Money and currency are considered synonymous, but a broader definition of currency gives an interesting perspective on the current financial crisis, as well as the next wave of currency innovation.
The Difference between Money and Currency
In a recent panel discussion called “Monetizing Intangible Capital” at the Future of Money conference (Feb 2011), Art Brock drew an interesting distinction between money and currency which I had not heard before. Brock suggested that a currency could be regarded as any symbolic representation of value, issued according to a set of rules:
I use the word currency distinct from money. Normally in every day speech we collapse the two. But monetary currencies or money is a subset of the overall range of currencies that we have. For me, something like “Certified Organic” is actually a currency. There are rules by which it’s issued. It changes value flows. It changes the way people shop. It changes the way production is done.
Art Brock, Monetizing Intangible Capital
According to this view of currency, money is just one type of currency which is fungible, enabling it to serve as a medium of exchange and a store of value. Symbols like “Certified Organic,” “Fairtrade,” or “AAA-Grade investment” or even “CNN” are all currencies too. Their issue is subject to rules which give them meaning, usually by the organisation which owns and operates the currency.
Brock suggests that one of the functions of a currency, in this broader sense, is to “change the way value flows.” The existence of the “Certified Organic” sticker on an apple makes visible an otherwise intangible part of the apple’s value. Consumers are able to factor in an aspect of the product they wouldn’t have otherwise known about, or perhaps valued – its organic production. Currencies of the broader sort have the power to change the way people perceive and value goods and services, and hence change patterns of consumption and production generally.
Brock’s distinction between money and currency is not entirely new. The ancient Greeks held a similar view. Diogenes the Cynic, a Greek philosopher and vagrant in the 5th century BC, famously called for the “defacement” of all currency. Diogenes was the son of a money changer, but meant more than “money” by the word “currency”. According to Peter Marshal:
The Greek for currency was nomisma, derived from the word Nomos (custom). Since Diogenes felt that the standard of society was wrong, his call to deface the currency represented an attack on all prevailing customs, rules and laws.
Peter Marshall, Demanding the Impossible
The less frequent use of the word “currency” – to describe an idea, belief or opinion which has common acceptance, also casts light on this broader definition of currency. Our currencies are, after all, symbols of value issued according to rules which have common acceptance.
Why do we need currencies?
After pondering Brock’s distinction for a while, I got thinking about the reason why currencies came into existence in the first place. It seems that symbols like “Fairtrade” or even brand names like “BMW” solve an epistemological problem faced by people having to make quick, accurate decisions based on limited knowledge of a complex world.
Our capacity for knowledge is limited in the first instance by sheer scarcity of attention. We don’t have enough time in the day to personally inspect and evaluate the production process underlying each good or service we consume. Additionally, and crucially for a democratic society, the degree of technical expertise in any domain of knowledge, from organic farming to finance, is beyond the grasp of the average citizen. There are very few people who know how to operate nuclear power stations, for instance. Yet, if we are going to rely on nuclear technology, we need to come up with a way of knowing who to trust, even if we don’t share their expertise.
It seems that we have invented currencies as a kind of social heuristic to solve these epistemological problems. By navigating our decisions with the help of currencies, we turn the knowledge problem into a trust problem. Rather than thinking about whether this apple really is produced organically (not to mention defining what “organic” means exactly,) by using the “Certified Organic” sticker we trust the organisation who regulates “Certified Organic” to do the job for us.
The trust problem which currencies give rise to is technically easier for us to solve than the knowledge one. This principle seems to be true of almost any currency you can think of. Take, for example, a car brand name like BMW. The value of the BMW symbol is a largely dependent on the quality of the cars to which it is attached. Consumers benefit from not needing deep knowledge of motoring and car manufacturing – they use “BMW” as a kind of short-hand in this regard – turning the absence of knowledge into an issue of trust towards the BMW brand.
When currencies go wrong
Brock’s distinction between money and currency also provides a powerful lens though which to view the ongoing financial and economic crisis. In many ways, there is a theme of “currency breakdown” where numerous, interdependent commonly accepted currencies failed to accurately reflect the underlying value they were supposed to represent. (The fact that such currencies still enjoy currency in the sense of common acceptance is perhaps an indication that the crisis is not over.)
One particularly obvious example is financial investment ratings leading up to the financial crash of 2008. The role of ratings agencies like Moody’s, Fitch and Standard and Poor’s is to analyse and rate financial products according to their level of risk. The three major firms effectively monopolise the ratings market: they are ubiquitous in the financial world, and their ratings are considered very strong indications of the safety of an asset. Many pension funds, for example, are forbidden from investing in sub-AAA rated investment products, which gives the ratings agencies a critical role in determining the flow of capital in the economy. This sounds very much like the kind of currency Brock is describing.
However, in 2008 investment ratings were one of the most unambiguous points of failure in the financial system, which led to the misallocation of billions of dollars into the sub-prime housing bubble. Financial instruments such as CDOs, which are complex combinations of sub-prime and prime mortgages, were systematically over-rated by the big three agencies, leading to large losses. It seems like an excellent example of a currency failing on a very large scale. Furthermore, there are some interesting insights to be learned about currencies by asking why this happened:
One of the overriding reasons for the failure of the ratings system were the conflicts of interest which arose within the ratings agencies, due to their centralisation and dependence on the investment banking industry for fees. The agencies’ revenues came from the investment banks who securitised and sold toxic financial products. A combination of short-termist self-interest, wilful delusion (and perhaps worse) led all three agencies to tell the investment banks what they wanted to hear.
Another reason was the degree of complexity in the financial products which were being assessed. If the role of a currency is to provide a social heuristic for making accurate judgments about complex issues, there is a problem when the people responsible for regulating that heuristic – the investment ratings – do not themselves understand what they are rating. It doesn’t seem unlikely that investment banks benefited from and promoted complexity in their products for this reason.
What further characterises currency failure is a kind of fetishism where people mistake a symbol of value for value itself. In many cases, individuals made poor investment decisions because they uncritically accepted currency systems like investment ratings, allowing them to monopolise their attention and decision making.
Karl Marx described described something similar when he wrote of commodity fetishism – the fallacy of attributing inherent value to money and commodities, while failing to perceive the underlying social relations they derive it from. This fetishism is described quite well in a World Policy Institute article by Matthew Bishop and Michael Green:
The global economic meltdown may have busted these toxic ideas, but the institutional framework of today’s capitalism—including our economic statistics—still rest upon them. To tell us where the economy is going, business television channels keep on reporting quarterly profits and minute-by-minute stock price movements. Politicians are cheered or tormented by quarterly GDP statistics that are taken to be a measure of whether voters’ lives are getting better or worse.
Matthew Bishop and Michael Green, World Policy Institute, We Are What Me Measure
The example of the investment ratings shows how currencies in the broader sense can become “debased” in the same way that money can. This is why it is also an apt distinction. During the Roman Empire’s Crisis of the Third Century, the Severan emperors reduced the quantity of silver and gold in the aurei in order to finance the expansion of the military to police the Roman empire, bringing Rome to the brink of collapse. Today, fiat money is backed by nothing and debasement thought so-called “quantitative easing” is done at the push of a button. In the same way, the “AAA” currency of the rating agencies have been debased as a result of improper issuance.
The future of currencies
Brock’s main interest in proposing a broader definition of currency is to consider what the future of currency might look like. It seems natural, looking at the failure of antiquated pre-information age currency systems, to ask how we might be able to build more robust and reliable currencies in the future.
Brock suggests that we are in fact at the cusp of a new wave of currency innovation, which he compares to the advent of language. Much like language enabled humans to create and share gradients of meaning, future currencies will do a better job of capturing gradients of value. In this sense, Brock seems to see the future of currency as a kind of major cognitive and social leap forward, which could change the way “value flows” for the better.
Quantifying new flows
The first observation to make about the future of currency is that information technology gives us the possibility of quantifying the previously unquantifiable. The ability to make intangible types of value, like reputation, trust, or authority, visible is the idea behind the metacurrency project. We can see such currency systems at work already on the web. One example is StackOverflow, a masterful implementation of social software which rewards people for asking and answering programming questions. StackOverflow has a single “reputation” currency, which can be earned in a number of ways – by asking good questions, giving good answers, voting answers and questions up and down. StackOverflow also rewards participation with badges, which it hands out liberally for key achievements. The reputation currency drives further participation, increasing the value of the site for its users.
Another of Brock’s insights is that in the future, currencies will become more interconnected, much like web pages are hyperlinked to each other. He gives the example of borrowing a power drill from someone, based on trust points earned from receiving CouchSurfer guests. Similarly, we can already see eBay reputation points playing an important role in determining prices – sellers with less reputation history are likely to earn less on their sales, as the increased risk is priced in. StackOverflow are also putting their reputation metric to use in the area of recruitment – their careers site allows members to apply for programming jobs. Rather than claiming to know a programming language on a CV, today’s talented coders can simply point to their StackOverflow reputation score. More recently, a story has surfaced about a professor achieving tenure based on his 16,000 Wikipedia edits.
Decentralisation and transparency
This vision of currencies seems to reintroduce some of the lost values of the pre-industrial era, where the consumer’s contact with a producer was far greater than today, and values like reputation factored into decisions far more. The exciting prospect of meta-currency is that it will allow us to extend reputation, trust and other metrics beyond our immediate social circle, making them count among people we have never previously come into contact with.
The currencies of the future will need to learn from some of the mistakes of industrial-era currencies which are continuing to fail the global economy, leading to large resource misallocation and market failures. These currencies failed due to a combination of centralisation, fetishism and opacity, which made them impervious to scrutiny and prone to debasement. A network of meta-currencies will need to leverage the power of decentralisation and transparency to prevent these mistakes from being repeated.
Find out more:
On this blog
- Monetizing Intangible Capital – Art Brock
- Metacurrency Orientation Prezi – Alan Rosenblith
- The Bank of Facebook: Currency, Identity, Reputation – Venessa Miemis
- We Are What Me Measure – Matthew Bishop and Michael Green, World Policy Institute