Red-Blooded Risk: The Secret History of Wall Street

The End of Paper

How will derivatives replace paper money? Paper money will not lose its value, any more than gold lost its value when paper money arrived. But the scope of transactions mediated by paper money will shrink in number and size. Paper money will lose its economic importance.

One suggestion can be seen in the world today. More and more transactions are being done on the Internet through bidding and future promises. It's easy to make the leap from bidding for airline tickets and hotel rooms to full derivative trading of future services. Companies like BetFair prove there is a large supply of sophisticated speculators willing to provide liquidity. We might see airlines going back to the business of flying airplanes from place to place and not worrying about fares. The seats would be sold in bulk on a travel exchange, where travelers would buy and sell what they needed.

The reason airline tickets are a natural early transition to derivative trading is that the value of seats is unpredictable. There may be empty seats, in which case an additional passenger costs only the extra fuel and a bag of nuts. Or demand might be high enough to support two or three times the normal price. Also, travelers form complex contingent plans. You might know you have to go someplace, but not exactly when. Or you may have your vacation scheduled exactly, but have several equally attractive destinations. Some people are on very tight schedules and change plans on short notice, whereas others ...