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INSIGHTS BLOG > The Future of Money

The Future of Money

Written on 24 January 2018

Ruth Fisher, PhD. by Ruth Fisher, PhD

Traditional currency systems are being assailed from several directions. Some propose digitizing national currencies as a means to decrease transaction costs, facilitate tracking, and discourage illicit uses of currency. Some suggest a single, global currency system is inevitable. Others propose creating non-government-backed forms of currency to eliminate the ability of government to control transactions, as well as to decrease transaction costs and enable anonymity.

What does the future hold for currency?

For more information on currencies and Bitcoin, see my previous blog, “Bitcoin: Wave of the Future or Flash in the Pan?”


Why Barter Systems Don’t Work

Before there were currency systems, the barter system was used by people as a means of directly exchanging one good or service for another. However, the barter system had several fundamental disadvantages, such as

  • Need for Double Coincidence of Wants: Barter transactions can be possible only when two people have goods or services that are mutually useful to each other.
  • Lack of Divisibility: Commodities and services cannot be easily sub-divided to effect an evenly valued exchange.
  • Lack of a Common Measure of Value: Barter systems lack a common measure of value.
  • Lack of Store of Value: In a barter system, value can only be stored in the form of commodities, which do not have a stable value over time.

Needs of a Currency System

Currency systems evolved to address the fundamental disadvantages of barter systems. Based on the disadvantages of the barter system listed above, then, we can divine the essential functions and requirements of a successful currency system.

Essential Functions of a Currency

The essential functions of a currency follow from the fundamental disadvantages of a barter system

  • Standard of Value: Currencies serve as common measures of value by enabling all goods and services to be expressed in currency terms.
  • Medium of Exchange: Currencies serve as a medium of exchange by enabling people to sell their goods and services in exchange for currency, and, with that same currency, buy goods and services which they need.
  • Store of Value: Currencies serve as a store of value, where people can store surplus purchasing power in currencies and use them whenever they want.
  • Standard of Deferred Payment: In today’s world people generate substantial utility from being able to establish and use credit, where future payments for current products and services are negotiated in currency terms.

Essential Characteristics of a Currency

Now that we’ve established what the essential functions of a currency are, the next step is to ask: What are the essential characteristics of a currency that will satisfy these functions?

  • Acceptability: A successful currency will be generally accepted by members of society in exchange for the provision of goods and services.
  • Divisibility: A successful currency will be divisible into units that will easily accommodate market transactions.
  • Durability: A successful currency will be sufficiently durable so that it cannot be easily damaged, destroyed, or counterfeited.
  • Limited supply: A successful currency will be sufficiently limited in supply (or otherwise possess inherent value), relative to the total value of transactions in which it is used, so as to maintain its value.
  • Portability: A successful currency will be easily transported for use in daily transactions.
  • Uniformity: A successful currency will be uniform so as to be easily identified and measured.
  • Liquidity: A successful currency will be quickly and easily exchanged by parties to transactions.
  • Stability: A successful currency will have a stable value over time.

Other Characteristics of a Currency

Buyers and Sellers often seek other characteristics from a currency:

  • Anonymity: The ability to engage in a transaction without being able to be identified by others as having been party to the transaction.
  • Transparency: The ability to document transactions.
  • Trackability: The ability to track transactions undertaken by individuals.


Why Government Wants Control over Money

Clearly, governments won’t easily give up the fight for control over currency. Why do governments want their own currency systems? In a word, control.

  • Control Transactions: To control who is able to engage in which transactions.
  • Taxes: To have a medium in which taxes are collected.
  • Tracking: To track transactions undertaken by individuals.
  • Punishment/Enforcement: To have a means of punishing individuals or enforcing orders.
  • Monetary Policy: To have a means of manipulating the price level in the economy.


The Future of Money Issues

Figure 1

currency game2 


Shadow and Black Market Issues

A nation’s economy can be partitioned into three sub-economies (For a more detailed description of these different markets, see my earlier blog “The Increasing Significance of the Shadow Economy”):

  • The (Legitimate) Economy: Legal products and services regulated and taxed by government,
  • The Shadow Economy: Legal products and services not captured by government, i.e., under-the-table or off-the-books transactions, and
  • The Black Market: Illegal products and services not captured by government.

Much to governments’ chagrin, the shadow and black markets are never going to disappear. Governments can minimize the size of the shadow economy by making the legitimate economy more hospitable to citizens. But there will always be transactions performed under-the-table.

The stability of the dollar has made it one of the currencies of choice for shadow market and black market activities globally. In particular, the $100 bill has remained an important store of value for people around the world. As Brad Plumer notes in his 2013 article, “$100 bills remain one of America’s leading exports”:

And an estimated two-thirds of those $100 bills are parked overseas. Many are no doubt used for black-market purchases and other illegal transactions. But many are simply held onto as savings, particularly in volatile nations like Cyprus or Greece.

Either way, $100 bills remain one of America's leading exports.

Large global demand for $100 bills is a boon to the US government. It supports the US dollar. Without this demand, interest rates in the US would be higher. As Bruce Bartlett at Economix notes in Brad Plumer’s article cited above,

It’s like borrowing money from foreigners that most likely will never have to be paid back, at zero interest.

As an interesting side note, higher denomination bills used to exist but were discontinued for “lack of use.” From Wikipedia:

The $500, $1,000, $5,000 and $10,000 denominations were last printed in 1945 and discontinued in 1969, making the $100 bill the largest denomination banknote in circulation.

Governments think that by digitizing currency, they can eliminate the shadow and black markets, but that's not going to happen. People will simply transition to other currency systems for shadow and black market transactions. If the US does decide to digitize its currency, what will people use instead for shadow and black market activity?

Will There Eventually Be Only One Global Currency?

For larger nations, given governments’ strong desire for control, it is unlikely they would cede that control to a “higher” power. Since there will always be taxes, governments can simply insist that citizens pay taxes using national currency. This will always ensure at least a minimal demand for the nation’s currency.

At the same time, government’s ability to control its currency benefits its citizens. Floating currencies enable governments to exercise monetary policy (change interest rates and/or the supply of money) to help keep its economy on track.

What’s happening in the European Union with the euro is a case in point. European countries, such as Greece and Spain are having big problems with their economies. The fact that they don’t have the ability to use monetary policy to improve the competitiveness of their goods and services is a significant contributor to their problems. As Timothy B. Lee describes in “The euro was a big mistake, and Greece is paying the price”:

Basic monetary theory says that when an economy is in a depression as severe as the one in Greece, the solution is aggressive monetary stimulus. So if you wanted to help Greece, you'd want to start printing more money in an effort to lower interest rates, boost demand, and bring down the country's unemployment rate.


The problem is that the ECB [European Central Bank] is responsible for both Greece and Germany — and 17 other countries as well. The right policy for Greece will be a disaster for Germany, and vice versa. Any policy the ECB picks will be either too tight for some European countries or too loose for others.

Government vs. Private Backers of Currency Systems

How would the interests of government and private institutions differ regarding their backing and control of a currency system? The different issues are discussed below and summarized in Figure 2.

  • Use: Citizens under a government-controlled currency system would be required to use the currency, for example, to pay taxes. Alternatively, use of a privately-controlled currency system – like Bitcoin – would most likely be voluntary. A forced-use system doesn’t have to gain credibility with users and establish a critical mass to be successful. A voluntary use system, on the other hand, does have to win over enough support by users to be successful.
  • Main Objective: The main objective of a government-controlled currency system is generally to control transactions, as discussed in the section above. The objective of a privately-owned currency system, on the other hand is to provide value for users. Private owners want to make their systems valuable to users to win their use. The interests of users of the currency system would thus be much more aligned with those of owners of a privately-owned system rather than a government-owned system.
  • Trust: One of the big issues surrounding a currency is trust. Today’s fiat currencies have no inherent value. What gives them value is people’s trust in the system. People trust that when they use the currency to purchase goods or services, sellers will accept that currency as payment. Users of a currency system trust in the long-term power and survival of the currency backer.

Do governments garner greater trust than private organizations? Not necessarily. Wikipedia lists dozens of companies around the world – hotels, breweries, wineries, restaurants -- that have been in existence for hundreds of years. In the US, the oldest family-owned business is the Shirley Plantation in Virginia, which dates backs to 1614. The oldest continuously operating family-owned business in the US is the Tuttle Farm in New Hampshire, which has been operating continuously since 1632. Certainly, these companies have out-lasted most governments.

  • Legal Transactions: Government-backed currency systems seek to enable and possibly identify and track transactions. Private-backed currency systems seek to enable and perhaps document transactions for buyers and sellers.
  • Shadow/Illegal Transactions: Government-backed currency systems seek to minimize, if not eliminate shadow and black market transactions. Shadow and black market transactions are less of a concern for privately-backed currency systems. In fact, if shadow and illegal market use of the currency serves to bolster demand and value of a privately-backed system, then all the better.
  • Transaction Costs: Privately-backed currency systems seek to minimize transaction costs. Lower costs increase the value of the currency to users and thus make users more likely use the system. Government-backed currency systems find transactions costs to be less of a problem. In fact, transaction costs provide a source of revenue for certain parties – notably banks – in government-backed currency systems.
  • Stability/Volatility: Backers of both government and private currency systems want their currencies to be more stable and less volatile. However, government is more inclined to increase the supply of currency as a means to fund activities. While currency dilution dilutes the value of the currency for government, the drop in value is generally less than the value to government (though not necessarily to the people) of dilution. Private system backers, on the other hand, will be less inclined to increase the supply of its currency unless doing so creates value for the system as a whole.
  • Risk of Loss, Counterfeit, Stolen: Currency counterfeiting reduces the value of the currency to users and to currency backers. As such, both government and private backers of currency systems want to minimize currency counterfeiting. However, backers of private systems have more of an incentive to minimize counterfeit and stolen currency than do government backers of currency systems. Currency use in private systems is voluntary. Currency that is easier to counterfeit or steal will be less valuable to users and thus reduce voluntary demand for that currency. Use of government-backed currencies, on the other hand, is generally not voluntary. Government therefore doesn’t have to worry about the impact of counterfeit or stolen currency on user demand for the currency.

Figure 2

 gov v corp

Could Multinationals Support a Currency System?

Could large multinationals, such as Google, support a currency system? In 2012, Google revealed that it almost did, in fact, issue its own peer-to-peer currency, Google Bucks. However, Google decided not to go ahead with the system, due to government concerns that it could be used for black market activity (see, for example, Dylan Love, “'Google Bucks' Were Almost A Real Thing”).

Certainly, multinationals would be as qualified as any private entity to back a currency system. Actually, name-brand recognition and trust would incentivize users to adopt a currency system backed by a well-known multinational sooner than users would adopt a system by an unknown private individual or organization.

How Many Competing Currency Systems Can Coexist?

How many different currency systems can co-exist in the world? First, let’s distinguish forms of a single currency system (cash, credit, debit, etc.) from alternative currency systems (dollar, euro, yen, Bitcoin, etc.).

The first question to ask is: Is it legal to use currency systems other than the US dollar to buy products and services in the US? That is, which currency systems are legal tender in the US?

Wikipedia defines legal tender as “anything which when offered in payment extinguishes the debt.”

According to the US Treasury, US coins and currency are legal tender, but creditors can refuse to accept them as payment. Go figure.

… Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

According to Nathan Lewis in, “What Is A ‘Legal Tender Law’? And, Is It A Problem?” people in the US can negotiate to use whichever currency system they want.

Contrary to popular imagination, this [Section 31 U.S.C. 5103] does not ban people from using other forms of currency. It simply defines what a “dollar” is, in a contract or obligation that is denominated in dollars. You could make a contract denominated in Bitcoin, if you want to. You could make a contract denominated in euros. You could even make a contract defined in “gold dollars”, or something of that sort. But, if the contract is simply for “dollars,” then this statute defines, for legal purposes, whether you have made payment in an appropriate medium of transaction.

It sounds like the same holds true for Europe. According to the European Commission,

Within the euro area, only the euro has the status of legal tender... This means that in the absence of an agreement of the means of payment, the creditor is obliged to accept a payment made in euro which subsequently discharges the debtor from his payment obligation.

Yet, during transactions, contractual parties are free to use other official foreign currencies with legal tender status in the state of issuance (e.g. the pound sterling or the US dollar). The same applies to privately issued money like local exchange trading systems (e.g. voucher-based payment systems in certain communities) or virtual currency schemes (e.g. Bitcoin). Although these are not official currencies and have no legal tender status, parties can agree to use them as private money without prejudice to the official currency.

Now that we know alternative currency systems are legal, we can ask: how many different currency systems can coexist? The answer is: as many as the market can bear.

Currency systems exhibit economies of scale, which means that a particular currency system becomes more useful, more valuable, and/or less costly when more people use it. For example, there are transaction costs associated with using different types of currency. In particular, banks and credit card companies both generally charge you a fee — “a change fee” — if you make a purchase using a currency system that’s different from that designated as the “home” currency. The existence of economies of scale will tend to limit the total number of different currencies people will use.

At the same time, different currency systems offer different advantages to buyers and sellers. US dollars (and credit cards) offer convenience, acceptability, and low transaction costs for purchases made in the US. Gold might offer security. Crypto-currencies might offer anonymity.

Generally, there are only a few basic needs that we have, such as convenience, security, or anonymity, that will cover most of the transactions in which we engage. To the extent that different currency systems fulfill different needs, they can coexist. However, due to the existence of economies of scale, many similar currencies are not likely to co-exist among people who use those currencies to meet similar needs.

At the same time, given the desire for different government to want their own currency systems, the total number of currency systems that exist won’t collapse to too few options.