Book Summary 1: Before Babylon, Beyond Bitcoin – David Birch

 First recognisable coins date from Lydia, Turkey, over 2500 years ago, made from electrum
(alloy of gold and silver)
 Paper money came from China, Kublai Khan created a paper money system through simple
expedient of capital punishment, death penalty for those who tried to use gold/silver,
system collapsed due to hyperinflation after leaders began to print too much
 All currency is now virtual, manifestations of sovereignty conjured by governments ever
since Nixon took the US$ off the gold standard in 1971 (the dollar was on the tobacco
standard for almost twice as long), entered a world of fiat currency,
 Functions of money – Unit of account, Medium of Exchange, Store of Value, Means for
Deferred Payment
 Mondex – launched in Swindon in 1990s, electronic purse based on a tamper-resistant chip,
value could be transferred directly from 1 chip to another with no intermediary or cost, did
not work out because it was too hard to get hold of, had to load them at ATMs, banks were
not interested in its implementation but rather their own profit
 Tally sticks- first form of government bonds in the UK, came into use in 1066, Tax
assessments were made for areas of the country and sheriff had to collect them and remit
them to the king, used a stick to keep track of this (one part to sheriff, one part to king), as
king got impatient, he sold the sticks at a discounted price to public, who were then paid the
tax remit when it arrived, used up until 1826, burned in 1834, which caused the houses of
parliament to burn down
 Gresham’s Law – ‘bad money drives out good’, Henry VIII tried to devalue money by using
more copper to produce them rather than silver as he was trying to maximise seigniorage
(profit accrued to the issuer of money), but people noticed and kept the good shillings as a
store of value while using the bad ones as a medium of exchange, which damaged
commerce until Elizabeth came into power and issued pure silver shillings again
 Operation Bernard – plan by Nazi Germany to cause recession in the UK during WW2, took
143 Jews and forced them to produce counterfeit pounds at Block 19 in Sachsenhausen, of
which they produced £132 million (£4 billion today), Jewish underground gave these notes
to Holocaust survivors fleeing to help them and raise money for the nascent Israeli army
 Bank of England’s role as settlement agent emerged in the middle of the 19 th century with
the provision of settlement accounts for the commercial banking sector, since 1996 these
accounts have been held with the Bank’s Real Time Gross Settlement (RTGS) system, which
provides real time posting, with finality and irrevocability, of debit and credit entries to
participants accounts. This system is used to settle for CHAPS in real time, real-time
settlement of the payment system embedded in the CREST securities settlement system,
settle several times a day on a net basis using the Faster Payments Service
 BACS (Bankers’ automated clearing service) is the UK’s automated clearing house for retail
payments, and is the only one in the UK
 A clearing house is a financial institution formed to facilitate the exchange of payments,
securities, or derivatives transactions. The clearing house stands between two clearing firms.
Its purpose is to reduce the risk of a member firm failing to honour its trade settlement
obligations.
 Today, most international interbank messages use the SWIFT network to send payment
instructions that are then settled through correspondent accounts
 M-Pesa – launched in Kenya in 2007 – originally for using mobile phones to make
microfinance loans in Africa more efficient, today it is widely used to pay for good/services,
 allows people to deposit and withdraw cash from accounts associated with their mobile
phone numbers, 2/3 of adult population using it, Kenya’s regulatory environment allowed
M-Pesa to flourish, was not developed by banks, allowed previously excluded people to
demonstrate identity and reputation, since M-Pesa transaction histories could be used as
substitutes for traditional credit ratings
 Currently, identification takes place using chip in a card or mobile phone, but in the future,
this may move over to biometrics, if transactions were to be completely anonymous this
would not allow for loyalty schemes
 Large ‘cash gap’ in the UK, demand for cash is rising but only around a quarter is used for
everyday transactions, most is hoarded, exported or stashed
 Black economy (illegal stuff) + grey economy (legal activities which are unreported to avoid
tax) = Shadow economy
 Using cash makes the government worse off, since the tax gap that can be attributed to cash
is vastly greater than the seigniorage earned by the Bank issuing notes
 Can reduce the use of cash by reducing the number of ATMs, and increase the number of
electronic POS terminals capable of accepting electronic payments
 Low value coins should not be produced anymore – inflation means their value is too low
and no one really uses them anymore.
 Reasons for keeping cash: conservatism, still used by poor and elderly, seigniorage revenue
for the government, privacy from the government, security reasons
 Completely anonymous transactions aren’t really required, as you would want a bank to be
able to find your money if you lost it, and you would want loyalty points, and they may
charge extra to be anonymous, better to be pseudonymous, where transactions are not
entirely anonymous, so that if required transactions can be traced in order to prevent illegal
activities, people want privacy rather than anonymity,
 Effects of cashless society – harder for criminals to operate (especially those using notes
with large denominations), will allow the government to measure the performance of the
economy more accurately, less tax evasion, less money laundering (although tracking illicit
money flows requires considerable bureaucracy and enforcing the regulations may cost a
low of money), more inclusive payments systems, loss of seigniorage revenue (unless the
government decides to issue the currency itself)
 Assassination markets – prediction market in which people bet (anonymously) electronic
money on the date of a person’s death, and they receive a pay-out if they win, which
incentivises the assassination of particular individuals, anonymous transactions may lead to
these kinds of markets growing
 Money of the future – no physical medium of exchange, electronic money that can be
passed from person to person, unit of account only in a virtual world and in virtual and
mundane transactions, has no issuer, value maintained by cryptography
 Identity in the future may be based on social networks, people will be able to use social
media accounts to verify/log-in to a bank account, adds extra security and verification,
 Irish bank strikes 1966-76, 3 major bank strikes in Ireland, 4/5 money supply disappeared,
people relied on notes and coins, but mainly on cheques, people based creditworthiness on
reputation, as people knew a lot about each other, same may happen in the future using
social media, as reputation is based on what everyone thinks, and is much more reliable
 People use Bitcoin because they want cheap, irreversible online means of exchange,
anonymous and fungible means of exchange, non-government currency (less trust in
government), bitcoin overcomes ‘double spending’ (sending the same money to 2 different
people) by distributing the transaction record across the network, uses ‘proof of work’ in
order to make it difficult to subvert the consensus, more efficient cryptocurrencies may
come along in the future, not necessarily bitcoin
 Bitcoin does not currently fulfil the economic roles associated with money, not reliable store
of value do to its volatility, restricted use as a medium of exchange, not an independent unit
of account against which other currencies may be measured, it is more of a digital
commodity right now
 Digital fiat may be used in the future, a central bank grants universal, electronic, 24/7,
national-currency denominated and interest-bearing access to its balance sheet, would
theoretically boost GDP due to a fall in real interest rates, distortionary taxes and monetary
transaction costs
 Decentralised currencies may use blockchain technologies, shared ledgers that are
distributed, decentralised, public or transparent, time-stamped, persistent and verifiable,
these would be robust (would not break down), innovative, have integrity and flexibility
 Rather than banks receiving deposits when households save and then lending them out, it is
bank lending that creates deposits (commercial banks create money, not central banks),
commercial banks are limited in how much money they can lend if they are able to remain
profitable in a competitive banking system, prudential regulation acts as a restraint on
banks’ activities to maintain the resilience of the financial system
 Future money makers – central bank (creates fiat money), commercial banks (create bank
money that we have right now), companies (currency to be redeemed against future
products and services), cryptography (no issuer and external regulation of the issue), and
communities (would issue local money)
 Central banks should issue money for 6 main reasons – widen range of monetary policy
instruments, promote innovation in payment systems, increase financial stability by
providing a risk-free alternative to bank accounts, recapture a portion of seigniorage, create
alternative finance, increase financial inclusion, needs to have no KYC (Know Your Customer,
protection by banks against fraud), no censorship so that people can use accounts without
sharing real name but if any suspicious activity were to be done then authorities can track
them down
 In the future it is possible to have every company issue their own currency that can be used
to pay for goods and services they produce, there would be many currencies in circulation
but computers would be able to calculate effective exchange rates using algorithms
 Communities can also issue their own currencies that will only be acceptable in that area, it
can have features depending on what that community may prefer, they may embody the
values that are important to communities
 Could be using ‘smart money’ in the future, which know exactly what it has been used for in
the past and who it was held by, all possible because of computers
 It may be difficult to have a universal currency, because the state of the economy in
different countries differ, and so there may be different monetary policies that work in
different areas, could use different currencies in different cities
 According to Paul Krugman: ‘anonymous, reliable means of exchange, prefer one backed by
the government’
 According to Marvin Minsky, ‘With fast computers and huge memories, we could have a
nonlinear database that would better understand what each person has and wants. Using
complicated game theory-related computations, it may turn out that in general everyone
would get more (in terms of their personal values) for the goods they’re willing to sell’ and
‘taxes will be lower because of the vast amount of uncollected tax today’
 Probably will be large amounts of experimentation with different currencies, seeing as how
the marginal cost of introducing another currency will be approximately zero
 In the future, digital currencies will be smarter because they will be able to collect much
more information about how they are used, and will allow for much more complex
transactions.
 Some communities will choose money with different combinations of features, some may
value transparency over anonymity and some may value currency that only they can use
compared with money that anyone can use
 The prediction – newest technologies will take money back to where it came from,
substitute for memory to record mutual debt obligations within multiple overlapping
communities, but this time money will be smart, reflecting the values of the communities
that define it, it will know where it has been, who has used it and what its been used for.
 Steps for the future – gov should reduce the total social cost of the payment system by
allowing retailers to levy a surcharge for all forms of payment except cardholder present
debit, remove large denomination bank notes (such as 500 euro notes), regulation for an on-
demand electronic payment account capable of holding a maximum of £1000 without
further KYC (people are financially excluded because they are unable to provide identity
proof, are unemployed, low education attainment, although these people suffer more as
they are excluded from online deals, face higher costs for cash acquisition and they pay
higher bills due to inability to use direct debit, however those that choose to exist in a cash
economy to avoid tax (e.g. gangsters) are cross-subsidised by the rest of society), create a
privacy-enhancing infrastructure for transactions and for the sharing of transaction data,
beginning with a law preventing payment cards from displaying the cardholder name
physically or electronically (pseudonymity is required, since most of the concerns that
reasonable people have about moving away from cash are to do with privacy and security)