Predicting the future of money

Before Babylon, Beyond Bitcoin: From Money that We Understand to Money that Understands Us. By David Birch. London Publishing Partnership; 264 pages; £22.50.

PEOPLE use money every day and yet struggle to understand it. The economic experiment known as monetarism—limiting the supply of money in order to control inflation—was abandoned when it became clear it was impossible to establish a precise definition of the money supply. The idea of negative interest rates, introduced by some modern central banks, puzzles those who think that savers should be rewarded for thrift.

“Before Babylon, Beyond Bitcoin” by David Birch, a consultant, offers a broad historical overview on the nature of this essential economic instrument. His underlying thesis is that money has evolved over the ages to suit the needs of society and the economy. Often these changes have occurred because previous forms of money were too inflexible. In the Middle Ages, metal coins were supplemented by bills of exchange to make long-term trade easier. Credit and debit cards have replaced the cumbersome process of clearing cheques.

Money may be about to change again. The author thinks cash will and should dwindle away. The future belongs, not to plastic cards, but to mobile phones. In Kenya, hundreds of businesses, including the leading utilities, accept payments through a mobile-based system known as M-Pesa (pesa means “money” in Kiswahili). More than two-thirds of adults use it. “With payment cards, you could pay retailers. With mobile phones, people can pay each other. And that changes everything,” he writes.

Furthermore, the future may see “frictionless” shopping. Hire an Uber car and there is no transaction with the driver. The app already has your credit-card details; when you leave the car, you simply shut the door and then get an e-mail with details of the bill. The same may apply in supermarkets in future. A reader will record the details of your purchases as you leave the shop and charge them to your account.

All this is plausible. The question is who will control this electronic money. The author thinks that communities rather than countries will be the natural currency issuers in the future. These communities could be based on cities or on affinity groups such as a shared religion or even enthusiasm for a sports team.

All these competing currencies would have different values. In theory, there would be no problem with this. The software in mobile phones and in the retailer’s payments system could instantly work out the correct exchange rate and adjust the bill accordingly. But money has to perform as both a means of exchange and a store of value. Would that be the case if there were a vast number of competing and unofficial electronic currencies?

The temptation for some communities to keep issuing money would certainly be great; those electronic currencies might suffer rapid depreciation. Some currencies might be a lot less liquid (harder to get rid of) than others. There might even be a spread—a gap between the prices at which people will buy and sell. Retailers would be reluctant to accept such currencies. At best, there could be a lot of arguments with customers. Nor will central banks willingly lose control of the money supply, with all the potential adverse effects of economic management. The future may be mobile but it will not be as anarchic as the author thinks.