Means of exchange
32 | the world today | october & november 2014
MONEY Future of Money Subacchi 05.indd 32 30/09/2014 14:11 Means of exchange It’s all change in your pocket With so many different forms of payment now available, from smart phones to bitcoins, Paola Subacchi looks at the future of money
The 1970s were years of high inflation in city began to ease and more mini-cheques Italy. As the price of goods increased and were issued – for an estimated value of the lira, a high denomination currency, was 200 billion lire. Eventually the authorities debased, the country faced a chronic lack had to intervene and mint more coins. of small change. Those were the years This story is not just an example of mon- when coins were used to operate all sorts etary ingenuity. It tells us a great deal about of devices, from pay phones to launder- money and how it works. First of all, ettes, vending machines and jukeboxes. money as a means of exchange needs face Minting coins is more expensive than value and extensive circulation. The mini- printing banknotes and the metal content cheques addressed both problems that of coins is often – especially at times of sweets could not solve. high inflation – higher than their nominal Second, to be acceptable money needs to value. So, for some years the amount of be issued by credible institutions. These coins in circulation in Italy was much low- are usually central banks on behalf of er than demand. People began to hoard sovereign states. The mini-cheques were loose change. instead issued by commercial banks, and Shopkeepers reacted to this scarcity by to many people they were the ultimate replacing small change with sweets, stamps guarantor. But this was misleading. The and other items of small value. Customers mini-cheques were not backed by the were not happy. This was a one-way solu- reserves of the issuing banks and were not tion as no shopkeeper would accept a redeemable against ‘real’ money. In theory bunch of sweets in lieu of money. their value was underpinned by the lira, To make up for the shortage of coins a being exchangeable one-for-one. In prac- few banks began to issue mini-cheques on tice, there were more mini-cheques in cir- behalf of local retailers. These were like culation than official money, and this could regular cheques, but the size was smaller, have created a crisis if users had tried to and they were issued for small amounts, redeem them all at once. such as 50, 100 or 200 lire. Because they Third, to circulate money needs a net- were made transferable, they could circu- work of people happy and willing to use it. late and be used in several transactions – The mini-cheques issued by local banks exactly like coins. The small change scar- had limited circulation. Where people were not familiar with the issuer they did Blank coins produced at the Royal Mint not trust the mini-cheques – they could be are sorted before going on to be stamped easily counterfeited. Banknotes and coins
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issued by a sovereign state, by contrast, are ernment to raise revenues through taxa- legal tender and have a ‘captive’ network ‘The Chinese hold tion. This is why ‘real’ money – unlike within the boundary of that state. mini-cheques, retail vouchers and local Fourth, it is expensive to print or mint the largest amount currencies – is normally issued by a sover- physical money, and to move it around. It of foreign exchange eign state. is not surprising then that the Italian au- There are currencies that are more effec- thorities reacted with benign indifference reserves, $4 trillion’ tive at storing value than others. The to the appearance of the mini-cheques. dollar, the euro, sterling, the yen – the so Finally, the story indicates that like any and receive money and make bank transac- called reserve currencies – are held in other transactional instrument money also tions. And there are less common but countries’ official reserves to withstand evolves to reflect the development of how increasingly popular electronic alterna- emergencies, for example a dearth of people deal with each other. tives, such as the scrip that gets passed liquidity to pay for imports, and to protect around in online games and social net- ‘the wealth of the nation’. The Chinese Alternative money works. state, for instance, holds the largest amount Mini-cheques are no longer around, except Compared with a few decades ago, cash of foreign exchange reserves, of an esti- as a collector’s item. They were an innova- is now a sub-optimal means of exchange: it mated value of $4 trillion dollars. The exact tion in the less connected world of the is bulky, can be counterfeited and can be composition of that holding is not dis- 1970s, where shopping was a local experi- lost or stolen. However, it retains features closed, but more than half of it is presumed ence; at the time they addressed a tempo- that make it the chosen means for some to be in dollars. Similarly, individuals rary bottleneck. Today many transactions, people. It changes hands quicker than elec- and companies hold reserve currencies as even small ones, are settled electronically, tronic money; it is the easiest and cheapest, assets that maintain their value and even and so we struggle less often with change. and often the only, option for those with- increase it. But alternative money, or ‘other physical out easy access to banking facilities – the The dollar is the world’s key reserve cur- media of exchange available for transac- poor and people with low income; and rency, and the key vehicle currency for tions’, to use the Bank of England’s jargon, finally its anonymity makes cash the international trade. It is used in approxi- still exists. There are book tokens, and preferred option for those who do not want mately 80 per cent of the world’s total similar retail vouchers with a face value to leave traces of their transactions. Drug trade. Most international trade, in particu- and nationwide circulation but limited dealers and other criminals, prostitutes lar oil and commodities, is quoted and exchangeability. Air miles and reward and corrupt politicians, as well as tax evad- invoiced in dollars. And two thirds of glob- points can be exchanged only within the ers and many domestic helpers and their al official foreign exchanges reserves are network of the participating airline or employers, all operate on a cash-only basis. in dollars. retailer. And their intrinsic value is deter- The greenback has glued the world econ- mined by the demand and supply for the A dollar world omy together since the end of the Second reward. Money is not only a means of exchange. World War, as a consequence of the Other examples of alternative money It is also a store of value, and this hugely post-war arrangements agreed at Bretton include local currencies such as the Bristol complicates the way we deal with it. Woods in 1944. pound and the Brixton pound that are Being a store of value facilitates the For many years dollar-holders have devised to encourage spending within the transfer of claims from one person to trusted the United States to maintain the local community. The Bristol pound, for another from one point in time to a later value of the currency. Reassured by Amer- instance, is backed one-for-one with ster- date. But, in deferring consumption – ican’s pre-eminent global role, they have ling and can be used to purchase goods and indeed the majority of us do not immedi- retained dollars in their portfolios. Even services from participating retailers within ately exchange money for goods and ser- during the most critical months of the the Bristol area. Unlike book tokens and vices, but tend to save – people need to be global financial crisis, between September air miles, local currencies are exchangeable sure that the money they accumulate will 2008 and February 2009, the dollar appre- against a wider range of goods and services, retain its value. ciated by 11 per cent, reflecting strong de- but within a limited geographical area. Historically, societies adopted commod- mand in spite of the fact that the crisis had And unlike ‘real’ money they are not legal ities such as gold and silver as the dominant originated in the US banking system. How- tender. store of value. Britain, for example, em- ever, the legacy of the crisis and the meas- It is not just paper instruments that have braced the Gold Standard until 1931 when ures pursued by the FederalReserve Bank, evolved to reflect different needs and it switched to fiat money, that is money the US central bank, to create abundant different transaction networks. The con- issued by government decree. Since then, liquidity have been shaking the confidence cept of means of exchange has changed too. the notes issued by the Bank of England of many Americans and non-Americans in Money no longer needs to be physically have been backed by the promise of gov- the currency. moved around; information can be sent ernment-guaranteed assets and are not instead. The widespread use of ‘plastic’ – exchangeable for a physical asset such as Fragmented future debit and credit cards, store cards and pre- gold. Ultimately, fiat money is supported Many have started to look ‘beyond the dol- paid cards – has eased out cash in many by confidence in the state’s willingness and lar’. Will the system of international money transactions. In addition, innovations ability to use future taxation to meet all of go through the same transformation that such as phone-based tools offer alternative its obligations. In other words, printing physical money has experienced in recent ways to pay bills, buy and sell goods, send money should reflect the capacity of a gov- years? Will it evolve to reflect the shift in
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MONEY Future of Money Subacchi 05.indd 34 30/09/2014 14:11 Means of exchange
the balance of economic power and the fixed – the total number of bitcoins in cir- will keep backing the greenback. emergence of large and fast developing culation will never exceed 21 million – and Money will continue to evolve. Different economies such as that of China? demand is growing, so the currency’s value instruments – from physical to electronic More options are available than just a goes up. Not being backed by any govern- money – will serve different types of few years ago. They stretch from emerging ment makes the bitcoin attractive to many exchanges and needs. And people will use nations’ currencies, in particular the Chi- who distrust central banks and govern- many different instruments to reflect the nese renminbi, to crypto-currencies such ments – libertarians, techno-anarchists, complexity of their transactional net- as the bitcoin, an electronic currency that post-modern hippies and criminals – and works: ‘plastic’ will be used for most phys- exists only online. The demand is certainly of potential interest to non-profit organiza- ical and for all electronic exchanges; Pay- there. Both the renminbi and the bitcoin tions, small businesses and even the World Pal for small denomination online deals; have increased their circulation in recent Bank. book tokens, air miles and supermarket years – the renminbi is now used in about Our monetary future looks more frag- loyalty points to be redeemed in specific 18 per cent of China’s trade. Both have mented, and with more choices. Neither transactions and specific outlets; cheques seen their value go up. of the available options – the euro, the ren- to deal with the computer illiterates; and Despite the Chinese leadership commit- minbi – is strong enough to become the cash for small physical transactions, such ment to reduce China’s dependency on the dominant one. Together, however, they as tipping, and for any dodgy deal. dollar and carve an international role for can break the de facto monopoly enjoyed It won’t be a cashless world, but it will be the renminbi – the concept that ‘great by the dollar as the global currency. one without high denomination banknotes nations have great money’ resonates well Depending on our preferences, ideo- such as the European criminal’s favourite, in Beijing – it will keep its foot on the logical stance, business needs and expecta- the €500 note, as most people will prefer brake. On many occasions the authorities tions on the future value of each currency, the convenience of electronic payments have indicated that they are not in a hurry we will be able to choose among a range in large transactions. And as for those to push the renminbi – not least because of currencies: money issued by sovereign engaged in illicit trade, they will need larg- this implies the huge task of reforming the states or by currency unions like the euro, er suitcases. domestic financial sector. or even stateless crypto-currencies. At As for the bitcoin, liquidity does not the same time we will be able to use local Dr Paola Subacchi is Research depend on any government policy, but is currencies. And those who think that the Director, International Economics, mathematically pre-determined. Supply is dollar will remain the ultimate safe haven at Chatham House
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