CURRENCY EXCHANGE | CURRENCY CONVERTER |
EXCHANGING MONEY
THE CENTRAL BANK OF
THE REPUBLIC OF TURKEY
Yuksel Gormez – Christopher Houghton Budd
Abstract
This paper discusses electronic money, its relation to free banking and some
implications for central banking. It begins by introducing its conceptual
framework for modern central banking, in terms of which it then rehearses the
free banking argument. It then reviews the development of e-money in terms of
both electronic payment methods and electronic issue, with special attention
paid
to the latter. The discussion includes both mainstream developments, such as
Mondex, and ‘alternative’ schemes such as LETS. From here the paper proceeds
by way of a consideration of the synergy between electronic issue of money and
free banking precepts, to a consideration of some implications for the future of
central banking generally. It offers an ‘contestable’ model of central banking,
which endeavours to show the effects that e-money may be expected to have (and,
indeed, may already be having) as regards monetary policy, financial supervision
and seignorage. It concludes that even in its current stage of development, the
emergence of e-money not only reflects and supports key free banking concepts,
but may be nudging modern central banking towards free banking practice.
Keywords: electronic money, free banking, central banking
6.2 Transforming Seigniorage
Enough has been said to show that free banking may yet be seen to have a
different significance than either its opponents or protagonists have in mind,
and
that the principles that it advocates may well be at work in a de facto,
unintended
way. To bring this paper to a close, however, we would like to make one final
comment concerning contestable central banking and seigniorage.
As rehearsed already, the concept of contestable central banking distinguishes
between three main aspects or tasks - the conduct of monetary policy,
supervision
of the financial markets, and maintaining the integrity of the unit of account –
and
then envisages their articulation or devolution. Such an image of the
development
of central banking has a profound implication in that the seigniorage relation
disappears and, with it, the possibility that seigniorage can be abused or
highjacked
by the government of the day for non-economic purposes. We do not
mention this for political reasons, but because it seems to be implied by the
historical developments we are seeking to illustrate. Indeed, we considered
making no mention of seigniorage at all, but it seems that some transformation
of
seigniorage is built into the logic of things. Omitting any mention of it might
have
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suggested that this aspect of the financial system would be unaffected, an
unlikely
event that it would have been disingenuous to ignore.
Current developments may result in a redefinition of seigniorage, away from the
“irrational” and inflationary habit of “printing money” to pay debt, a concept
of
seigniorage that should be confined to immature approaches to central banking.
We would like to think that money is sufficiently understood nowadays, at least
in
the developed economies, so as to be beyond the mis-management entailed by
such practices. The recent financial turmoil in Russia, for example, had much to
do with their not having appreciated that the inflationary effects of
manipulating
the domestic monetary base would invite currency substitution and thus
undermine the financial system. In the Russian case, it is likely that any
seigniorage gains expected were more than cancelled out by the punishing
shortrun
interest rates that the mis-management incurred, as has been the case in other
such situations . This hardly makes a case for seigniorage. On the contrary,
seeking income from the printing of money is likely only to cause distortions in
the money stock, leading to monetary and financial crises. Consequently, it may
be better to limit the definition of seigniorage to the amount of profit from
money
business made by public authorities through their production, distribution and
management of money.
In recent years, for example, especially in developed economies, a significant
portion of profit has come from the interest earnings from the bond and bill
holdings of monetary authorities used to back the amount of currency in
circulation. For example, the US Treasury earns around 5% seigniorage on the
issuance of dollars. The Bank of England also profits from bank note issue
through its Issuing Department (see Chart 2), so that even in current
circumstances central banks can make a profit without dealing with banknotes and
coins, since the Issue Department of the Bank of England is accounted
separately.
.
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As the chart shows, the Banking Department is independently profitable, with
some of its profit even being transferred to HM Treasury. At the same time, the
cost of central banking has been diminishing along with that of conventional
banking, thanks in part to the effects of cheaper computing and communicating
costs.
7 Conclusions
To sum up, the impacts and effects of e-money are broad-ranging and farreaching.
We focus on three areas in particular:
1. For two main reasons, e-money may lead to a new era for free banking type
practices. Firstly, innovation in payment technology is reducing the fixed costs
of
banking business. Being cheaper than printing, distributing and retrieving
banknotes through banking systems, the creation of digital strings of money is
likely to reduce the cost of maintaining a payment system infrastructure for the
economy as a whole. This may attract more economic entities to provide financial
services as the natural barriers to entry to the banking sector become less
effective. Secondly, as the computing power of new generations of computers
increases, risk management and data processing with huge amounts of entries
might become risk-free and less costly to process. It may then be possible that
the
information monopoly of banks relating to financial services may deteriorate,
giving further opportunities for non-banks to supply financial services to
customers. Such a development may decrease the special treatment of banks over
against other firms, so that the argument about the private positions of banks
in an
economy may become even harder to defend.
2. The development of e-money further implies radical changes in regard to
money, banking, and finance due to the manner in which it ‘befriends’ markets
solutions to monetary problems. Its impact in terms of the lender of last resort
function, currency backing, and multiple currencies is likely to be especially
powerful.
3. Technically, e-money may have different impacts for different functions of
money. With regard to the unit of account function, it may be expected that
emoney
would decrease network externalities by both decreasing the fixed cost of
networking (for example private clearing systems are already available) and by
lowering the cost of switching from one local network to the other (choosing
alternative units of account without difficulty provided legal tender laws are
adjusted to allow freedom to contract in preferred currencies).
With regard to the medium of exchange function, e-money would facilitate
currency competition by allowing economic entities to provide technically
efficient and effective alternative monies to reach end-users. Competitive issue
is
not necessarily national in character; it may be international as well, witness
the
competition between the euro and the US Dollar. Even at its current stage of
development, e-money in banking the provision of ‘multiple currency based
individual accounts’ that are transferable to any currency at any moment of
time,
while one bankcard may allow one to spend in different denominations anywhere
in the world. E-money thus offers local and international solutions to
settlement
problems, thereby enriching the cover of money. Through local exchange trading
systems, anything from bread to time may be defined as money as long as there is
a community willing to accept it and such ‘local’ solutions may be extended to
wider regions provided the supply of the instrument manages to create enough
demand. E-money enables anything - from gold to seashells – to be distributed
electronically within local or international networks. Such a development
increases people’s understanding of money and financial markets and puts
pressure on financial institutions to be more transparent to the society they
serve.
It brings good money in reach of anybody on earth as far as they have a network
connection, and increases the awareness of the growing importance of stable
currencies at the international as well as the national level.
With regard to the store of value function, e-money would increase the quality
and
quantity of information available. This would greatly help to reduce imperfect
information possibilities, to increase data processing and risk management
techniques, and to make easier portfolio selection procedures. Secondly, it
would
decrease barriers to entry to financial service provision, a fact already
observable
in the financial industry. With regard to systemic problems for the financial
industry, it is likely that e-money will support individual assessment of the
safety
and soundness of particular financial institutions. This would allow individual
treatment of troubled financial institutions, decreasing contagious trends. By
reducing the interdependence of financial service providers in this way, the
risk of
systemic problems may also be reduced as a consequence of e-money. Lastly, in
the sense that e-money also implies or refers to the wider phenomenon of
electronic finance generally, it is having a profound impact in the banking
system.
Taken as a whole, online banking, tele-banking, mobile-phone banking,
computer-based accounting systems, and so on, are making entry into banking
ever easier by making explicit and replicable processes that previously were not
generally understood and were the province of experts.
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Although explanations of them may not say so in so many words, current
developments in the financial world seem to be unfolding along the lines
indicated
in this paper. They approximate certain features of free banking, although not
as a
result of free banking advocacy, and they are reinforced, even accelerated by
the
emergence of electronic finance and e-money. Their appearance suggests that,
unless ‘repackaged’ in a contestable way, the future of central banking may
become uncertain. Central banks may yet, therefore, become transformed in
conformity with free banking philosophy and principles.
From this point of view, the advent of so-called e-money is both a technological
and monetary phenomenon, and care should be taken not to underestimate its
significance. If the ‘incompetence’ argument is accepted, as would seem
reasonable, the fact that e-money is of relevance in both central banking and
free
banking contexts indicates that it will increase the efficiency and productivity
of
the future of current monetary and financial systems, whether conducted within
existing or revised arrangements.
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