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« I bank, you bank, we bank | Main | Narrower banking »

Payments without banks

By Dave Birch posted Feb 6 2009 at 10:36 PM

[Dave Birch] We implicitly associate the notion of payments with the notion of banks but, as I often point out, this reflects current arrangements not laws of physics. Michael Linton's mention of the "Irish bank strike" example of a modern economy functioning without bank services at the retail level reminded me of this. He points out:

For several months, almost a year from start to finish, the Irish did it all with their own paper and no banks.

[From kashklash:: exchanging the future » Blog Archive » The Irish answer]

What's the story? Well, between 1966 and 1976 there were three major "all out" bank strikes in Ireland that shut the retail banks for (in total) a year. There is a super case study, written a few years ago, on this called "Money in an Economy Without Banks" by Antoin Murphy of Trinity. I've sometimes referred to it when challenging people to think harder about how the payment system works, but of course it's taken on a new lease of life in current circumstances and in the context of the "utility vs. casino" strategy discussions.

Back to Ireland. The case study notes that about four-fifths of the money supply disappeared because of the bank strikes, so the general public were left with the notes and coins in their pockets and nothing else. How did this society function? Since people could not go to the bank and draw out more money, they developed their own currency substitutes: some people began to use Sterling instead, but it was the cheque that stepped in to keep the economy going. People began to accept cheques from each other, and these cheques began to circulate.

In summary a highly personalised credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalised banking system.

Murphy points out that one of the key reasons why a "personalised credit system" could substitute for cash was the local nature of the circulation -- which, as Michael Linton points out and I make no comment on, was centred on pubs -- so that the credit risk was minimised. The owners of shops and pubs knew their customers very well and so were perfectly capable of deciding whether to accept cheques (or just IOUs) from those customers. And since the customers also knew each other very well, they too could make sensible decisions about which paper to accept.

My conclusion: in "local" transactions, business can work perfectly well with no currency and no banks. A generation ago Ireland's economy was built up from such local transactions, so people were able to self-organise their own money supply. But, as I think we all understand, in the modern economy "local" means something entirely different. While none of us know how this is going to pan, there is a clearly a redefinition of locality underway, and it has social networking, virtual worlds and disconnection technologies as inputs. One of my son's localities is the World of Warcraft: if Zopa were to offer loans in World of Warcraft gold, my son could perform that same function as an Irish publican in the example above and provide an assessment of creditworthiness for avatars he knows. There is nothing particularly odd about this as a concept: over on the Digital Identity Forum the concept of an economy based on reputation has already been discussed.

How could these "new local" currencies be used? Well, the new payment technologies -- PayPal and M-PESA, IDEAL and EMV -- do not understand that Sterling is a "real" currency and World of Warcraft Gold isn't. Surely a key impact of the transition to efficient electronic platforms, rather than bits of paper, is that currency is just another field in the dataset: I could use PayPal to send "Dave's Dollars" as easily as to send "US Dollars". Once again, this may be an unusual idea but it is not terribly fantastic.

So perhaps the idea that "alternative" money can work in isolated local environments but not scale is wrong, because both locality and globalisation now mean something different and there's no reason why interconnection between local money of one form or another (via markets) cannot operate globally. I'm not thinking about Lewes Pounds or LETs here, but mobile minutes, bandwidth and Tesco money. Next time the banks collapse, or Sterling becomes worthless, we'll get a chance to try some of these ideas out!

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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Comments

this is such a sad situation. i hope the economy comes back for all countries.

gov should be very happy about these new monies since anything that goes through a set of books is accountable and the tax authorities get a piece of the action, just like with normal money - more money in circulation means more money for gov, business and people - how's that for win-win-win?

that's really interesting! i think, given the current economic environment, some people may actually think about that. i know some place in the east (i think) has its own bucks for local tender. i'm sure govt. wouldn't look to kindly on that.

I was excited about a project called Ripple Pay (http://ripple.sourceforge.net/) that basically did something very similar to what you described. The system allows anyone to accept debt from anyone else. That's sort of like accepting each others' checks.

What I've realized, however, is that none of this solves the reputation problem. Maybe if bankruptcies and the like became published widely, financial intermediation could be eliminated or done more cheaply.

But right now, having financial intermediaries saves a lot of computation. How much is Jim's debt worth vs. Jan's debt? Since many people don't want to get into the business of evaluating such things on a large scale, they are willing to pay others to do it for them.

"the idea that "alternative" money can work .. but not scale is wrong"

Very clearly, in many cases, they can scale very well. Thanks for making this point.

However - "I'm not thinking about Lewes Pounds or LETs here, but mobile minutes, bandwidth and Tesco money" needs some elaboration, imo.

The last three are much the same - apples, oranges, eggs - limited supply, single issuer, many users, standard "stuff" money. They work, but would work better together than they do separately.

LETS are definitely virtual, not stuff at all - and come in many forms, some which will scale and some which won't. That's a whole other post, probably a series.

However, Lewes £, Totnes £, the Berk $ and other such paper fronts are really nothing at all (beyond appearance and persuasion) and scaling isn't anywhere in the frame.

Local currency is taking off in a big way in the States and I see the transition townes, Stroud, Totnes and Lewes are alreay in the games. What is really interesting is that the open source community has made the jump (or in the process) of using a paper voucher like a paymer, for offline spending of open source digital currency. It even has the new square bar code on it for easy scanning. So not only can you create your own local and personal digital money system from open source programs but you can add an offline paper version. http://www.stepthreeprofit.com/2009/01/p2p-money-with-app-engine-oauth-and-qr.html
This is very cool stuff. http://www.austintimemachine.org/
Mark

As long as chain of value-transfers connects two distant people, locality shouldn't be an issue. Ripplepay and Scred seem to be addressing that problem well from a technical POV. (Actual adoption is another matter so far.)

I think the new localities or places are the social networking communities.
A place or locale is just an environment that allows us to position ourselves with respect to others.
We used to do that exclusively by buying a relatively bigger or smaller house in a neighborhood we liked and good afford to live in, we know buy reputation with good thoughts or virtual actions on various social networking platforms or MMORPG.
BTW, see my post on Twitter "currency": http://tr.im/f1oi

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