Please note that this is BBC copyright and may not be reproduced or copied for any other purpose. RADIO 4 CURRENT AFFAIRS ANALYSIS THE FUTURE OF MONEY TRANSCRIPT OF A RECORDED DOCUMENTARY Presenter: Diane Coyle Producer: Chris Bowlby Editor: Nicola Meyrick BBC White City 201 Wood Lane London W12 7TS 020 8752 6252 Broadcast Date: 18.04.02 Repeat Date: 21.04.02 Tape Number: TLN213/02VT1014 Duration: 27’15” Taking part in order of appearance: Jonathan Williams Expert at the British Museum on the evolution of money David Birch Director of Consult Hyperion Mervyn King Deputy Governor, Bank Of England Heather Grabbe Research director, The Centre for European Reform Keith Hart Anthropologist and author Simon Davies Director, Privacy International and a Visiting Research Fellow at the London School of Economics. COYLE How often do you think about it? Every two minutes? Daily? Or only once a week? Money, that is. The most basic of our preoccupations. We all care about not getting enough of it. It’s much harder, though, to be sure of what it is rather than what it buys. WILLIAMS When money was gold and silver it was immediately graspable for everyone. This was money. This thing in my hand is money. It’s got the king’s head on. I know who the king is. I know what this is worth. This is it. BIRCH We tend to think of money as if it is a law of physics. It’s part of nature. And the way money works is fixed and always has been. And, of course, that’s not true. The way money works right now is actually a relatively recent phenomena and it can change again. So, the options are expanding - which of them will succeed I’m not clear COYLE Jonathan Williams, an expert at the British Museum on the evolution of money, and David Birch, a director of Consult Hyperion, a technology consultancy. He’s an enthusiast for the technical developments that are replacing gold coins and crisp banknotes with zeroes and ones exchanged between computers. And he anticipates a transformation in the nature of money. BIRCH I think the reason why it’s become such an interesting topic again is because of two forces that are coming together. So, on the one hand you have the maturing of the technological infrastructure that can be used to deliver new kinds of money - by which I mean things like chip cards, that we’re all going to have in our pockets soon, the internet, mobile phones, digital television, encryption and so on and so on and so on. And, on the other hand, you have people who are beginning to think that if we use these technologies to re-invent money, we might want to re-invent it in different ways. There are different constituencies, looking at it from that perspective. There are people who think that perhaps money should be reformulated on more regional or community grounds, people who think money might work better if it was more aligned to the needs of certain kinds of business and so on. And it’s really those two things coming together that have given the topic its current energy. COYLE The idea of radical reform in the monetary system is unlikely to appeal to the cautious guardians of tradition in the central banks. Officials at the Bank of England have been watching wild enthusiasms come and go since the days of the South Sea Bubble. Yet even they see developments on the horizon now that would be no passing technological fad but could fundamentally alter their role and authority. Mervyn King, the Bank’s deputy governor responsible for monetary policy, has been considering the likely changes. He foresees a time when we could all pay directly, computer to computer, without passing through a centralised body that approves all transactions. KING It is possible to imagine that in the next century or perhaps the next two centuries, that technology will challenge the need for the central bank to play that role. It might be possible for this final settlement to be played by different institutions - perhaps organisations that specialise in information systems, computer systems - to provide computer networks that will enable the settlement to take place directly between private sector organisation and not go to be mediated through the central bank. And that will raise a question at that point because if the way in which the central bank has control over settlements is undermined by developments in technology then, as a society, we will have a choice between either deciding to create new bodies other than central banks to control the price level - which will become more akin to something like a weights and measures inspectorate - or we will need to give central banks new powers to force settlements of various kinds to go through the central bank so that the central bank will still have control over short term interest rates as now. COYLE In other words, what’s at stake is the method of managing the whole economy which has evolved so successfully over the past decade or two. This is a lot more than just a technical question for bankers about the system of making payments. One way the technology is already by-passing the traditional central banks is by making it easy for people to use supra-national currencies like the US dollar and the Euro. The politics of national sovereignty play a decisive part, of course. But whatever your opinion about the Euro, millions of people this year have been happy to give up their old national currencies. Heather Grabbe, research director of the Centre for European Reform, points out how straightforward it has been. GRABBE The interesting thing is that Germany, one of the countries most attached to its currency, was pushing forward with it. Its government was very keen on the idea of monetary union even though two thirds of the population were against. And yet, the debate that the Germans were having about it disappeared overnight once the currency union went ahead. Once monetary union was decided of upon, then people were much less bothered about it - public opinion changed quite rapidly. So the Germans, although they were very attached to the Deutschmark and very attached to the Bundesbank, this issue has receded into the background - it’s no longer a vital thing. In other countries, it disappeared even more quickly. In France, which has had the longest established currency, they didn’t last very long at all and they were very happy to move towards the Euro. Italy, which had had inflation, you can see why they’re quite keen to move towards a more stable currency and they’re generally more in favour of the European Union anyway. COYLE This trend is global, not just European. There are examples of countries all around the world opting to use something other than their own national currency. They’ve already lost faith in their monetary authorities. GRABBE You can certainly see a gravitation towards particular dominant currencies in a region that the more fragile economies which are actually not part of the currency bloc, people will tend to use the currency which is nearest to them. Latin America - you see this all the time with dollarisation happening. Similarly for Central and Eastern Europe, for the Balkans and going eastwards, people are using the Euro. It’s not just because it’s near and therefore it’s easier to get hold of this currency - it’s also because that’s the bloc with which they do most of their trade. COYLE In the longer view of history, individual national currencies are rather unusual anyway. The ties of trade and political realities have always created pressures that favour an international medium of exchange, according to Jonathan Williams. WILLIAMS The whole point about national currencies is that you can only use the currency of that nation within its borders. You can’t come along and use French currency or German currency in Italy, because it’s not legal. Whereas before, though there were sporadic attempts to exclude foreign currencies in principle because everything was made of gold and silver, every coin had a validity - a value - in any political entity. So you could and sometimes did use Spanish dollars in England because they were made in silver. You could tariff them according to local prices and so on. You could tell that a Spanish dollar was worth - I don’t know - 10 shillings or whatever - it had a local value. The rise of the nation state really puts an end to that. The international nature of money, of coin based money, which in a sense we’re seeing coming back with the rise of extra territorial currencies. The way in which the dollar is now the generally accepted currency in many parts of the world and, of course, the Euro too in various parts of the Balkans. COYLE Yet even as international currencies re-emerge to remind us that national ones are a passing phase in history, in an echo of the wider patterns of globalisation, the new technologies will also make possible the issuance of smaller-scale regional money or company money. The currencies of tomorrow could be based on local needs and relationships, because it will be cheap and technically feasible to issue them electronically. Although the Euro has been given a physical form, there is no longer any real need to mint and distribute tonnes of coins and notes in order to create a new currency. Localised money has become a practical possibility. Keith Hart is an influential anthropologist and author. He has spent many years looking at how money has shaped different societies, from developing African countries to the European Union. HART What’s at stake is that the national unions that organise the human society are losing their credibility and society is evolving upwards towards more inclusive associations and downwards towards less inclusive associations. The fact that two or three currencies will be slugging it out for control of world markets is an evidence of the first tendency. The Euro is a significant marker of increasing European political and economic integration and it does represent a significant challenge to the dollar as a global currency. But, at the same time, I don’t see how it can organise economic life in any equitable way for the vast majority of Europeans. It’s one thing and it can only do one thing. And unless they develop a plurality of monetary instruments, then it will have the effect that the dollar had on Argentina, for many regions of Europe. I mean, when the Eastern Europeans come in, they will, in fact, be like Argentina joining the dollar. For backward regions, the same inequalities because of the rigidity in the management of money supply, interest rates and so on. So, what I see fairly soon, not as a replacement of the Euro but as a complement to it, there will be some need to generate lower level alternatives. COYLE Can you give me some more examples of that? What sort of ways will we use money in the future? Are you talking about lots of different sorts of currencies? HART Yes. Well, I mean, I think Argentina is quite a good case because before the recent crisis, the provincial governments have been issuing their own currencies. Pesos and dollars were being exchanged on the streets very readily and then as liquidity dried up, a whole number of barter clubs emerged and also alternative currencies - Creditos, Bonos - all kinds of things, in very substantial amounts. COYLE The Argentinian example may not be the most encouraging if it means local currencies are just a desperate reaction to financial crisis and national collapse. But advocates of local electronic money see it as a positive development, a sign that we don’t need to depend on central government to organise our monetary affairs. BIRCH I think that the digitisation of money, just like the digitisation of other things - songs, or anything else - allows us the opportunity to dissemble the various components and re-assemble in, you know, the optimally efficient way of the new economy. COYLE David Birch, the digital money enthusiast, says it could make a radical difference to a diverse economy like Britain by allowing regions to shrug off the yoke of a one-size-fits-all pound and issue their own currencies. BIRCH We might decide that it makes more sense for places like, for example, Scotland and Wales, to have their own money again. Now, if that had to be done in an era of paper and coins, then, of course, the costs involved and, frankly, the inconvenience caused, would be astronomical. But when you’re just talking about bits and bytes hidden away on smart cards and zooming around on the Internet, the marginal cost of handling the extra new currency, is very, very low. So, we might decide, for example, instead of giving regional aid from rich areas to poor areas, we might instead float the currencies of the poor areas to let them depreciate against the currencies of the rich areas. If it was cheaper for people in London to buy things in Liverpool, for example, then you might suppose they would buy more of them and because that bypasses the government mechanism of wealth distribution, it could be much more efficient. COYLE This could do wonders for regional pride and prosperity. Or, if the idea of spending Liverpool Livers or Yorkshire Brass doesn’t tickle your fancy, what about Vodafone Dollars or Tesco Tokens? Could companies or any other kinds of organisation issue their own money? BIRCH It wouldn’t be for me to say which organisations people might trust more than others but I’m sure we all have our own ideas. The basic question of would people trust people other than the government to provide money, I think the answer to that is yes they would. There are plenty of surveys that show that people trust certain brands, for example, more than they trust MPs. COYLE Trust is the crucial ingredient. Perhaps this shouldn’t come as a big surprise; trust is after all one of the biggest themes of our times and the subject of this year’s Reith Lectures. It’s clear that a currency that can’t be trusted is literally worthless. And that raises a question about what difference the technological opportunities will make in the end, if it still boils down to whether or not people believe in the value of the new electronic cash. Mervyn King sees trust as fundamental to the whole economy. KING I suspect that trust is actually undervalued as an important role in most economic transactions. I think one thing that’s striking is the amount of trust that we all place in each other when engaging in any economic behaviour. Employers put a great deal of trust in employees. They don’t monitor them with cameras watching people 24 hours a day to make sure that they don’t destroy the equipment of carry out sabotage. When you use a credit card in a restaurant or a hotel, quite often you’re prepared to let the imprint of the credit card be in the possession of the hotel staff for quite a long time before actually checking the bill and leaving the hotel. I think in all these transactions, we actually come to realise that no economy could work on the basis of what one might call a sort of Cold War scenario. Do you remember those stories and films about the Cold War when we exchanged spies in Berlin and their spy approached the bridge at the same time as our spy approached and they walked across and passed each other in the middle? If every economic transaction had to be like that so that you’ve only handed over the money at the same time as the goods were coming across the bridge, as it were, towards you, then you would find it very much more expensive to make transactions. So, the ability of people to trust others with whom they carry out business is an absolutely fundamental part of all economic behaviour and it’s true of money as well. COYLE In one very important way, computer technology is making the need for trust redundant. That fraught exchange of hostages is easier because computers can monitor and record every transaction. The electronic tagging of money is increasingly being built right in to the basic equipment we use. The technical advances can guarantee trust if there’s no hiding, and we don’t need to worry as much about forgery and fraud. On the other hand, the inbuilt monitoring also poses a threat to our financial and civil liberties. Since September 11th the fear of terrorism means there has been little resistance to this steady erosion of the anonymity of old-fashioned cash. Banknotes don’t have our names on them. But almost every time we spend now, we leave a clear trail of electronic fingerprints behind us. Simon Davies is a director of campaign group Privacy International and a Visiting Research Fellow at the London School of Economics. DAVIES The new generation of mobile phones has surveillance and tracking capability built into the core requirements of the system. That’s backed by legislation passed by many western governments through the OECD and the Council of Europe requiring companies to have a tracking mechanism in their telephones. Now the same then applies to financial systems. Audit trails are required by law. So privacy is fundamentally engineered into extinction at the design phase. That’s the problem we face. COYLE Is it possible to evade monitoring by the authorities by using cash more and, in fact, not switching to electronic means of payment? DAVIES There was a time when cash was an option to preserve one’s privacy. The problem with using cash these days is that in small amounts it’s quite feasible to go about your day to day business and to remain relatively invisible. In large amounts, of course, legislation is slowly cracking down on institutions handling such transactions - requiring them to report them to the government. it could easily be that in the future, it’s impossible to use cash because the design of business systems will be such that you will have to use government accredited cards or account systems to conduct your day to day business. COYLE So that if you wanted to use cash at all it’s an automatic sign of guilt anyway? DAVIES Yes. There will be an assumption, in time, that anyone using cash must be on the run - must have something to hide. At the very least, must be some sort of paranoiac. COYLE Paranoia hasn’t yet displaced trust, though. We’re some way from the official tap on the shoulder after a furtive visit to withdraw some used tenners from the bank. On the contrary, cash is still very widely used in some countries, where it’s the electronic money that is regarded with suspicion. Such differences in national habits reveal the importance of culture, as well as technology. Jonathan Williams, the British Museum’s expert on physical currencies, observes many patterns. WILLIAMS Though there will be an increasing trend towards non- material transactions, I’m more confident actually than I used to be that the bank note and the coin has a future. One sees it, for instance, in the variability in the monetary cultures in the different European countries today. The Finns, for instance, like the British, are wedded to plastic. They’re totally open to electronic transactions. Contrast them with the Germans who are very, very suspicious of credit cards. You go to a restaurant in the centre of Berlin, as I did last year, and you offer your credit card and they won’t accept it. The Germans don’t like credit cards - they pay for large sums, by British standards, in cash. Hence the existence of the 500 Euro note which costs about £300. It’s a lot of money. It makes sense in Germany and Austria where you don’t use credit cards. And I don’t actually think that’s necessarily going to change very fast. You’re going to have increasing homogenisation, no doubt, but it’s not necessarily the case that we’re all going to be like the Finns. Could be that the German cash culture is going to take over. It very much depends upon, to my mind, the centrally irrational and unpredictable factors like people’s trust in these electronic means of transaction. COYLE He raises the question of whether we will ever actually trust the money that only exists in a computer network in the same way as our national notes and coins, with their evocative symbolism. WILLIAMS Now that it’s not actually quite clear what money is, people’s understanding of it is extraordinarily vague because it has quite suddenly overnight becomes an intensely complex and essentially theoretical matter rather than a very clear and graspable concept of money being objects made out of a certain metal. Yes, it does in one sense increase its mystique but it also increases its incomprehensibility which is something like mystique but it’s something other than that too, I think. COYLE I suppose this reaches its pinnacle in those global financial markets that we don’t understand at all but are thought to be all powerful and the imperial dollar rules the world through the markets intangibly? WILLIAMS Yes, you’re right. That’s right. You know that it’s powerful but you actually don’t understand - I certainly don’t - how they work, except on a very, very basic level. Whereas, say in the 17th century when the Spanish dollar which was a silver coin, had a world-wide domination, it was very clear what was going on. The silver simply comes from the mine, it’s transformed into silver coins, then it’s shipped off to Spain in the famous treasure fleets of that period and then it circulates throughout the world and it becomes the first world wide currency. That’s very clear and very easy for anyone to understand. Quite what the worldwide dominance of the dollar now means or the extent to which Euro is conceived as a rival of the dollar and the role of the Yen in all of this, is tremendously difficult to understand by contrast. And yet, we have the sense that money is now much more powerful over our daily lives than it used to be, though, perhaps, we’re not terribly clear what we mean by that either. COYLE The baffling, turbo-charged tides of money washing across the global electronic exchanges might well make us nostalgic for the reassurance of tradition, even though the historical record shows that the specific symbols of authority come and go. Digital money will have a struggle to find some way of mimicking the symbolism of national heroes and monuments displayed on banknotes. According to Mervyn King, the monetary authorities recognise the role such signs have played in the past and have thought about what might replace them in the digital future. KING Real trust in the integrity of the processes used to make the payments is fundamental but symbolism probably is not. Some people are obviously nervous about using the internet to make payments but a great deal of effort has gone in to ensuring that the message sending capabilities of different computer systems are such that you can have confidence in making payments on the Internet even though there is no symbolic exchange that people might recognise as something that corresponded to money. And I think that will go very much further because it will simplify and make easier the exchange of resources, the exchange of money to make transactions in general more efficient in the future. COYLE And do you think the loss of symbolism will make the innovation easier? KING I don’t know because the symbolism, sometimes, has been used to represent the existence of integrity and trust in the method of making payments. And, I think, probably with computer systems people will learn certain ways of making payments on their computer will be ones that they can trust. And I imagine that there’ll be some symbol attached to it to enable people to recognise that fact and the symbol will have value because of the integrity which has been given to the underlying process. But it is the underlying process which generates the integrity and the trust, not the symbol. COYLE And it may not be a national one - it’s a sort of another aspect of the decline of the power of the nation state in a way? KING Insofar as it’s computer network, it’s very unlikely that anyone would know to what nation or region or authority one could attach that process. COYLE Some of the enthusiasts for new electronic money think the traditional authorities like central bankers have a vested interest in downplaying the technological possibilities of a computer network, free of ties to national territories, because this could undermine their power. It’s more than just a matter of monetary policy becoming a bit trickier as time goes by. Footloose electronic money offers the potential for breaking free from the control of governments in many areas of their power, perhaps even a full-scale global tax revolt. The implications of new forms of money are profound, which according to Keith Hart explains the concerns of the authorities. HART I’m not against central government pursuing good causes and being financed for it. What I’m interested in is what happens if they can’t make people pay up? And when I say that there is a creeping tax revolt, I mean there has been for a long time an understanding of western governments that they simply cannot increase the level of taxation of their people. Secondly, the ability of people to evade taxation by increased mobility and telecommunications is growing all the time. For example, Internet commerce is growing all the time. The American government has a very interesting policy towards internet commerce. They want the governments of the world to keep their hands off it. They want to have an international treaty that will ensure that Internet commerce expands without any double taxation, preferably without any taxation at all. And more than anything else, the bureaucrats in Washington are scared to death that Congress is going to see Internet commerce as a milch cow for the financing of their schemes. And so there’s a tension within the American government between the political branch and the bureaucratic branch as to whether they should let this new electronic economy go, as it were, or whether they should try and harness it to the needs of public finance. COYLE He points out that the power of national government to raise a lot of tax is relatively recent, and we might be starting to see it decline if we can indeed move our money more easily out of the government’s reach. If centralised states are starting to lose control over their citizens’ resources thanks to the technological revolution in money, it would point to enormous social and political changes. Other experts on the technology, like David Birch, also believe in the potential for electronic money to limit state power although perhaps not as quickly as we might hope or fear. BIRCH In 1400 or 1500 it would be unthinkable that anybody other than the king actually issued money. As soon as paper money came into existence there were other issuers and then you had central banks but, you know, in reality the bond market are more in control of interest rates than central banks are and so on. Every innovation in monetary technology has served to lessen central control over the money. COYLE Do you think focusing on the technology has made us a bit too impatient? Do we think it should all happen now? BIRCH I think it’s true that the first wave of digital money schemes which came into existence a decade or so ago certainly overestimated the extent to which new technology would take over some of these functions. I was as guilty of that as anybody else. Technologists like me tend to make the assumption that because a new way of doing something is cheaper, better, faster, it would automatically be adopted by everybody. But that misses the institutional change that’s necessary to really affect these things in the market place. That institutional change, of course, isn’t technological because it’s driven by social imperatives, fundamental economics, business drivers, which are hard for technologists to imagine. So there’s a contradiction between the short term expectation, which wasn’t realised, and, I think, the longer term ramifications which are still greater than we realised. KING We will need to have a clear standard of value and unit of account for all our monetary transactions. COYLE Mervyn King insists some things will remain constant no matter how enormous the changes in store for us. KING Just as we have a clear definition of what is meant by a pound or a kilogram in terms of weight, or a litre or a pint in terms of volume, and it’s illegal to cheat when you use those words to mean something different from the formal collective definition we have, so in terms of a monetary value, we need one definition that all of us use so that when we talk about, I’ll give you a hundred pounds for this or it costs two hundred and seventy pounds for that, we know what we mean and you shouldn’t go around using those words and meaning something quite different and cheating people in the process. And that’s why this is a matter for society to define collectively. COYLE The idea of money being freed from the shackles of over-centralised and over-mighty states is very appealing. Perhaps we could all make ourselves e-millionaires if the technology offers such democratic possibilities. But this exaggerates the scope for the technology to alter our collective monetary institutions. It is starting to undermine money as we know it but nobody can yet say how trust and technology will come together. Until they can, most of us will continue to prefer well-stocked wallets to mega-bytes of computer cash. 18 17