Saturday, April 9, 2011

Franz Hoermann – “The death of money – electronic money”

(This is a long, unbroken excerpt from “The End of Money”, about as long as I dare go in one unbroken stretch, out of politeness, and despite the author's generous permission, but this is a passage I personally found very helpful. It covers a lot of important ground quickly and clearly, and links with many other aspects of our money predicament. I hope you get as much out of it as I have.

Now over to the Professor...)

“In 1993, Joel Kurtzman, former editor of The Harvard Business Review, authored “The Death of Money: How the Electronic Economy Has Destabilized the World's Markets and Created Financial Chaos”. In this work he points out how investment bank business practices themselves have changed in the electronic age. Purchase of shares is no longer decided on the quality of the company's products, nor on the competence of its management, rather exclusively via the mathematical properties of these shares' historical performance in the market – should price level, dividend, and volatility fit to a mathematical formula, the share will be bought, otherwise not. The actual economical foundations of the company have become totally irrelevant. Today mostly anonymous transactions are effected through use of electronic trading systems, and many of the involved see an advantage therein.

But do moral considerations impinge on us when we trade anonymously? If the person at whose loss we are making a profit is totally unknown to us, can there then be any moral restraint in pursuit of profit? And, through the comprehensive deployment of networked, electronic information systems multiple business institutions become redundant: Who needs the stock market, when trade can take place on some central computer in some server room?

To what end do we still need banks when our accounts could also be managed from the server room of the post office or a Telecom company? And what exactly is the role of an insurance, when the banks' contracts and computational formula could also be produced and administered in the self-same computer? The implication of this development was that elementary economic ground rules – like, for example, every good is only valuable when it is scarce – could suddenly no longer be applied to money and the value derived from it. Physical gold, which might have been used as backing, was already insufficiently available at the time of the introduction of the fractional reserve system to give money an acceptable value. Values existing as mere bits and bytes on computer disks, couldn't be effectively treated as scarce, since new business models continually arose whose sole purpose was to produce these values, and then, via an assortment of pyramid schemes, to direct them largely to the creators of the schemes, and perhaps also to those positioned closest to the creators. Because the creators of such “mathematical puzzles” are most often graduates of business finance academia, the models created were, generally, mathematically challenging, and their meaning and historical genesis were assiduously withheld from end users – customers – that is, these devices were abused to appropriate other people's money.

A generic example of this form of misuse are so-called derivatives, values supposedly generated from other values. Hundreds of thousands have been created and deployed, very effectively too, as money redistribution mechanisms. The redistributed monies could have been used far more sensibly in the real economy.

If we look a little more closely at electronic money we quickly discern another problem for the continuing use of double entry bookkeeping at banks: the problem of money identity.

No doubt you have already come across the manner in which bank robbers can be caught by tracing the serial numbers of the stolen notes when they later spend them. This “passport of the exchange medium”, the serial number on the bank note, is sadly only sporadically, never comprehensively used as a way of tracking actual money flows. While obvious bank robbers can be apprehended with this system, then presented to the public as the “real crooks”, one avails oneself of this mechanism quite happily. When, on the other hand, such questions as, say, how it is that banks, which apparently had to be rescued by the state, can now suddenly earn “profits”, no one wants even to consider using a water-tight system for tracking money.

And here the following connection becomes clear: as long as physical money, more exactly bank notes – coins have no serial numbers – are used for business transactions, a precise tracking of money flow via serial numbers would be possible.

But, when values are booked to accounts, no physical money is used. In that case it is about nothing more than a representation of money, money as an accounting number. In double entry bookkeeping serial numbers are not recorded, only the amount is noted down. Because bookkeeping is indeed but references to money-sums, is not really about a legal exchange medium, it is in fact not possible to use this instrument to follow money flow in any meaningful way. If bank money-creation were to include a money-identity, that is, were the extension of credit to be in the form of notes with serial numbers and not as mere accounting entries, then it would be immediately obvious that money creation on the part of the banks is not backed by anything at all.

The bank would create notes with serial numbers but these notes would represent what value? They would represent precisely no value at all.

The only value involved here is the debtor's promise to pay back the loan. Why this person is at all obliged to insure (for example with a mortgage) money created as an accounting entry without a backing like gold, on which it would then represent a rightful claim, is, economically speaking, not clear at all. Through the “magic” of double entry bookkeeping and its systemically inherent offsetting entry, the pure accountancy illusion arises that this money possesses a real consideration, or counter-value.”


Malagodi said...

I keep coming back to this old humorous line in Ginsberg's 1959 poem "America":
"America, when am I going to be able to go into the supermarket and get what I need with my good looks?"
In short, how do we value (human and other) life divorced from it's participation in the economy?
The value of 'labor' is the cost of slavery. And as population increases and technology becomes more adept, the value of labor decreases. In just the technological realm of robotics, it is increasing possible to create wealth without any labor at all. This is something quite new.
And, of course as your author notes, the creation of wealth ~rather the concentration of accumulated capital~ is entirely possible without any possible trace, much less effective regulation, by governments.
In short, I maintain that the Economy, global and electronic, has all the requisite characteristics to act as an autonomous entity. It has a unified internal communications system and a desire to be. All activity that we see within this system is the physical manifestation of that desire.
That being said, I have been fascinated by the technology of handset-based credit card readers such as the Square ( system, which brings the transaction process down to the individual level and completely bypasses the banking, monetary system. In this case, there are no bank or notes involved, anywhere. In this situation, what is the role of the banks and what is the role of the so-called 'sovereigns' who issue baseless paper notes? I say, none.
So, upon what do we base this electronic currency? My amateur's idea is that this should be based on a measure of energy, like the watt, or some other naturally occurring measure. I don't see why numbers representing actual energy units is any different than a gold standard, after all, a watt is a watt. This doesn't solve any issues of inequity or accumulation due to greed, but at least it's understandable.

Toby said...

"In short, how do we value (human and other) life divorced from it's participation in the economy?"

Yep. Economics values air at zero. That's a problem. There are so many other vital elements of our lives which economics can't touch, like a genuine smile to lift someone's spirits, a day of beautiful weather after weeks of winter, hearing just the right song on the radio at the right moment, someone thoughtfully commenting on someone else's blog, and so on. The things that make life rich. Goods and services can't do that. Only life can.

We live as embedded nodes of such a complex network of uncountable, intertwined variables that value--aside from the fact of it being purely subjective--cannot be meaningfully measured. When I started pondering this way back in 2008 the phenomena I thought most representative of common denominator value is life's capacity to generate joy, the potential we each have as parts of life to participate in its joy. But this is not about a 'joy unit of account,' this is merely a notion that helps us slip away from worrying about the fact that the economy does not need us anymore. Why measure 'value' accurately? Why not just go with the general ebb and flow of things? I don't keep an account of the times my wife was nice to me, cruel to me, but I do have a dim sense of where the relationship is at. When there are problems we use a medium of exchange called language. It works, and when it doesn't there's separation. How does this scale up? That depends on how automated the economy is, and how relevant our education institutions are.

The economy should be about the most sustainable processes for producing what humans need and want. We need money while some significant portion of humanity must exchange its labour to keep the economy going, and the work they do is undesirable somehow, i.e. the workers would rather be doing something else. It may be that money is necessary for ever, who can tell, but we should at least demote it's role as Invisible Hand Arbiter of Value and see it as a necessary indicator of societal contribution. I believe a guaranteed income is essential to demote money, as are tools like the Square (which you've linked to elsewhere--very exciting).

But, because technology has rendered almost everything of the current system redundant, and because institutions don't want to go the way of the Dodo, this transition can only be very bumpy. And meanwhile we're trashing the planet like there's no tomorrow. I can only hope that doesn't become a self-fulfilling prophecy.

Toby said...

I forgot, the Technocrats are developing an energy-unit based money, but they're a tiny group of people who have little to no purchase. The idea appeals to me, except that 'value' is richer than that. There's something about hours that appeals too, though it seems an easy system to game. That said, with openness built in via word of mouth, cheats would not find work easily. The Internet could stop that. NRG-Hours perhaps?

Franz Hörmann said...

Economics today is an abuse of mathematics. The term "measurement" is abused as well. There is no measurement in a realm of subjectivity. Here you will find a fundamental critic as well as some hints how to change the way economists think: