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Goodbye Paper Money: Does It Mean More Ways for the Banks to Screw Us?

April 6, 2010

The spiral of economic calculation is dizzying, when you factor in inscrutable fees and other invisible transactions banks attach to the light-speed movement of our money.

by Scott Thill for

Currency has come a long way in the past few thousand years of human existence. Ancient Turkey started using hybrid silver and gold coins around 640 B.C. and the Chinese started passing paper around 800 A.D. But it wasn’t until the middle of the 20th century that Diners Club finally invented credit cards, or that electronic transfer payment systems like PayPal threw dirt on the century’s grave in the late ’90s. And now that the 21st century has fully arrived on the heels of both a harrowing terrorist attack targeting finance nerve centers in New York City and an economic depression downsizing everything from global bank accounts to job prospects, it is high time we rethought how we should pay and get paid to live and die.

Despite the deep thoughts and deeper concerns, it’s not hard to see that our digital age perhaps deserves a fully digital currency, compliant across real and virtual geographies. In fact, we’re pretty much already there, without admitting it.

“Nowadays, when the Federal Reserve prints money, it doesn’t mint a new penny or dollar,” Mikka Pineda, research analyst at famed economist Nouriel Roubini’s think-tank Roubini Global Economics, explained to AlterNet. “It just changes numbers in bank accounts. Individuals can do this too, provided they have electronic access to their accounts. They can transfermoney from one account to another, accept deposits and pay bills online.”

With one major difference: Unlike the Fed, individuals actually have to back up their virtual ones and zeroes with so-called real money, in the form of deposits. So-called, because what they’re really putting into their accounts, at least in America, are dollars, which are merely material symbols of real value made of paper. Or checks, which are even more hyperreal, given that they are just more paper signifying other paper that symbolizes real value. The spiral of economic signification is dizzying, especially when you start factoring in inscrutable fees, levies and other mostly invisible transactions that banks and other parasites attach to the light-speed movement of our money.

The dizziness increases when you factor in recent news from the Fed, whose controversial chairman Ben Bernanke argued in a February speech that America’s central bank should no longer have to adhere to a fractional standard. In other words, its currently feverish ex nihilo money creation, more commonly known by the hilarious nomenclature “quantitative easing,” finally wouldn’t have to be supported by any minimum reserve requirements. That would, wrote Raw Story’s Stephen Webster, make “free-floating, infinitely self-replicating capital a pervasive reality.” A bottomless ATM machine, altogether unmoored from material value, or reality itself.

Keeping It Hyperreal

It’s a logical endgame for such an illogical system of finance still dependent on currency paradigms created during the rise and fall of Jesus Christ, who stars in both America’s money and motto, “In God We Trust.” Indeed, our fiat currency, and those like the suspicious Fed entrusted with greasing its wheels, is nothing other than that trust made manifest. Paper money, silver and copper coins, bars of gold, whatever. The only thing that has any real value are the goods being exchanged, and the promises we make to each other to live by a set of rules governing our interactions. Pure digital currency is just that ages-old relationship rendered in bits and gigs, rather than dollars and cents.

“There’s nothing shocking or strange about a purely digital currency,” explained Jonathon Keats, the conceptual artist and Wired contributor who created the First Bank of Antimatter last year in San Francisco. “It’s just a logical technological upgrade on old-fashioned paper money.”

Keats’ economic thought experiment was illuminating, especially for those who think a paper slip actually worth mere pennies nevertheless equals 100 cents. After the global village’s inextricably leveraged game of finance and faith imploded in 2007, monstrously birthing our still-ongoing Great Recession, Keats decided it made just as much sense to peg global currencies to antimatter positrons. If we’re going to nuke our collective economic and political integrity with arbitrary currencies and rapacious deregulation, we might as well truly nuke ourselves, so to speak. The idea was challenging and, of course, impossible, but it cleverly exposed the stress fractures in our current system, which is obviously overdue, given recently terrible events, for a serious technological upgrade.

“In the 18th century, when the American colonies started printing cash, ink on paper was the state-of-the-art, the most advanced medium for communicating information,” Keats told AlterNet. “Since an economy is just a communications network by which a society trades wants and needs, the most efficient system of information storage and transfer ought to serve that society most effectively. Hence, bits.”

But since our digital currency, just like the various historical currencies it could eventually replace, is based on trust and faith rather than actual material value, which itself is resolutely fluid given who is buying and selling what in any given transaction, it’s just as vulnerable to the type of impenetrable corruption that has sunk us in the worst depression since the ’30s. Transparency and regulation is key to any currency transformation. But given the way we’ve utterly failed at both with our current fiat currency, prospects aren’t good for a clean break from our fractured financial past.

“Problems arise when the information is manipulated, as happened in colonial America shortly after Ben Franklin and his fellow printers started inking lucre on paper. They took all sorts of precautions against personal fraud — threats to punish counterfeiters with death were typeset on each and every shilling note — but they didn’t consider the catastrophic effects of inflation when the government issued more and more cash to pay off larger and larger debts. The same thing is happening today with quantitative easing, and I suspect there would be a similar risk with any central authority issuing state-of-the-art digital cash.”

“Digital currencies are fiat currencies too,” Pineda cautioned. “They are not backed by hard assets but rather trust that $1 is worth $1. Even if the world moved on to some global, digital currency unbound from the financial woes of any sovereign state, somebody still has to control the supply of money to determine, for example, how many Twinkies $1 can buy nationally on average.”

Fine. But who? Some players are starting to emerge.

Trust, But Verify

“This is the highest-potential business I’ve ever seen in my career,” eBay CEO John Donahoe gushed, according to Wired’s Daniel Roth. That was in 2008, aftere-commerce visionary PayPal, which eBay acquired in 2002, launched a presentation to explore the possibilities of, “a true digital currency that could be used on any Web site,” Roth wrote, “that enabled money to move as easily as email.”

For more than a decade, PayPal had acted as a digital middleman for international online buyers and sellers exchanging goods on the online auction site, gaining ground on the conventional banks, which levied unnecessary but nevertheless escalating finance charges, that customers wanted to deal with less and less. After the recent econopocalypse, trust and faith in the banks is in shorter supply than ever, to say nothing of their overlords at the Federal Reserve Bank, whose itinerant secrecy was recently crippled after the U.S. Court of Appeals in Manhattan ruled that it had to open its books and finger the lenders that would have collapsed were it not for its bailout from thin air. In that duration, however, PayPal’s reputation and users have only increased, as has its services. Although it originally functioned “pretty much as an online credit card company,” Roth wrote, it has since expanded its operations, urged on by its users, which in fact encouraged eBay’s 2002 acquisition. Now it is opensourcing its code to developers and seeing how far it can push the digital finance envelope.

Can it push it far enough? If it doesn’t, someone else will, because the current system is full of holes.

“Much more honest and democratic, perhaps,” Keats told AlterNet, “would be a free market of free markets, in which everybody started issuing bits, each person disseminating his or her own digital cash based on what he or she owned or could make. Many competing currencies: This is what happened to a somewhat lesser degree with banks in the 19th century, each issuing its own legal tender. Back then, the obvious problem was geographic: A New Yorker couldn’t be sure whether a bank as far away as South Carolina was legitimate. But the same technologies that make a currency of bits feasible also make physical distance trivial. Via the internet, one could assess the worthiness of other people’s bits, and decide how highly to appraise them relative to one’s own. Just imagine: Integrity would take on value.”

Such a scenario would be a digital upgrade of our earliest economic arrangement, known as the barter system, which is actually gaining in popularity in America. International barter sites like U-Exchange are reporting skyrocketing traffic, while eBay and are fearlessly charting the path forward. For now, the latter lean, like all of us, on the foundation of fiat currency; that is, we still expect to get paid, usually via PayPal, in dollars and cents. But what if we could just get paid in things we need, or want, from those sites? Instead of punching in bids for baby clothes, what if we all could offer individual goods or services? What if the seller could post his or her wants or needs, rather than a minimum reserve bid? Wouldn’t things move much smoother? The jury is out, ironically enough, because of technology. Or lack thereof.

“People still barter for goods in some parts of Africa,” said Pineda. “But a purely digital currency is many decades away from adoption as long as the digital divide remains. Developing countries in Africa, Asia, Latin America and more lack the infrastructure to depend completely on electronic transactions, let alone currency transactions. ”

Of course, that could change as well, once the rest of the planet catches up to our new century’s wireless broadband benchmark. And given what happened toZimbabwe’s disastrously devalued dollar, the barter system isn’t looking as crappy as before. In fact, it’s the system most used by Zimbabwe when dealing with its chief trading partner China, whose extensive investment in U.S. Treasuries has also empowered decades of gluttonous American consumption. For victors and victims of fiat currencies, the barter system is still an excellent fallback, if you still need to do biz in rapidly changing times.

Wake Up and Smell the Money

But the barter system only really works for those with material goods desired by an increasingly fickle market, which will get even more fickle as climate change takes hold this century and drastically shrinks what’s left of the planet’s easily obtainable natural resources, from oil to water to arable land and beyond. To chart a path forward into a truly democratic digital future, those having to live on the margins of the international market need something for when they have nothing to give but their own labor. And since some worry that the dollar could be next in linefor a bout of hyperinflation, there’s little comfort in the thought of exchanging that labor, which is more or less a universal currency, for a piece of paper that could be less than the labor is worth. If you thought underwater mortgages were bad, underwater labor is even worse. Let’s just hope we don’t have to go there.

We won’t, if dogged financial regulation once again rears its lovely head. That could correct serious imbalances in our currently compromised economic system, and perhaps short-circuit the need for a purely digital currency.

“Electronic finance won’t spread the wealth, unless the institutions, such as a bank or an online global clearinghouse, that hold — or, in the case of digital money, record — your money for you redistribute that wealth,” Pineda explained. “Why can’t we do away with banks or clearinghouses? If we decentralized our money holdings there would be no overseer to regulate the transactions between people and make sure everyone’s being honest.”

But that is obviously not happening now, and given the trillions in bailouts of so-called too-big-to-fail banks, it won’t be happening anytime soon either. The United States used to have a series of checks and balances on banks, insurance companies and other hyperreal value peddlers, such as the Glass-Steagall Act. In fact, banks and other clearinghouses are mostly epicenters of financial corruption, rather than its sworn enemy. They’re easily as if not more corrupt than the worst of us, and can hardly be called upon to honestly value, much less capably redistribute, the wealth of nations. As for the nations themselves? Should we go there either?

Here’s what’s obvious: The current system of finance is broken beyond repair, and needs to be rebuilt from the ground up. Literally: We need to reconnect our hyperreal financial stratagems to the Earth spinning beneath our feet, rather than hand them off as playthings of algorithm-addicted monoliths like Goldman Sachs and more. And while some nations like Venezuela, Cuba and more have begun to counter that crime by creating their own regional currencies, and other organizations like the International Monetary Fund are openly lobbying for a global currency, it has become clear that currency as we knew it could soon change forever. The question left to answer is what exactly it will change into as the 21st century unfolds.

While digital currency is just as prone to corruption and manipulation as any other fiat system, it is at least honest. By stripping away the paper dollars and precious metal coins, digital currency could unplugs us all from the hallucination that our papers and coins are worth more than yours. Digital currency could perhaps check speculation and predation, all while putting old-world currency’s material resources to better use. And sure, it will be a serious headache. But you don’t get the baby unless you take the pain of birth or surgery. And given all the pain we have inflicted lately, in the name of our antiquated money system, perhaps it’s time we started making a new life in a still-new century, before the dollar becomes a stillborn reminder of what we can do when we’re at our worst.


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