Historical Reflections on the Transition between Money

Technologies Professor Catherine R. Schenk

University of Oxford

Uses of the Past in International EconomicRelations

www.UPIER.web.ox.ac.uk

The Long History of the Future of Fintech• Money

• Means of Exchange (settlement systems)• Store of Value (assets)• Unit of Account (denomination of transactions, valuation)

• Incentives for Technological innovation• Efficiency (gold to notes)• Network externalities• Monopoly rents/Seigniorage• Fee generation/commercial interests

• Environment for transitions• ICT innovations (telegraph to TCP/IP)• Inflation (destroys fiat money)• Political disruption/War - legal tender for tax purposes

What is Money

Means of Exchange Store of Value Unit of Account

Notes and CoinFinTech:

Card PaymentsMobile Payments etc

National CurrencyGlobal Currency?Gold (safe haven)

Crypto-currencies: speculative, unstable value, limited means of exchangeEnvironmentally damaging to mine

Grasberg mine Indonesia(13,000 feet deep)

Hut 8 Medicine Hat Canada: uses as much electricity each day as entire cityMost is fossil fuels (CBC.ca)

Sebastião Salgado, SERRA PELADA, GOLD MINE, BRAZIL, 1986

Bitcoin mining is not directly extractive – also providing settlement system

International Currencies Transitions• Sterling until 1950s, then USD

Loss of stable value, shrinking share of UK in world trade, transition delayed by institutional controls, fragility of the USD until 1970s floating era

• USD remarkably stable share of global reserves, dominant in means of exchange, unit of account and settlement

• 2008: China and Frankel ‘Why the Euro will rival the dollar’, International Finance.

• 2010: RMB Internationalisation

Currency Distribution of Foreign Exchange Reserves 1950-1982(SDR Valuation)

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Perc

ent Sterling

US$Other

1955 1970

International Currencies Transitions• Sterling until 1950s, then USD

Loss of stable value, shrinking share of UK in world trade, transition delayed by institutional controls, fragility of the USD until 1970s floating era

• USD remarkably resilient share of global reserves, dominant in means of exchange, unit of account and settlement

• 2008: China and Frankel ‘Why the Euro will rival the dollar’, International Finance.

• 2010: RMB Internationalisation

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US Dollar Broad Effective Exchange Rate Index (2010 = 100)

March 2002

July 2008

Emerging Market Economy Crises 1990s

Great Moderation

Quantitative Easing November 2008- October 2014

End of Quantitative Easing October 2014-

BIS Quarterly Review | September 2018 | 23 September 2018

International Currencies Transitions• Sterling until 1950s, then USD

Loss of stable value, shrinking share of UK in world trade, transition delayed by institutional controls, fragility of the USD until 1970s floating era

• USD remarkably stable share of global reserves, dominant in means of exchange, unit of account and settlement

• 2008: China and Frankel ‘Why the Euro will rival the dollar’, International Finance.

• 2010: RMB Internationalisation• Trade settlement• Accumulations for speculative purposes• August 2015: downward price risk, new exchange controls

Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value.

Supranational Currency• IMF Special Drawing Right (SDR) 20 years to develop and refine (1961-

81)• Triumph of compromise over clarity: 1967

• Ambiguity about purpose: • Replace or supplement USD as a reserve asset?• Form of credit or reserve asset?• NOT an international money: unit of account, not store of value or means of exchange

• Efforts to develop Market SDR• 1980s denomination of oil trade (geopolitical obstacles, but also liquidity)• SDR denominated bonds• SDR – diversification easily replicated• Few advantages over dollar or diversified currency portfolio

• Enthusiasm tends to increase with dollar volatility/depreciation and recede with appreciation (only 3% global reserves)

The Long History of the Future of FinTech• Accounting systems: long distance trade (trust, security, stable value)• 12thC -17thC: Promissory notes, letters of credit, Bills of Exchange

(negotiable)• Correspondent Banking: enhanced by Telegraph from 1851 Dover-

Calais/1866 Transatlantic (underwater cable still used)• 1973 SWIFT: Electronic cross-border message system to allow

settlement: secure correspondent banking - first message 1977• 2012 – Ripple/XCurrent (Blockchain wth Santander 2018)

• 1980s: Real Time Gross Settlement (RTGS) – large value transfer systems between banks and central banks

1986 Big Bang – 1987 Stock Market crash

Cashless Society?• Originates in late 1950s, prevalent in 1980s (Batiz-Lazo et al 2014)

• Highly anticipated: 60 years to arrive?

• Card Payments: Credit to Current payments• 1958: Bankamerica and American Express• 1965: Bankamerica licenses other banks

• Mobile payments: still linked to banks• Central Bank Digital Currency (additional liquidity)

• Need to balance additionality against risks (BIS March 2018)

• Requires secure protocols

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Notes and Coin as a Percentage of M4 1982-2018

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1961

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1963

-05-

0119

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6-01

1965

-07-

0119

66-0

8-01

1967

-09-

0119

68-1

0-01

1969

-11-

0119

70-1

2-01

1972

-01-

0119

73-0

2-01

1974

-03-

0119

75-0

4-01

1976

-05-

0119

77-0

6-01

1978

-07-

0119

79-0

8-01

1980

-09-

0119

81-1

0-01

1982

-11-

0119

83-1

2-01

1985

-01-

0119

86-0

2-01

1987

-03-

0119

88-0

4-01

1989

-05-

0119

90-0

6-01

1991

-07-

0119

92-0

8-01

1993

-09-

0119

94-1

0-01

1995

-11-

0119

96-1

2-01

1998

-01-

0119

99-0

2-01

2000

-03-

0120

01-0

4-01

2002

-05-

0120

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2004

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2006

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2008

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2011

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2013

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2017

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USA Components of M2 1959-2018

Currency Checkable Deposits Demand Deposits Non-M1 Components of M2

Increase in Card Payments is not related to a decrease in Cash in Circulation(except in Sweden)

Source: Committee on Payments and Market Infrastructures BIS (2018)

Cashless Society• Originates in late 1950s, prevalent in 1980s (Batiz-Lazo et al 2014)

• Highly anticipated: 60 years to arrive?

• Card Payments: Credit to Current payments• 1958: Bankamerica and American Express• 1965: Bankamerica licenses other banks

• Mobile payments: still linked to banks• Central Bank Digital Currency (additional liquidity)

• Need to balance additionality against risks (BIS March 2018)

• Requires secure protocols

RBS: ‘Mary’ 1968-1976

1971

1969

Switz 1991

2007

Hong Kong 2008Greece 2015

Cashless Society• Originates in late 1950s, prevalent in 1980s (Batiz-Lazo et al 2014)

• Highly anticipated: 60 years to arrive?

• Card Payments: Credit to Current payments• 1958: Bankamerica and American Express• 1965: Bankamerica licenses other banks

• Mobile payments: still linked to banks (2007 Bank Run)• Central Bank Digital Currency (additional liquidity)

• Need to balance additionality against risks (BIS March 2018)

• Requires secure protocols

Conclusions: What might be different?• New money is difficult to introduce: need demand, stable value,

liquidity• ICT technology cheaper and easier to access:

• lower barriers to entry for start-ups• Competition vs externalities (less need for conformity?)• Quicker to tipping point for Network Externalities?

• ICT also poses Risk and supervisory challenges• Bank of England bringing Fintech into its settlement systems, Payments Systems

Regulator

• Secure protocols, distributed ledgers, quantum computing?