Thinking about debt outside the twin intellectual straitjackets of state and market opens up exciting possibilities. For instance, we can ask: in a society in which that foundation of violence had finally been yanked away, what exactly would free men and women owe each other? What sort of promises and commitments should they make to each other?David Graeber, Debt: The First 5000 Years
This post is more about principles than detail; though I intend to follow up with more information about Pebble, a project I am collaborating on to create money around trust, soon. The idea is to use this post to define what I think is the most pressing question in the future of money debate: how to create genuine, decentralised and abundance-based peer-to-peer money. If that sounds like a mouthful, bear with me, as I try to try to convince you that it’s the shape of things to come…
First of all, a detour. Why this discussion about money? There is a great deal of interesting thinking going on about the nature of money itself, and how that might be changing. Money, some believe, is not value-neutral but makes us think about the world through the lens of scarcity and materialism. There is also the debate surrounding social currencies, which attempt to measure and represent previously invisible forms of value, such as trust and reputation. These currencies have proven instrumental in creating trust between strangers, lubricating online collaborations, and allowing peer-to-peer “collaborative consumption” to take off. No doubt there will be much more to say about these fascinating inventions still.
However, I want to look at a different question, which I think is fundamental to the future of money. While I’m sure that the role of money is changing as new types of currency, forms of exchange, and a different values emerge, I still believe that money is, in principle, here to stay. By money I mean the thing we use to store savings, measure the value of scarce goods, and transact with. As a technology money is as old as the hills. It was never invented at a precise moment in time, and unlike Economics text books would have us believe, is probably as old as numbers, writing, cooking and clothing. It answers a fundamental need in human life which I do not think is about to go away.
Given this, I can return to peer-to-peer money. What is it, and why is it so important? Without going into the details of specific proposals to create it, I want have a go at defining the criteria according to which any such project should be judged. Consider this an attempt to set the groundwork for discussions to come…
Peer-to-peer money should be radically decentralised. By this I mean that nobody should have full control over how it is created, by who, and for what purposes. Any serious peer-to-peer money proposal should show how these tasks are delegated to the nodes of a network. The banking system, as should be obvious, is not such a network: the task of creating money as debt is performed by banks, who do so according to their own commercial interests, with some influence from central banks. Clearly this is undemocratic: the amount of money which gets created, and the projects and people who are deemed “creditworthy,” are controlled by de facto central planners, who have their own interest to look after. What’s more, these decision makers have very inadequate information for the task they have undertaken – a classic Hayekian argument against centralised allocation of resources.
It follows that, in an ideal scenario for peer-to-peer money, such decisions should be pushed out to the edges, to take advantage of local intelligence. The amount of money that gets created should be based on decisions undertaken by people, using their shared knowledge and mutual trust as a basic principle. If this is the political meaning of “decentralisation,” there is a further technological one to make. The kind of software which should underpin genuinely peer-to-peer money should itself be peer-to-peer. Any monetary system which depends on a central coordinator to take care of verifying payments and keeping records of transactions has a single point of failure. It will be vulnerable to rogue administrators, cyber attacks, and will create administrative overhead. In a digital, networked environment, serious peer-to-peer money should become a protocol, like email or HTTP, which can be used as a matter of convention. It should be part of the backbone of the internet, controlled by nobody and existing by free consensus.
You may be thinking that what I’ve described already exists, in the form of Bitcoin. Bitcoin is indeed a fascinating project for anyone interested in the future of money. It is decentralised, and delegates the tasks of running the currency to its network, without any central control. To date, it has never been successfully attacked or disrupted – an amazing achievement which its critics often overlook. However, Bitcoin is not what I have in mind when I think of genuinely peer-to-peer money. The reason why brings me to my next point.
One of the main complaints a peer-to-peer advocate could wage against the banking system is the fact that it creates money according to the imperatives of a narrow elite, and forces everyone else to use its own IOUs rather than their own. Part of the complaint, as we have seen, is political – about who controls the money supply. The other side of it, from my point of view, is about artificial scarcity and abundance.
On this point, I’m in agreement with monetary theorists who recognise that the fundamental nature of money is social, not physical. While physical things have acted as money, they aren’t it by themselves. Even gold, when it has been considered money by governments, gains part of its value because of a political arrangement, not because of its inherent metallic qualities. Coins and notes, most obviously, circulate at much higher than face value. The reason is: money is a social phenomenon. It’s the collective agreement of a group of people to accept a certain symbol as a promise for value which gives it its power.
Once we can understand this, it’s ours to create and change as we see fit. Since its basis is in belief and confidence, its supply does not need to be artificially constrained by the availability of a physical medium. The amount of gold in the ground or processing power in a Bitcoin miner shouldn’t determine the quantity of money available. The basis for money issuance should be our mutual trust and confidence, and not the availability of physical objects, or artificially scarce electronic symbols. Michael Linton, the inventor of the LETS scheme, summarised this well when he spoke of the absurdity of not being able to build a house for want of inches. People connected by a chain of trust shouldn’t be prevented from transacting for lack of symbols with which to encode and formalise their trust. So, the reason Bitcoin fails the peer-to-peer test, in my view, is its flawed conception of what money is. This is not to say that it isn’t a great technological project; just that it doesn’t fulfil the potential of peer-to-peer money.
The third criteria by which a peer-to-peer money project should be assessed is its conception of community. A community of individuals is more than the some of its parts. Community money, created as credit, is a promise which is backed by a group of individuals who accept it as payment. This makes it more valuable: since more people can accept it as payment, it can travel further, making it more useful as money. So, while a peer-to-peer credit network should allow for the creation of money by individual nodes, it should also allow for emergent, community phenomena. The credit of communities should be maintained by their constituent nodes, who internally rearrange their obligations to one another based on their acceptance of it as payment for value to outsiders. In this way, groups of people who regularly trade with each other can create extra credit, and use it to interact with other communities. There is no reason why there should only be first-order communities as well. Peer-to-peer money can exhibit fractal patterns of communities of communities, and so on, each creating a higher-order of credit sustained by their members. This feature of a peer-to-peer money supply will encourage a balance of local and global economic activity, rather than the radical centralisation our present monetary system encourages.
This point is a little tricker, however, I think it’s also a crucial dimension of a peer-to-peer money proposal. In David Graeber’s terms, the practice of debt has historically been bounded by institutions which limited its corrosive consequences on social fabric. In ancient Sumer, the birthplace of credit money and lending at interest, debtors were protected by regular debt jubilees. In the next stage of credit money, the Middle Ages, lending was controlled by the religious institutions which regulated commercial activity. It was impossible to be made a slave because of one’s debts in the literal sense. Further, lending at interest was tightly controlled. It is one of the characteristics of the modern financial system that institutions which existed to protect debtors have been eroded, in favour of the interests of lenders. The rolling back of usury restrictions is one example.
However, historically the understanding that debt is socially dangerous, and to be controlled, is important. If money is just a promise, we need to have collective agreements preventing money creation from getting out of control. This is perhaps the biggest challenge for peer-to-peer money: to create credit money which transcends or limits the logic of debt. Since in software terms, agreements about the structure of the banking system will be a matter of which software gets used, the principles which limit the effects of debt will need to be coded in. How exactly this is fulfilled I will leave open for the time being.
Why build it?
Having outlined the general principles peer-to-peer money should fulfil, it’s worth returning to the original question. Why is it a desirable project, at this stage? One reason is simply that it should be done because it can be: the technology and know-how exist. All that remains are the design ideas, and the willingness to implement them, in search of a solution. With the available technology, it can only be a good idea to experiment and try to realise the ambition of genuinely peer-to-peer, democratic money.
However, the other reason I think this is the most pressing area in the future of money conversation is the current state of the world’s financial system. In this post I’ve argued that the banking system creates money in an inefficient way, at an angle to economic and democratic needs. One thing which should also be obvious, in light of the ongoing financial crisis, is that it is hugely unstable. According to some theories of banking and credit, the design of the banking system itself is inherently geared towards infinite growth, and endless expansion of debt. In a world of finite resources, and finite appetite for debt, the game of credit creation at interest cannot continue. Logically, we should expect the banking system to shake itself to pieces as it confronts its own inherent, paradoxical design. Politicians’ attempts to patch it up, rather than reconsider its basis, appear to me misguided and ignorant of opportunities to create something better.
The banking system is premised on two twin assumptions. If money is just a promise, then the existence of a centralised banking system presumes that individuals acting as peers cannot trust each other enough to make their own. It must also assume that individuals lack the technological means to create the necessary payment infrastructure to keep track of their mutual obligations. The project of peer-to-peer money should presume the exact opposite: that we cannot trust the banks to do this job for us. Given the technological means at our disposal, and equipped with an understanding that money is just a social agreement, we should be able to find a way to do it ourselves.