It’s all too common. At the front of the room, an enthusiastic futurist or entrepreneur is at work setting up a vision of future finance in which all money is digital and banks are increasingly redundant. Whether at a fintech conference or the like, it’s this idea that is frequently set against the backdrop of–what I believe to be–a highly flawed folktale about the origins of money and banking. It’s a vision that casts money as a type of quasi-commodity and banks as just the intermediaries, moving this object-like “thing” around. If they’re just money go-betweens, then banks can be out-competed and disrupted by newer, nimbler intermediaries, right?
If you have a false picture of the history–and current reality of–money, your idea about what constitutes its future is bound to be flawed. For big banks, the digital format is just a different way of doing business-as-usual, a continuation of centuries-old practices. Believe me, banks are nowhere close to becoming obsolete. Actually, they’re probably getting stronger.
That’s not to say that we can’t design interesting, alternative money forms–provided we start challenging the standard stories about money’s past. This is not meant as a pedantic historical exercise either, but as a way to point out deeper approaches to changing the future of finance.
The standard money story inevitably goes something like this:
“In the beginning there was barter, with people trading chickens for corn. Then people invented money in order to deal with the inefficiency of this. They nominated a particular commodity to be a universal ‘store of value’ and means of exchange for transactions between all the other commodities. Precious metal coins satisfied the characteristics necessary for this, but at some point we started using paper money, which isn’t really a commodity but is still a store of value. And now we are moving to digital money, a world where money is “‘dematerialized,’ becoming mere bytes of information “¦ “
The idea here is that money was rationally “invented” to facilitate trade that was already happening. The typical tale always starts by saying that the default mode of ancient exchange was barter, after which people got so irritated by its inefficiency that they developed money to replace it.
It’s a story that’s repeated by nearly every business media outlet and in every economics textbook (sometimes with variations from gold bugs who insist that the only real standard for measuring wealth is with precious metals). Check out this Wired thought piece by Michael V. Copeland, a partner of top venture capital firm Andreessen Horowitz, in which he says:
“There was a time when people happily used chickens, pigs, or a nice pile of lumber as payment for a cow, some clothes, or anything else of value. And then some smart people got behind a breakthrough–they introduced currency.”
You should be intensely skeptical about all of this.
The first warning sign is the barter story. Superficially it seems to make sense, but there is very little evidence that it has ever been a dominant form of exchange, and the more you think about it, the more absurd it seems. For example, have you ever noticed how people always use agricultural goods to illustrate historical barter? Anybody who has studied basic anthropology realizes that in many premodern agricultural societies people were largely self-sufficient. It is very unlikely that you would find yourself in the strange situation of somehow having raised chickens while having neglected to grow cereal crops.
But let’s hypothetically say you did find yourself with a surplus of chickens and a corn deficit. In many ancient societies people did not own land–and therefore did not “own” the things they produced. That’s all to say that they were not in a trading mindset. Rather, they might collaborate in production within a hierarchical patronage system where a chief took whatever surplus there was and redistributed it, much like a patriarchal father decides who gets what in a family. If exchange occurred between people considered to be equals, it was more likely to happen via ritualistic gifting or informal reciprocity systems.
Reciprocity–which exists to this day–is informal scorekeeping between people who know and trust each other. It’s along the lines of: I’ll help you build a house now, and in a few weeks you can help me build a house. And if you don’t, things are going to get awkward between us.
It was 17th- and 18th-century philosophers like John Locke and Adam Smith–gazing out windows from where they sat in their urban studies thinking, “I wonder how strangers engaged in the specialized trade I now see when they didn’t have money”–who popularized the idea that barter was the primordial mode of exchange. It didn’t really occur to them that trade in specialized goods between strangers might be a result of money, rather than something that required the invention of it. Perhaps money catalyzed trade that otherwise wouldn’t exist.
One of the reasons why the barter myth stubbornly persists is because it’s part of a paradigm, a group of mutually coherent ideas that work together as a whole within economics. The barter myth is essential for establishing the idea that money is a special kind of commodity, which in turn is essential for maintaining the traditional story about banks as mere intermediaries that move this commodity around. The traditional Banking 101 story tells us that banks take money via deposits from savers, then lend it to borrowers and–as a side activity–enable those depositors to move it to one another through the “payments system.” It is this precise story which enables entrepreneurs to forecast that banks can be “disintermediated” from the payments and lending system.
Do yourself a favor and ditch this paradigm. Especially if you want to participate in changing the future of money.
Step 1: Disrupt your ideas about monetary history.
There’s no point here trying to establish a once-and-for-all history of money (if you’re interested in exploring that, see the work of Ingham, Graeber, and Martin), but the first step in designing monetary alternatives requires challenging historical dogmas.
Ever wondered why historians and museums fixate upon coins? That’s because coins are made of durable metal and thus have a predictable tendency to show up in the archaeological record. The British Museum’s money room is full of physical objects, but that’s only because it’s impossible to display non-physical “scorekeeping” systems (like the aforementioned reciprocity) in a public-viewing setting. It’s why generations of school children walk through hallowed museums, being taught that: In the past, money was all these beads and metals “¦
The standard economics story describes ancient coins as spontaneous eruptions of economic necessity, but it’s equally plausible that they were political creations related to war, tokens stamped with the faces of powerful monarchs who sent soldiers to lands where they were surrounded by strangers who did not trust them. Conquering monarchs demanded tribute and taxes, perhaps paid in these tokens they sent along with their soldiers. How could you get the tokens? From the soldiers by providing them with food, for example.
And those paper notes we use? People often associate them with states, but paper money was often privately issued by wealthy merchant traders and banks as promises that eventually came to circulate in trade. It was only when financial and political elites got together to establish central banks that paper money issuance was centralized in states.
When we start to delve into monetary history, we quickly realize that many things considered futuristic–like privately issued alternative currencies–have actually been around for ages.
Step 2: Abandon the idea of money as a “store of value.”
Secondly, you need to challenge the sacred idea that money is a store of value, or that is ever has been. It is much more useful to conceive of money as a socially and politically constructed claim-upon-value. If you’d like to understand this argument, I wrote a short blog post about it, but the summary is this: Money derives all its value from the things it enables you to get. It does not hold the value, but rather enables access to that value.
Imagine you walk into a coffee shop. Monetary transactions essentially involve someone exchanging a real good or service for a claim or token that grants them the ability to obtain goods or services in the future. So, you get a coffee by giving the shop owner an abstract value claim that enables them to, say, get a beer later if they so wish. If the owner decides to burn that money, no value is destroyed. All they’ve destroyed is their personal ability to claim value in the future.
Step 3: Understand the different ways this claim is represented.
To get a bit more sophisticated, let’s distinguish between the two ways of representing monetary claims.
a) First, a claim on value can be represented in physical form, like with a paper note that literally moves between people. In this setting, “getting rich” means accumulating physical tokens. Imagine Scrooge McDuck, swimming in his money bin.
b) Alternatively, claims can be recorded in text form on a ledger system–a formal scorekeeping account where they’re written down next to the names of particular people in some kind of notebook or database. Here, “getting rich” means accumulating a high score next to your name on the ledger, and your “moving” money means sending messages to whomever controls the ledger so they can edit it and thereby attribute the money to someone else.
In our current world, the state controls the physical token method in the form of cash; the banks control the ledger method in the form of your bank account.
Step 4: Understand the role of banks. (Be warned, this can seem complicated.)
In the past, banks ran these ledger systems by literally writing people’s names down in accounting books that acted as records of how much money was attributable to any one person. People altered the ledger by going into bank branches or sending checks (documents ordering banks to pay a specific amount of money from one person’s account to another). Nowadays, the exact same thing is facilitated on digital databases that you alter by sending secure messages to your bank via your internet banking page or payment card. Money still moves when banks edit private account databases that they control.
But there is a little catch to this. The dirty (not-so-secret) little secret is that commercial banks do not merely record and edit money claims for people, they can also create new ones. This is sometimes called fractional reserve banking or, more accurately, credit creation of money. In essence, the system works like this: The central bank creates base money, and then commercial banks issue their own money on top of that simply by recording it into existence within accounts they set up for those who “borrow” from them. Confidence in this system is maintained via a system of reserves and ratios, given boring-sounding technical names like “Basel III” and “capital adequacy ratios.”
Don’t worry if you don’t understand this yet. It takes a while to get your head around it, but for now focus on this one implication: You cannot separate banks from digital-electronic money. It is impossible to wrench away digital U.S. dollars from banks, because by definition digital U.S. dollars are units recorded in the data centers of U.S. banks.
The overexcited futurist might breathlessly say that–compared to the 1960s–the substance of money has fundamentally changed, becoming electrons moving through wires. No. Digital money is not in the wires, or the fiber-optic cables of the internet or telecommunications system. The cables merely convey messages destined for the bank data centers where money is stored, like it has been for centuries, as an entry in their ledgers.
And that data entry has power, because it finds itself within a legal, social, and political system that gives it reality. You can record money as information inscribed on physical objects, scrolls, or a computer, but the recording itself is not sufficient to make it work.
Step 5: Now you’re ready for actual disruption
We live in a world in which money is a hybrid creation of states and commercial banks–acting in alliance with each other to manage a powerful social construct upheld by us all. In this context, what many startups call the “future of money” often just means “how you might interact in new ways with bank databases,” whether that be via mobile phones or signals triggered by a biometric fingerprint reader. Now don’t get me wrong, this has lots of implications–many of them negative–but if you’re serious about actually changing money you need to go beyond this superficial user-experience layer and dig deeper.
Want to disrupt money? Your choices are as follows:
Rather than adding new ways to interact with the bank ledgers, change the power dynamics of who controls the ledgers. Cryptocurrencies like Bitcoin actually do this, replacing centralized ledger systems with decentralized ones (at least in theory). The bank-payments system is one where a limited number of banks control access to private databases that “keep score” of your money for you. The Bitcoin system is one where a much larger number of your peers maintain a public database (called a blockchain) that is used to tally your digital tokens for you.
Change who gets to issue money on those ledgers. Check out, for example, mutual credit systems like Sardex, where small businesses get together to issue money as credit to each other. Everyone starts from zero in the system, and then goes into and out of short-term debt to one another by either receiving goods and services–which creates a future obligation owed–or by being prepared to offer goods and services to people on the system, which earns you positive claims on others–otherwise known as money.
Change what it is redeemable for. Check out local currencies like the Brixton Pound that take a normal currency type and limit its usage to independent businesses within a local area. If designed properly, such systems can both boost customers for local businesses, while also providing those shops with a powerful symbol that shows their commitment to a local economy–something that big corporate retailers will never do.
Change the internal properties of money. Check out demurrage systems like the Chiemgauer, where the money claim literally disintegrates if you don’t use it. Such a system can be useful in recessionary times when people hoard money and therefore stop others from being able to provide goods and services. (Remember, money is a claim on value, so if you stop its circulation, you stop others from working to provide value.) An interesting historical example of such a system is the Worgl experiment.
Alter the financial institutions that dominate the standard money system. You needn’t necessarily change the money itself if you can build socially responsible banks and financial reform initiatives that alter how normal money is issued. Regular banks pump credit into other financial institutions, large corporations, and housing, often oblivious to the systemic effects of this (remember the financial crisis?). Social banks with explicit ethical outlooks are much more likely to issue credit responsibly, into areas like renewable energy infrastructure that have long-term benefits.
Find ways to bypass money entirely. Gift economy systems like Streetbank try to (re)engineer systems that are not based on explicit measured exchange, but rather on generosity toward those in need. There’s no point in romanticizing these systems, but they’re a welcome change in a world obsessed with everything having to be earned.
As I see it, perhaps the most disruptive forms of alternative money would combine the above with a decentralized ledger system issued via a democratic decision-making process (something that Bitcoin does not have); it would only be redeemable for goods and services from enterprises that don’t wreck our planet or sponsor injustice, and would be supported by financial institutions with explicit principles of sustainability. We are some ways off from that, but hopefully this gives you an opening glimpse of what a truly alternative future of money could look like.
How We Get To Next was a magazine that explored the future of science, technology, and culture from 2014 to 2019. This article is part of our Made of Money section, which covers the future of cash, finance, economics, and trade. Click the logo to read more.