Free international and local currencies may soon ride roughshod over conventional cash, suggest David Le Page and Donna Block
Anyone who doesn’t cash in all his or her South African Airways (SAA)Voyager air miles by January 15 stands to lose them.
Just kidding!
But the sensation of panic this possibility offers gives some key insights into how money and economies may evolve after 2000.
Following a century in which, for the most part, governments have controlled money and economies, or at least believed in their own ability to do so, the 21st century may see them losing that control. But it is likely to be an ugly and hard-fought battle, pitting libertarians and bureaucrats, privacy advocates and surveillance mandarins, central bankers and free marketeers against each other.
So why mention air miles in the first place?
Air miles are a rudimentary new form of currency. They are standardised units redeemable for a range of goods and services, and can sometimes be exchanged with other parties. The Internet is proving to be fertile ground for the growth of such experimental currencies. Consumers can gain credits on one site which are redeemable at others. No conventional cash is involved.
The value of air miles, as much as any “real” currency depends on confidence in the issuer – SAA. In many countries, they are taxed as if they were real earnings. If SAA seemed about to go bust, nobody would want your air miles. Everyone who holds them might rush to redeem them – much as there can be a run on a bank. The origins of central banks were in collaborative banking clearing houses intended to prevent such crises.
In the early to middle years of the 20th century, central banks and governments began to realise that they had considerable control over economies. By fiddling with interest rates, money supply can be increased or decreased, influencing economic growth. But such control depends on the banks’ being the sole issuers of currency. However, banks have no control over air miles or any other new forms of Internet currencies.
Technology is making all these transactions increasingly hard to keep track of. As one economist points out, “The day will inevitably come when the amount of effort required to breach low-cost, widely available encryption will become so impractical that it will not be economically feasible. Governments of the world will have to accept their impotence in prying into their citizens’ economic affairs.”
And Mervyn King, deputy governor of the Bank of England, said in August: as new currencies develop on the Internet, soon “the successors to Bill Gates [will] have put the successors to Alan Greenspan out of business”.
Ever-increasing numbers of consumers will not only use these new types of currencies, but will increasingly use smart cards and credit cards to make purchases and pay their everyday bills.
Globalisation has given the consumer the ability to purchase goods for the best possible price from far-flung places. Those who have the wherewithal to maintain hard currency credit or bank accounts are playing the foreign exchange game with their fantastic plastic. But consumers will not only be taking advantage of the best foreign exchange rates; they will be using “e- money”, which can be encrypted and anonymous, leaving governments and regulatory authorities in the dark. As one analyst notes: “When that develops there’s nothing to prevent people from engaging in economic activity over the Net without leaving a record for the government to track.”
The advent of e-money could be a tremendous boon for bankers. Blue-chip consulting firm McKinsey & Co. has found that converting consumers to electronic transactions could save more money for banks than their merger-driven efforts to close down branches. As much as 55% of a retail bank’s costs come from cheque processing and other payments. Converting to electronic alternatives could cut those expenses by up to 90%.
But there are also tremendous risks to the development of e-money. Being anonymous, it could aid drug-dealers, black marketers and those seeking to avoid detection by law enforcement.
That’s why the United States government, in co-operation with other leading industrial countries, is carefully monitoring e-money developments and advocating payment schemes that allow bureaucrats to identify suspicious transactions. Regulators are fearful of the consequences if organised crime, terrorists or an enemy state found a way to crack a popular form of electronic currency.
At the same time as the Internet is internationalising money more than ever, and creating the space for new forms of currency, imaginative communities are realising the value of creating local currencies redeemable only within small geographic areas.
In the small university town of Ithaca New York, Ithaca “HOURs”, valued at $10, are used as a parallel currency to the dollar, encouraging locals to trade with each other for goods and services, rather than going outside the area. HOURs are exchangeable for everything from plumbing to firewood, movie tickets, hospital services and rent.
“Ithaca’s new HOURly minimum wage lifts the lowest paid up without knocking down higher wages. For example, several of Ithaca’s organic farmers are paying the highest commmon farm labour wages in the world: $10 of spending power per HOUR. These farmers benefit by the HOUR’s loyalty to local agriculture,” says an HOURs co- ordinator. Similar local currencies, in which part of the proceeds of the system go to community projects, are planned for London and Manchester.
The point of such currencies is to preserve money’s functions of being a standard of value and means of exchange, while eliminating its use as a store of value or a means of speculation.
Hoarding is best discouraged by making the currency a “negative interest currency” – the longer it is unused, the more value it loses – so that spending, and hence economic activity, is encouraged. Of course, the existence of local currencies will often depend on the consent of central banks, which squashed successful experiments in Austria and Germany in the 1930s.
Such systems exist in different forms. In Brazil, in the 1970s, the introduction of tokens swapped for recyclable rubbish and exchangeable for public transport appears to have helped transform the city of Curitiba over the last 30 years into a clean, prosperous and modern metropolis, which is financially self-sufficient.
There may be in the future a curious cooperation between global and local currencies. For the embarrassing persistence of poverty in the modern world makes conventional money unlikely to disappear in a hurry. Poor people do not have the resources to manage virtual currencies and prefer the security of cash.
But community currencies offer the hope of overcoming the world’s growing “wealth gap”, without ineffective centralised intervention. Fortuitously, the tools of the “new economy”, smart cards and the Internet, are considered by many of its proponents to offer the best prospects for managing and popularising the concept. The return of negative interest, non-hoardable local currencies, first used in ancient Egypt, might some day hasten the substitution of Internet currencies for hard, physical cash, establishing the money of the future that is the stuff of high-tech dreams.