Digital Money Forum

Viking expedition

[Dave Birch] I was in Copenhagen recently, so naturally I went along to the national museum to see their notes and coins exhibition (galleries 141 to 146, if you're interested). It was really good, and I particularly enjoyed the display of Swedish copper money from the 17th century. Sweden had lots of copper, so that's what it used for coins. But copper isn't worth very much, so the coins were huge -- the one thaler "coin" was a block of copper weighing a couple of kilograms.

While pottering around between the 10th century Islamic coins found in Viking treasure hoards, the short-lived Norwegian privately-issued banknotes that preceeded Denmark's first paper currency and the English gold nobles from the time of Henry II, I happened across some other long-forgotten artefacts from the story of the evolution of the means of exchange in the world's oldest kingdom...

Danmont cards! I have to admit to a moment of melancholy while gazing at the cards, notes and coins. Some of them were ugly, some of them were beautiful, and all of them tell a story. Such as, for example, you've been cheated.

A one euro coin has turned up in Spain bearing the face of cartoon couch potato Homer Simpson instead of that of the country's king

[From Spanish shopkeeper finds Homer Simpson euro | U.S. | Reuters]

So when cash disappears, and there are no more portraits of heroic characters or Latin inscriptions, what will take over the narrative? Facebook, I suppose. But wiping away the tears, I remembered that there are a great many people around the world who can't wait to replace coins with mobile phones. The truth is, coins today are as much hassle as the Swedish copper currency from the days of the Carl Gustav wars.

Mr. Zhang of Shenyang carried two bags of coins to a bank outlet in the city, having accumulated 37,000 coins, more than 600 yuan, over the past decade. According to the rules of the bank, there is a one-yuan service fee for counting every 50 coins. If he were to hand the money over to the bank, the service fee would amount to more than the total value of his 37,000 coins... Shenzhen, Shanghai and Beijing banks have charged counting fees since 2005... the most affected were bus companies. In order to save counting fees, the Shenyang Bus Company handed out change to its employees as their wages.

[From China sees change scarcity -- china.org.cn]

Enough is enough.

Jeff Slawsky, Slawsky & Associates

[Dave Birch] Jeff Slawsky has spent thirty years in the US financial services industry and wrote the book on developing and managing a successful payment cards business. Literally: it's called "Developing and Managing a Successful Payment Cards Business" and he wrote it with Forum friend Samee Zafar back in 2005. In this podcast, Jeff reflects on the seismic shifts in the US payment card business and speculates about the longer-term impact on regulatory, social and business changes in the American market.

Listen here in either [Podcast MPEG4] or [Sound-only MP3] format.

On the money

[Dave Birch] It's rather exciting for us transaction chaps to be centre stage for a change. In the space of a couple of years, payments has gone from being a dreary corner of banking, an unexciting cost base, to the future of the "narrow bank": the utility, as economist would say, that is attached to the investment banking casino. But if you were to go down to a real casino and put a bet on the next big thing in retail payments, where would you put your money?

One way to start thinking about this is to go back one economic cycle and look at what kind of innovation in that cycle led to real change in payments. At conferences and seminars, people tend to use the example of Paypal as a success forged in the last recession that has moved on to become part of the mainstream.

At Ebay’s first analyst day in three years, the contrasts it gave between its core auction business and Paypal were black and white. The company expects its marketplace segment, which only grew revenues 1% last year, to grow slower than the online commerce market this year. By 2011, it may finally surpass industry growth rates again. On the other hand, Paypal grew its revenues by 26pc last year and could see them double over the next three years to $5bn, with margins of 20pc.

[From Ebay’s future lies in payments not auctions - Telegraph]

Just by way of comparison, although it's not a perfect comparison, look at the value of the newcomer Paypal compared to the value of a long-established player such as Visa.

Visa trades at 14 times 2011 estimated earnings. On that basis Paypal would be worth $14bn – or $2bn more than Ebay’s total enterprise value today. Moreover, Paypal is growing faster than Visa, so it arguably deserves to trade at a higher multiple of earnings.

[From Ebay’s future lies in payments not auctions - Telegraph]

When you get transactions right, they become a thin but crucial layer between technology and the market, turning places into marketplaces, enabling growth and progress. But this thin layer must spread widely enough to make money as well and so any challengers to PayPal obviously need ecological niches big enough to expand into (although as the example of M-PESA shows, you only need one decent niche to get off of the ground).

Sarah Rotman, CGAP

[Dave Birch] Sarah Rotman works on the project and research agenda of the CGAP Technology Program, designing innovative projects in branchless banking that deliver financial services to low-income customers. Her research projects include the business case for agents and future scenarios of branchless banking. Prior to joining CGAP in 2008, she interned with Urwego Opportunity Microfinance Bank in Kigali, Rwanda. She was a Peace Corps volunteer in Benin and later worked for a development nonprofit on education projects in Haiti and Africa. Rotman has a master's degree in International Relations from Johns Hopkins University. In this podcast she shares some of her conclusions about e-money cash replacement schemes (including Mondex, Simpay and Movilpago) from the CGAP report on Going Cashless at Point of Sale which she co-wrote with Ignacio Mas.

Listen here in either [Podcast MPEG4] or [Sound-only MP3] format.

cashless, history, podcast

Born on the 4th of July

[Dave Birch] Appropriately for today I'm reading Jason Goodwin's Greenback. It reminds me just how much the birth of America and the birth of modern money (ie, paper) are intertwined. Regarding the most famous document of 1776, he says

There is a niggling list of grievances right at the beginning of the Declaration of Independence which seemed, at the time, crucially important, though few people nowadays read or remember these. The first two blame parliament for ignoring laws passed by colonial assemblies, and what they actually mean is: we agreed to have paper money, and you simply shut us down.

Remember Patrick Henry's impassioned denunciation of King George as a tyrant? It was about paper money, the latest in the series of experiments -- starting with wampum -- that helped America to develop as an economy in its own right, despite the British mercantilism prevalent at the time. In Britain, money was about custom and generations of practice, implicit in the structures of society. In America, money was invented: a creature of the law, whether seashells, tobacco or paper. As Goodwin so nicely puts it

Paper money cost nothing to produce; it was just a promise, like America.

history, notes and coins

Whispers

[Dave Birch] I think I've spotted a meme. The second serious story in a month talking about the economic benefits of getting rid of cash. First Willem Buiter, a former chief economist of the European Bank for Reconstruction and Development and former external member of the Bank of England's Monetary Policy Committee said that we should

Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank... Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I discussed Willem's article in more detail over at Kashklash, but suffice to say that it seems a plausible strategy. And now I read in The Times that

Japan may start mulling the most radical monetary policy of all — the abolition of cash... Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible.

[From To fight deflation, abolish cash.]

I agree with both sets of commentators that new technology means that we could move whollly to e-payments without a problem, because of technological advances made in the last couple of decades. I've written before about the situation in Japan, where the introduction of contactless payments and phones had led to a decline in the use of coins, but it's also important to point out that cash use in Japan remains high. Nevertheless...

A significant milestone in the penetration of electronic cash within Japanese society has been reached, with this survey conducted by goo Research and reported on by japan.internet.com into electronic cash showing that now over half the population (of internet users) carry some form of credit-card form-factor electronic cash.

[From e-money » 世論 What Japan Thinks]

Let's imagine that Willem's version of the future of money is adopted. What would the retail payments landscape look like? Well, not entirely unfamiliar, because he suggests not getting rid of all cash entirely.

As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I don't think I agree with him here, as cash isn't a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Surely it makes more sense to simply switch off cash. Willem summarises thus:

Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed [...] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Do we really want to retain cash?

Larry H. White, UMSL

[Dave Birch] Lawrence White is the F. A. Hayek Professor of Economic History at the University of Missouri–St. Louis and an adjunct scholar at the Cato Institute. He is the author of, amongst other things, “Currency and Competition” and “Free Banking in Britain 1800-1845”, books that had a great influence on my views of both the history and future of payments. An expert on "free banking" and the history of monetary institutions, in this podcast he talks about the Scottish free banking experience and what we might learn about the future of money from it.

Listen here in either [Podcast MPEG4] or [Sound-only MP3] format.

Thought experiment: cash crash

[Dave Birch] A couple of people mentioned to me that my post about replacing cash is based on the assumption that cash will go away, whereas cash is a very conservative technology. This is true, of course. But the fact that cash is losing market share only very slowly does not mean that it could not see a more rapid drop in the future. Nevertheless, it would appear that the cashless store remains as a common as the paperless office, to repeat a frequently-used analogy. However, as The Economist recently pointed out, while fantasies about the paperless office began in the 1960s and are still derided by lazy commentators as "as likely as the paperless bathroom", the truth is that it takes a generation to effect change. The use of paper in American offices has indeed been falling, but the decline didn't begin until 2001 (paper use per office worker has fallen by about a sixth since then). Perhaps cash will take a generation to go away as well. What then? Suppose all of the cash in Britain went away and was replaced by electronic cash instead. What would happen? Well, let's begin the thought experiment by trying to figure out how much cash there actually is. Narrow money (M0) is the amount of notes and coins in circulation.

The total amount of cash in the UK is just over £50bn, with about £43bn circulating outside the banks and £7bn in banks' safes, tills and cash machines.

[From BBC NEWS | Magazine | Where has all the money gone?]

If that went away, the first thing that would change is tax: the government earns interest on that £50 billion loan that we are granting it in exchange for bits of paper and metal and that interest -- a couple of billion per annum -- would need to be replaced by other tax revenue. Oh well. At the least the cost of government would be made more explicit. But I don't think the government would see a net loss: after all, no cash means less tax evasion so we can reasonably claim that the transition to e-money will be revenue neutral and the economy as a whole will be much better off because of the high social cost of cash (resources would be freed for more productive activity).

A couple of billion! Actually, it's not that bad. Much of the £43 billion outside the banks isn't really circulating: it's under mattresses and in jam jars. The euro has steadily been replacing the dollar and the pound in drug-dealer's stashes though, so let's say that two-thirds of M0 is the circulating medium of exchange, say £30 billion for a round number. If the seigniorage on that is five percent, that means around £1.5 billion per annum remitted to the government (which tallies roughly with the Bank of England's figures I think). Where is that £1.5 billion going to come from? Perhaps the government will cut spending accordingly by reducing waste and getting rid of pointless programmes... no, maybe not.

There have been worse ideas, surely?

[Dave Birch] As people view government money (known as "fiat currency", from the Latin meaning "let there be") as more and more unstable, so they begin to look around for alternatives and when a discussion of alternatives arises, one idea always gets debated: gold. Not necessarily as a Ron Paul-style return to a full gold standard, but as a way of giving citizens a choice. So what about the idea of having digital gold of some form circulating as a medium of exchange? Some people who understand economics call this "the worst idea ever":

You can not have two competing currencies, one backed by gold and one backed by faith in the American government. As long there exists even a trivial probability of a dollar collapse, everyone would simply hold the gold backed currency, which would necessarily precipitate a dollar collapse.

[From The worst idea ever | Free exchange | Economist.com]

Now, "worst idea ever" sounds a little over the top, especially to anyone who has ever watched "Britain's Got Talent", but you can see the reasoning. If the average person in the street thinks that their government is printing money round the clock so that it will inevitably lose its value, then they would naturally want to hold gold or some other asset that might hold value against inflation. Does that mean we would go back to using gold doubloons in Tesco? No: using gold as a hedge against inflation means using gold as money that is a store of value, not as a medium of exchange. I could envisage, for example, having a gold account. But I couldn't imagine going to an ATM and drawing out gold: I'd still be drawing out Sterling, but I'd only be drawing enough to support transactions and I wouldn't be stuffing it under the bed. That would reduce the demand for Sterling, but not eradicate it: currency is partly a means of exchange and partly a store of value (in less inflationary times). The world's most attractive currency for criminals is the euro: if criminals abandoned the euro for gold, then perhaps half of the euros out there would disappear (substantially reducing the seigniorage income to the central banks of the euro zone). But I digress. Is digital gold the future?

Time for the Borat

[Dave Birch] It's not clear to me why people think that creating a new world currency would improve the global economic outlook any more than creating a new European currency has helped the European economic outlook, but there's been yet another call for a single currency for the globe, and this time it's come from central Asia.

Nursultan Nazarbayev, Kazakhstan's leader [called] for every member of the United Nations to adopt the "acmetal". "A new global currency should serve as the foundation for a new harmonious system. The president said the name of his proposed currency was an amalgamation of the Greek work "acme", meaning "the best", and capital. So confident is he in the success of his new currency that Mr Nazarbayev predicted that the world would soon be talking of "acmetalism" instead of "capitalism" and that Kazakhstan could play a vital role in the implementation of the new currency because it had long been at the forefront of the global economy.

[From Global currency 'could save world economy' - Telegraph]

Personally, I don't like acmetal as it reminds me too much of cartoons, so I think something more modern, more relevant in contemporary culture would be better. I propose "the Borat". The proposal has some heavyweight support from someone who knows much more about economics than I do, by the way.

KAZAKH President Nursultan Nazarbayev has won backing for his plan for a single world currency from an intellectual architect of the euro currency, Nobel-prize winner Professor Robert Mundell. "I must say that I agree with President Nazarbayev on his statement and many of the things he said in his plan, the project he made for the world currency, and I believe I'm right on track with what he's saying,'' Prof Mundell said, adding the idea held "great promise''. Mr Nazarbayev and Prof Mundell urged the Group of 20 leading developed and developing economies to form a working group on the proposal at their summit on the global economic crisis in London on April 2.

[From Nobel-prize winner backs world currency | Herald Sun]

I wonder if I can persuade them to come along to next year's Digital Money Forum? `After all, the delegates seemed to really enjoy the session kicked off by Larry H. White which included a great talk on the Lewes Pound. The global, act local?