I read this piece by Andrew Ross Sorkin about the future of money with great interest. He discusses how the future of money will rest with digital innovations that allow us to transact more freely and conveniently. But much of the article surrounds the nebulous concept of “money”. And in doing so it creates a very vague picture of what money is and how it’s really used.
To me, money is simple. Money is a medium of exchange. Full stop. Anyone can create money. But as Hyman Minsky said, getting anyone to accept your money is the hard part. Your money has to be credible, usable and valuable. These are not easy elements to establish. Bitcoin certainly hasn’t achieved it. Bitcoin is barely usable and hardly credible. And other digital currencies suffer from the same problems.
Credibility and value are obvious necessities in money. But the key is really the usability. You have to be able to get lots of people or firms to accept your money. And that means having a network. It doesn’t really matter what you call the “money” you issue (whether it’s deposits, Bitcoin, etc). You really need to control the network through which it is disseminated. People don’t often think of the US banking system as a network, but that’s really all it is. It is a big payments network controlled by a bunch of private entities. The reason why bank deposits, cash, coin, etc are distributed through this private network is because banks control the network which connects consumers to firms. These forms of money are all just various forms of “money” distributed and accepted through this network. It’s that simple.
The future of money will become increasingly digital. I think cash and coin will probably cease to exist entirely at some point. There’s simply no need for it. And that means we’ll have one big electronic system. But it will still be a streamlined network. Whether a digital form of money like Bitcoin can compete with the banking system is a whole different ball game. But I can guarantee you one thing – trillions of dollars have gone into creating this network, legislating it, and ensuring that the banks control it. So if you want to understand the future of money you still need to understand banking because they’re not going to just roll over tomorrow and let some innovative kid in Silicon Valley steal one of the oldest and most lucrative businesses in the history of man out from under their noses.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.