The future of money and business

In My Humble Opinion
1

Money is a funny thing. On the one hand, it plays a role in almost everything that human beings do. On the other hand, it’s hard to define exactly what it is. In ancient and medieval times, money was generally just a coin stamped by the government in order to guarantee its value. Today we still have coins as well as paper bills, but the government no longer backs up that money with gold or silver. Furthermore, the great majority of our money doesn’t exist as bills or coins. It just exists digitally in bank accounts.

As has often been pointed out, the basis of money is trust. Money exists, in other words, if people believe they can trust the government to uphold its value. People trust the United States government because it’s the most powerful on earth, and the longest-lasting. Likewise most other stable governments in developed countries. But in a country such as Argentina or Venezuela, the people can lose trust and the value of the country’s money sinks to almost nothing.

Here’s another truth: in today’s world, things can change very quickly because to technology. Case in point is the video industry. In 1995, Blockbuster Video looked like one of the most solid companies in existence. People wanted movies and video games, Blockbuster provided them for a price in the most efficient way possible. Then online video distribution arrived, and Blockbuster Video was knocked out almost overnight.

It’s possible that money as we know it could be knocked out by a technological alternative within the next couple decades. Basically, just as the internet offered a way of delivering movies, games, and TV shows that was better than what Blockbuster offered, it could offer the trustworthiness that underlies money in a way that’s better than what the government offers. There have already been attempts at digital currencies. Bitcoin drew a lot of attention a few years ago, but practical and technological barriers prevented it from taking over ordinary monetary transactions. Few businesses are interested in using Bitcoin, so for most people there’s just no point.

There is no theoretical reason why a better digital currency couldn’t surmount those obstacles and become a standard. The reason is that our current money system leads to losses for ordinary users. First of all, by holding our money in dollars, we are subject to inflation. Even when inflation is low, it’s still effectively wealth being taken out of our pockets. Second, unless we’re willing to keep all our money as cash under the mattress, we have to have a bank account, and the bank has numerous ways to take some of our money as the price for letting us store and use our own money.

With a digital currency on the other hand, there would be no need for a bank, or at least not a traditional one owned by profit-hungry human beings. A digital bank dealing only in digital currency could be “owned” purely by an artificial intelligence that cared nothing for profit, that was immune to corruption, and that was programmed to always put the interests of customers first. This would solve the trust issue. As soon as this AI had demonstrated its successful business practices in a sufficiently large number of cases, people would know that it was trustworthy and would be happy to use the AI’s digital bank, thereby avoiding inflation and user fees and overdraft penalties and all that crap.

2

You’ve confused “money” and “currency”. Money is the idea. We’ll probably always need a mostly-stable store of value to facilitate transactions.

US Dollars, Euros, and bitcoins are currencies. Each is an at least OK substitute for the other under many circumstances.

It wasn’t but a couple hundred years ago that currency was mostly not issued by or controlled by governments. There’s no particular reason to think currency will always be government issued in the future. There’s certainly plenty of in-game currency in some of those MMPORG environments, although I’ve suddenly forgotten which game is most famous for it.

Digital tech affords another vehicle for creating and managing currency. One with some actual advantages. But at the same time digital currency is in most ways not fundamentally different from hunks of gold with Caesar’s picture stamped on it.

3

What is it you think a bank actually does? And how much banking do you think is “digital” vs “large bags of cash in a Scrooge McDuck vault”?
The reason we have interest has nothing to do with digital currency. It has to do with money in hand now being worth more than the promise of money in the future.

4

This.

Ultimately, money is just a widely agreed upon measure of value. It makes trading vastly easier- back in the day, a shepherd might have wool, manure and livestock to sell. Another guy in the area might be a blacksmith- he’s got knives, pots and horseshoes to sell. A farmer might have wheat to sell, and a miller would have flour to sell. How do all of these things relate in terms of bartering ratios? Eventually, I imagine, these things fall into an equilibrium, and rough exchange rates form between them, i.e. one bushel of wheat = 1/8 cooking knife = 2 cartloads of manure = 1/2 bale of wool = 2 horseshoes = 3/8 bushel flour.

Probably someone starts using some sort of intermediate counter - doesn’t even have to be inherently valuable; no reason it couldn’t be certain stones, or seashells or something like that. 1 abalone shell represents the value of say… 1/16 of a cooking knife, 1 cartload of manure, 1/2 bushel of wheat, etc…

At some point whatever government is in place starts regulating the whole thing, likely for taxation purposes. And, this is important, banks arise for the purpose of storing and lending these seashells. Rather than everyone having to protect a big pile of shells, they store them in the bank, and it’s much easier to protect them. And, just as importantly, the bank can lend out shells to others with the expectation that they get paid back a little more than they lent out. So it’s a win-win- people get there shells protected better than they could at home, and the bank can lend them out (and get them back) and make some money in the process.

Where you’re going off the rails is in thinking that the banks “take our money for the privilege of letting us use our money”. Not quite- they provide value in being a safer place to put it than buried in a coffee can in the backyard, or stuffed into the mattress. Plus, they allow you to spend it in more efficient ways- debit cards, checks, cashier’s checks, etc… all of which are more convenient than cash for their intended purposes. They charge you for those two things, most likely because your balance isn’t enough for them to actually make money off you. (hint: if you habitually carry a big enough balance, most banks don’t charge you fees, and some will even pay you a nominal interest on it)

In other words, banks are in business to make profit- they do so by basically safeguarding your deposits, and then lending those deposits out in aggregate to likely loan applicants for interest.

All AI-governed banks (assuming strict AI rules against malfeasance and financial shenanigans) would accomplish, IMO would be to react better, faster and more logically in the face of shocks to the system than human bankers and investors would. Or they could get hopelessly deadlocked in ways that humans wouldn’t. We don’t know.

5

When I took econ we read a paper about prisoner of war camps, where cigarettes were the unit of currency. All prisoners got them from Red Cross packages, and those who did not smoke were relatively wealthier.

6

Dollars are backed up by the United States government. People, even those who live outside the United States, have faith that the United States government is reasonably stable. It will continue to exist and give support to dollars in the foreseeable future.

What’s the equivalent for digital currency? What’s backing it up and supporting it? The credits issued by your hypothetical AI are only as stable as the AI itself is.

Which should I believe is more likely to still be around in twenty-five years; the United States government or your AI?

7

I think you’ve missed a step. It wasn’t online video distribution that killed Blockbuster. It was Redbox. You could rent a DVD from a kiosk more conveniently and cheaper than from a brick and mortar store. You could also rent it at one location and return it to another, which you could not do with Blockbuster. Blockbuster couldn’t lower the rental price to compete because of the significant overhead associated with their brick and mortar stores. Physical DVD rentals from kiosks continued to grow well after Blockbuster shuttered its doors. It has only been within the last 18 months that physical DVD rentals has reached a peak, and has begun a decline. Redbox still generates billions of revenues annually from physical DVD rentals.

8

Slightly off-topic, but whenever the subject of a ‘future cashless society’ comes up I like to remind people that 30-40 years ago the dawn of personal computers in business heralded the coming of the ‘future paperless office’. On the contrary, the speed and ubiquity of computers have increased the usage of office paper ten-fold*!*

9

Inflation is created by lending money (in the way that banks do).

Say that I’m a bank with $0. The economy also has $0.

I loan $100 to 100 people. My account has -$10,000. The economy has $10,000.

Each person is charged interest on the loan, so they’ll end up having to pay me $102.04 each, if they don’t default.

98 of them pay me back, including interest. 2 of them default. My account has $0 again. The economy $0 again.

But now say that during the time that I (the bank) was in debt, more people came to take out a loan, and I went even more into debt. Then instead of going back to $0 after the first set of loans come back in, the economy might stabilize at $10,000, it might shrink over time, it might grow over time. But certainly the amount of time until the bank gets back to $0 is pushed out further. If the economy grows over time, then the bank might just never get back to $0.

And, in fact, in a healthy economy, that’s the case.

Often, when people take out a loan, they do it in order to create a business. And businesses which are successful are those which can offer a service to a world that’s more cost-effective than pre-existing options. That reduces the amount of money people have to budget for, in their daily life, so they can instead pay off their loans. And once someone has paid off their loan, they’re more likely to take out another loan and/or take out a larger loan. This creates a cycle of bigger and/or faster loan cycle, putting the bank into a deficit at a increasing rate, while the economy grows at an increasing rate.

And of course, the population also tends to grow at an increasing rate, so that also causes the rate of loans being made grow over time.

As long as your bank, AI or not, works on the same principal as those of today:

  1. It loans money that it doesn’t have.
  2. We trust that it is properly applying interest rates to cover default rates.

Then inflation will occur.

10

But wait. Who are the customers of a bank? The depositors, borrowers, and shareholders of the bank (including the case of the AI being a 100% shareholder). One could also argue that society is a customer of having a common store of value.

Given these 4 customer interests, which one does the AI put first? If we rule out the AI itself, as the OP suggests, then we have an owner that does not value its own solvency. The general public might applaud this altruism, but the depositors and borrowers would not.

Ruling out those parties, who does the AI put first, the borrowers or the depositors? As a depositor, when I put my money in a bank, I want high interest and a guarantee that I can withdraw funds whenever I please. As a borrower, I want low interest, and I don’t care whether the depositor gets their money or not. So what if the bank goes bust, I still have my first draw and the depositors are left holding the bag.

Short answer… an AI cannot solve value judgments for you.

11

I think it could, if it was smart enough.

As things stand now, the government insures small deposits. When there’s a bankruptcy of a major corporation, investors will be fighting to recover a share of their money for years afterwards.

And what would cause a bank to go bankrupt? Stupidity, basically. That’s what happened to some of them during the 2008 financial crisis.

So if an AI were smart enough, it would solve the stupidity problem. It could understand statistics better than any human being, make projections and analyze trends faster than humans, and avoid plain old human error. Its probability of bankruptcy would be a lot lower.

As for what happens if there is a bankruptcy? Well, the AI could publish a clear, algorithmic explanation of what will take place if there is a bankruptcy. How will remaining assets be distributed,etc… it’s all done by formula. If the AI bank does go bankrupt, everything just gets distributed to depositors and investors in a fraction of a second. Much less costly and less stressful than years of courtroom battles.

12

But that’s not the only relevant question. True, the US government will likely exist in 25 years and American dollars will likely be worth something, but on the other hand inflation keeps eroding their value. A competing currency with lower or no inflation could compensate for that.

To take a simple example, let’s say that we expect inflation of US $ to be 3% a year. The expected value of $100 in one year is $97.

Now suppose we had digital dollars (D$). The chance that the entire system collapses and gets wiped out and D$ become worthless in the next year is 2%, but there is no expected inflation. The expected value of D$ 100 in one year is D$ 98. D$ are the better deal.

But now think about people in countries like Argentina and Venezuela, where inflation runs double digits. For them, a digital currency wouldn’t need to be all that good, in order to be better than what their governments are currently providing.

So the question is, how do we get to a digital currency that has a 98% chance (or greater) of not collapsing each year? Well, I’m not a technological genius so I can’t give you the details. But I do know that technology improves quickly these days. (Compare your phone to what you had 20 years ago.) Currencies like Bitcoin already exist as a sort of proof-of-concept. In the next generation, new digital currencies will iron out the technological problems and provide improved security. The value of Bitcoins swings wildly, because few people use them. But if a digital currency gained widespread use by millions of people in everyday transactions, it’s value would stabilize.

13

What you’re really trying to do is remove greed from the bank’s decision making. Which is foolish.

As long as there are humans anywhere in any part of the business process, greed will prevail everywhere. We need to work on limiting the ability of the humans to act on their greed.

If there are two AI banks they will end up competing to offer better = cheaper products. Not because they are greedy for growth, but because their human customers are greedy for cheaper products. The one that is cheaper will get the business. And once some human decides the bank is overextended they will short the stock or whatever and cause a panic as the greedy humans rush for the exits.

Yes, an AI bank might react to the run more swiftly and loose less total value in the ensuing disaster than human bankers might. But it will do nothing to prevent the disaster itself. Because that’s caused by the human customers.
The great flaw in all capitalist financial systems is the tragedy of the commons; what works best for the “smartest” money in the shortest term is massively destabilizing for the whole in the longer term. Attempts to prohibit the “smartest” money from doing what it wants mostly create opportunities for ever more intricate arrangements to work around the rules.

Which opaque arrangements are especially well-suited to diverting risk onto parties that are unaware of what they’re actually buying. Can you say “CDO”?

14

Not necessarily. The purpose of a bank is to put unused value to productive use. True, a static currency gives you a better deal as a depositor or lender. But borrowers are better off with some degree of inflation. So are corporations, whom inflation serves by eroding the real cost of senior employees and senior debt without actually having to renegotiate terms.

If you’re arguing that digital currency can be a better means of exchange than government fiat currency, I would tend to agree with that. But if you’re arguing that digital currency is better because it gives superior returns to depositors, I would say your analysis fails because you don’t understand what banks are for.

15

Are you sure of that? I know that in my office, the use of paper has decresed enormously. Virtually all internal communication is by e-mail. Tomorrow, I will be chairing a PhD final exam. In the old days, I would get a copy of the thesis, copies of the examiner’s reports on the thesis and one signature sheet. The thesis alone would usually be over 100 pages, maybe several hundred. Now everything I get comes as email attachments and I print the signature sheet. When signed, I scan and send it to the thesis office as an email. I do not know if even one copy of the thesis is ever printed, although I imagine it is.

I have not had anything in my department mailbox in several weeks. Yes, we are nearly paperless.

16

I know that 10-15 years ago I was constantly trooping over to the office printer to get something. But I can’t remember the last time I needed to use the printer for real at work. I know it’s been at least a year.

My daughter uses our home printer all the time for schoolwork, but that’s not the same.

Wait, I just remembered! I have had to print out, sign in ink, scan, and email some official documents when I started a new job. So that happened one time.