Just as the Federal Reserve is not a central bank, VISA is not actually a credit card company. What is it about money and payments which leads to so many of these things being labeled as what they aren’t? The answer, quite simply, is in the human ingenuity to expand the ability of money to interact in our daily economy and do so in ways that don’t consciously register.
There is a lot that's good in this. Some bad.
People should be forgiven for believing what VISA is not. The company is not a bank, does not issue credit, nor even the little plastic cards upon which its logo gets prominently featured. For all intents and purposes, it is a computer networking firm
Hand to hand exchange of currency may be the simplest, most recognizable format for settling transactions outside of barter, and next to bartering is the least efficient, especially factoring any amount of distance.
Primitive currencies were fine enough when economies were small and regional in scale, bound mostly to the large cities in any area, but as revolution in industry spawned integration along much wider ranges, together with innovations in communication it wasn’t just convenience driving radical change.
Late in 1984, according to a contemporary account printed in World of Banking, some unnamed fellow from Arkansas slid his VISA card into a new-fangled Automated Teller Machine, or ATM, way on the other side of the planet down under in Australia. As the story recounts, the magic truly began when the ATM sent an electronic signal to Singapore via geostationary satellite only to traverse the Pacific from underneath using a cable to California, USA, from there across the country to VISA’s operations center in DC, finally to the user’s bank in the woodlands of Pine Bluff.
And that was only half the fun; another signal was sent following a quick bit of computer processing in the exact reverse order letting the Aussie ATM know it was OK to dispense a few of those funny looking (to US eyes) bits of foreign government paper. Altogether, the procedure took six seconds though traveling a 31,000-mile round trip.
Prior to the advent of international payments networks, our traveler would’ve had to use truly crude technology dating back to the very first documented banking organization, the Knights Templar. Before sojourning somewhere across Europe, even to crusade in the Middle East (or sack ostensibly friendly Christian cities like Zara and Constantinople), a wealthy nobleman could deposit gold or treasury in exchange for a writ on paper detailing the value of the deposit.
Arriving at one’s destination, the paper would be presented for payment at the local Templar “office” for equivalent value in whatever useful local monetary form – assuming there was enough on hand (liquidity crunches spawn all history, too). This is what a reserve currency really does. It travels.
In the 20th century, what difference was a Travelers’ Check (or cheque) from that ancient method? Who wants to bother with all that?
Mr. Pine Bluff didn’t and because so represented another huge leap forward. It was not one done in isolation, obviously, for all what’s documented above – and more – had to have been ready to go. VISA’s card network, like those developed by its fierce competitors’, was a long time in the making. Expensive and complicated, too.
And there is even more to consider. We often think about this transaction solely from the perspective outside the ATM; once the cash is dispensed, enough said. Except, no, that only leads to even more settlement issues as the bank which owned and stocked the Australian machine had to have some way of getting repaid by that bank all the way over there in Arkansas.
This meant even more forms to electronic settlement, equally spanning massive distances though routed through far less material exchanges as this one example. This Sydney bank might request payment via a SWIFT message (another 1970s innovation pieced together from loose conglomerations relying on telecom inventions from the 1930s on up) to some sponsoring member bank of CHIPS in New York.
This CHIPS sponsor would then request payment from whatever other sponsor in the same CHIPS arena who might be correspondent to the one nestled along the Arkansas River.
How then to repay this obligation?
The small bank in Pine Bluff likely doesn’t have the required physical pieces of officially-sanctioned Australian paper - why would it? - so it would have to send a payment request to a dealer bank somewhere out there (though probably in the CHIPS network) which does, or at least has the ability to claim it can get those pieces of currency, exchanging the approved Federal Reserve Notes for whatever number of Australian cash the Sydney bank has requested to receive.
In reality, no paper pieces will travel anywhere, either, rather more electronic signals through which the middlemen of dealer banks merely record who owes what to whom for when and by how much.
The matter is further complicated by another 1980s innovation, the master trust, building upon yet another 1970s invention, the pass-thru vehicle. Put together by the government to encourage more mortgage lending (how can that go wrong?), first GNMA came up with a way to package the payments made from mortgagees by guaranteeing them in the event of any that might be missed.
This then led to the first ABS in 1985 (Sperry Lease Finance) wherein an equipment leasing company sold the rights to lease cash flow payments to a master trust special purpose vehicle (SPV) which bought those rights by issuing bonds of varying specifications to the increasingly global marketplace.
While our 1984 Australian holiday-goer wouldn’t have been involved in one, nearly every credit card owner since – whether they know it or not – has been. This, of course, only adds more transactions to the complexity whereby future international payments from the bank in Pine Bluff having originated a credit balance on behalf of any subsequent customer, issuing them their piece of plastic with the VISA logo, and having sold the receivables to whichever master trust, it must now coordinate all those prior contacts along with several more navigating a maze of interactions among the bond world.
We also have to account for our bondholders who aren’t just sitting around with stacks of dollars, Australian or otherwise. Rather, they’ve taken their parceled-off claims on that master trust into the repo market as, ironically, security to fund these activities, too, the specific funding coming out from a wholesale market which developed most in, say it with me, the 1970s.
Had the Arkansas man done his stuff in ‘86 rather than ’84, “dollars” very likely would’ve come out of repo through the hands of ABS bond-owners back through the master trust to the payor account in Pine Bluff across CHIPS overseas to some correspondent dealing in both dollars and dollars (USD and AUD, respectively) to then forward the right ones with the right amounts all the way down into Sydney just so a guy could spend a few useful bucks in a foreign land.
The word “complicated” doesn’t do this full justice. But this right here is how a true reserve currency works, and how any other that might wish to be one - a real one not what dollar-doomers shout about every time China and Russia make some statement about geopolitics out of DC, and not VISA – must duplicate. There has to be enough capacity to take on all these functions, especially transmission meaning redistribution (velocity, if you like), and make it acceptable in the vast majority of places.
That’s what reserve currencies truly are, the ability to have a common medium useful in more places than just the issuing area. To this it needs to be flexible rather than solely elastic. To get it where it has to go means, well, a lot more than many would think.
Decades of research, testing, and patience were required to jumble together not just VISA’s but all the other networks linking up not just banks but all manner of point-of-sale (POS) outlets, too, joined together with a growing bevy of non-banks (or shadow banks, if you like). Because in our 21st century updates to all these 70s and 80s tech, we don’t really require even the pieces of paper since stores and restaurants, hotels and airlines are all linked in some way to this distributed ledger system.
We’ve largely removed the ATMs, too, as a result. Government currency doesn’t pay, instead it is all virtual, private bank money. Ledger money.
What it all amounts to is ledgers stacked upon ledgers linked to other ledgers policed by Big Ledger Keepers. Those latter are not in any government, instead the global Eurodollar Cartel (for lack of a better name). In one sense, this is exceptionally elegant, a true solution to an ages-old problem of payment settlement taking little to no time yet overcoming every distance.
And it is also a potential nightmare; it isn’t so easy to get all these little things lined up just so with so many working parts. A million things can and do go wrong.
At times, the one-million-and-first might trigger an unhelpful cascade of imbalances that can’t easily be identified let alone settled, erased and correct numbering penned in place. Unlike those ancient times when paper currency or commodity money was made to be the ultimate in convertibility, where does it all dissolve among these computer networks when one number among trillions in these various ledgers goes out of whack?
That is the question we’ve been grappling with ever since August 9 of 2007. As with all those behind-the-scenes details described before, hardly anyone realizes it. The issue isn’t VISA, Australia, nor even ABS master trusts. Our problem, in many ways, is the ways in which these ledgers fit together, or don’t.
It has opened the door of opportunity for a competing solution, and I sure as hell don’t mean a “petroyuan.” A real form of ledger money though maybe without all the unnecessary complications which have been rendered needless by their own successes!
Instead of networks piled on networks of individual, bite-sized ledgers, why not a single one made available to everyone?
Blockchain.
When it comes right down to it, modern banks are not banks, either (add them to the list where central banks and VISA already sit). A traditional bank is a storehouse of largely government currency (before that, commodity money). We don’t even use government currency when travelling around the world.
Therefore, what is a bank nowadays other than a glorified bookkeeper; some much more glorified (essential) than others. Blockchain is a better, more efficient way to keep everyone’s books and make those books available for everyone at the same time with no need for so many duplications and inefficiencies.
So, while the door is wide open for it, the real hurdle is not to be “digital gold” or some kind of store of value, whatever competing format must become a useful medium which can replicate the reach and vitality of the existing structure.
That is no easy task. Blockchain operators have made substantial progress in recent years, they truly have, yet no one is anywhere close to achieving the coverage, reach, and depth wherein some nondescript person from basically anywhere can go clear around the planet to some God-forsaken place and still be reasonably assured of easy, reliable access to usable medium.
This is why digital currencies are suffering their second bubble bursting. Regular folks had piled into them – twice – by this monetary illiteracy, believing in the store of value story where the Fed printed too much money and eventually destroying the dollar. The Fed doesn’t print money; it doesn’t follow any but its own small ledger.
The dollar didn’t plummet because the ability to operate across its vast networks has become far too expensive (risk), making these virtual “dollars” likewise. Yet, since there is no realistic alternative on the horizon, the promise of digital is left off in the far-distant future for whenever it or something else can duplicate all those intricate if necessary requirements.
It can be done, though it won’t be easy and there is a long, long way to go. I believe it will be done, though how and in what format no one can say. We’re stuck with what we have right now until that day comes. The good news is we’ve been on a digital money standard, for the most part, for at least half a century already. Even if no one knows it.
