The Recent History of the Future of Cash
Dave Birch has a really interesting post about The future of the future of cash:
The report also identifies three key attributes of cash that make it — still — the dominant payment system. Universality, trust and anonymity. I’m curious about the location of anonymity in the customer mindset and I’m going to post some more about this shortly, so I’m only looking at the first two here.
I want to extend Dave’s assessment of what makes “trust” interesting:
Trust, on the other hand, may not be such a big barrier. It’s not clear to me how to disentangle trust in the medium of exchange from trust in the store of value, since people clearly use cash for both, but it is clear that a great many other tradable items can easily usurp cash once technology has acted to shift them from being a store of value into a viable medium of exchange (remember the tally sticks!) for their age. A couple of months ago we were discussing Nick Szabo’s classification of commodity derivatives as a kind of near-money, but there are plenty of exant near-monies already in use around the world, including mobile phone minutes in a great many developing countries. If I lived in Zimbabwe, it would take me years to learn to trust cash more than Vodafone minutes.
I think there’s an important element of trust missing, which is finality. With almost all computer-based systems, payments are conditional on some complex bureaucracy deciding to credit them. For example, see Gary Leff on some deal for frequent flyer miles:
Second, print everything and I mean everything. I printed the offer itself. I printed the page where I enter all the information about the rental (including my Skymiles number, etc). I printed the confirmation page. I’m saving all of those, and will save my rental receipt as well.
Why does he do this? Because he doesn’t trust the system. He’s prepping himself to go fight its decisions. In contrast, if they handed him a bearer certificate for 9,999 miles, or $200 cash (the rough value of the miles at $.02 per) he’d be done. He’d trust those things.
People used to sell things for cash on the barrelhead. When that cash was cold, hard cash, rather than fiat, print-it-yourself money, the deal was done when the money changed hands. You can’t lose any more than you have in your pocket (or under your mattress). Electronic systems don’t have that property, and that makes them harder to trust. You don’t just have to disentangle value-store from medium of exchange. You have to estimate the value of finality.
One effect of inflation that rarely gets talked about is how inflation makes certain denominations of bills and coins obsolete. Pennies are now worthless, and the Treasury wants us to use dollar coins, but interestingly refuses to print $500 or $1000 bills, when in real dollars those denominations existed within our lifetimes. It’s a deliberate attempt to make using cash unwieldy and difficult.
I’ve been looking at cash businesses, in particular laundromats. coin-op systems are becoming problematic, despite the obvious tax advantages of them, because a) you can’t easily raise prices on a coin op system quickly and b) it has gotten to the point where the number of coins you need is so unwieldy that people are saying screw it and moving to stored-value card based systems that you can pay for with a credit or debit card. They’re doing this DESPITE the fact that it will eliminate their tax avoidance opportunities.
I’m convinced that the reason why we don’t have larger bills in circulation is to 1) not acknowledge the long term effects of inflation and more importantly 2) to make it difficult to launder large amounts of money. I’ve read that drug dealers are already preferring the euro for their transactions. Makes sense. So long to the greenback as the standard currency for the world.
Sorry for the long rant.
Good link. I’ll look forward to his further exploration of the anonymity angle. Visa’s cash-free commercials sent my former co-worker Scott Berinato into a (characteristic) rant about this at the beginning of 07: http://www.csoonline.com/article/221126/Cash_is_Dead/1
“The location of anonymity in the customer mindset” is interesting; many have posited that the notion of privacy means something different to the camera-phone generation that it did to their parents. Maybe anonymity is on the way to becoming a non-factor.
It’s partly a question of transaction cost. It takes a lot of effort to cross-check your account every month, so that’s part of the cost of having a service provider you don’t entirely trust.
Print, hell. They’re called screenshots. You can print them the day before you walk into the place to get cranky.
I’ve got copies of all sorts of things stuffed into my Google Notebook — screenshots of cellphone charges, orders I placed, etc., and if I copy that out, snip the edges off, and print it, it looks as good as a printout from the webpage itself. I’m satisfied.
This analysis isn’t quite right. Mr. Leff is getting those printouts because he wants to be able to reverse the payments if something goes wrong. He doesn’t fully trust the transactions, therefore he wants them to be reversible. If he had to pay irreversibly, that wouldn’t make the overall transaction any more trustworthy, it would just give him the Hobson’s choice of risking his cash with no recourse or not participating at all.
In contrast, if they handed him a bearer certificate for 9,999 miles, or $200 cash (the rough value of the miles at $.02 per) he’d be done. He’d trust those things.
The 9,999 miles would come with the same problems in bearer form as they do in any other form: for example 9,999 miles to where? And when? Furthermore, what happens if he’s owed $300 but only gets $200?
The chargebacks on credit cards serve as a very simple consumer contract law. Credit cards are much more than just a payment system. Normal contract law is far too heavyweight for standard consumer purchases, and chargebacks were a brilliant solution to this problem.
One needs a stateful and thus reversible transaction in order to be able to implement contract law or a simple substitute for contract law like the chargeback system. Perhaps one could design a cryptographic protocol for blinding the state of a transaction, and thus having it anonymous at least up to the time it is challenged. The general idea being to combine anonymity and an option for at least one party to prove, challenge, and reverse the transaction. I have previously proposed post-unforgeable transaction logs and confidential auditing with similar problems in mind.
Nick,
I think that Leff (whose blog is a great source of interesting travel deals and analysis of frequent flyer sorts of programs) can analyze the value of a fiat currency like miles.
If he’s only given $200 when he expects $300, he doesn’t walk away from the counter. He says “my contract right here says $300. Where’s my other $100?”
In an in-person transaction, he can see and analyze the goods for sale. He doesn’t really want to reverse payments, he wants to get the miles.
Why is normal contract law too heavy? Didn’t it work for a thousand or more years?
If he’s only given $200 when he expects $300, he doesn’t walk away from the counter. He says “my contract right here says $300. Where’s my other $100?”
He had a contract, which requires state left over from previous transaction(s). If he’d walked away from the prior transactions without the contract, or without at least one party keeping a record of accumulated miles under a shared ID or cookie, he’d be out of luck. And the interaction over the counter itself is, it’s safe to guess, reversible — if he doesn’t like the $200 he can hand it back and keep the miles.
Why is normal contract law too heavy? Didn’t it work for a thousand or more years?
In English law contract law is a fairly modern development that mostly comes from the medieval Lex Mercatoria. The latter had a far less costly and far more timely method of lawsuit — just go to the judge a few stalls down at the market fair. Small claims court the same day. Anything that requires a modern lawsuit, or even a credible threat of such a lawsuit, to obtain remedy is too heavyweight for small purchases. Chargebacks, a kind of mini-contract law within a contract (with some later statutory amendments) provide some basic incentives of contract law in a very simple way so that the vast majority of cases need not be appealed to courts. But chargebacks, like contract law (and like any similar solution I can imagine) require state and reversibility.
Sorry, I should have said “offer,” not “contract” on the first point.