Identity is the New Money

David Birch

• Publisher: London Publishing Partnership
• Year: 2014
• eBook ISBN: 9781907994357
• Edition: 1
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

This book argues that identity and money are both changing profoundly. Because of technological change the two trends are converging so that all that we need for transacting will be our identities captured in the unique record of our online social contacts. Social networks and mobile phones are the key technologies. They will enable the building of an identity infrastructure that can enhance both privacy and security – there is no trade-off. The long-term consequences of these changes are impossible to predict, partly because how they take shape will depend on how companies take advantage of business opportunities to deliver transaction services. But one prediction made here is that cash will soon be redundant – and a good thing too. In its place we will see a proliferation of new digital currencies.

Chapter 4

Imagine there’s no money

‘He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that nobody ever did anything legitimate with it.’

William Gibson in Count Zero

The key to understanding the effect of technological change on money is to understand the relationship between the functions of money and the technology drivers, because those drivers affect the different functions in different ways and across different timescales.

Tallies and technologies

This relationship is illustrated perfectly by the wonderful story of the tallies, the wooden sticks used to record taxes due to the Crown in England. They first came into use shortly after the Norman invasion of 1066. Tax assessments were made for areas of the country and the sheriff (the shire reeve) was required to collect the tax due and hand it over to the Crown. To ensure that both the sheriff and the king knew where they stood, the tax assessment was recorded by cutting notches in a wooden stick. The stick was then split into two pieces, a larger ‘stock’ and a smaller ‘foil’, so that both parties had a durable record of the assessment. When it was time to ‘tally up’, the sheriff would show up with the tax due and his foil to be matched against the king’s stock. The new technology worked well. The sticks were small and long lasting (very long lasting, in fact, given that they still exist), were easy to store and transport, and were easily understood by an illiterate population.

The technology soon began to exhibit unforeseen (in the context of their record-keeping function) characteristics. This is generally true of all technologies and one of the main reasons for this is their persistence. There is no overnight change. As the historian David Edgerton wrote in his detailed study of the phenomenon of technological change, The Shock of the Old, it takes a very long time for technologies to move through a culture, and their downstream use is often different to that imagined by their inventors. Money is no different. As he says, ‘The modern world is a world of “creole” technologies, technologies transplanted from their origins to find use of a greater scale elsewhere’,41 and this will certainly be true of the technologies that replace cash.

Back in medieval times the king couldn’t be bothered to wait until taxes fell due and wanted cash as soon as possible for all sorts of reasons. The king could not borrow money at interest against the collateral of a stock, because of the religious injunction against usury, so he would instead sell the stock at a discount. The holder of the stock could then get the cash when the taxes fell due. This made the stock (in effect) a fixed-term government bond. Selling stocks at a discount became a key means for the Crown to borrow money without God noticing what was going on.

There was an immediate result of this shift in function from a record-keeping to transactional technology: the value of an individual tally was no longer fixed by the amount of tax it entitled the holder to, but by the market, and the market evolved quickly. Someone in (say) Bristol who was holding a stock for taxes due in (say) York would either have to travel to collect their due payment or find someone else who would, for an appropriate discount, buy it. Thus, a market for tallies grew, arbitrating temporal and spatial preferences by discounting, transferring economic resources across space and time before the pre-modern banking system began to emerge to implement these functions. London money markets are not new! The efficiency of this market helped the Crown to raise money more cost-effectively than it might otherwise have done and it is known from recorded instances that officials working in the Exchequer helped this secondary market to operate smoothly.42

Incidentally, the tallies remained in use until the nineteenth century. When the last person who knew how to carve tally sticks died in 1826, they were stacked in a corner and forgotten until 1834, when the Treasury had ordered the underused tally office in the Exchequer’s room in the Palace of Westminster to be cleared out to make way for the new bankruptcy court. John Phipps, the Assistant Surveyor for London in the Office of Woods and Forests, and, for the usual strange English historical reasons, in charge of the Palace, told the clerk of works at the Palace, Richard Weobley, to take them out and burn them next to the River Thames. Weobley came up with a better idea, which was that they should be burnt in the furnaces that formed part of the ‘central heating’ system.43 The tallies were duly loaded into the furnaces and burned very well, resulting in the famous fire that destroyed the medieval palace on 16 October 1834.

Thus, the technology of money, like all technologies, exhibits the law of unintended consequences, so beware of anyone who claims that they can see clearly the direction in which a new technology will take us. The tallies began as a technology for record-keeping, soon went on to become the basis of a money market, and then remained in use long after ‘better’ alternatives were available. It’s impossible to say what the unintended consequences of current innovations in financial technology will be, only to observe that there will be some.

What we see today, with chip cards and the Internet and mobile phones coming together to change the nature of money, is nothing new. Society has been through times of innovation in money technology with considerable long-term ramifications before. In England at the end of the seventeenth century there was a crisis in the means of exchange because of coin ‘clipping’ with the result that people wouldn’t take silver coins in payment nor bring them to the mint for replacement. No less a brain than Isaac Newton (a reasonable candidate for the title of cleverest person ever) quickly figured out what to do.

First, he suggested, the mint should use machines instead of people to make coins. This would vastly reduce the cost of production (and therefore increase mint profits) and would also introduce uniformity and consistency to the coinage. Second, he suggested that the machines ‘mill’ the edge of the coins to prevent further clipping. The king himself agreed to these changes, with his proclamation of 19 December 1695, referring to ‘the great mischiefs which this our kingdom lies under, by reason that the coin, which passes in Payment, is generally clipped’.

Newton’s conclusions were correct (to match an industrializing economy to industrial production of money) but it still took a generation (30 years, in fact) to replace the old, clipped, hand-made coins with shiny new emblems of the nascent industrial revolution. If these advances in coinage took time, things didn’t accelerate with paper. The earliest UK cheque recognizable in its modern form dates from 1659: it instructs a London goldsmith to pay £400 to a certain Mr Delboe. It took more than a century after cheques were invented for cheque clearing to be invented, and it wasn’t invented by banks but by their clerks. Tired of running round to every bank to clear cheques, they began to meet (unofficially) at a coffee house to clear and settle between themselves. (Some years later the banks realized their clerks’ idea was a good one and in 1833 established a clearing house at 10 Lombard Street.)

By the time Newton died in 1727, a generation after the currency crisis that had led to his appointment, Britain had a central bank (the Bank of England), banknotes in wide circulation, a working coinage and a gold standard. At the time of the Glorious Revolution of 1688, none of these had existed, yet within a generation money had changed completely. The world of bullion and coins had been replaced by a world of paper and signatures.

We are at an analogous point in the co-evolving relationship between the technology and the money.

Cash is a hack

At the 2013 South-by-Southwest Interactive conference (SXSW) in Austin, Texas, there was a session called ‘Identity + 30’ run by Sam Lessin, the Head of the Identity Product Group at Facebook. He argued that when sharing is expensive, or when it makes an individual less well-off, people don’t share. I won’t give you my spare bread if I don’t get anything in return or if it costs me more to swap my bread for your chicken than it benefits me. Human societies evolved trade to deal with the costs of exchange, and we evolved trust networks to do it efficiently by growing larger networks with more trading partners and by capturing more information about those partners over time. Thus the cost of trade reduced and the amount of trade went up. Money was an element of these trust networks, because it was cheaper to trust the money than the credit of a counterparty beyond your clan, village or tribe.

Sam had a useful way of thinking about this, which was the idea of what he called ‘social hacks’ to deal with the historical problem that the speed of bits and the speed of atoms are different. These hacks are things like badges, diplomas, dress codes and, as it happens, banking. Banking grew as a risk intermediary in those trust networks.

However, because of what Sam memorably called the ‘superpower’ we have gained because we can instantly communicate with anyone else on Earth, we will no longer need those hacks. I may be summarizing incorrectly, but I think his way of looking at the existing business models around identity as being hacks in response to incomplete identity, credential and reputation information is a good way of framing some problems that can be solved using the infrastructure I am suggesting.

A consequence of the ending of the need for such hacks is that social capital will get ever more fungible, so (for example) going to Harvard will mean less than it does now, which means that it will be worth less than it is now. You can see exactly where this headed. Just look at the way we use LinkedIn. In the old world, I would use the social hack of finding out which university your degree came from as a sort of proxy for things I might want to know about you, but I no longer need to do that because from LinkedIn I can find out if you are smart, a hard worker, a team player or whatever. So there’s less premium for you learning, say, biochemistry at UCL rather than Swindon Polytechnic: so long as you know the biochemistry, my hiring decision will be tied to your social graph, not the proxy of an institution.

The implications go further. Google was famous for its rigorous hiring criteria, but when they looked at ‘tens of thousands’ of interview reports and attempted to correlate them with employee performance, they found ‘zero’ relationship.44 Their infamous interview brainteasers turned out not to predict anything. Nor did school grade and test scores. The proportion of Google employees with college degrees has decreased over time, a point echoed by Rory Sutherland, the vice chairman of Ogilvy & Mather UK, when he wrote that he was unable to find any evidence that ‘recruits with first-class degrees turn into better employees than those with thirds (if anything the correlation operates in reverse)’....

Table of contents

• CoverImage
• Birch-Title-Page
• Birch-Copyright-Page
• Birch-Dedication-Page
• Birch-Epigraph
• Birch-Foreword
• Birch-Preface
• Birch-01
• Birch-02
• Birch-03
• Birch-04
• Birch-05
• Birch-Glossary
• Birch-Endnotes