The November issue of Media Magazine hit newsstands yesterday. Edited by my colleague Brian Monahan, it's called the "Future of Media" and is really quite something. I'm proud to have a piece in it, called "The Future of Money", which I've included below. Feedback warmly welcomed.
The Future of Money
As 2011 draws to a close, we enter the fourth year of the global economic crisis. The drama has been chronicled second-by-second by the pulse of Twitter and a bleak financial future is easy to imagine. Might we all just end up huddling together in an impoverished global village, linked by little more than our Facebook accounts and Reality TV? Against this backdrop, last year hundreds of millions of people spent billions of real dollars on virtual goods. What has the world come to?
To answer to these questions we must look at future of money. Let’s start by defining the word. To paraphrase financial historian Niall Ferguson:
“Money is a medium of exchange that eliminates the inefficiencies of barter and facilitates valuation and calculation; a store of value, which allows economic transactions to be conducted over long periods of time as well as geographical distances.”
Reread that sentence. Amazing that something we take for granted can actually be so nuanced. Consider the countless sayings on the subject from “time is money” to “money can’t buy love”. Money has become a way to signify many things from status to love, but I will suggest that the essence of money is trust; the faith in other to honor their commitments. When this faith is shaken the result is fear.
As we have evolved, Darwinism has always rewarded more advantageous traits. Natural selection has been limited to physical traits. It has also selected for the ingenuity needed to create better tools and improve our lives. Hand axes, spears, the wheel and the plough all transformed history, but the invention of money has arguably dwarfed them all. The accelerating pace of change suggests radical transformations in our financial future yet despite the changes to come, money will always remain a tool.
Communication and commerce have been wedded together for centuries and this trend will accelerate, as money and media intertwine and business becomes increasingly electronic, real-time and global.
The history of money is fascinating and sheds light on what is to come. Prior to the advent of money, tribes of people lived in close proximity to each other. They hunted and gathered, saving little. Culture was preserved and passed on orally in stories and legends. Money was unnecessary because the tribe members shared resources and needed to trust each other in order to survive.
Money emerged as a method for recording a promise to pay and was the first medium to communicate trust. As early as the 2nd Millennium BCE., Mesopotamian clay tablets recorded debts redeemable for grain. Encoded in such transactions was trust and belief in the fact that the promise of payment in grain would be upheld. In fact, the word “credit” comes from the Latin word “credo”, or literally “I believe”. So text served as money and, as if by magic, media transformed clay into food.
As time went on, people figured out that carrying clay around was inconvenient. They soon discovered precious metals were ideal forms of money. Gold was rare, easy to transport and universally valued. The relationship between the scarcity of gold, silver and bronze originated exchange rates and international currency. By the 16th century, money went global as Incan ore fueled the Spanish armada, financing global trade, wars and empires.
Not much about money changed from the days of gold ingots until the 20th century. Take scarcity and value. In virtual worlds like Farmville, such scarcity is artificially created but plays on time-honored principles. Zynga, the game’s creators, have increased profit by selling limited editions of seeds that grow virtual crops more quickly. Others use virtual items as status symbols, with players buying jewelry signify power.
Another trend in the future of money is the way in which the medium of exchange affects business models. This may have begun with the advent of the telegraph, which changed forever by making messages instantaneous. Since then, both communications and money have become networked systems, defined by ever-increasing speed and higher requirements for trust, even between competitors in order to succeed.
The creation of credit cards is a fascinating illustration of this type mutually dependent competition. In order to succeed, Visa’s founder Dee Hock recognized that competing financial institutions would have to agree en-masse to honor and clear each other’s transactions. The result was a global credit system that today processes trillions of dollars of annual transactions. Similarly, the Internet would grind to a halt if operators of competing networks did not agree process each other’s data.
So here we stand. It’s 2011. There are 7 billion people on earth. In the years to come, our collective challenges will be related to natural resources. How will we produce food and energy to sustain ourselves? There are only a few possibilities. We must reduce consumption, increase production or increase efficiency. How we adjust those knobs will determine how we handle currency and commerce.
Imagining or accurately predicting what the future of money is impossible however several macro trends will inevitably continue. Firstly, all goods that can be virtualized will be, most importantly intellectual capital. Next, there will be a growing pressure to source physical goods locally to reduce energy costs from transportation
. As collaboration grows in importance, methods for calculating trustworthiness will grow in sophistication. What used to be expressed in a FICO credit score has transformed into peer generated rating systems like eBay’s. Companies like Klout and Rapleaf are calculating reputational influence, though it remains to be seen how currency will play out in social network like Facebook. For Facebook’s “Credits” to really work, users will need to trust both each other but more importantly, trust Facebook to process transactions safely while ensuring their privacy and security.
In Darwinistic terms, those who adapt have always prospered. We’ve long spoken of the digital divide between those with access to new technologies and those without. How our society democratizes technology equips itself to meet this challenge will determine how effectively we are able control our financial destiny and collective well-being.