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"The Future of Money" at the OECD

In Luxembourg this year, from July 11th to 13th, an OECD Advisory Unit on Multi-Disciplinary Issues hosted a conference on "The Future of Money".

We don't actually know who was there, or how the actual discussions went, or what may yet come of them. However, five papers prepared for the conference are available. One introduces the main issues as seen by the conference organisers, two are from professionals in the field of technology and money, and two papers are from academic sources. (For the general impressions of one participant, see fininter.net.)

The following is part of a briefing prepared for an informal meeting with the OECD Advisory Group in Paris, 9th October, on the way to OS.

In overview, the papers for "The Future of Money" strongly relate to history, and thus tend to project a future that closely resembles the past. There are significant exceptions to this, however, that open windows of virtual opportunity, and may let some light into the concrete box of mainstream "bank" money.

The "Main Issues Paper" provides a useful overall summary and framework for three discussion sessions. The leading questions posed for discussion accept that digital means of payment are coming, and ask - how are they coming, and how big are they, and how soon will they be here?. They recognise the co-evolution of markets and money, and raise questions of stability and regulation. They propose a "congruent global monetary system" to be a good thing, and ponder the process of getting it. Throughout the briefing, it appears to be taken almost as faith that the central banks are the core of a stable and effective money system and are going to remain so.

While this was a starting point for all four other papers, some went forward, and some went back.

Two writers, coming from an academic world, rely heavily on history to argue that the future will really be much the same as the past, certainly more technological, but still essentially managed by central banks of some sort or another. One concludes - "Although the internet extends the technical capacity to expand the economic exchanges to an almost infinite extent, it cannot provide the monetary space that would enable this to happen. The world cannot be "run on Windows"." Another insists - "The historical process of centralization will also apply to electronic money".

But there are more things in heaven and earth than run on Windows. And, it's difficult to centralize things that really don't exist - bankers know well how to look after things that are singular and unique, but where, and how, will they secure things that don't exist and do proliferate?

Both papers reveal the same fundamental weakness in their superficial and confused use of the phrase "form of money". Despite insisting on the importance of fully understanding the forms of money, their arguments focus almost exclusively on different forms of media - bills, cheques, smart cards, digital certificates - but only for the transfer and settlement of one form of money - central bank money.

They seem unable to free themselves from their central presumptions - that only central bank moneys are fundamentally stable, that such money will be the basis for all settlement, and that the different forms of technical media will only have incremental effects.

They assume any new money will necessarily be competitive with and alternative to bank money, and that the banks will inevitably win. They presume any new forms that do survive will be quite unstable, and likely to have a destabilising effect on the economy, and thus that control by central authorities will be needed.

In brief, they see no likelihood that technical and social developments will substantially enable new forms of money.

History will, however, soon prove them quite wrong.

Fortunately the professionals are working in a more open frame.

One paper provides generally excellent information and analysis, particularly of the various impediments that "e-money" schemes face and have failed (so far) to overcome. The means are available, but the market has not happened. Micropayment systems are now viable and cost effective, but only at the high traffic levels that justify the capital outlay, and those levels have not yet been reached.

The interest in micropayments is mainly from those who want the revenues - the payers are a lot less interested and have yet to be persuaded in the necessary numbers. Until there are many seller sites accepting micro-payments, there's little point in the buyers adopting them.

But again there's a factor overlooked - the money itself. The use of any payment channel ultimately depends on the actual stuff the channel is there to move. The system may be perfect, but with no flow, it's no go. There's only so much mainstream money in the world, and very little of it is spent in micropayments - on things that cost more than a few cents, yen or pennies.

People haven't any history of spending very small amounts of money, and so micropayments isn't so much a new technology for an existing market, a better means to do something that's already happening, as it is an entirely new market.

One way to create new markets is to create new moneys. When the micropayments world extends the services they offer from legal tender to virtual money services, it will resolve their market development impasse. People will spend virtual money much more readily than they will spend legal tender, for instance for software, music and information services.

One paper, however, is right on the money. The treatment of the intangible economy is especially good. In all matters covered, it seems to me the information is accurate, the analysis faultless, the projections reasonable. I agree almost completely with everything. In my opinion, this material - at gefma.com - is required reading in this field.

But even this writer doesn't cover the whole field. He and all others writing for the conference stay almost entirely within the central bank "box". They all seem to assume the only way money of significance can work is when it has guaranteed convertibility with legal tender.

For money that is intended to have an assured value, to be generally transactable, this is very likely so. But there are other forms of money that don't have that requirement.

There are two main forms of money:

    1) hard money that goes fast and generally goes away

    2) soft money that goes round and always stays here

The "hard" stuff goes anywhere and so goes through communities, financing import and export. The "soft" stuff only works through reputation and so goes round within networks, sustaining community.

In due course, we're all (virtually all) going to use both moneys - the hard (fast/away) and the soft (round/here).

We hope we can help the OECD become as well-informed and up to date on the current developments in this part of the field, as they are in the part where the banks are.