The Future of Money | Chapter 2 – Chapter 3 | Bernard Lietaer (1999)

Reproduced from:

The Future of Money © Bernard Lietaer August 1998

Chapter 2: Today’s Money

“The study of money, above all fields in economics,
is the one in which complexity is used to disguise truth, or evade truth,
not to reveal it.”
John Kenneth Galbraith1

“The thing that separates man from animals is money.”
Gertrude Stein, 1936

“The only thing money cannot buy is meaning”
Jacob Needleman2

“Mom, could I have some money to go buy some candy at the store?” For most of us, our first experience of money is as a necessary object in the ritual of getting the things we want from stores. We accept it with the pragmatism of an innocent child, unaware of the mystery behind the transaction.

As we mature, we become conversant in many adult mysteries. We learn where babies come from, and participate in that process. We learn that all living things eventually die, and witness the death of a relative, friend, or perhaps a pet. We learn how our government works, and who makes the rules by which we are required to live.

And yet, one of the central mysteries of our lives as social beings – money – remains completely obscure to virtually everyone. Most people probably suspect that the answer to the nature of money comes from the study of economics or monetary theory, and we all know these fields are boring – full of equations and devoid of emotional juice.

Ironically, money itself is a very emotionally juicy topic. Throwing money on the ground in a public place gets as much attention as taking off our clothes. Those who work in financial markets recognize that strong emotions rule over most money issues: emotions that are ubiquitous, violent, volatile and overwhelmingly powerful. Strangely, neither economics nor monetary theories consider the emotional nature of money. In fact, in order to study money “scientifically,” they deliberately suppress its basically emotional nature. What is going on here?

The creation of money is largely invisible to the untrained eye, and seems almost miraculous. Most people, when they find out where money really comes from, are as disbelieving as some children when they first find out where babies come from. “How could this possibly be true?” they wonder.

Economics textbooks deal with the question of what money does, but not with what money is. By asking the deceptively simple question “What is money?” we are put in touch with money’s age-old magic. This chapter will clarify the mystery by showing that money is not a thing, but an agreement – usually an unconscious one.

In contemporary society, we not only agree to participate in the existing money system — unconsciously – but we also bestow extraordinary power on that system. Here, the nature of that power will be explored, as well as the four key features of modern money that we usually take for granted. For instance, national currencies make economic interaction with our fellow citizens more desirable than with “foreigners,” thereby cultivating national consciousness. Less obvious is the mechanism of the interest, which will be shown to foster competition among users of the currency.

A “Simple” Question

The best known economist of the 20th century, John Maynard Keynes, must have understood money. He was, after all, the Chairman of the team who designed our current monetary system, known as the Bretton Woods agreement. Marcel Labordère, a French financial journalist, postulated in a letter to Keynes: “It is self-evident that man will never be able to know what money is no more than he will be able to know what God is in the spiritual world. Money is not the infinite, but the indefinite, an astounding complex of all sorts of psychological as well as material reactions.”3

Keynes’ answer to Labordère was not preserved, but we can deduce his opinion on the topic from his quip: “I know of only three people who really understand money. A professor at another university; one of my students; and a rather junior clerk at the Bank of England.” A prudent man, he didn’t name them. What Keynes is saying is that you can go right to the top of the hierarchy of experts and still not find an answer to the deceptively simple question, “What is money?”

Where is the money mystery coming from?

The representative of the Clinton administration to the IMF offered this revealing definition: “Money is magic. Central bankers are magicians. Like all magicians, they don’t like to show their tricks.” Was she referring to the real magic or simple parlor tricks? The answer is both. Magic and mystery have surrounded the money process during its entire evolution. There are two main reasons why money appears so mysterious:

  • Its history
  • The need to perpetuate the confidence game.

The History of Money

Keynes pointed out that “Money, like certain other elements in civilizations, is a far more ancient institution than we were taught to believe. Its origins are lost in the mists when the ice was melting, and may well stretch into the intervals in human history of the inter-glacial periods, when the weather was delightful and the mind free to be fertile with new ideas – in the islands of the Hesperides or Atlantis or some Eden of Central Asia.”4

While the exact origins of money are unknown, all its earlier forms were deeply related to the mysteries of the sacred, and its first role was as a symbol. A symbol is “something which represents something else which is immaterial or abstract,” according to the Oxford English Dictionary, which goes on to point out that all early symbols were related to religious concepts.

One of the oldest coin currency is a Sumerian bronze piece dating back to about 3200 BC. On one side of the coin is a representation of a sheaf of wheat, and on the other is a representation of Inanna (the Ishtar of the Babylonians), the Goddess of life, death, and fertility. They called it the “shekel,” and it was a sacred symbol embodying the mysteries of life’s fertility (see sidebar). The shekel is by no means atypical. Throughout history, virtually every society has conferred some mysterious sacred qualities on its currency.

Photo 1

On a large alabaster vase dating from 3100-2900 BC, a naked man brings a large basket filled with food to Inanna. The Goddess is shown standing in front of a twin-doorpost entrance, symbolizing her temple.. An ancient repair with copper rivets is visible above the head of the goddess, indicating that the vase was treasured at the time.

Alabaster vase, Uruk (Level III) h. 3 ft. Iraq Museum. Photograph Hirmer Verlag, Munich

The Mystery of the Shekel

The Sumerians called their first coin the “Shekel” because “She” meant wheat. “Kel” was a measurement similar to a bushel. Hence, this coin was a symbol of a value of one bushel of wheat. (The word “shekel” survives in modern Hebrew as Israel’s monetary unit.)

The original purpose of the shekel was for payment for sacred sexual intercourse at the temple of Inanna/Ishtar, the goddess of life, death and fertility. This temple, as well as being a ritual center, was the storage place for the reserves of wheat that supported the priestesses, and also the community, in lean times.

So farmers fulfilled their religious obligations to society and the Goddess by bringing their contribution of wheat to the temple and receiving in exchange this shekel coin, entitling them to a visit with the priestesses at festival time.

Two thousand years later, after the patriarchal system had changed the meaning and nature of these rituals, the Bible would describe these priestesses as “temple prostitutes.” However, all this must be understood in its own cultural context. The “sacred prostitutes” were representatives of the Goddess, and intercourse with them was intercourse with the Goddess of fertility herself, nothing to take lightly. At that time, fertility was truly a matter of life and death. If the crops failed, there was no alternative, and everyone starved or at least went hungry until next year. And, of course, completing the magic ritual properly insured the fertility in crops, animals, and children that were the requisites for future prosperity.

The reason why money, sex and death became all three powerful taboos in the West relates to the fact that all three are attributes of the ancient Great Mother archetype, as illustrated by the shekel associations. The full implications for the collective psychology of this connection are explored elsewhere.5

More than 2,500 years after the Sumerian shekel, the first Greek coins were actually tokens given to citizens as proof of payment of their dues. These tokens could be redeemed for participation in the annual “hecatomb” or sacred meal to be shared with the Deities.

The Arab scholar Ibn Khaldun claimed that “God created the two precious metals, gold and silver, to serve as a measure of all commodities…” Without the further need for intervention by any religious institution, gold and silver remained symbolically associated respectively with the sun and moon. For centuries, their prices stabilized mysteriously in a fixed ratio of 1/13.5, astrologically determined to reflect the heavenly cycles. These two metals remained divinely ordained currencies after the astrological justification was long forgotten. There are many people who, to this day, claim that “real” money would be a return to the gold standard. Some even keep invoking its biblical origins.6

There is some irony in the fact that the Almighty Dollar is no exception to this mystical phenomenon. Issued by a country with a scrupulous separation between Church and State since its founding, where school prayer can still stir a heated debate, the most ordinary one-dollar bill has as motto, “In God we Trust.” That same bill is illustrated with both sides of the Great Seal of the United States. That seal has been described by Joseph Campbell as extraordinarily laden with esoteric symbols (see sidebar).

The Esoteric Dimension of the One Dollar Bill
(Synthesis of a Joseph Campbell conference)

I invite you to really look at the familiar one dollar bill. The most interesting side is not where George Washington is engraved, but the one where the Great Seal of the United States is represented.

On the left, the obverse (normally hidden) side of the Great Seal provides an image of the Founding Fathers’ interpretation of the Source of Manifestation. It has the truncated pyramid crowned by the Delta of Light with the all-seeing eye of God. It represents spiritual power commanding the foundation of matter. The eye depicts the “opening of the eye” of Yahweh or of Brahma by which He created the physical world. This alludes to the eye that manifested the first world – we would say the Big Bang in our contemporary scientific language. The Latin text Annuit Coeptis translates as “It supports our endeavor.” It is interesting that the Latin here is gender-neutral, and therefore, does not necessarily imply a “masculine” God. The other text, Novus Ordo Seclorum, means “The New Order of the Centuries.”

The other side of the Seal (the officially visible one) represents the Source of Action, symbolized by the Eagle – symbol of Zeus, the only bird that could look into the sun. This eagle holds thirteen arrows (symbol of power) in its left claw, and an olive branch (symbol of peace) in its right claw.

The number 13, the number of transformation – represents at the exoteric level the number of initial founding states. However, here it also has to be taken in its esoteric meaning, given the extraordinary lengths to which this number is repeated in the figure. The number 13 is referred to no less than seven times!

These are: the number of rows of stones in the pyramid, the number of stars, the number of leaves on the olive branch, the number of arrows in the claw, the number of letters in ‘annuit coeptis,’ and the number of letters in the rest of the figure (including the Roman letters of the date) which amount to 26 (or 2×13).

Achieving the right number of letters has required introducing an orthographic “mistake” in the Latin text (seclorum instead of the normal seculorum). The disposition of the 13 stars above the eagle forms a “Seal of Solomon” (also called the “Star of David”) and is intended to give us some further clues. That six-pointed star is indeed one of the richest cabalistic and alchemical symbols.

Do we need to go further to prove the point that, even in today’s totally secular world, the currency bill most-circulated globally is instilled with substantial “mysterious sacred qualities”?

It can be fascinating to discover the next supporting mystique. Liberia, for instance, issued its legal tender coinage with the portraits of Captain James T. Kirk and Captain Jean-Luc Picard of the starship Enterprise, paying royalties to Viacom, owner of the Star Trek trademarks, in the process.7 Until recently, it was the fashion to design banks to look like temples, complete with reverence lingering inside them. Even the first Internet bank, the First Security National Bank, with only an Internet address and no physical customer branch, felt the need to bow to custom by using a Greek Revival bank building as its first webpage symbol.

Central Bankers, in particular, still shroud their doings in priestly mystery. A hearing of the Chairman of the Federal Reserve in Congress has just as much ritual and studied ambiguities as the oracles of the priests of Apollo in Delphi in Ancient Greece. Two quotes illustrate this perfectly. The first is my favorite Alan Greenspan witticism: “If you have understood me, then I must not have made myself clear.” The other comes from William Greider in his well-named best selling book on the Federal Reserve, Secrets of the Temple: “Like the temple, the Fed did not answer to the people, it spoke for them. Its decrees were cast in a mysterious language people could not understand, but its voice, they knew, was powerful and important.”8

However, there is more to the mystery of money than just a reflection of the well-established conservatism of the financial world.

The Needs of the Confidence Game

If a friend were to offer you a choice between a $20 bill and a piece of paper on which was written, “I promise to pay $20 to the bearer of this note,” which would you prefer? You may know your friend as a sterling and trustworthy person. But if you try to exchange the little chit at the hardware store for a new garden hose, the clerks won’t take it. Even if they also know your friend, they will be concerned about the store’s ability to pay its suppliers with the note. So, naturally, you would prefer the $20 bill, because lifelong experience has taught you that the $20 bill will be accepted by everyone as worth $20. You have a deeply held belief – and here is the key – not that $20 bill is valuable, but that everyone else will accept it as valuable. It doesn’t really matter what you think about your money, you still know that you can spend it. You believe that everyone else believes that the money is valuable. What we are talking about here is a belief about a belief.

Matters of belief and social convention can be powerful and practically indestructible. History abounds in examples of people who have chosen torture and death over changing their beliefs. We also recognize that someone can choose to continue believing something, even when faced with ample evidence to the contrary. So belief has a formidable presence in the human psyche.

A belief about a belief, however, is a different animal altogether. It is a fragile and ephemeral thing. Perhaps nothing can shake my belief, but my belief about your belief can be eviscerated by a rumor, a mere hunch, a feeling. Moreover, a chain of belief about a belief is only as strong as its weakest link. If I think that someone on the other side of the world has stopped believing in the Mexican peso, the Thai baht, or the Russian ruble, then I have to fear that his neighbors may stop believing. As a result the whole house of cards may fall down, as it did for Mexico in December 1994, for Thailand late 1997, or for Russia in August 1998.

For instance, in June of 1977, US Treasury Secretary Michael Blumenthal addressed the dollar valuation problem. Simply by airing his concerns, he launched the dollar into a two-year tailspin.

In brief, the game of money, exactly as the Ancient Greek oracles, is a confidence game.

Whenever the emperor has no clothes (i.e. whenever a “crisis of confidence” looms), those in the know hope that no guileless kid will make an improper remark. Under such circumstances, a facade of regal confidence, mystery, decorum, and ritual serves to ensure that a long and fragile chain of beliefs will hold.

Why Money is not a Thing

We should now dissipate a key illusion in the magic about money: Money is not a thing.

For most of history, money has definitely appeared to be a thing, in fact, an incredible variety of things (sidebar). Without even mentioning the most recently prevailing forms of money, such as paper, gold, silver or bronze, Glyn Davies created a full money alphabet with a small selection of objects that served as symbolic of value: amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettlesleather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiaks, wampums, yarns and zappozats, which are decorated axes.9

From the Smallest to the Biggest

Not only did money vary in the nature of the objects used as its symbol, but also in its size. The smallest coins were probably some denominations of coins from Lydia, the place which Herodotus credited for having invented “modern” coinage around 687 BC. Their smallest denomination was struck in 0.006 ounces (one-fifteenth of the weight of a modern US penny) in electrum, a naturally occurring alloy of gold and silver.

The record for the heaviest currency is unquestionably the Yap island’s money, in the Caroline Islands of the West Pacific. They are gigantic six-feet wide round slices of a special limestone, cut from a rock on islands 400 miles away. They are a “macho” currency, used ceremonially by men, without moving them from the place where they rest. Yap women used more practical money in the form of strings of mussels.

Interestingly, a simple thought experiment can separate the aura of money from any or all these things. Let us assume that you are stranded alone on a deserted island. If, when you were left stranded, you had a thing in your pocket – say a knife – that knife will still be useful as a knife on your island.

Now, you may take with you a million dollars in money in this fantasy, and you may have it in any form you like: cash, a cashier’s check, credit cards, gold bars, Swiss Francs, even any of the forms of the above money alphabet that strike your fancy. Whatever form you choose, on your island that money changes into paper, plastic, metal or whatever else, but it has ceased to be money. This is why explorers to unknown lands have sometimes had trouble guessing what currency to carry with them (see sidebar on Stanley’s money).

Stanley’s Money

“When Stanley set out to find Livingstone in East Africa in 1871, he took with him three types of money – wire, cloth, and beads – because at the level of his consciousness where money and Africa had their existence, those seemed to be what Africans would make of the gold, silver, and copper of Victorian London …As it turned out, he did not use much of his money – if that’s what it was – lugged by two hundred porters half-way across the continent, but resorted to another nineteenth-century currency, the bullet.”10

To be precise, Stanley took with him 29,200 yards of assorted Indian and American cloths, 22 sacks of 11 varieties of beads and 350 pounds of #5 and #6 brass wire. Stanley ended up leaving 992 pounds of beads and all the wire, which had found no taker, with Livingstone at Ujiji. He had also taken ample ammunition and used it to shoot any animal or human who would not cooperate in his project.11

Events in recent decades have further made evident the non-material nature of money. In 1971, the United States ceased to define the value of the dollar in terms of gold. Since that time, the dollar has represented a promise from the US government to redeem the dollar with – another dollar. At least when the dollar was backed with gold, we could more easily believe it had some objective value.

With the demise of the dollar-gold equivalency, such self-deception has become more difficult.

For another analogy of money and magic — no magician’s routine is complete without a disappearing act. Money has been performing this feat in a rather spectacular way. Once upon a time, when money was mostly gold and silver coins, banks started issuing pieces of paper that stated where the metal was kept. The next step in the disappearing act is already well under way. The vast majority of our paper money has further dematerialized into binary bits in computers belonging to our bankers, brokers, or other financial institutions, and there is serious talk that all of it may soon join the virtual world. Should we wait until the last dollar bill has disappeared into a cyber-purse to wake up to the true non-material nature of money?

A Working Definition of Money

Our working definition of money can now be very straightforward:

Money is an agreement, within a community, to use something as a means of payment.

Each one of the boldfaced terms is essential in this definition. Seen as an agreement, money has much in common with other social contracts, such as political parties, nationality, or marriage. These constructs are real, even if they exist only in people’s minds. The money agreement can be attained formally or informally, freely or coerced, consciously or unconsciously. Later in this chapter, you will learn about the terms of our contemporary money agreement.

Money as an agreement is always valid only within a given community. Some currencies are operational only among a small group of friends (like tokens used in card games), for certain time periods (like the cigarette medium of exchange among frontline soldiers during World War II), or among the citizens of one particular nation (like most “normal” national currencies today). Such a community can be the entire global community (as is the case of the US Dollar by treaty, as long as it is accepted as reserve currency), or a geographically disparate group (such as Internet participants).

Finally, the key function that transforms the chosen object into a currency is its role as means of payment. Notice that the words “means of payment” are used instead of the more narrower “medium of exchange” (sidebar). The nuance is useful to include transactions which have ritual or customary purposes, instead of just commercial exchanges. After all, it is only in modern Western culture that total priority has been given to commercial exchanges, neglecting the other purposes for payments.

Means of Payment vs. Medium of Exchange

Jonatha Williams, curator of the Department of Coins and Medals in the British Museum makes the point “it is arguable that Western culture and its money systems, far from being ‘normal’, are actually an historical anomaly in their fixation on the commercial. If this is right, it would be an even greater mistake for Westerners to interpret other monetary systems as a more primitive version of their own.”

He gives the example of the use of cloth currency among the Lele in Congo, Africa, until the middle of the 20th century. Payments in specific cloths woven in raffia were supposed to be made to reinforce or heal social ties among the Lele, for instance as payment for initiation fees into religious groups, marriage dues, rewards to wives for childbirths, compensation for fighting or wounds inflicted on others, or as tribute to chiefs. In addition, the same cloth currency could be used as payment for goods, but this medium of exchange function was considered marginal compared to the other social uses.12

There are also other functions that today’s money tends to perform, such as unit of account, store of value, tool for speculation, and so on.13 However, for the purposes of this book these functions are comparatively secondary, considering that there have been perfectly effective currencies that did not perform some or all of these other roles.

In summary, the “magic” of money is bestowed on some “thing” as soon as a community agrees on using it as a means of payment.

The Origin of Money’s Power

Besides magic, we also endow money with power. As Marcel Proust observed, “Material objects have in themselves no power, but, since it is our practice to bestow power upon them…”14

James Buchan eloquently described our rationale for doing so: “The difference between a word and a piece of money is that money has always and will always symbolize different things to different people: a banknote may describe to one person a drink in a pub, a fairground ride to another, to a third a diamond ring, an act of charity to a fourth, relief from prosecution to a fifth and, to a sixth, simply the sensation of comfort or security. For money is frozen desire. …That process of wish and imagination, launched or completed a million times every second, is the engine of our civilization…For the objects of human desire are limitless, or rather limited only by the imagination, which amounts to the same thing.”15

Money Shifts and Power Shifts

Money is, therefore, much more than a technical issue. Whenever a currency is accepted within a community, it makes an implicit statement about power in that community. So when priests or priestesses were in power, temples issued money. When kings dominated, Aristotle attributed to them personally the “Sovereign right to issue currency.” In the Industrial Age nation-states became the paragon of power, so national currencies automatically became dominant.

Now that power is starting to shift away from the nation-states, it should not come as a surprise that new non-national currencies are coming out of the woodwork. Some people still assume that there is only one kind of money possible in the modern world – the familiar national currency, in the form of bills and coins. The first magician’s trick concerning money is to make us believe that we need the magician’s help to create money. This is definitely not the case, unless we choose to take slight of hand for reality. Different kinds of money have co-existed in the past, and do so now as well.

Frequent-flyer miles or Internet money are just early examples of corporate scrip that we should expect during an Information Age. Other examples will be spelled out in the next chapter.

Before we explore these new, less familiar currencies, we need a firm basis from which to compare them with the key characteristics common to all our familiar national currencies, and the social effects they tend to generate.

Today’s Money

All money systems serve to facilitate exchanges among people. Whenever a specific financial system is designed, the remarkable motivating power of money is invariably used to load the system with a host of other objectives – sometimes conscious, often unconscious – from the prestige of the Gods or the ruler, to collective socio-economic motivations.

The main characteristics of today’s system were pieced together in pre-Victorian England, just in time to trigger the Industrial Revolution. Its legacy – the money system that prevails today – looks as if its designers had asked: How can we create a money system that reinforces our nation-state, and concentrates resources to enable systematic and competitive heavy industrial development?

Even if its designers never asked such a question, the system has proven remarkably successful in meeting these objectives. Every country in the world, independent of its level of development or its political orientation, has bought into this pre-Victorian construct. Even Communist countries have reproduced all its key features, except that banks became state-owned rather than private, which in practice did not prove to be beneficial.

Four Key Design Features

All Industrial Age currencies have four key characteristics in common, which gradually came to be considered as self-evident for the first time in England between the 17th and early 18th centuries. It’s not as if some conspiratorial group of Englishmen gathered in a dark, smoked-filled room to dream up the current money system. What happened instead was a slow gradual evolution of payment and banking habits. This was accompanied by dramatic changes in personal insights and collective crises – such as the need to finance wars, or the political reactions to the South Sea Bubble of the 1720s. Such a combination of more or less conscious choices by the many and the few shaped a money system remarkably in tune with the pre-Victorian English Zeitgeist,16 the priorities and mindset of an island country poised to carve out its empire in the world.

Many aspects of the modern money system can be traced back to the customs of medieval goldsmith money lending, or to Renaissance banks from Tuscany and Lombardy. But many of these hallowed traditions were dropped and replaced with brand new ones whenever they did not fit with the Zeitgeist of pre-Victorian England. For instance, charging interest on money – which had been prohibited on both moral and legal grounds for more than 20 centuries – suddenly became a normal and accepted practice.

While payment and banking technologies (i.e., how we do things) have continued to dramatically change and improve, the fundamental objectives pursued by the system (i.e., why we do them) seem not to have been seriously revisited since Victorian England. From the perspective of the objectives pursued by the money system, we are still living with what propelled us so effectively into and through the Industrial Revolution.

Four key features still characterize our “normal” money systems and remain basically unquestioned: Money is typically geographically attached to a (1) nation-state. It is (2) “fiat” money, i.e. created out of nothing, by (3) bank debt, against payment of (4) interest.

Perhaps this sounds obvious, even trivial, but the full implications of each one of these characteristics are much less clear. When we question these assumptions, we can sometimes discover a wealth of new insights. Let us take a brief look at each one of them.

National Currencies

We now have trouble imagining any currency other than those issued by a given country, or in the case of the Euro, a group of countries. However, it is useful to remember that the concept of a nation-state itself is only a couple of centuries old.17 Therefore, the vast majority of historical currencies were, in fact, private issues made by the sovereign or some other local authority.

However, if you want to create a national consciousness, the creation of a national currency is one of the more powerful tools available. It makes evident in everyday life the boundaries that are otherwise visible only in an atlas. In a recent example, during the breakup of the Soviet Union, one of the first acts of the newly independent republics was to issue their own currencies. “A common currency translates into a common information system, so that its inputs and outputs can be measured and compared across the parts.”18 Sharing a common currency creates an invisible, yet very effective, bond between all sectors of a society, and draws an information boundary between “us” and “them.” Similarly, the Euro – the single currency that, as of January 1999, officially replaced national currencies in 11 European countries — has as one of its goals the creation of a more unified European consciousness.

The ubiquity of national currencies should not make us forget that during the few recent centuries when national currencies were issued, there was always another transnational currency available for global trade, namely gold. The only exception to this rule has been in the past twenty-five years or so, when one particular national currency – the US dollar – has become the global currency. This arrangement has serious negative consequences for all participants, including the US (see Appendix A).

Lastly, emerging global non-geographic communities, such as the Internet, foretell significant changes in the transnational currency realm, which will be addressed later (Chapters 3 and 7).

“Fiat” Money

The simple question “Where does money come from?” propels us back into the world of magic. Not only does money perform the act of disappearing and reappearing, it is also, quite literally, created out of nothing. To fully understand this process, we need to look beyond appearances. At first sight, national currencies appear to be created on the printing presses of Central Banks or, in the case of the US, the Department of the Treasury. But this is not where money is created. The rabbit that appears to come out of the magician’s hat is not really coming from the hat, either. If we want to know where the rabbit comes from, we need to track its path through the magician’s sleeve.

If you want $100 in cash, what do you do? You go to your bank teller and ask for $100. He or she (or now with ATM’s, ‘it’) will look up your account balance. If there is more than $100 in your account, that amount will be debited and you will be given the cash. If your balance is not large enough, you will get an apologetic smile or some other message, but not the money.

Your money is really what is in your account, because the familiar physical bills will be given to you on demand as long as there is a positive balance on your account. Similarly, the Treasury will deliver to your bank as many bills as it wants, but it will debit the bank’s account for the corresponding amount.

So how does the money appear in your bank account? Most of the time, it is there because you deposited your paycheck or some other form of income. But where does your employer get this money? To play on Truman’s famous line: Where does each buck ultimately start?

Bank Debt

The Primer has alluded to a fact that may be surprising to some. Every dollar, Euro or any other national currency in circulation started as a bank loan. For instance, when you qualify for a $100,000 mortgage to buy a house, the bank enters a credit into your account and literally creates the $100,000 out of nothing. That is the moment when money is really born. Of course, these bank loans are typically secured by an asset such as a house, a car, a corporate guarantee, etc. Once you have the credit, you can draw the check to pay the seller of the house, who in turn deposits it in her bank account, and the money starts flowing infinitely through the system. Until someone reimburses a loan, at which point the money is destroyed, disappearing back into the void where it originated. (sidebar)

The Void at the Center

The American author Ayn Rand asks the question: “So you think that money is the root of all evil. Have you ever asked what is the root of all money?”

One of the main differences between Eastern and Western philosophies is that in the East the Void is explicitly placed at the origin of everything, while in the West there is always a God, a “Logos” (Word), a “Monad” (the One), some originating and organizing principle.

In fact, in the West the void has been hidden at the center of our money system Is this one of the reasons for its mesmerizing power?

This is why paper money is really “the part of the national debt on which no interest is paid,” as summarized by Britain’s parliamentary Radcliffe Commission.19 This simple process of creating money is dubbed with the appropriately fancy technical Latin name “fiat” money. “Fiat Lux” were the first Words that God pronounced, according to Genesis: “ Let light be.” The next sentence is, “And light was, and He saw it was good.” We are dealing with the truly Godlike function of creating something out of nothing (“ex nihilo”) by the power of the Word.

Little wonder that you may feel intimidated by your banker the next time you respectfully make a request for a loan! Just as the magician needs a handkerchief to wave above the hat before the rabbit can appear, the banker has an additional veil. In the process of creating money, your attention will be drawn toward the boring technical aspects, such as mechanisms to foster competition among banks for deposits, reserve requirements, and the role of the Federal Reserve in fine-tuning the valves of the system.20 While these technical features all have a perfectly valid purpose (so does the handkerchief), they all simply regulate how much fiat money each bank can create (the number of rabbits that can be pulled out of which hat).

Particularly inventive about this scheme, that goes back to pre-Victorian England, is its ability to enable societies to solve the apparent contradiction between two objectives: creating and reinforcing the nation-states, while, at the same time, relying on private initiatives and competition among them. Specifically, it provides a smooth way to privatize the creation of the national currency (theoretically, a public function) as a privilege of the overall banking system, while still maintaining a competitive pressure between banks to obtain deposits from clients.

There is also one very important built-in aspect of bank-debt “fiat” money systems. Jackson and McConnell have summarized it in a few words: “Debt-money derives its value from its scarcity relative to its usefulness.”21 In other words, for a bank-debt-based fiat currency system to function at all, scarcity has to be artificially and systematically introduced and maintained. This is one of the reasons why today’s currency system is not self-regulating, but requires the active role of Central Banks to maintain that scarcity. One can even say that Central Banks compete with each other to keep their currency internationally scarce. This serves to maintain their relative value and scarcity as well.

We will see later that there also exists other types of currencies called “mutual credit systems,” which are more self-regulating than national currencies, and the value of which is maintained by the backing of goods and services they represent within the communities that accept them. These currencies can afford to be available in sufficiency, as opposed to requiring artificial scarcity.22


The last obvious characteristic common to all official national currencies is interest. Here again, we believe that interest on money is somehow intrinsic to the process, forgetting that for most of history that was definitely not the case. In fact, all three “religions of the Book” (Judaism, Christianity, and Islam) emphatically outlawed usury, defined as any interest on money. Only Islamic religious leaders still remind anyone of this rule today. It is sometimes forgotten that the Catholic Church, for instance, remained prominently in battle against the “sin of usury” until the 19th century (see sidebar).

Usury and Religions

Technically in Judaism, usury was only prohibited among Jews. “Unto thy brother thou shalt not lend upon usury, that the Lord thy God may bless thee in all that thou settest thine hands to.” (Deuteronomy 23:20). This enabled Jews to lend with interest to non-Jews. This practice became one of the reasons for their unpopularity in the Middle Ages. Islam is more encompassing in its condemnation: “What ye put out at usury to increase it with the substance of others, shall have no increase from God.” (Koran Sura 30:38).

Given that the modern world evolution occurred mostly under Christian influence, it is this religion’s change of direction over time that is really most relevant for our purposes. The historical importance of usury in the teachings of the Christian Church can only be compared with today’s emphasis on sexual sins and abortion. It was definitely one of the most persistent dogmas of the Church. One of the earliest Church fathers, Clement of Alexandria, specified, “the law prohibits a brother from taking usury; designating as a brother not only him who is born of these same parents, but also one of the same race and sentiments… Do not regard this command as marked by philanthropy.”

The litany of councils specifically condemning this practice as one of the most despicable sins is really impressive: the Council of Elvira (305-306AD), Arles (314), Nice (325), Cartage (348), Taragona (516), Aix-la-Chapelle (789), Paris (829), Tours (1153), the Lateran Council (1179), Lyons (1274), Vienna (1311). This last one was even more sweeping than the previous ones; any ruler who would not criminally punish anybody committing usury in his realm would be excommunicated (even if the ruler himself did not do it!). Since the practice was often concealed beneath various devices, money lenders were compelled to show their accounts to the ecclesiastical authorities. The fifth Lateran council (1512-1517) reiterated the definition of the sin of usury as “receiving any interest on money” once again.

Henry the VIII legalized interest for the first time in the Western World in 1545, after he had broken ranks with the Pope. The first time that the original doctrine was questioned within the Catholic Church itself was in 1822. A woman from Lyons, France, had received interest on money and was refused absolution unless she returned the ill-gotten gains. Bishop Rhedon requested a clarification from Rome, which responded, “Let the petitioner be informed that a reply will be given her question when the proper time comes; …meanwhile she may receive sacramental absolution, if she is fully prepared to submit to the instructions of the Holy See.” A forthcoming resolution was promised again in 1830, and from the Office of Propaganda in 1873. This promised clarification never came. The sin of usury was never officially repealed, but was simply forgotten. The Canon Law of 1917 (Canon #1543), still operational today, makes it obligatory for bishops to invest, “As the administrators are bound to fulfill their office with the solicitude of a good father of a family, they shall invest the surplus revenue of the church to the benefit of the church.” The issue of interest is not mentioned. Later still, usury is redefined as the charging of excessive interest.

Estelle and Mario Carota, two Mexican Catholics, in the hope of providing relief to Latin American countries when they were reeling under the debt crisis of the 1980s, made a formal request in 1985 to the Vatican to clarify its position on usury. They were informed by no less an authority than the Office of the Congregation for the Doctrine of the Faith, headed by Cardinal Ratzinger, that there had never been a new definition of the doctrine of usury, that there has never been any change. Their attempts at finding an expert opinion among the Jesuits, Augustinians, Dominicans, Salvatorians, and even professors of moral theology in Third World seminaries teaching theology of economic justice failed to turn up anybody who remembered the forgotten Doctrine of Usury.

The Effects of Interest

The full implications of applying interest on the loans creating money are the least understood of the four characteristics. Nevertheless, the effects of interest on society are pervasive and powerful. They therefore warrant more detailed examination. The way interest is built into the money system has three consequence. These are:

  1. Interest indirectly encourages systematic competition among the participants in the system.
  2. Interest continually fuels the need for endless economic growth, even when actual standards of living remain stagnant.
  3. Interest concentrates wealth by taxing the vast majority in favor of a small minority.

Each of these issues will be addressed in turn.

1. Encouraging Competition

The following story from Australia illustrates the way interest is woven into our money fabric, and how it stimulates competition among the users of this currency.

The Eleventh Round

Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone’s barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. “Poor people,” he said, “so primitive”. The farmer’s wife overheard him and challenged the stranger, “Do you think you can do a better job handling chickens?” “Chickens, no,” responded the stranger, “But there is a much better way to eliminate all that hassle. “Oh yes, how so?” asked the woman. “See that tree there?” the stranger replied. “Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I’ll explain the better way.”

And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. “Now you can trade and bargain with the rounds instead of the unwieldy chickens,” he explained.

It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat. “Oh, by the way,” he added after every family had received their 10 rounds, “in a year’s time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives.” “But where will the 11th round come from?” asked the farmer with the six chickens. “You’ll see,” said the man with a reassuring smile.


Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.

So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.

This is how today’s money system pits the participants in the economy against each other. This story isolates the role of interest — the 11th round – as part of the money creation process, and its impact on the participants.23

When the bank creates money by providing you with your $100,000 mortgage loan, it creates only the principal when it credits your account. However, it expects you to bring back $200,000 over the next twenty years or so. If you don’t, you will lose your house. Your bank does not create the interest; it sends you out into the world to battle against everyone else to bring back the second $100,000. Because all the other banks do exactly the same thing, the system requires that some participants go bankrupt in order to provide you with this $100,000. To put it simply, when you pay back interest on your loan, you are using up someone else’s principal.

In other words, the device used to create the scarcity indispensable for a bank-debt system to function, involves having people compete for the money that has not been created, and penalizes them with bankruptcy whenever they do not succeed.

The interest rate decisions of Central Banks get our attention, and this is one of the reasons. The additional cost of increased interest results automatically in a proportional number of increased bankruptcies in the near future. This takes us back to the time when the high priests had to decide whether the Gods would be satisfied with the sacrifice of only a goat – or require the sacrifice of the first born son instead. Lower down on the totem pole, when your bank checks on your creditworthiness, it really is verifying whether you are capable of competing and winning against the other players, i.e., managing to wrestle out of them something that was never created.

In summary, the current monetary system obliges us to incur debt collectively, and to compete with others in the community, just to obtain the means to perform exchanges between us. No wonder “it is a tough world out there,” and that Darwin’s observation of the “survival of the fittest” was so readily accepted as self-evident Truth by the 18th century English, as well as by any societies that have accepted, without question, the premises of the money system that they designed, such as we have today.

Fortunately, we now have ample evidence that supports less harsh interpretations of the “natural world” (see sidebar).

What is “Natural” – Competition or Cooperation?

Professor of bio-sociology Imanishi from Kyoto University has shown that the Darwinian vision of nature as a struggle for life has been completely blind to the many more frequent cases of co-evolution, symbiosis, joint development, and harmonious coexistence that prevail in all domains of evolution. Even our own bodies would not be able to survive long without the symbiotic collaboration of billions of micro-organisms in our digestive tract, for example.24

Evolutionary biologist Elisabet Sahtouris points out that predominantly competitive behavior is a characteristic of a young species during its first forays in the world. In contrast, in mature systems like an old-growth forest, the competition for light, for instance, is balanced by intense cooperation among species. Species that do not learn to cooperate with the other species with which they are codependent invariably disappear.25


Our current money system is biased towards competition. Hence the need for complementary currency systems, (described later) that would balance this bias by rewarding cooperation.

2. Need for Endless Growth

The main simplifying assumption of the “Eleventh Round” is that everything remains the same until next year. In reality, we do not live in a world of zero growth of population, output, or money supply. In the real world, there is typically some growth over time in all these variables, and the money system just preempts the first component of that growth to pay for the interest. Even in this respect, there are long-forgotten religious precedents for this process. The “first fruit of the harvest” was ritually sacrificed as an offer to the Gods in many ancient societies.

This dynamic also makes it much harder than in our Eleventh Round story, to notice what is actually going on. Nevertheless, indefinitely compounded interest in the material world is a mathematical impossibility (sidebar).

Joseph’s Penny or the Impossible Mathematics of Compounded Interest

Indefinitely compounded interest in the real world is a mathematical impossibility. For example, one US penny invested at 4% compounded interest by Joseph at the birth of Jesus Christ, would have grown by the year of the American independence to the value of one ball of gold of half the weight of the earth.26 By today it would have compounded further to the value of 2,252 balls of gold of the weight of the earth.

Compounded at 5%, Joseph’s penny would buy by 2002 an incredible 4 of the weight of planet earth!!!

In this dynamic view, the money system is like a treadmill that requires continuous economic growth, even if the real standard of living remains stagnant. The rate of interest fixes the average level of growth that is needed to remain at the same place. This need for perpetual growth is another fact of life that we tend to take for granted in modern societies, and that we usually do not associate with either interest or even our money system.

3. Concentration of Wealth Effect

A third systematic effect of interest on society is its continuous transfer of wealth from the vast majority to a small minority. The wealthiest people and organizations own interest-bearing assets. They receive an uninterrupted rent from whoever needs to borrow in order to obtain the necessary medium of exchange. The best study on the transfer of wealth via interest from one social group to another was performed in Germany during the year 1982, when interest rates were at a low 5.5%.27 All Germans were grouped in 10 income categories of about 2.5 million households each. During that one year, transfers between these 10 groups involved a total of gross total of DM 270 billion in interest payments received and paid. A stark way for presenting the process is to graph the net effect in the form of the net interest transfers (interest gained minus interest paid) for each of these 10 household categories (see Fig 2.2)

Figure 2.2 Net Interest Transferred (billion DM) for 10 groups of households of 2.5 million each (Germany – 1982)
[NB: Editor: graphic art should replace the bars with a pile of coins]

The highest interest transfers occurred from the middle class (categories 3 to 8) which each transferred about DM 5 billion to the top 10% of the households (category 10). Even the lowest income households (category 1 – which one would expect not to have easy access to credit) transferred DM 1.8 billion in interest per year to the highest group. The net effect is that the top 10% of households received a net transfer of DM 34.2 billion in interest from the rest of the society during that one year.

This graph clearly shows the systematic transfer of wealth from the bottom 80% of the population to the top 10%. This transfer was due exclusively to the monetary system in use, and is completely independent of the degree of cleverness or industriousness of the participants – the classic argument to justify large differences in income.

I have not found a study on interest transfer between different segments of society in the US, but the census provides an idea of total income redistribution that has occurred over the past 20 years. The overall results are even more acute than in the German case. Unfortunately, the available data in the US does not allow for isolation of the component of interest transfer in the income redistribution.

The information in Figure 2.3 commingles the interest paid and received with all other forms of income, such as rents or dividends. John F. Kennedy’s thesis that “a rising tide raises all boats” is not supported by this data. At the very least, all boats are not raised equally.

The only group that has increased its percentage of overall income in the US over the past 20 years is the top 5% of the households. For all practical purposes, the next 15% held its own. All other groups have seen a decrease in their piece of the national pie. Graphing the net changes in income between 1975 and 1995 drives this point home (see Figure 2.3). Between 1975 and 1995, the combined income of all US households rose from $2.7 trillion to $4.5 trillion in constant 1995 dollars. But the benefits of this growth were not the same for all, given that the top 5% increased its average income by a whopping 54.1%, absorbing thereby the bulk of the new growth, mostly at the expense of the middle 60% of the population.

Figure 2.3 Percent Change (1975-95) of the Share of Income of US households by income group (in constant dollars).

The cumulative result of this process explains the striking imbalance in US wealth distribution. Financial wealth, by definition, is the accumulation of income over time. The final outcome is an accentuation of the imbalances in wealth distribution. For instance, “the top 1% of Americans has now more personal wealth than the bottom 92% combined.”29 This process of concentration keeps occurring on all levels. For instance, the assets of the tiny group of the top 500 families in the US rose from $2.5 to $5 trillion between 1983 and 1989.30 Globally, the world’s 447 billionaires have agglomerated financial assets greater than the combined annual income of over half of the world’s population.31

The top three billionaires own now more wealth than the combined GDPs of 48 poorest countries in the world.32 And it is expected that 60% of all purchasing power within the US will be in the hands of millionaires by 2005.

Was it a concern for social justice and stability that previously motivated all three major religions – Judaism, Christianity, and Islam – to unanimously prohibit the practice of charging interest?

It is intriguing that after interest became officially legal, almost all countries have felt the need to create income redistribution schemes to counteract at least part of this process. Some of them, such as the welfare system and progressive taxation, are increasingly being criticized for their ineffectiveness. Is this the fault of the overly efficient money system, or of the inefficient redistribution schemes? Or both?

The Really Big Picture

Evolutionist Steven Jay Gould calls the “Great Asymmetry” the remarkable ability of evolution to create a bit more, on the average, than it destroys. The biosphere is cumulatively creating complexity and growth, which runs in the opposite direction than entropy in physics. The human species’ way to engage in this “Great Asymmetry” has been the economy.33

Within this grand scheme of things, money is the evolutionary information system that accounts for the human contribution to this “Great Asymmetry.” It plays the role of a social DNA. The Modern Age gave birth to a money system that enforces its ideal of continuous economic progress under hierarchical, controlled, centralizing conditions.

Changes in the DNA play a superficially invisible but vital role in mutations and evolution. Similarly, changes in money have the potential to deeply re-shape the values and priorities of the Post-Modern, Post-Industrial world.

What next?

The three side effects of interest – competition, the need for perpetual growth, and wealth concentration – are the hidden engines that have propelled us into and through the Industrial Revolution. Both the best and the worst of what the Modern Age has achieved can, therefore, be indirectly attributed to these hidden effects of interest – the apparently banal feature of our officially prevailing money system.

There is a growing consensus that the Industrial Age is dying. We have begun navigating the uncharted waters of the Information Age. Curiously, unnoticed by mainstream media and academia, new monetary experiments have already started to thrive in a dozen countries around the world. My view is that these innovations offer realistic possibilities for gradually correcting the excesses and imbalances of the current system without revolutions or violence. Even more important, these new complementary currencies, operating in conjunction with the dominant national money system create new wealth, both financial and social. They also have already proven that they address some of our most urgent social issues without requiring either taxation or regulation. It is no coincidence that these new currencies typically do not share any of the four obvious characteristics of the national currencies described above. For instance, they specifically do not involve interest.

It is worth remembering what John F. Kennedy remarked

“Those who make peaceful revolution impossible
will make violent revolution inevitable”

Chapter 3: Cybersphere – The New Money Frontier

“Money has evolved from shells to green paper
to the artful arrangement of binary digits.”
Dee Hock, Chairman VISA, 196834

“The real voyage of discovery consists not in seeking new landscapes,
But in having new eyes.”
Marcel Proust

“Confusion is the word we invented to refer to an order
we don’t yet understand. “
Henry Miller

In less than two decades, what Daniel Bell originally called the Post-Industrial Society is now commonly referred to as the Information, Knowledge or Communications Age. As information becomes our critical resource, there are sweeping implications not only for our economy, but also for the very fabric of our society.

We saw that our oldest information systems are money systems (Chapter 1) – remember, even writing was initially invented to record financial transactions. So it is no surprise that money is again on the forefront in computerized cyberspace.

We can expect fundamental changes not only in payment systems for conventional currencies, but also the emergence of new types of money.

Post-Industrial Society = Knowledge Age

In the 1940s, IBM’s first Chairman, Thomas Watson, predicted a world market for “maybe five computers.” By 1975, about 50,000 were operating, and in 1997 more than 140 million.35 There are an additional 170 million computers-on-a-card currently in use worldwide,36 as well as the innumerable “invisible computers” that are built into routine appliances – a typical car today contains more computer-processing power than the first spacecraft that landed on the moon in 1969.

The reason for this explosive proliferation is simple: never before has the world seen as dizzying a drop in the price of an industrial product. We have gotten used to the idea that today’s $2,000 laptop packs more power than the $10 million mainframe of 20 years ago. If car efficiency and costs had followed the same trend, you would now drive coast-to-coast across the US on a fraction of a drop of gasoline in a car costing less than one dollar.

When steam power was introduced, it was not much cheaper than water power, and it took from 1790 to 1850 for its real price to be cut in half.37 Likewise, it took between 1890 and 1930 for the price of electricity to drop by just over half.38 In contrast, the cost of computing power halves every 18 months. Named after the President of Intel, “Moore’s law” actually describes an even more impressive rate: every 18 months, computational speed doubles and the price drops by half.

Just one facet of it – the Internet – is the topic of an estimated 12,000 articles per month in the US press alone, and this does not even include what is written about the Internet on the Internet. Never before has any technological shift been heralded by such an information avalanche. George Gilder calls it “the biggest technological juggernaut that ever rolled.” Bill Gates claims that “the benefits and problems arising from the Internet Revolution will be much greater than those brought about by the PC revolution.” It is worth repeating again that what drives the change are the gigantic drops in costs and speed not only in computer chips but also in communications in general (see sidebar).

Comparing Communication Costs

  • Sending a 42-page document from New York to Tokyo normally takes five days by airmail and costs $7.40.
  • You can get it there faster, but at a much higher cost: a courier delivers it in 24 hours for $26.25; or with a fax- machine in 31 minutes for $28.85.
  • Compare all that with the email alternative of two minutes and a cost of 9.5 cents. No wonder Internet traffic doubles every 100 days! If you read this text end 1999, during the time you have finished reading this sentence, ten million emails will have been sent.
  • In 1980, telephone copper wires could carry one page of information per second. Today, one thin strand of optical fiber can transmit 90,000 volumes in one second. The drop in communication costs will further accelerate as the available bandwidth grows.
  • High-capacity, high-speed transmission networks are in the process of creating a “Broadband Kingdom” where it will be cost-effective to leave the Internet “always on” at work and/or at home. Various technologies compete with fiber optics to create this world, including high-speed data delivery systems via television cable distribution, digital subscriber line technologies (DSL) which enable dramatic speed increases on traditional copper telephone wires, satellite operators, and wireless networks. All this competition means that the cost of data communications will continue to drop dramatically in the foreseeable future.iGoldman Sachs Investment Research: The Race to Build the Broadband Kingdom” (August 12, 1999)

Although skepticism is healthy when we are faced with this much hype, this Revolution could yet prove to be a real one. That is clearly the opinion of the stock market: by early 1997 the combined stock market value of Microsoft and Intel ($274 billion) comfortably exceeded the combined value of General Motors, Ford, Boeing, Eastman Kodak, Sears, JP Morgan, Caterpillar, and Kellogg ($235 billion). Internet stocks, such as or Ebay have yet to earn a dollar in profits, but are nevertheless valued in the billions. Yahoo by itself is valued at $30 billion as of January 1999, double of the stockmarket value of J.P. Morgan.

Whole libraries are being written about the gee-whiz technologies involved. The focus here will be only on the meaning of this Information Revolution and the opportunity it represents for choosing our money systems in the near future.

To help us navigate this material, this chapter is organized under the following five headings:

  • The Nature of Information
  • Implications for the Economy and Society
  • Implications for Money
  • Implications for Banks and Financial Institutions
  • Wisdom in the Information Age?

The Nature of Information

The power structure of every economic system has been designed to control some critical resource. Information, the raw material for creating knowledge, is the next likely candidate for that role. “As far into the future as we can see, information will be playing the prima donna role in economic history that physical labor, stone, bronze, land, minerals, metals and energy once played.”39

As information becomes that key resource, its unique features will shape a very different society. For our purposes, Harlan Cleveland40 and Howard Rheingold41 have made the best inventories of those characteristics:42 43

  • Information is shared, not exchanged. With any of the previous focus resources – from a flint spear-point to land, from a horse to a barrel of oil – if you acquired it from me, I lost it to you. After an exchange that involves information, both of us have it. In buying this book, for instance, or a magazine or permission to access a database, it may look as if a traditional exchange has occurred. However, what is bought, sold, and then owned, is the delivery mechanism, not the information. Even after it has been shared with the buyer, the message delivered is still retained by the seller. When you use software, you are not stopping millions of others from using it also, as was the case with the key resources of the past. As a consequence, information is what economists call a “non-rival” product.
  • The most powerful catalyst of the transformation is not information but the communications revolution. Over the past decade, the total electronic communications worldwide have increased by a factor of four. However, during the next decade, we should expect another multiplication, this time by a factor of 45!44 Communicating information literally multiples its power. Telecommunications has made information transportable. It travels through electronic networks at almost the speed of light and for a very low cost. The nature of information, therefore, is that it tends to leak. The more it leaks, the more of it we have, and the more of us have it. Government classifications, trade secrecy, intellectual property rights, and confidentiality are all attempts at artificially reducing this natural tendency to leak. Increasingly, these artificial attempts are failing because the actual information cannot be ‘owned,’ but only the conduits of its delivery system. Although he admits to still searching for a patent lawyer willing to agree with him, Cleveland sees “the expression ‘intellectual property’ as an oxymoron, a contradiction in terms.”45
  • As a consequence of the two points above, information expands as it is used. Information spontaneously tends toward abundance, not scarcity. In one way, this is fast becoming a drawback: we all complain about information overload. What remains scarce and competitive is human attention, and our ability to understand, turn into knowledge, and use all the information available to us.
  • As an ideal possibility, conventional economic textbooks describe the theory of “perfect competition.” This theory works from the assumption that all parties have all the information relevant to optimize a given purchase, that there are zero transaction costs, and no barriers to entry for new suppliers. In “real” world transactions, these conditions are rarely met. Interestingly, the cybereconomy could become the first actual large-scale “near-perfect market”. Information can definitely be more abundant and accessible to more people in cyberspace. The Net makes transaction costs lower than ever. And many of the usual barriers to entry, such as location, capital requirements, etc., are less applicable. Because comparison-shopping is so easy on the Net, it promises to be a fiercely price-sensitive market. Even so, the emerging market environment of the Information Age seems to conform perfectly to conventional economic theory.
  • In other important respects, information economics sets traditional economic theory completely on its head. One breakthrough is the realization that information and knowledge are the only factors of production not subject to the law of diminishing returns.46 They, in fact, enjoy a law of increasing returns.47 In practice, this means that as information becomes more available, it also becomes more valuable. This has also been called the “fax effect.” Imagine that you have bought the first fax machine ever produced. What is the value to you of that device? Practically nil, because there is no one else with whom to communicate at that point. However, every newly installed fax machine increases the value of your fax machine. This is an exact reversal of traditional economics, where scarcity determines value. For instance, gold or diamonds, land or any other traditional commodities are valuable because they are scarce.

Figure 3.1 shows the conceptual relationship between resource and use in three different types of systems: physical, biological and information systems.

Figure 3.1 Relationships between Resource and Use for physical, biological and information systems

Economic theory has been on the basis of observation of the physical/material realm where a resource is reduced by use. The challenge is to develop a framework which can also take into account realities where the resource either changes with use (biological systems) or increases with use (information systems).

Implications for the Economy and Society

What are the consequences of these characteristics for a society that uses information as its primary economic resource? First, such an economy is literally dematerializing. In 1996, Alan Greenspan noted: “The US output today, if measured in tons, is the same as one hundred years ago, yet the GDP48 has multiplied by a factor of twenty over that time.” The average weight of one real dollar’s worth of US exports is now less than half of what it was in 1970. Even in “manufactured” goods, 75% of the value now consists of the services imbedded in it: research, design, sales, advertising, most of which could be “delocated” anywhere in the world and transmitted via high-speed data lines. Along with the other factors, this dematerialization process makes it much harder for governments or regulatory agencies to measure, tax or regulate what is going on. For instance, the French government will find it more difficult to keep US media products out of France using import controls when these products can be channeled through satellite TV or the Internet. The switch to information-as-resource means that governments are less able to intervene in (or muck up, depending on your viewpoint) the high-speed train of social transformation that is headed our way.

The Positive Forces

Harlan Cleveland states most succinctly the positive implications:

“A society suddenly rich in information is not necessarily fairer or more exploitative, cleaner or dirtier, happier or unhappier than its industrial or agricultural predecessors. The quality, accuracy, relevance, and utility of information are not givens. They depend on who uses this new dominant resource, how astutely, for what purposes. What is different is that information is, in all sorts of ways, more accessible to more people than the world’s key resources have ever been before.

It was in the nature of things that the few had access to key resources and the many did not. The inherent characteristics of physical resources (natural and human-made) made possible the development of hierarchies of power based on control (of new weapons, of energy resources, of transport vehicles, of trade routes, of markets, and especially of knowledge); hierarchies of influence based on secrecy; hierarchies of class based on ownership; hierarchies of privilege based on early access to particular pieces of land or especially valuable resources; and hierarchies of politics based on geography.

…Each of these five bases for hierarchy and discrimination is crumbling today because the old means of control are of dwindling efficacy. Secrets are harder and harder to keep, and ownership, early arrival, and geography are of declining significance in accessing, analyzing and using knowledge and wisdom that are the really valuable legal tender of our time.

…In the agricultural era, poverty and discrimination were explained and justified by the shortage of arable land. Women and strangers could hardly be expected to share in so scarce a resource.[…]In the industrial era, poverty was explained and justified by shortages of things: there just weren’t enough minerals, food, fiber and manufactures to go around.

…Theoretically at least, compared to things as resource, information-as-resource should encourage:

  • The spreading of benefits rather than the concentration of wealth (information can be more readily shared than petroleum, gold or even water)
  • The maximization of choice rather than the suppression of diversity (the informed are harder to regiment than the uninformed).”49

The Negative Forces

Paradoxically, the dynamics of information economics could also create an unprecedented concentration of power in the hands of a very few Information Age billionaires; business barons who bare scant resemblance to those who created wealth during the Industrial Age. Some people foresee the spread of a “Winner-Takes-All” economic environment.50 The trend toward increasingly exorbitant compensation for the very few at the top has been notorious. It started with movie stars, entertainment and sports heroes, and spread over the past decade to high-performance CEOs, traders, lawyers, and doctors. Is this just a strange shift in societal values, or is this also a consequence of deep-seated forces in the information economy?

The “network economist” Brian Arthur claims that positive marginal rates of return can propel some corporations into an almost impregnable monopoly. For instance, once a particular software moves toward becoming an industry standard, it will tend to automatically crowd out competitors until it captures 100% of the market. Microsoft’s dominance in the PC software market is often cited as an example of this process in action. Are we inaugurating an era where de facto monopolies can emerge more easily than in the traditional Industrial economies? Have anti-trust laws designed for the Industrial Age become ineffective in cyberspace?

Or are these compensation flare-ups and new types of monopolies just a last gasp of the transition out of the Industrial Age? This is something like what happened to skilled weavers at the beginning of the industrialization process: their incomes soared after spinning was mechanized, only to crash when new machines replaced their own skills later on. This is what MIT economist Paul Krugman claims is going to happen. Take the case of high-priced actors: Mirage Entertainment Sciences describes itself as the first “Posthuman Talent Agency.”51 Its first “synthetic image actor,” a blond and buxom beauty named Justine and produced on a CAD called Life F/x., is already available. “We are even able to wrinkle the skin so it behaves like real tissue,” says Ivan Gulas, the Harvard clinical psychologist who is shaping the new actress for Hollywood’s purposes. Today’s actors may suddenly find themselves competing with Marilyn Monroe or Humphrey Bogard, or even a new “ideal” synthesis of several of the best actors of all times. Similar early inroads being made in other high paying jobs: for example, robots that perform hip-replacement surgery; expert systems that plan your will or prepare and file your tax returns. The first successful adaptive neuronet applications that replace currency or bond traders are being implemented because “humans cannot keep up with the high speed of these information-dependent systems.”

In short, nobody should believe that they will remain forever immune to Information Age obsolescence. All should be interested in a society that is viable for everybody. After all, we are only making the opening moves in the new global Information Age chess game, and nobody really knows how the game will unfold.

Figure 3.1 Curve of Adoption of New Technologies in the US
(Source: IBM)

Given that this are still early days at this point, and that the implications of the Information Revolution entail two paradoxically opposing trends, what will be the final outcome? There is definitely room here to project any one of our favorite dreams and nightmares, and we will do some of that in the next chapter. Samuel Becket’s tease comes to mind: “Everything will turn out all right – unless something foreseen happens.”

Distribution and Retail

The Net is already completely altering the economics of the gigantic distribution and retail sector, by far the largest employer. In cyberspace, more and more people are comparison shopping and purchasing at wholesale prices, with no more effort than clicking a mouse. Instead of a retail economy with physical processes, we are already well on our way toward a wholesale economy with digital processes. In other words, the old way consisted of physically moving a product from manufacturer to wholesaler, and then to the retailer and finally to the consumer. In the new way, the middleman deals only with information, makes it available to the consumer in a palatable form, then communicates orders back to the manufacturer, who ships the merchandise directly to the consumer (the Cendant case study in Chapter 4 explains this process in detail). Although one should not necessarily conclude that this means the demise of the small personalized retail operations (sidebar). In any case, in such a switch, nothing remains the same. For example, the prices charged to the consumer can be radically different.

Internet and the Power of the Small

Internet does not necessarily mean the take-over by giant cyber-merchants. For instance, it may make possible for small specialty shops to better compete with the giant retail chains. One example of such a process can be found in high-quality audio systems. The associations of small retailers specializing in high-end audio products called PARA52 have used the Internet to regain leadership as trendsetters in the industry. 300 members of PARA cooperated to create the most sophisticated comparative databases of all the equipment available on the Net, as well as new tools to better customize systems to client requirements, or continuous on-line training courses for their staff.

Large chains compete best on price for commodity-type products, exactly aspects which the Internet is unbeatable. In contrast, neither the chains nor Internet vendors can provide the personalized product information, customer service, product demonstrations, and local repair services that small specialized shops can provide.

PARA is taking advantage of the Net to foster cooperation among its members, provide better tools and training for their employees to reinforce their capacity to customize. They thereby reinforce their differentiation with both the large chain and Internet vendors. Is this a case of David gaining over Goliath thanks to better use of new tools?

Cheaper than Wholesale?

The following example provides a taste of things to come53. You can buy the Virtual Vegas Turbo Blackjack computer game in a store at $29.95 or download it from the Net for $2.95 (one tenth of its “normal” retail price.54 The CEO of Virtual Vegas, David Herschman, has figured out that, even with this drastic price reduction for the Net, he still makes more money on a Net sale than on a retail sale. Each $29.95 CD ROM version of the game has to pay for the retailers’ and distributors’ share; for the production, packaging and shipping costs; for sales commissions and unpaid accounts. After all this, the income to Virtual Vegas is $4.50, out of which Herschman pays for his own staff and the infrastructure to manage distribution middlemen and production steps. In contrast, each $2.95 copy of the game paid for with CyberCoin and delivered over the Net costs him only 26 cents, yielding a $2.69 profit. At the Web price, many more copies will be sold. Herschman summarizes: “The profit margin on the Web is huge. We make it once and….we could sell that from here to eternity.”

Nor is this the end of the cost compression game: Digital Equipment Corporation is launching its Millicent payment product to compete with CyberCoin, promising to further reduce the costs of a Web transaction from 26 cents to the order of 0.1 cent (yes, one tenth of a cent!). Other companies, such as Citibank, Verifone, and Microsoft are all known to be developing similar products, ensuring that these costs will remain really low.

New Yorker
New Products?

Even so, it would be a mistake to look at the cybereconomy as an unusually cost-effective new wholesale marketing outlet, or as a very special and fast growing export “country” for existing products. It also promises to make possible totally different products. For instance, the new micro-payment technologies already offered by CyberCash make it economically interesting to “unpack” products that we have always purchased as a unit. One could charge a very small fee for providing exactly what the consumer specificies. Instead of buying a whole cookbook, a magazine, a CD or even a newspaper, for a few cents, you could order only the sections, articles or songs that you really want.

The next Gutenberg revolution?

Purported to be the largest bookseller in the world, does not have a single bookshop. It started operations in 1994, and recorded sales of $16 million in 1996. In 1997, it sold $148 million worth of books, and in 1998, a staggering $460 million. Over two million titles are available at any time with the click of a mouse. Some people would like to extrapolate such dizzying trends forever; as of November 1998, the stock market valuation was $6.3 billion. In 1998, the largest publisher in the world, Bertelsmann of Germany, decided to acquire Barnes and Noble’s Internet shop so it could directly partake in the electronic fray.

However, the real Internet book revolution is still invisible in the market place. Patents have been issued for a thin-leafed “electronic book.” Such an “e-book” looks like a normal book with a few hundred paper-thin pages, but each “intelligent” page is controlled by its own computer chip and covered with millions of microscopic two-toned particles. The book’s “spine” hides the chips, power and connection plugs needed.55 Unlike a computer screen, you can flip to any page back and forth, and remember where you were. It is totally flexible, and infinitely reusable. This all-purpose e-book can be loaded with any content as needed, and the resolution is better than the text you are currently reading. Different formats are available: from newspaper to paperback-size, from kid-proof to waterproof. You can throw your e-book in your backpack, read it on the bus or the beach – it is more rugged than the book you hold in your hand.

This is a second Gutenberg revolution in the making, where everybody can become an author and sell their book for the price of today’s royalties. Bookshops could become mostly coffee shops, where one compares notes and tips about the most interesting websites that provide detailed ratings on the infinite supply of “publications” available. For people who prefer good old traditional paper books, a printer-binder – located in the corner of the “book-shop,” at the Post Office, or at Kinko’s – could even prepare such paper-books to order. They could be hardcover or paperback, large or small print, with everything always “in stock,” exactly when the customer prefers it. The first “print-on-demand” (POD) book was demonstrated at the 1998 “Chicago Book Expo.” The time between the moment the book is ordered and handed to the customer is less than five minutes. And it can be sold at the same price as a mass-produced book. During these five minutes, the book is downloaded, printed, and bound, producing an exact clone of the normal edition.56 Is this another nightmare or dream in the making? Another example of an industry (publishing) hit by the information revolution? Another sign that an age is dawning where we will breathe life into Cleveland’s vision of increased choice and the democratic availability of information as the key resource?

Implications for Money

An inscription in the lobby of New York’s Library of Science, Industry and Business reads: “Information about money has become almost as important as money itself.” The quote is from Walter Wriston, ex-Chairman of Citibank. He should know. Under his guidance and that of his successor, Citibank became the biggest investor of all banks in Information Technology ($1.75 billion in 1995).

Money was one of the first domains to enter the Information Age. Most financial transactions have been computerized for decades. Most of your own money is likely to reside in a bank or brokerage account, i.e. in a computer somewhere. The development of the cybereconomy simply means that other aspects of economic activity are finally catching up with money in cyberspace.

Payment Systems

In turn, the rise of commerce on the Net is sparking off a whole new wave of money applications. The expected bonanza is huge – the land-rushes of Oklahoma were puny by comparison. By the end of 1997, 70% of the Fortune 1,000 corporations were ready to do business on the Net. The 1998 e-commerce Christmas season boom confirmed that the cybereconomy has all the makings of the fastest growing economy in the world.

Price Waterhouse estimates that by the year 2000, the number of Netizens will have soared to 168 million, and that they will buy some $175-200 billion of goods and services on the Net. Forrester Research’s survey of business executives resulted in forecasts that the Internet trade among businesses alone will reach $300 billion by 2002. The market research company International Data estimates that the Internet economy — which includes online shopping, business-to-business purchasing and advertising – reached $200 billion in 1998, and will soar to $1 trillion by 2002. No wonder everybody is interested in creating cyber-payment services.

The implications of all this are hard to fathom. For some businesses, the Net has already become their biggest single distribution outlet. For example, Best Western’s website generated 48,000 hotel nights for a value of $3.5 million in 1996. The website for Dell Computers registered a daily sales volume of over $1 million in the first quarter of 1997 with peaks of $6 million per day during the holiday seasons. Cisco’s website cashes in on over $2.3 million on an average day. Such a website is a distributor’s dream: a retail outlet with no rental costs, no employees, not even a light bulb is needed; the customers fill in their own orders and pre-payment slips; and orders roll in 24 hours a day, 365 days per year. In addition, corporations can skip all intermediaries and eliminate the cost of keeping inventories of finished products – they manufacture and ship directly to the specifications of the order placed on the Net.

New Money

The real revolution of possibilities unleashed by the Information Age will start manifesting when different kinds of currency follow the same electronic path that the national currencies are now blazing. One example of the such creativity was demonstrated in the UK by the Tesco Clubcard (sidebar). But the blurring is even deeper than that. We have now already airlines becoming retailers (e.g British Airlines’s Air-Miles becoming redeemable in Sainsbury’s retail vouchers) or getting involved in phone services (e.g. the new Lufthansa Senator cards are used not only to buy air tickets and keep track of frequent flyer miles, but also for paying phones, rent cars and other traveler’s services). We have phone companies getting involved in retail payment systems (e.g. France Telecom’s 1.2 million mobile phones are used to charge payments for goods and services). The Irish telecom operator makes more money from investing the ‘float” – the unspent balances issued on phonecards – than they do from actual phone calls.57 Cable TV become e-commerce networks (Canal Plus in France is providing this service now; and there will be 29 million Set-top boxes operated by smartcards in Europe alone by 2003, ten times more than there will be shop terminals.58) Zambian smartcards have already programs for 10 different types of currencies.

The Case of the Retailer Turning Banker: the Tesco Clubcard59

Tesco, one of UK’s largest retailers introduced a remarkably successful loyalty program that forced rival retailers to follow suit. The Tesco Clubcard is even credited with helping Tesco overtake rival Sainsbury as the UK’s most successful retail chain.

Tesco Clubcard members earn one “point” for every Pound spent. These “points” are consolidated in vouchers and product specific coupons. In 1998, this helped Tesco increase customers by one third during the year. One in three UK households noware members and their Clubcard magazine is Europe’s largest circulation customer magazine.

Since 1999, the scheme also provides a “key” for each 25 Pound transaction. With 100 keys, customers get a discount of up to three-quarters off the normal price on Clubcard deals.

Tesco Personal Finance is a key ingredient in this mix, directly competing with traditional banks by a better quality of customer service. Quarterly statements are sent out to 8.5 million members, including 100,000 different personalized variations. Tesco doesn’t charge customers for withdrawing conventional money from the 350 ATM’s which operate around the UK. Every store also provides leaflets and a freephone service for other financial products such as interest-bearing saving accounts, loans, insurance, pensions and a Visa card.

A Clubcard Plus functions as an all-purpose banking service card in addition to a loyalty card, earning 2 Clubcard points for every pound spent, double the usual rate.

All new PCs produced in the year 2000 have smartcard slots, and new smartcards use the same Multos platform so that you can download by telephone on it whenever you need it, for instance a Paris Metro or an Euro-star application, a local library lending program, launderette payments, healthcare insurance data or what is needed to change it into an phone card in Italy.

In short, mobile phones, cable TV, computers, smartcards, complementary currencies and traditional payment systems are starting to converge and create a new money world in the process.

Why should we expect that one of the most conspicuous legacies of the Industrial Age – our national currencies – would remain impervious to change? Even bankers, such as Citibank’s CEO John Reed, agree that “banking will become a bit of application software on an intelligent network.”60 The 1998 merger between Citibank and Travelers Insurance proves that he means it. Similarly, the integration of frequent-flyer miles incentives with traditional national currency-based credit cards shows the trend toward the future. In fact 40% of frequent flyer miles are now not earned by flying; and for British Airlines for instance only about two-thirds of air miles issued are cashed in for something else than flights.

Implications for Banks and Financial Services

In the Primer, we saw that from the 1980s forward, banks found that they were forced to move into new arenas of businesses, performing in them totally different functions and facing different competitors. Instead of making money from the spread between customers’ savings deposits and loans to businesses, banks are now in “financial services”. Their biggest profit centers are likely to be credit cards, foreign exchange, derivative trading, securitization, specialized insurance products, or other exotic “financial products” designed for sale to individuals and businesses. As a consequence, in addition to other banks and savings and loans institutions, their competitors are now brokers (e.g., Merrill Lynch Cash Management Accounts), insurance companies, mutual funds, real estate mortgage brokers, and specialized payment service companies such as Automatic Data Processing (which handled the payroll for 18 million American employees in 1995).

As the Internet expands, it brings with it a second wave of computerization including Open Financial Services. “Open Finance” is defined by Forrester Research as “emerging affluent consumers enjoying best-of-breed financial services combined with easy electronic movement of money. Open Finance means using technology to extend premium financial services that the wealthy enjoy to the mainstream investing public.”61 This will open up a whole series of new questions for everybody, including taxation authorities (sidebar).

Taxation in Cyberspace?

The US government Internet Tax Freedom Act of October 1998 has declared a three year moratorium on taxation of all Internet transactions. But even after this moratorium will lapse the questions arising from taxation in cyberspace promise to be far from trivial.

  1. Whoever taxes cyberspace may loose the chance of leading in the world’s new economy.
  2. Who gets to tax what when a English customers buys something on the Net from an Indian producer and pays for it, all under serious cryptographic protection? Just as critical, if one succeeds in taxing such transactions, how does one avoid double-taxation?
  3. The issue of privacy and taxability are two sides of the same coin. A traceable transaction is easy to tax, but eliminates privacy; a transaction that respects privacy is difficult to tax. No easy compromise for this structural dilemma!
  4. Furthermore, an estimated one sixth of all wealth in the world is now already in tax havens.62 Open Finance will make such facilities available to much larger populations.

I claim that the ultimate answer will be to fundamentally rethink the taxation game. Industrial Age taxes were those on labor (which are counterproductive from an employment perspective), income, sales or value-added (the former intrusive from a privacy viewpoint, the latter socially regressive, and all increasingly hard to define and collect in cyberspace anyway).

Knowledge Age taxes will be those that are comparatively easier to identify and collect and which provide an additional social or sustainability incentive such as: pollution taxes, taxation on the use of land, energy or of non-renewable resources. Even from a theoretical economic viewpoint this approach makes more sense, given that these taxes would make explicit real costs which today’s market system doesn’t capture.

Such a systemic transfer of the taxation base has already started in some forward thinking countries such as the Netherlands.

Equally as critical, the Net will also strip away the geographical protection layer that most financial institutions seem to take for granted. While the Internet clearly started as a US phenomenon, why would Swiss, Bermudan or Singapore banks or service companies not provide payment services or investment advice worldwide via the Net? If data about investment in Information Technology by financial institutions worldwide is any indication, it shows that European financial institutions are now investing more every year than all US banks and non-banks together. By the year 2005, even the financial institutions in the rest of the world will be outspending their US counterparts (See Figure 3.2). Such massive investments are likely to translate into a more aggressive cyber-presence as well. 

Figure 3.2 Annual Investment in Information Technology (US$ billion)
(Source: The Tower Group)

In addition to traditional financial institutions, a whole group of newcomers are likely to enter the field of financial services. Some of these are corporations that are established in adjacent fields, such as DEC, IBM, British Airways, Tesco, Sainsbury,63 or Microsoft, as well as a host of previously unknown players designed purely for the Net (such as Accutrade, eBroker, E*Trade and Datek).

These Net-brokers hit the market of established brokerage firms in 1995 with a flat fee of under $25, and sometimes under $10 per trade. Compare that with a full-service commission averaging between $150 and $300 per trade. These Net firms are not burdened with the overhead of real estate, legacy computer systems, or habits bred by high commissions in traditional firms. This enables them not only to offer cut-rate pricing that puts discount brokers to shame, but also more sophisticated services than provided by many of the full-service houses. Notwithstanding their low costs, they provide for free services such as real-time price and volume quotes, news stories about the specific companies you follow, online access to your account, up-to-the minute stock monitoring and portfolio pricing, even analysis and portfolio management tools. In October 1997, Christos Cotsakos, CEO of E*Trade, which charges only $15 per trade, said his business handled $4 billion in customer assets and opened 600 accounts in a typical day, yet it could claim only 7% of the online trading market. Some of the biggest established houses such as Charles Schwab and Merrill Lynch have retaliated by going online themselves and matching the upstarts’ offerings, so that Schwab now handles online some 700,000 accounts and $120 billion of customer money. Even the crusty London Stock Exchange had to bow to Tradepoint, a rival online upstart, to allow it to disseminate real-time electronic dissemination of its prices.

Forrester Research forecasts that the number of online investment accounts will soar from 1.5 million in 1996 to 10 million in 2001. By then, online securities trading is expected to grow four-fold to $350 billion and online mutual fund trading ten-fold to $173 billion.

All this will really take off when a significant percentage of the emerging affluent are wired – sometime during the first decade of the Millennium – when Netsurfers, who grew up with computers as teenagers, enter their money-making years. But by then the early movers will have staked out the Open Finance territory, and established their brand names.

Even more fundamentally, in Open Finance, the institutions that will be the winners are those that have positioned themselves to transfer value on the Net, instead of only national currencies. For example, the capacity to handle non-traditional currencies smoothly, as a complement in payment systems to the national currencies, will be a major plus. Payment systems that try to deal exclusively with national currencies will be put at a structural disadvantage. For instance, how about sending an email to your daughter stranded in a foreign country, with an attachment of some dollars and some frequent flyer miles for her to buy an airline ticket back home? How about paying for something on the Net with a mixture of dollars and corporate scrip or complementary currency? Cendant64 is already using mixed payments of dollars and its own “netMarket Cash.”65 Similarly, the first dual-currency smart cards for payments in a mix of dollars and complementary currency were being tested in Minneapolis in 1997 (as will be shown in Chapter 7).

All this may sound strange to the habitual ways of thinking by today’s established market leaders. But as Eric Hoffer put it:

“In times of change,
those who are ready to learn will inherit the world,
while those who believe they know will be marvelously
prepared to deal with a world that has ceased to exist.”

Wisdom in the Information Age?

The coming of the Information Age does not entail only positive consequences. The one certainty it heralds is change. Resisting the change has been proven to make the shift even more traumatic in the long run. The cost structure in favor of the Net is so overwhelming that the wave will be irresistible. It will also go global much faster than was the case of the Industrial Revolution.

It is important to remember that information-as-resource is only a raw material, the equivalent of a sack of coal during the early Industrial Age. It becomes truly useful only when it is transformed into knowledge and handled with wisdom. We therefore need to define the subtle but critical differences between the adjacent concepts of data, information, knowledge and wisdom.

A good starting point is T.S. Eliot’s question:

“ Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?”

To which Harlan Cleveland adds: “Where is the information we have lost in data?”66

Data are undigested observations without context. A list of phone numbers is an example of raw data.

Information is data organized by someone else, not by you, according to some system aimed at making it retrievable and hopefully useful to someone like you. An alphabetical listing in a phone book organizes the raw data of phone numbers in some such a useable way.

Knowledge is information that has been internalized by you, integrated into everything else you know from experience and study, and that is therefore available to you for as a basis for action in your life. You know that this particular phone number is your friend’s number, and this links it with everything else you know about that friend. An increasingly important form of knowledge is learning how to find the information that is useful to you.

Wisdom adds depth, perspective and meaning to knowledge by integrating ways of knowing other than logic and analysis, such as intuition, or the intelligence and compassion from the heart. Wisdom is by definition multi-dimensional, crossing the boundaries between different fields and ways to knowledge. It is the ultimate synthesis which cannot be forced on or taught to someone else:

“We can be knowledgeable with other people’s knowledge,
but we cannot be wise with other’s people wisdom.”

(Michel de Montaigne 1533- 1592).

In our Industrial Age coal metaphor, data is the coal vein still deep in the mine. Information is a sack of coal ready to use. Knowledge is the steel we make out of it. And wisdom is the bridge, and the new connections between people that it enables – which is the real purpose of the whole process.

If we are to realize the benefits of the Information Society, navigating the transition will require both knowledge and wisdom. If we choose to have some degree of wisdom prevail, the Information Revolution could serve in the creation of Sustainable Abundance, rather than other possible scenarios depicted in the following chapter. This is why I also call Sustainable Abundance wise growth.

As you read the rest of this book, the following four key points from this chapter are worth remembering:

  • Whether we like it or not, an information revolution is occurring right now. Neo-Luddite attempts at stopping the process will prove even more futile during this transition than did those of their predecessors during the Industrial Revolution.
  • Information technology by itself is neither a magic bullet that will spontaneously solve all our problems, nor a Frankenstein monster that will devour its creators. Potentially, it is both, and now is the time to become vigilant and aware of the deeper underlying issues. That same technology is unleashing simultaneously two powerful opposing dynamics. One leads to Cleveland’s “fairness revolution” where information-as-resource becomes an opportunity to increase and spread wealth on an unprecedented scale. Another could lead to a “Corporate Millennium” (next chapter) where “information barons” play the role of the “robber barons” of the early Industrial Age.
  • What really matters is not the technology, but the way we use it. The whole money game is going to change. Additional choices beyond national currencies are both unavoidable and necessary. This process started before the new technologies were available, and such technologies have the capacity to amplify their spread and scale. For the first time in several centuries, new players are moving in to create totally new ways for defining money, creating it, and using it. This new money frontier provides unprecedented opportunities for rethinking the kind of money we want, and for incorporating features to help address issues our societies will be facing in the foreseeable future. For example, the possibilities that new money systems offer to address the unemployment problems likely to occur during the transition to the brave new information society should be of interest to everyone, even those who are today’s elites at the top of the compensation scale. Similarly, elderly care, community and environmental restoration are goals to which a majority should be able to subscribe.
  • Private corporate currencies are not a problem per se. After all, as we saw in the Primer and Chapter 2, our familiar “national” currencies are bank-debt currencies, i.e. are in reality privately issued corporate currencies which have been homogenized on a national level. Potential problems arise when corporate currencies become de facto or legally enforced monopolies.

On the positive side, information-as-resource is giving to more people than ever the opportunity to create their own currencies that can reflect their own values. The starting point is to be aware that choice in money systems exists, and that choice matters. Historically, most features within money systems have not been designed consciously. They just evolved and ended up reflecting whatever the power structure and the collective unconscious of the corresponding societies projected onto them. This time, we have the opportunity to do it differently. We know enough about money and the collective unconscious to open conversations about the available options. Conscious choice in money systems at all levels – global, national, corporate, grassroots or individual — may well be the most powerful leverage point for determining whether or not the opportunities of the Information Age will produce Sustainable Abundance or some other outcome.

The consequences to society of the dominance of various types of currencies created by different actors are explored in the next chapter. Such an exploration may in fact reveal itself to be the ultimate way of understanding money. As Kurt Lewis pointed out: “If you want to truly understand something, try to change it…”


Table of Contents










  1. Galbraith, J.K. Money: Whence it came, Where it went (Boston: Houghton Muffin Co., 1975) pg 5.
  2. Needleman, Jacob: Money and the Meaning of Life (New York: Doubleday Currency, 1994 ) pg. 239
  3. Skidelsky, Robert: John Maynard Keynes: The Economist as a Savior, Vol II (New York: Penguin, 1994) pg 312. Also quoted by Lawrence S. Ritter ed. Money and Economic Activity (Boston: Houghton Mifflin, 1967) p. 33
  4. John Maynard Keynes A Treatise on Money (London, 1930) chap 1, pg. 13
  5. ???
  6. Congressman Bill Dannemeyer, from southern California, wrote to his constituency that “It is not an accident that the American experiment with a paper dollar standard, a variable standard, has been going on at the same time that our culture has been questioning whether American civilization is based on the Judeo-Christian ethic, or Secular Humanism. The former involves formal rules from God through the vehicle of the Bible. The latter involves variable rules adopted by man and adjusted as deemed appropriate.” Quoted in William Greider The Secrets of the Temple (New York: Touchstone Books, 1987) pg. 230.
  7. Ferguson, Sarah: “Star Trek: The Next Currency,” Worldbusiness, Spring 1995, pg 14.
  8. Greider, William The Secrets of the Temple (New York: Touchstone Books, 1987) pg. 240
  9. Glyn, Davies: A History of Money from ancient times to the present day (Cardiff: University of Wales Press, 1994) pg. 27
  10. Buchan, James Frozen Desire: The Meaning of Money (New York: Farrar Strauss Giroux, 1997) pg 17.
  11. Stanley: How I found Livingstone (London, 1874) pg 22-24.
  12. Williams, Jonathan: Money: A History (New York: St. Martin’s Press, 1997) pg 207 – 209.
  13. These are explained in more detail in Appendix A.
  14. Proust, Marcel Le Temps Retrouvé
  15. Buchan, James Frozen Desire: The Meaning of Money (New York: Farrar Strauss Giroux, 1997) pg 19-20 Italics added.
  16. Zeitgeist would translate literally as “Spirit of the Age,” but the English translation does not really do justice to the original German. Zeitgeist also captures the mood, fashionable ideas, and the artforms through which this mood and ideas are expressed. It is interesting that the concept of Zeitgeist, and its accompanying constructs of Weltanschauung (literally, “Way of Looking at the World”) were developed in parallel with the concept of the nation-state by the German philosopher Hegel (1770-1831).
  17. The German philosopher Georg Wilhelm Frederick Hegel (1770-1831) developed the theoretical concept of a nation-state owned by the people who inhabit it, as opposed to private or oligarchical fiefdoms which were the historical norm for kingdoms or empires.
  18. Handy, Charles The Empty Raincoat (London: Arrow Business Books, 1995) pg.108
  19. Committee on the Working of the Monetary System, Report (London: Her Majesty’s Stationary Office, 1959) paragraph 345, pg. 117.
  20. These technical aspects are explained in Appendix A.
  21. Jackson & McConnell: Economics (Sydney: McGraw Hill, 1988)
  22. Please note that I use the word “sufficiency” and not “over-abundance.” Economists will – correctly – point out that if there is an over-abundance of anything (including money), it becomes treated as valueless. This is not true with sufficiency. Mutual credit systems – discussed in later chapters – create currency in sufficiency (for example service-time) which is not scarce, but is not over-abundant either.
  23. The story of the Eleventh Round is a simplified illustration for non-economists, isolating the impact of interest on money on the system. To isolate that one variable, I have made the assumption of a zero growth society: no population increase, no production or money increases. In practice, of course, all three of these variables grow over time, further obscuring the impact of interest. The point of the “Eleventh Round” is simply that – all other things being equal – competition to obtain the money necessary to pay the interest, which is never created, is structurally embedded in the current system.
  24. Thuillier, P. “Darwin chez les Samourai” in La Recherche Number 181 (Paris, 1986) pg. 1276-1280
  25. Sahtouris, Elisabet Earth Dance: Living Systems in Evolution (Alameda, CA: Metalog Books, 1996)
  26. This calculation assumes the price of gold at $300 per ounce (a generous price in 2001-2002), or about $9,375 per kilo. The weight or mass of the earth is 5,973 kilos followed by 21 zeros. The value of Joseph’s investment at 4% at the year of the American independence would have been $29,692 million trillion, or $29,692 followed by 24 zeros
  27. Kennedy, Margrit Interest and Inflation Free Money (Okemos, Michigan: Sava International, 1995) pg. 26 Also German edition
  28. Hacker, Andrew Money: Who has how much and why? (New York: Scribner, 1997) pg. 17 data derived from the US Census.
  29. Source: Project Responsible Wealth 37 Temple Place, Boston MA 02111
  30. Meadows, Donella “Wealthy stand up for greater equality” Bennington Banner (November 1997).
  31. Korten, David: “Money versus Wealth” YES! A journal of Positive Futures (#2 Spring 1997) pg 14. This number is based on a study performed by Sarah Anderson and John Cavanagh for the Institute for Policy Studies (1996).
  32. Gates, Jeff The Ownership Solution (Boulder: Perseus Books, 1998)
  33. Kelly, Kevin New Rules for the New Economy (New York: Viking, 1998) pg 141
  34. Quoted by Mayer, Martin The Bankers: The Next Generation (New York: Truman Talley Books/Dutton, 1997 pg. 129
  35. The Economist (September 28, 1969): Survey of the World Economy pg 3-4
  36. Estimate by John Gage, Chief Scientist at Sun Microsystems. He also estimates that the number of smartcards will rise to 600 million by 1999.
  37. von Tunzelman G.N. Steam Power and British Industrialization to 1860 (Oxford: Clarendon Press, 1978).
  38. The Economist (September 28, 1969): Survey of the World Economy pg 10
  39. Cleveland, Harlan “Fairness and the Information Revolution” World Business Academy (Vol. 11 no. 2, 1997)
  40. Cleveland, Harlan: Leadership and the Information Revolution (Minneapolis: World Academy of Art and Science, 1997); and The Knowledge Executive: Leadership in an Information Society (New York: Truman Talley Books/ E.P. Dutton, 1985)
  41. Rheingold, Howard Virtual Reality and Virtual Community (New York: HarperPerennial, 1993)
  42. Cleveland, Harlan: Leadership and the Information Revolution (Minneapolis: World Academy of Art and Science, 1997); and The Knowledge Executive: Leadership in an Information Society (New York: Truman Talley Books/ E.P. Dutton, 1985)
  43. Rheingold, Howard Virtual Reality and Virtual Community (New York: HarperPerennial, 1993)
  44. Remarks by Ted Hall, Director of Mc Kinsey and Co, at the State of the World Forum, San Francisco November 1997.
  45. Ibid. Pg 9
  46. This law dates back to agricultural economics. It points out that whenever one applies an additional input such as fertilizer or labor to a given plot of land, each additional ton of fertilizer or worker-hour will produce less benefit than the previous one. At a certain point, too much fertilizer or labor will actually reduce the output.
  47. Arthur, Brian: “Increasing Returns and the Two Worlds of Business” Harvard Business Review (July 1996).
  48. Gross Domestic Product
  49. Cleveland, Harlan “Fairness and the Information Revolution” in Perspectives on Business and Global Change (Volume 11 number 2, World Business Academy) [all italics in original].
  50. Frank, Robert and Cook, Philip: The Winner-Takes-All Society (Free Press), see also the seminal 1981 article by Rosen, Sherwin “The Economics of Superstars.”
  51. Wired (November 1997) pg 202
  52. Jacobs, Garry ; Macfarlan, e Robert & Mira International PARANeering ub Cyberspace: Opportunity of the Millennium (PARA: 11 E 22d Street, Lombard, IL 601 48) 1999.
  53. Hilzenrat, David S. “Change is Good, they Bet” and “Fewer Middlemen, Bigger Margin” in (October 21, 1997) pg 13.
  54. “Change is Good, they Bet” and “Fewer Middlemen, Bigger Margin” by David S. Hilzenrat. The Washington Post (October 21, 1997) pg. 13
  55. Platt, Charles “Digital Ink” in Wired (May 1997) pg 162-165
  56. These POD presses are currently owned by Ingram Book Company, the largest book wholesaler in the US. Their first application is to produce copies of out-of-print books, several hundred of which were already available in the summer of 1998. Optimists see this as a way to keep books from going out of print. Pessimists see the risk of having many books never produced in “the normal way.”
  57. Gosling, Paul Changing Money: How the digital age is transforming financial services (London: Bowerdean, 1999).
  58. Smart-card News February 1999.
  59. Boyle, David E-Money (Financial Times Management Report, December 1999).
  60. at a meeting in Washington sponsored by the Treasury Department, quoted by Mayer, Martin The Bankers: The Next Generation (New York: Truman Talley Books/Dutton, 1997 pg. 34
  61. The Forrester Report: Money and Technology – Open Finance (Volume Two, Number 4, December 1996) pg. 3.
  62. Boyle, David “The scandal of the tax havens” New Statesman November 13, 1998.
  63. Sainsbury is one of the largest British retail chains, with 380 supermarkets. It has opened a Sainsbury bank so that customers can do their banking while in the store. It intends to offer a range of accounts, standard and gold Visa cards, checks, personal loans and even mortgages. See Rankine, Kate “Sainsbury plans to open as bank: Challenge to rivals in food and finance” (London: The Daily Telegraph (October 26, 1996).
  64. Cendant is the largest online merchandiser with a sales volume on the Net of some $1.5 billion in 1997, also the topic of a case study in Chapter 4.
  65. Wired (September 1997) pg. 223
  66. Eliot’s quote is from The Rock and Cleveland’s from The Knowledge Executive: Leadership in an Information Society (New York: Truman Talley Books/ E.P. Dutton, 1985) pg 22

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