intend to extort their share of this trade by taxing data flow by volume; just like they do with whisky. Under the smokescreen of chasing narco-dollars, the USA is using money-laundering laws to track down tax-flight dollars in Switzerland and Grand Cayman; Germany wants to staunch the haemorrhage of euros to Jersey, Guernsey, Liechtenstein and the Isle of Man. The battle has only just begun. Soon under-reporting of taxes will snowball into the total migration off-planet of a state’s taxation capacity.

But dematerialized E-cash is the ultimate in ‘liquidity’. If income or sales are taxed at ‘source’, that source will find its lowest tax level. If that tax is based on ‘residence’ then it can be collected only if the authorities have global access to data on international money flows. Off-planet commerce will purge itself of intermediaries who meekly report their audit-trails to governments. When there is a direct link between buyer and seller, like in the black economy, both sides have much to gain by keeping their transactions to themselves. Look to the horizon; through a sky full of laundered and untaxed dollars the Information Age is dawning. The rich individual is finally free of the grasping and ungrateful tribe, and will escape to what William Rees-Mogg calls “the greatest tax haven of them all, Bermuda in the sky with diamonds.”

The term ‘Capital Flight’ will take on a whole new meaning. The worldwide government conspiracy over the issuing of money will finally be smashed. Then, like in William Gibson’s science fiction novels, governments will try to ban money. The ‘control freaks’ of government will have finally lost the plot.

So we all know what money is ... or do we?