Umair Haque / Bubblegeneration
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Tuesday, November 16, 2010

The Future of Money

So what does this great crisis say about the future of finance--to begin at the beginning, about the future of currency? Here’s a thought. Its first great lesson is that it's time to, finally, unbundle money--and doing so is a surefire path for radical institutional innovation.

To unpack that rather cryptic statement, consider some finance 101. Money has several functions.

  • It’s a store of value.
  • It’s a medium of exchange.
  • It’s a unit of account.

Here’s the problem. All of these functions are bundled together into a single (for lack of a better word) asset: currency. Sometimes, these functions are complementary. When times are predictably good—when expectations are optimistic about prices, wages, and future wealth creation—an asset that’s a store of value, a unit of account, and a medium of exchange reduces transaction costs. You can store your (rising) value and conduct your exchanges, with a handful of notes.

But when times are bad--or, crucially, if we admit the possibility of Black Swans--the story’s very different. When expectations are pessimistic about prices, wages, and future wealth creation—when the quantity of money exceeds output, productivity, etc—the three functions of money conflict with one another. You’d probably want to store your value elsewhere. You’d probably want a medium of exchange that reflected long-run time horizons. And you’d probably want a unit of account that reflected your own potential productivity, or at the very least, long-run potential social productivity--not just "the market's" contagion-driven, pessimistic opinion of it, this myopic nanosecond.

Now, that’s all pretty abstract. So imagine, for a second, three very different kinds of notes. With the first, you can stock up value you’ve earned, inherited, or bought—and if you want to exchange it, you’ve got to transform it into the second kind of currency (or pay a Tobin Tax, etc). With the second, you can conduct day-to-day transactions—but accounts aren’t kept in it. To do that, you’ve got to exchange it for the third: with the third, a continuous, transparent, real-time account is kept—of how much real wealth a single note can be exchanged for.

Now, that’s all still pretty abstract. So think about it this way. You have three kinds of notes in your wallet. The first you use at the grocery store. The second, at the bank and in the financial markets. The third, between your employer, the state, and public services. Each has very different volatilities and trajectories, because each has very different levels of supply, demand which are, crucially, independent from one another—but interdependent on real wealth, long-run productivity, etc.

That’s the future of money. Make no mistake: the efficiency and productivity gains in terms of information, transaction, and interaction are probably too significant to ignore. Will we get there? Sure we will—it’s just a question of who wants to be an institutional innovator first, and reshape their economy for resilience.

-- umair // 6:04 PM // 14 comments


Interesting idea, but you overlook a crucial fact: what we value changes over time, so there is no perfect way to store value. In fact, the more I think and read about currency, the more convinced I become that its problems are related to central management. I mean, all these Fed dudes and their ilk are madly trying to do something, anything, to "solve" the problem but their acts all seem to be in vain (and almost always have been). I confess, I do not have the answer, but to your point, I would say we already have multiple currencies for different purposes (stocks, bonds, etc.). Not sure we need more.
// Anonymous Jeff Shattuck // 6:46 PM

Do you think it's possible that the central banks' monopoly on currency will not exist in the future?
// Anonymous Anonymous // 9:11 PM

Umair, How do we have them be independent from each other? In the end don't we have to convert them into exchangeable media in order to exchange them for value? In other words, all we would do is hold different currency in a different account and pretend it doesn't change value like the more volatile other currencies, but to use the money we have to convert it so at any given moment its actual value is in fact fluctuating with the other currency.

Another thought is that we do have one option to store value in a different format now in the form of investing in ourselves. We can convert currency or time into education and skills such that our ability to add value to others' lives is increased, not to mention our own eternal worth. We then can convert that stored value into currency by adding value to others' lives for which they pay us.
// Blogger Ben Pack // 11:48 PM

keep going with the 3 different kinds of notes, please. it's still a bit abstract to me and i'd like to understand.
// Anonymous amanda judd // 2:36 AM

I think a major problem - that cuts across all these, is that the currency system is set up so that whoever lends the money into existence gets to leach value out without putting any in.

The whole system is designed to be parasitic... it's designed so that rich people get something for nothing.
// Blogger Nick Taylor // 3:33 AM

We just made a video called The Future of Money which explores some of the emotional sentiments around the future of money from the perspective of young people. It was presented at the SIBOS financial conference in Amsterdam earlier this month. Most of the bankers there barely connected with the themes in the video. Some of what you're saying here about multiple complimentary currencies resonates with Doug Rushkoff's perspective in the video. I think you and your readers will enjoy it.

-Gabriel Shalom, KS12
// Blogger Gabriel Shalom // 9:00 AM

Currencies are homologating, not diverting. Witness the Euro, and discussions of other regional currencies. This is because of the inefficiency of currency exchange (time and cost). People are definitely not going to want to concern themselves with three types of money, which is why this will never happen.
// Blogger Kirk // 10:27 AM

Interesting segmentation. I guess institutional innovation is in fact key to getting us out of the mess we are in. With currencies, though, we are speaking about one of the fundamental state monopolies. Segmenting money into its three functions would probably open a space for competing currencies (community currencies, local currencies, ...)

I still do not see it happening soon
// Blogger Luis Alberola // 12:21 PM

I like the idea. I would need more information before I would be convinced. But I think a very important point that is made here by Umair is that the monetary system that we currently have does not give value where value is due. We need a system where those that give back to society are rewarded for their actions. For instance a marketing executive for a cigarette company get paid far more than a nursery school teacher, or the guy that cleans out our sewer system. And yet society NEEDS teachers and the sanitation works but society DOES NOT NEED the marketing executive. We need a system that rewards those that give back to society, rather than those that leach from it.
// Anonymous Andy Sontag // 6:53 PM

Fortunately, we already have disaggregation of the store of value component. Most of us don't save our money in savings accounts simply earn the rate of interested. Instead we invest our money in companies, commodities, non-monetary debt (corporate bonds, etc), and other assets that are not monetary in nature. These assets are accounted for in terms of money (3rd function) but they are not themselves monetary stores of value.

The big issue that is often marginalized is contracting. We devise our contracts in terms of a monetary unit that fluctuates in value based on the arbitrary decisions of the central bank. You might say this falls under the "unit of account" umbrella but it rarely receives the explicit attention it deserves.
// Anonymous Gregory Rader // 7:06 PM

It's an interesting thought experiment, no doubt.

My question is, why wouldn't you get 1000 types of currency as soon as you get two?

It seems like to have 3 types of money, with independently moving markets, you would need a to have a great platform for trading. Extremely liquid, instantly accessible, absolutely 0 fee/spread trades, built into every system that accepts money. It would have to be instant, since you wouldn't want to have the medium of exchange money for longer than necessary.

Once you have that foundation it would be very hard to stop. My Best Buy gift card could have a floating exchange rate with USD where the asset's value is determined by Best Buy's continued popularity. As long as Best Buy has TVs, the notes would be a store of value (but not a medium of exchange until it was traded for a commonly accepted asset).

Why wouldn't Best Buy offer this if the option were available? And for that matter, why not every city or town?
// Anonymous Nicholas Molnar // 7:15 AM

Today we have some cases when money is a medium of exchange!:

I recommend this book:
// Blogger Marlon Ortiz // 9:17 PM

Mr Haque, you forgot one crucial function.
Money is an incentive to create value. Labor is monetized by the State (the monopoly issuer), so citizens can earn currency to meet their tax liability. I think you cannot have a discussion on the future of money, if you omit the issuer and taxes.
// Blogger Rik // 3:16 PM

I don't know much about all this, but I think Ben is right. How would you earn these different 'independent' currencies. And how can you determine how much you need of a single one of them. Would be hard, I think, and therefore one has to be able to exchange them with each other.

Another thing is: As much as I know, the value of money was pretty constant, when it was based on the value of gold. That is, a natural constant was given. By making it independent of such a fixed 'constant' or at least a predictable one, who would say how much you get for your note?

Bet besides all this, if men and women, who seem to know nothing about moral, social responsibility and humanity and who will do anything to tell us, their goal is to the best for us, by kicking our a***s at the same time and always look for this virtual value 'money', if those people control the system we are living in and with, no currency will change anything. Independent of how many there are.
// Anonymous Joe // 6:21 PM
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