From: Ian Grigg <iang@systemics.com>
Date: Wed, 23 Dec 1998 00:26:20 +0800
To: iang@systemics.com
Subject: Re: alternative b-money creation
In-Reply-To: <199812140427.AA12697@world.std.com>
Message-ID: <199812221528.LAA05757@systemics.com>
MIME-Version: 1.0
Content-Type: text/plain




> What about near money, e.g., S&H Green Stamps,
> frequent flier miles, Toys R Us Bucks, or anything
> else that can only be used reflexively with the
> issuer?

Near money is something that many people hold out hope for,
and you may all be right, in that it may be the way forward
through the morass of difficulties.  I personally don't think
so, not for any killer reason, but for a whole host of little
reasons.  I'll see if I can't enunciate them, and no doubt
within the session you are running, we'll have some lively
discussions.

> In the Depression, many southern manufacturing
> firms and, so far as my relatives tell, 100% of
> the coal mining outfits, paid in scrip which was
> redeemable only at the company store.  Some of my
> Mother's people worked at the phone company and
> converted their scrip to stock since they judged
> it worthless otherwise.

This is the Hiawatha Hours, as I rudely called them
(I keep forgetting the name, sorry).  Now, these are
working systems.  They are more or less the same as
the LETS systems, which are sort of successful in many
hundreds of places.

Where they work is generally an indication of some
shortage.  With the above systems, and as far as I
can tell, with all systems, there is a shortage of
cash.  It is not just that everyone is poor, but
that the cycle of money in its journey from entity
to entity throughout the economy is broken.  In
contrast to this shortage and cyclic failure, demand
and supply for goods and services remain high, at
least in many sectors.

In this case, anything that is injected can conceivably
bootstrap the cycle again, and this is why, IMHO, the many
different range of instruments all appear to have been
successful.  It is not the instrument, but the presence
of an instrument.

One thing to remember is that the local economy is
generally the larger proportion of the total economy.
I have empirically noted that in most towns with
identifiable export industries, there are 3 people
employed elsewhere for every one within the direct
export sector - this is a reflection that most people
are actually supporting the rest.  (However, this
doesn't take into account the import side of the
equation.)

Under such circumstances, it is no real wonder that
a shortage of money will cause an economy to grind
to a halt, and an injection of money will start it
up again - to the extent that import/export permits.

But bear in mind that this is a competitive scenario,
and the scrip money tends to work well when the statal
currency disappeared as in the Depression.  When the
statal money comes back in, the scrip fails to entice,
because it is only useful by definition for local
products, not imported products.  In that scenario
it is dominated (to use the term) by statal currency.

> You can buy FF miles at
> 2c/mile at both the Delta and AA websites and US
> Air FF miles now exchange 1-for-1 with AA FF
> miles.  Every affinity program in the country
> offers dollar denominated discounts at the home
> issuing location.

Yes, one of the huge barriers to any money system
is the border to any other money system.  At this
border, the change costs are a very important limiter
on the success of the system.  Remember that a merchant
must convert to useful money in order to pay his costs,
so a small system cannot really work without an internal
method of spending money, to offset that.  This is the
real reason why countries have money, because they have
a border that defines a naturally sized unit.

With MTB ecash, this became very apparent when merchants
had to extract their cash at somewhere between 2 and 5
percent, thus putting the lie to the notion of cash.
With FF miles, they alleviate this somewhat by
recasting the situation as a loyalty programme,
and thus you use the internal goods.  So it only
works when you are a regular user.

Adding convertability makes it closer to money.  But
there is one killer that will never make it be accepted
as a dominating form of money.  All loyalty programmes are
calculated on the basis of this actually accruing
value to the provider, rather than the other way
around.  Necessarily, this means the user is paying
for the priviledge of being loyal.

This is done three ways.  Firstly, most successful loyalty
programmes such as FF miles are based on goods with a
low marginal cost but high ticket cost.  To the airline,
it costs the price of a seat which is somewhere around
$30.  To you, you believe that you are getting, say, $200
value (for points marked as $200 for example).  Within
that range, the airline wins.

Secondly, on average, FF miles are not actually used up
beyond a benchmark figure of 30%.  Airlines also have a
number of tricks that use up or block the use of points.

Thirdly, FF miles work best when the individual is
consuming, but the company is paying.  What FF miles
are is essentially a bribe to the business traveller
to insist on using their airline, when the traveller
doesn't otherwise care.  This separation of user from
payer is cunning marketing, something that is employed
by all the best companies (IBM were the past masters,
now the crown has passed to M$.  Odd that computing
displays this domination amongst all industries...).

Now, regardless of all this, you are right that these
systems take on the nature of money if people suffer
all these things and then continue to participate.
What can stop these becoming real useful is several
things: people working out that they are regularly
over paying, taxation departments working out that
the business traveller is taking an untaxed benefit,
and various other hurdles.

If you can manage to navigate that particular river
stretch of crocs and snakes, then you might make
money, to stretch a pun.  However, if you are going
to all that trouble, why not just start a real money?
That's my real thesis.

> I can get a tax deduction for
> turning in some of these sorts of things to, say,
> the Make A Wish Foundation.

Well, not sure what to say about giving away your
overpaid loyalty points.  That makes for two charities,
the Foundation and the Airline.

> My university co-op
> gives rebates based on purchase volume and in
> cash, but there is no attempt to verify that the
> purchaser is really the account holder if that
> holder pays in cash.

Oh, anonymity/untraceability/bearer status might be
useful features, but that is only what they are, features.  
If our objective is to invent one with those features
as requirement, then I think you will find a single
purpose, centralised registry, poor convertability
system as a really bad starting point.

>  For the longest time,
> stamps could be used in place of coin for small
> denomination mail order.

Single system.  Why did they stop?

> Until security worries
> required a named passenger, shuttle tickets
> between Boston and NYC might as well have been
> cash.

We know why these have been stopped.  For precisely
reasons similar to the elimination of unknown activity,
including monetary activity.  Add this to the list of
disadvantages of near money.

> The Mass State Legislature only this past
> week considered a bill that would make used
> (non-winning) lottery tickets have a residual
> cash value useful only at lottery agents (this as
> an anti-litter thing).

Ah, so this will be very interesting.  So will there
be an arbitrary limit placed on there to stop them
being used as cash?  Remember that cash itself dominates
if you can more easily use cash rather than a handful
of used lottery tickets.

> My thinking -- enough near money and it will tend
> to convertibility...

Yes, that I agree with.  But I fall short of saying
that it reaches a useful level of convertibility.

Looking forward to our loyalty systems session in
March!  Actually, I should mention that whilst I
do not favour these systems for the above reasons,
I do believe that in the study of them, we better
understand how money works, much more so than if
we were to simply study money, which is so completely
lost in statal marketing these days as to be
unfathomable in isolation.

iang