Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, February 11, 2005

The Future of Money

I carry out a very small percentage of my transactions using currency or cheques. Like many people, I use credit cards and internet banking. This doesn't mean I don't like currency, and it certainly does not mean I think economies will stop using currency in the near future.

First of all, currency is easiest for small transactions; the transaction costs of making a purchase using Interac or a credit card are sufficiently high that many merchants set a minimum for electronic forms of payment.

Secondly, I value my privacy. I can imagine, especially under some political regimes, that there would be times I would rather not leave a well-blazed electronic trail about the nature of my purchases.

But just because our economies are moving toward increasing use of electronic funds, that does not mean central banks will have no control over the money supply. It might mean the monetary mechanisms will become fuzzier, and it might play havoc with measures of M1, M2, M3+, M7, M16, etc.

The OECD has a book out on this topic, The Future of Money, which is available through Here's the blurb:
Money's destiny is to become digital. Throughout the ages physical money in the form of objects, coins and notes has increasingly been replaced by more abstract means of payment such as bills of exchange, cheques and credit cards. In the years to come that trend to virtual money will continue apace. As technological advances in ICT and biometrics come on-stream, as intangibles progressively become the primary source of value-added in the burgeoning knowledge economy, and as the public at large come to grasp the advantages of digital transactions, virtual forms of payment will dominate. How quickly will this happen on a major scale, and will cash disappear altogether? How will it affect our daily lives? Will it deepen already existing rifts in society? Does virtual money threaten control of the money supply, raising the spectre of greater inflationary risks? Or will it put central banks out of business? This book tackles these and many other critical questions, offering timely suggestions on why and how to make the transition to the world of digital money.
I honestly do not expect banks, central or otherwise, to be put out of business by the growth of virtual money. I can, however, imagine that we will see even fewer small-town branches and more competition from international near-banks like ING Direct.
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