Is Freebanking Inevitable?

Wired Magazine has a great article on the future of money. Its basic premise is that, like with the media industries, the internet and the global communication infrastructure will allow the market to cut out the middlemen that lubricated the market in its absence. In the media industries these were the record labels, the movie studios, and the book publishers. In the financial world, they are the banks and the credit card companies.

A far more fascinating implication that Wired failed to mention, however, is the fact that the banks and credit card companies aren’t the only ones made irrelevant by the lubrication of the financial market: The very idea of a central bank could become obsolete.

Wired celebrates the Paypals and the virtual worlds of social networks. Paypal deals in transferring existing currencies. At the bottom of the first page, there is a graphic listing the exchange rate between a series of virtual currencies (such as Facebook credits or WOW gold). Some, such as the Facebook credits, are one-way convertible, and are trifling enough to be pegged to a dollar amount. Others, such as WOW gold, are big enough to have spawned an exchange market of its own, much to the ire of Blizzard, which wants to keep Soviet-style commands on their currency (and like the Soviet attempts, they’ve simply created a black market). Hub Culture’s Ven (pegged at 10 to the dollar) in 2008 even became “the first global digital currency to move from an online social network into the real world“.

The capability is here. Companies create virtual currencies in the first place in order to avoid credit card and bank fees. Paypal already has the stateless transnational internet-based currency infrastructure. Hub Culture already has its own international dollar-backed currency. The next logical step is for a company with a large monetary reserve to completely declare independence from the Dollar – to create its own independent commodity-pegged currency.

Once several companies or banks start to enter the market of supernational currencies, and as the volume of trade becomes more significant, the benefits of commodity backings will become obvious: a safe haven from the capricious monetary policies of central banks. One company will exchange its dollars for gold reserves at a dip in the price of gold. Another company will choose silver to compete without buying gold at the higher price. Without the benefit of being able to coercively tax, commodity backing is the only option independent of a government fiat currency.

And so we get a variety of commodity currency options, all automatically compatible with the instantaneous modern-era benefits of the credit card swipe, because it will be built on that system – or built to supplant that system with something better. In the absence of active government intervention to prevent it, technology could make freebanking inevitable.

From the sound of the article, the future of the international monetary system looks extremely bright. But then again, governments have expressed their wild distaste for private commodity reserves in the past, and the current wave of regulatory sentiment might be just the wrong time for this market to mature.