Author: Leslie Budd

Money’s Second Life?

Updated Monday, 2nd November 2009
Our increasingly virtualised world has seen music switch from physical formats to digital downloads. Should money also go digital - and if it does, would it necessarily be for the best?

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The latest broadcast of The Bottom Line discusses the role of money and the relationship of the poor to contemporary capitalism, with guests drawn from the well-known companies Poundland, Cisco Systems and Barclaycard. In many ways, the discussion is a reprise of the debates about the promise of digital or cyber money at the end of the last millennium, yet despite the seductive appeal of virtual transactions, the material realities of the societies we inhabit remain. The poor, like climate change, will always be with us and no amount of cyber technologies will change that, unless of course, the dystopian visions of John Carpenter’s film Escape From New York is a means of managing the digital underclass.

At the beginning of the 21st century, the seductive delights and trappings of the digital age and the virtual universe were apparently transforming the way in which we viewed and organised our lives and relationships to each other. The networked firm and society, the virtual organisation, the virtual city, teleworking, e-business, the opening up of new private and public cyberspaces suggested that new social transformations would sweep away the old conservative forces of materialism.

The universalisation of information and its communications media seems to promise a new democratisation that cannot be easily contained or institutionalized. The brave new digital world is now extending into prospects for different private cybermonies. Resisting the rhetoric and hype, we find this age carries with it its own exclusivity, its own marginality and peripherality. In the case of money, the confusion between form and content in digital transfers of all financial assets does not cloak an important historical fact.

Money is an abstraction from real relations of production, exchange and distribution and as such bestows social power. In other words, money has always been virtual and the source of marginality and peripherality in the kind of societies we inhabit.

The evolution of banks – from crude coinage to plastic money, financial globalization, the implications of technology and money futures – constitutes the narrative of digital transformation. In re-telling the narrative of money, the standard textbook classification of money remains a constant:

  • a generally acceptable means of exchange for goods and services;
  • an effective store of value;
  • a unit of account.

Money can also be said to be “at rest” and “in motion”. In a cyber age, money at rest is where its store of value is held in computer disks or electronically formatted cards.

Money in motion occurs where there is a transfer of liabilities between individuals and / or organisations. Electronic transfers speed things up and reduce periods of free credit (or “float”). Money is created through the generation of deposits by banking institutions (not necessarily banks per se) underwritten by reserves held in central banks.

Monopoly money

Borrowers or lenders are paid through the central bank creating a new deposit (a liability), but the key question is, can we really create our own e-money? We merely transfer the form in which money is held from a conventional one to an ethereal one, but it is the e-money issuers, not us, that do the money creating, backed by official money, which we have entrusted to them. If it is not backed by official money e-money becomes no different from Monopoly money or Second Life, bounded by the internal rules of a particular game.

There is also a regulatory implication that is analogous to the “black economy,” within which transactions are only conducted with cash; still a common experience of most large metropolises around the globe, namely that if agents increasingly circulate money outside the official system, the banking system’s share of money declines. This situation is related to the problems of estimating its size and impact where, in certain places, large sums of cash (and therefore officially underwritten) never touch the banking system. Indeed, the “black economy” is the lifeblood of many communities, who neither have the infrastructure nor the aspiration for their exchange to become wired or networked. Thus, the de-materialisation and re-materialisation of money is not a recent or cyber phenomenon.

A number of years ago, two Irish economists, then working at the European Investment Bank, suggested that the complete electronic transmission of money would kill off inflation. They forgot one fundamental law of economics, which is that money bestows purchasing power. Furthermore, the different magnitudes of purchasing power come out of the struggle over the distribution of the social product. Clearly, they hadn’t told a former Governor of the Bank of England nor the citizens of Britain’s northern cities, upset at his statement that “unemployment in the North is a price well worth paying for controlling inflation in the South”. Eighty years before John Maynard Keynes's Treatise on Money, Karl Marx anticipated the former’s view that: “we cannot get rid of money even by abolishing gold and silver and legal tender instruments.” Again, the possibilities of e-money and cyber money do not change this elemental fact. Money can only be digital if it still remains money – complete with its conventional functions and its relationship to the production of commodities.

Inflation has been temporarily conquered because of the global recession and also because governments have intervened to sustain the fractional reserve system. Without this intervention, a number of economies may have collapsed and the ability to produce, exchange and consume goods and services could have been undermined. There does not seem to be a digital solution to this material problem – unless of course, we all become avatars in a cyborg world.

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