This is a portion of Chapter 17, The Next Big Thing in Business: A Complete Web-Based Trading Platform, from my book, The End of Money and the Future of Civilization. — t.h.g.
If exchange alternatives are to gain a foothold within such a protected (for the banks) milieu, they will need to first find small niche markets where their special qualities are recognized and valued. As performance improvements are achieved, they will be able to attract more of a mainstream market. This has already been happening for some time in both the grassroots and commercial sectors. In the former, the attraction has been mainly ideological. Complementary currency and exchange has been seen as a means for achieving social justice, economic equity, local self-determination, and environmental restoration. Most grassroots initiatives have tried to incorporate features that promote such ideals. In a few cases, like Argentina, the impetus has been more practical, as we’ve already described. Within the commercial sector, the features that have been most highlighted are the ability of trade exchange membership to mobilize the excess capacity of members in the face of scarce official money by providing a supplemental medium of exchange (credit), and the marketing advantage that comes from preferred access to the membership base.
In both cases, a strategic approach will need to be taken to avoid the legal and regulatory minefields that have been laid to inhibit market advances from newcomers to the field of exchange services. Since the usefulness and marketability of credit clearing services is determined by both the scale and scope of the network, it would seem essential that critical mass must be quickly achieved. That goal necessitates that all levels of the supply chain must be included from as early on in the process as possible. But how does one recruit participants into an emerging network?
The Emergence of a Complete Web-Based Trading Platform
Over the past decade, commerce has been increasingly migrating onto the World Wide Web. Barring some major catastrophe that would disrupt our information and communications infrastructure, that trend is sure to continue accompanied by ever-greater functionality and additional services. If there is such as thing as a “monetary science,” it is presently undergoing a revolution—and the technologies that are arising from it are sure to bring about enormous changes. Compared to conventional money and banking, the complete Web-based trading platform we will describe here will achieve the innovative potential that Christensen writes about.
Within my own lifetime, I have seen a number of companies that were so entrenched in their industries and so much in control of their markets that it was unthinkable that they might ever be dislodged from their position of dominance. This was especially true in the fields of computers, telecommunications, and photography. Yet many of those companies have either ceased to exist or have been eclipsed by others that developed and marketed what seemed initially to be inferior technologies.
In the early 1980s I was working as a consultant with a company on projects that required a considerable amount of statistical analysis. We had been buying time (at some considerable expense) on a university mainframe computer, and had to put up with long turnaround times. It began to seem sensible to consider acquiring a computer system that would enable us to do that work in-house. Among the proposals that were submitted to us was one from DEC (Digital Equipment Company) for a multistation minicomputer. This was at the time when desktop microcomputers were just beginning to provide some significant computing power, and local area networks (LANs) were becoming a real possibility.
Fortunately, we realized that the DEC system and other mini¬computers would soon become obsolete. We decided instead to acquire one of the new AT-type microcomputers, thinking that it could serve our immediate needs and be networked with other similar computers, if needed, later on. That solution did prove to be quite satisfactory for our purposes, and at a small fraction of the price we would have paid for the obsolescent minicomputer. DEC was not nimble enough to adapt to the fast-changing computer technologies and market conditions. It made an early foray into the microcomputer market with the DEC Rainbow desktop machine, but it was overly expensive and not “IBM-compatible.” Where is DEC today? An interesting analysis of DEC’s failure to succeed in the personal computer market is provided by Christensen.162 He notes that DEC had all the necessary resources to succeed but their processes and values did not permit them to effectively compete in that market. IBM, Eastman Kodak, and Xerox are still viable companies, but they are nowhere near as dominant in their industries as they once were.
The entrenched position of the money and banking establishment far exceeds that of any single company or other kind of cartel. Its position, as we have described, has been established and sustained through political privilege and the suppression of competition rather than by the quality and value of the services it provides. Given that situation, is there any chance that new technol¬ogies might enable the emergence of significant exchange alternatives? I think there is. The U.S. Postal Service enjoys a monopoly in the delivery of mail, but that did not stop the massive shift to newer, faster, electronic communications channels like fax, text messaging, e-mail, instant chat, and Internet file transfers. Now voice-over-Internet is mounting a similar challenge to telephone and cable companies.
What are the “disruptive technologies” that are emerging within the realm of money and banking?
• Direct credit-clearing among buyers and sellers
• The use of the Internet to create Web-based marketplaces
• Transparency in Web-based accounting, information, and exchange systems
• Strong identity verification
• Secure encryption of information over the Internet
• Social networking
• Reputation ratings of vendors and buyers that are continually updated and available on-demand
• The reemergence of mutual companies, coresponsibility, and localized Web-based markets
It is not any of these individually but all of them in combination that will, I believe, result in structures that will provide superior performance in mediating the exchange process. Worsening economic and financial conditions, such as those experienced in 2007 and 2008, will create enhanced market opportunities for this sort of nonpolitical trading platform, and will assure their eventual implementation and wide acceptance.
Essential Components of the Web-Based Trading Platform
Management guru Peter Drucker has expounded the following “law”—profits migrate to the supplier of the missing component necessary to complete the system. What system are we talking about, and what is needed to complete it?
It is what I call a complete Web-based trading platform, and it requires these four basic components.
1. A marketplace
2. A social network
3. A means of payment
4. A measure of value or pricing unit
There are already numerous Web-based marketplaces—eBay, Amazon, and Craigslist, to name just a few—and there are numerous social networks—Facebook, Friendster, Linkedin, MySpace, the Living Directory, and so on. But what about payment systems? And what about measures of value? This is where gaps remain. Yes, PayPal is a payment system of sorts—but it only allows the transfer of the same old bank-created debt-money. The only real advantage it provides is in enabling you to pay an online vendor without the risk of revealing to them your credit card or debit card information. PayPal plays the role of a trusted intermediary. That is a useful service but it does not provide a true alternative payment system. PayPal could conceivably become a full-blown credit clearing service if it were to allocate interest-free lines of credit to some or all of its account holders. W ith regard to value measures, we have numerous ones (like dollars, euros, pounds, and yen) but each is a political unit, the value of which is dependent upon the policies of their respective government or central bank issuer. These are the very measures that are unstable and problematic. But before proceeding with that line, let us consider each of the four components a bit more fully.
A marketplace is a “space” where buyers and sellers come together to display their offerings, express their needs and wants, and negotiate the terms of trade. It need not be a physical space, as we see with the emergence of marketplaces on the Web. It is important to recognize that there are marketplaces that bring businesses together with consumers (B2C), marketplaces that specialize in business to business transactions (B2B), and some that enable all types—B2C, B2B, and even C2C. A social network enables participants to make themselves known to one another and to communicate more effectively. It allows one to establish their identity online, to post their credentials, and to provide other information for others to see. It also can track correspondence and behavior within the network, establishing one’s reputation and enabling an impersonal medium to serve as a tool for building a matrix of trusting relationships that can lead to collaboration and coordinated action on many levels.163 Social networks are enabling an inherently impersonal medium to become an effective tool for forging very personal relationships across all sorts of boundaries.
A means of payment facilitates the exchange process and transcends the barter limitation of coincidental wants and needs. Possible payment media include
- • official money,
- • private currencies, and
- • direct clearing of traders’ credits and debits.
Everyone understands the use of official money as a means of payment. Thus far, Web-based payment systems have been mainly limited to the transfer of conventional bank-created money from one party to another. It does not usually occur to people that there might be any other payment possibility. But private currencies have a long history and have often served the payment function, especially during times of financial malfunction and economic distress like the Great Depression of the 1930s. We have already discussed a number of such payment possibilities.
A measure of value enables comparison in the marketplace of the values of distinctly different kinds of goods, services, and contracts—including financial claims. In times past, values and prices were expressed in terms of some standard commodities, most notably a specified amount of gold or silver. As described earlier, those value measures were obliterated by legal tender laws that made the various national currencies both the means of payment and the measure of value. At some point, legal tender laws will be abolished. In the meantime, buyers and sellers can adopt some nonpolitical measures of value to use in pricing their goods and services for sale.
Completing the Web-Based Trading Platform
Recalling Drucker’s Law, we propose that the missing components that are needed to complete the edifice of a complete Web-based trading platform are (1) a means of payment that utilizes no political currency as a payment medium and (2) a concrete, objective, universal measure of value that provides a unit of account that is independent of all national currency units. Of these, the first is more critical; the second can be temporarily deferred, as we discussed in Chapter 9.
What we propose as the innovative means of payment is direct credit clearing, which has already been described. And what we propose as the objective measure of value is a composite commodity standard such as that described in my earlier book, Money and Debt: A Solution to the Global Crisis, and summarized in Appendix B. These missing components need to be properly integrated with an online marketplace and adequate social networking tools. When these things are accomplished, the trading platform becomes an integrated milieu that subsumes the functions of both a marketplace and a bank.
Who are the dominant players in Web-based commerce today? Will eBay or Amazon be able to exploit this opportunity, or will it be some nimble start-up that is still fluid enough to develop the necessary internal processes, lean enough to accept the small initial returns, and venturesome enough to develop new markets? The past three decades have seen great progress in the development of private commercial “barter” or trade exchanges that provide direct credit clearing among their business members. These and other historical examples provide adequate proof of concept. Optimizing their design, putting all the pieces together, and taking these networks to scale are the remaining tasks that will revolutionize money and banking and enable the evolution of civilization toward greater peace, prosperity, and sustainability.