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managing books

Wildcat Currency

By Edward Castronova

(Yale University Press, 265 pages, $32.20)

Canadian Tire money isn't real, in the sense of authorized by the government, but most people would be willing to give you money in exchange for the store's faux currency because they know it's redeemable at the store. By that token, are Air Miles and other frequent-flier points currency of a sort? What about Shoppers Drug Mart discount points?

Monopoly money isn't real, either. Nobody would give you actual money to buy it and pile up some more hotels on Boardwalk. But in the world of online gaming, it's a different matter.

When the online role-playing game Gemstone was launched in the late 1980s, it allowed players to give the virtual "gold" used in the game to one another, Edward Castronova, a professor of media science at Indiana University and avid gamer, notes in his book Wildcat Currency. That meant a flourishing trade emerged in which those who had accumulated high balances sold them for real money to people starting out or others who wanted an advantage in the multi-user game. So is the game money real money? And if it is, in an era where such game currencies are a staple and often saleable to other players, should this worry central bankers and governments?

Prof. Castronova takes readers on a tour of real and virtual money that sometimes – particularly if you are not a gamer – can seem as if you have toppled into Alice in Wonderland's world. Indeed, he challenges any notion we have that the Canadian dollars in our wallet, let alone their digital representation in our bank account, are real while other forms of money are fake, play, or virtual currency.

"The value of money has always depended on what people think, which is not a 'real' thing. Even gold, whose worth is so culturally ingrained that many people are convinced of its inherent value, is useful as money only because people think it is," he writes.

Money is used for trade. But over time, barley, camels, salt, parmesan cheese, and beaver pelts have been used for trade. Hard metals, silver and gold, eventually took over, and that in turn was replaced by paper money. Today's currency in games might be considered virtual currency, but so effectively was barley, silver and gold. Their value as currency had little to do with their tangible uses.

If you buy a house, you pay for it with paper money. If you build a home online, in a virtual world like Second Life, you pay in the game's currency. It's the same process: Paying for something you value, a home – one home actual, the other virtual, but why is one purchase considered real and the other not? Why does one count in the tallying of our gross national product and the other not?

Prof. Castronova points out that in Second Life, developed by Linden Labs, a vast economy evolved as users made various digital objects and then sold them. Parcels of land in this virtual world were sold for money, with the game originators issuing their own currency, the Linden Dollar. "Legitimate amounts of real money were made in Second Life land speculation, Linden Labs allowed its dollar to trade freely against the U.S. dollar, and its value held steady. Moreover, the company broke new ground in openly publishing its economic data," he says.

If all that seems too woolly, or silly, to contemplate, then let's return to other forms of money and near-money around us. The euro is real money, right? Well, actually, Prof. Castronova points out originally it was a virtual currency, launched as digital assets you could hold in your bank account but without paper bank notes, which came later. "For three years, the euro was play money, like a game's gold pieces," he says.

A century earlier, in 1888, Coca-Cola gave us the first company money, offering paper tickets that could be redeemed for a free Coke. In 1896, the famed Green Stamps were first issued, allowing people to collect what today would be considered points, a forerunner of so many loyalty programs, all worth money of a sort. But, he stresses, for the most part they aren't mediums of exchange, since your points – while they can be exchanged with somebody – can only be spent at the specific company.

This may all seem fanciful, an academic playing mind games, except he argues that we will soon live in a world in which anyone can issue his own currency and create his own payments system. That should chill policy makers. How does one protect people? "In the United States, we have the Federal Deposit Insurance Corporation. Perhaps one day there will be a Federal Virtual Value Insurance Corporation," he suggests.

Prof. Castronova has put together an easy-to-read, stimulating, and often amusing look at something little of us have given thought to but demands attention at a time when our hallowed Canadian Tire money is also going digital. These days, talk of virtual currencies tends to hover on the bitcoin, a software online payment system, but he has only about a half-dozen short references to that phenomenon, and instead offers us a host of other wildcat currencies that are springing up with far less attention and perhaps more profound implications.

Harvey Schachter is a Battersea, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column Balance. E-mail Harvey Schachter