The Future of Money

The Future of Money

by Michael E. Marotta

Paper #3 for SOCL 202: Social Problems

Winter 2008 Dr. Ron Westrum

This paper ©Copyright 1996 by Michael E. Marotta originally appeared as “Money in the 21^st Century” in Loompanics Conquers the Universe: the 1997 Annual Catalog, Loompanics Unlimited, Post Office Box 1197, Port Townsend, Washington 98368, now defunct. In 1999, portions were purchased by the State of Kansas for a five-year reading level assessment of eleventh graders. The present version has been updated for historical accuracy. Also, the citations, all of those omitted from the previous publications, as well as new ones, were added for this paper.

In the 21st century, new forms of money will make possible accumulations of capital several orders of magnitude greater than anything today. We will see trillionaires and quadrillionaires.

The ways that people create, store, and transmit wealth define every major shift in social history. This is not Marxism, it is Capitalism. The common lot, the life of the average person (who may always be called a “serf”), improves. Life gets better. Life gets best, however, for those who understand the nature of money. Like electricity, money works according to objective physical laws. Only an elite few understand these laws. Most people do not even know that such laws exist: they survive hand-to-mouth on monetary superstitions.

Knowledge is Power

Until about 8000 BC, in order to be “wealthy” you had to have a herd to follow. Then, some woman invented agriculture.[1] Domesticating herds and crops made it possible to have more food than you could eat in a lifetime. The invention of agrarian villages brought new forms of social organization. Among these forms was the invention of taxation. Engravings from Babylon show people being beaten with sticks for not paying their taxes. The privilege of living in a world of predictable bounty from agriculture carried a price.

Also, about 8000 BC, a system of clay tokens was invented.[2] The tokens represented sheep, wheat, cloth, beer, and other products. The tokens allowed future planning – and the prediction of taxes. By about 4000 BC, use of these tokens led to the invention of writing and numbering.[3]

This, then, is the basic pattern. A new form of wealth (agriculture) brought a new form of society (theocracy) and two new forms of information transfer (writing and counting).

Accounting for History

The earliest written records consist mostly of inventories. When not tallies of taxes, the inventories are often part of contracts between merchants. Following the accumulation of capital that agriculture made possible, trade became the newest way to manage and accumulate wealth. A special kind or “class” of person discovered profit in carrying goods from place to place.

By 4000 BC, merchants invented (or discovered) metal money. This escalated the levels at which wealth could be created, stored, and transmitted. A shekel of gold (about 10 grams or one-third of an ounce) was the equivalent of a cow.[4] The value of a herd of cows could be carried in your hands. Metal also lasts much longer than a cow. Thus, the value of the animal in the here-and-now could be transmitted in both place and time. The rise of metal money accompanied improvements in record-keeping: cuneiform and hieroglyphics. Also at this time, the records show the first use of abstract number.[5]

About 700 BC, coinage was invented as bonus payments to the mercenary soldiers of tyrants.[6] The Greek tyrants were generally self-made men, merchants, who capped a successful career with civic service.[7] To do so, they had to overthrow the agricultural aristocracies. Coinage was the tool that made the revolution successful.[8] That revolution brought a rapid transformation from hereditary monarchy to tyranny, oligarchy, and democracy.

The written records from the ancient Greeks no longer consisted of the concrete listing of physical objects. The Greeks had also discovered the metaphysical. And the metaphysical is objectively real. So real, that by 300 BC, Philetairos founded the town of Pergamon with 9000 talents of silver from Alexander's treasury. This is about five million ounces at a time when an ounce of silver per month was an average wage for a soldier, a rower on a galley, or a citizen at assembly. Think of it as $7 billion.

During the Middle Ages, bankers invented double-entry bookkeeping and adopted Arabic numerals. They also invented money of account: pounds, shillings, and pence. These units originally had no physical reality. They were only constructs for tallying a confusing plethora of local coinages. More subtly, the books of a banker were regarded as a store of wealth. When bankers met at fairs, they could clear their accounts without ever touching a coin. In the 1500s, Spain looted the Aztecs and Incas, but the silver and gold ran through her ports like water through a sieve: it had already been mortgaged to the bankers of Holland and Germany.[9] Each shipload of hard money made Spain poorer.

The British colonies of North America had always been short on hard currency. They made due with paper. Just as metal money follows rules different than a cow so, too, does paper money have its own reality. Paper was well-suited to frontier life: it is easy to transport; it depends on inter-personal trust; it has no permanence. Americans moved mountains with paper. Coal, steel, railroads, telegraphs, everything that America became, derived from a generally correct (if intuitive) understanding of the power of paper money. From John Jacob Astor and Cornelius Vanderbilt to Bill Gates and Donald Trump, far more Americans became far richer, far faster, than anyone could have dreamed possible.

Today, we have an information-based global society whose proper form of money is digital cash. Electronic funds transfers and parking lot debit cards are only two expressions of this new medium. Just as cows and coins and paper changed the people who used them, so, too will digital cash reshape your world.

The Great Pyramid

Every day trillions of dollars in transactions cross the electronic networks as banks buy and sell currencies short term.[10] In a typical midwest American town like Pittsburgh or St. Louis, a nondescript, medium-size bank might have four or five high-strung traders who earn a dizzying net of one percent (or less!) by the end of the day.[11] But 1% compounded over 365 days means that their capital increases 37 times in a year.[12]

Futures trading in leveraged accounts opens the door to the person with a desire to get rich electronically. And it must be electronically. The daily “investment” newspapers only record the past. It is not enough to read about a change in price on the bus home and execute a trade the next morning. The global village never sleeps.

While millions of people watch sitcoms, a handful of others are online, trading wheat, dollars, sow bellies, and heating oil. In the morning, the price of cooking breakfast has changed and someone is several hundred dollars richer than they were the day before. One half of one percent each day, compounded over 365 days means a six-fold increase in your holdings: say from $30,000 to $180,000. The white collar employee who reads a newspaper and calls a no-load broker is not in the same league at all. That person is much closer to a third world farmer helping a cow deliver a new calf.

Try to buy something from abroad with a check drawn in a foreign currency. Your bank will charge you $20 just to handle $20 worth of euros or yuan. You will pay twice: once for the money and again for the bank to handle it. If you want something from overseas, you have to buy it here from a retailer who bought it from a wholesaler who bought it from an importer. The person who uses cash is condemned to an economy they can visit in person.

But, if you use a bank card, the credit card company will automatically exchange your currencies for the smallest of transaction fees, about one percent, for instance. With a credit card, you enter the world of international electronic money. This is just one small slice of the electronic money pie. In today's world, the rich will outpace the poor at whatever transmission rates their modems will allow.

A New Continent

In the 1200s, the bankers of Florence adopted arabic numerals without hesitation – and the city council outlawed the new system.[13] Of course, this was futile. In our age, the invention of public key crytosystems is also well-received and also subject to government controls.[14] Such controls cannot last.[15]

Public key cryptosystems enable a technology of anonymous authentication.[16] You no longer need to know who someone is in order to be satisfied that they are who they say they are. If they have the key to the code, that is enough. This means that if a smart credit card says that it has $1000 on it, a merchant can know it does without knowing what bank it came from or how it got there. The merchant can transfer all or some of the value to their own account – either a bank account or a “digital cash” card.

This technology is being developed by several firms today. The leader in the field may be DigiCash, founded in 1990 by mathematician David Chaum.[17] DigiCash has a licensing agreement from MasterCard. That agreement also opened the door to two other cards: Europay and VISA. All of this transaction processing requires computers, of course, so IBM and Siemens are also working with the DigiCash corporation.

Again, we have the basic pattern. The new technology includes new forms of communication. In fact, they are equivalent. The computer is newest tool of wealth-creation. It is also the medium of storage and transfer. The person who today cannot be comfortable with a 100-digit encryption cipher is like the Babylonian farmer who could not conceptualize abstract numbers.

In fact, DigiCash has also created its own currency: “Cyberbucks.” Launched in October, 1994, this is a “virtual currency.” There is no way to exchange Cyberbucks for yen or dollars. But you can buy goods, services, or information with Cyberbucks: the relative scarcity of what you buy gives value to the currency. About 100 companies offer their wares in exchange for Cyberbucks.

This is not a new idea.

In the 1700s, merchants like John Wilkinson struck tons of their own copper coins.[18] In the early 1800s, bronze tokens from America and Canada joined those from the British East India Company. The king of England and the Congress of the United States outlawed them to no avail.[19] The Supreme Court of the United States declared that American workers had a “right” to be paid in government money.[20] Of course, the officers of America's corporations were happy to be paid in something far more valuable: options and warrants for stock in their companies.

The Utopia of Greed

Historically, money has served three purposes: it is a medium of exchange (indirect barter), it is a store of value, and a unit of account. That it is a medium of exchange is its primary nature. This creates the opportunity for the other two purposes. Historically, gold served all three needs. However, there is also a division of labor among the forms of money. The store of value, the medium of exchange, and the unit of account need not be the same item.

Gold may be the best store of value. It is not the best medium of exchange. If he were to liquidate Microsoft for gold, Bill Gates would need a troupe of 3,000 bearers to carry the bullion.[21] Hard currency, paper, or coins, are inherently limiting. On the other hand, electronic transfers involve no such physical constraints. In the world of the 21st century, those who master the medium of digital cash will be the only ones on the top of the pyramid.

Political conservatives claim that gold is an “objective” value, that it is “universally” recognized and accepted. Perhaps so. Perhaps not. The universe can be a big place. On the other hand, in a world where airliners strike skyscrapers, your universe can become limited. We may see the end of nation states as we know them. We might see small, sealed communities, relying on telecommunications for virtual commerce. In that world, you are more likely to exchange cyberbucks than gold.

The accelerating accumulation of wealth cannot be stopped. In the year 1913, when my maternal grandparents came to America, they had to have $20 in hard money, about one ounce of gold. My father’s parents came over “without passport” thus named “wops” having paid the UK pound “guinea” for their passage. In the next century, successful trillionaires will plot to become quadrillionaires. The “wretched, huddled masses” who debark at a space station called New Liberty might be those who scraped together $20 million in cybercredits.

[1] Most anthropologists accept that hunter-gatherers became pastoralists who settled into villages that benefited from organization and agriculture. Jane Jacobs (The Economy of Cities, 1969) suggested a different history: successful hunting camps became permanent trading posts at which domestication led to agriculture. Thus the invention of agriculture required the existence of cities, just as today, farming would be impossible without urbanization. Some of her theories were supported by subsequent excavations by Ian Hodder at Çatal Hüyük.

[2] Schmandt-Besserat, Denise, Before Writing (Vol. 1 and Vol. 2), Austin : University of Texas Press, 1992.

[3] Schmandt-Besserat, Denise, How Writing Came About, Austin : University of Texas Press, 1996.

[4] Ridgeway, William, Sir, The Origin of Metallic Currency and Weight Standards, Cambridge : University Press, 1892.

[5] Schmandt-Besserat, Denise. “Oneness, Twoness, Threeness,” The Sciences 27 (1987), pp 44:48

[6] Marota, Michael E., “A New Look at the Origins of Coinage,” The Numismatist, Vol. 108, no. 8 (Aug. 1995), p. 956-959, 999-1001.

[7] Steiner, Deborah.Tarn, The Tyrant's Wrt : Myths and Images of Writing in Ancient Greece: Princeton, N.J. : Princeton University Press, 1994.

[8] Ure, P[hilip] N[eville], The Origins of Tyranny, Cambridge: University Press, 1922.

[9] Porteus, John, Coins, London: Octopus Books, 1964, page 66.

[10] Reported to me by Bradley J. Stoler, JD, in July 2007, whose Commodities Brokers of Troy, Michigan, trained currency speculators, the global currency market alone represents US$ 1trillion per day, of which about 95% is speculative and 5% for immediate delivery.

[11] Directly reported to me by Irene M. Joseph (deceased), administrative assistant for such an operation.

[13] Wallin, Nils-Bertril, "How was zero discovered?" YaleGlobal Online,19 November 2002, http://yaleglobal.yale.edu/about/zero.jsp, February 1, 2008.

also asserted at

www.math.udel.edu/~pelesko/Teaching/Math308_Spring_2006/carlypresentation.pdf

[14] "Statement by the Press Secretary," April 16, 1993, http://csrc.nist.gov/keyrecovery/clipper.txt

See also, Garfinkely, Simson :L.,“Public key cryptography,” Computer, June 1996 (Vol. 29, No. 6) pp. 101-104, IEEE Computer Society1828 L. Street N.W. Suite 1202, Washington, DC 20036

[15] Export restrictions to the European Union, Hungary, Australia, and others were lifted in January 2000. Some controls are still in place.

[16] “3.1.1 What is the RSA cryptosystem?” http://www.rsa.com/rsalabs/node.asp?id=2214 See also the ever faithful Wikipedia on Public Key Cryptography http://en.wikipedia.org/wiki/Public-key_cryptography

[17] http://www.chaum.com/ (Of course. The world has changed significantly since 1996)

[18] Dalton, R. and S. H. Hamer, The Provincial Token-coinage of the 18th Century. [Bristol], 1910-18.

[19] Taxay, Don, The U. S. Mint and Coinage : An Illustrated History from 1776 to the Present, New York : Arco Publishing Co., Inc., 1966.

[20] Timberlake, Richard H. "Private Production of Scrip-Money in the Isolated Community," Journal of Money, Credit and Banking, Vol. 19, No. 4 (Nov., 1987), pp. 437-447

[21] The price of gold has more than tripled to $900 per ounce, and Bill Gate is now valued at $46 billion. He would need about 40,000 men today, if each carried 100 lbs of gold. If he took his value in cattle – the traditional currency upon which the invention of gold was based – he would need about 450 million feeder cattle.