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
14
However, the impact of e-money would seem to be most significant when it
comes to the electronic issue of non-bank money, that is, money issued without
reference to banking reserves. If e-money is introduced as independent money,
not a representation of any conventional currency, it may have the potential to
revolutionise the competition among monetary policy frameworks. This impact
may well be different for developed and developing countries: For developed
countries, it may provoke 'currency competition' among core currencies like
Dollar and Euro, or perhaps between these traditional currencies and new,
privately issued monies (if the performance of the incumbent central banks is
seen
as unsatisfactory by money users). For developing countries, it may facilitate
and
speed up currency substitution to dollarisation and/or Euroisation.
4.1 Implications for Finance
E-money and related technologies would seem to have powerful consequences
and serious impact on the future of finance for at least two main reasons.
Firstly,
with increased on-line connection between the service provider and the end user,
information quality is not only increased but it individualises it as well.
Mutual
flow of information allows both the service provider and the customer to develop
a better relationship base, which will allow lowering the potentials of panic
during
financial crises. This new model of relation may allow individual valuation of
particular financial service providers so as to decrease systemicity
(contagious)
between financial institutions. Because once the end-user has all the
information
about the service provider including the potential risks that may arise from any
change in the financial market conditions, any potential danger for a systemic
run
may be expected to decrease compared to conventional financial market
conditions.
Secondly, all the financial assets may get digitised even further, a trend that
is
already clear. Recently, bonds, bills and securities are all electronically
represented as electronic assets with a technology similar to EFT, allowing
smaller and flexibly denominations for example. As a result, clearing, trading
and
custody services are getting to be cheaper, easier and more importantly, open to
any customer all around the world, which eliminates local independence. Emoney,
in this respect, favours all these electronisation of finance by providing a
medium for sustainable micro-transactions and speed up the reach of
individualised services. To give an example from current financial markets, an
alternative to SWIFT or credit and debit card networks may be both cheaper to
design and easier to operate so as to open the market for competition, which
will
increase efficiency and effectiveness of the service quality
One interesting impact of e-money phenomenon is very apparent in the
emergence of ‘closed circuit currencies’, ranging from the marginal and ‘low
tech’ but numerous local exchange trading systems (LETS), 2 through corporate
2 Good (1998) mentions 470 such systems in the world, mainly in the US, Canada,
Australia, New Zealand
and Britain, as well as around 30 low-technology local currencies. There are
also many LETS schemes in
France, Belgium and Italy. They typically have less than 300 members, often
people from ‘alternative lifestyle’
movements.
15
barter arrangements in the conventional business world, 3 to experiments in
bankcreated
e-money such as Mondex, 4 and Internet-based currencies such as Beenz5.
As a consequence, payment systems become simplified and easier to handle,
inviting new entrants into the industry, challenging credit and debit card
infrastructures as well. We mention Mondex and Beenz in particular because,
first
of all, of more than fifty e-money proposals with very different approaches to
micropayment solutions on the Internet, Mondex is one of the few to allow
person-to-person transfers without the involvement of financial service
providers.
Thießen (1999) surveyed most of these proposals ranging from Digicash6 to
Mondex. The second reason is that, although the company that operates Beenz
began the scheme as a purely Internet-based approach, it recently co-operated
with Mondex to benefit from smart card technology in order to issue and redeem
Beenz on conventional transactions as well, so that Mondex cards will be used to
earn and spend Beenz. In this connection, it is worth noting that almost all the
major banks now operate Internet-based services, but there are also non-bank
initiatives, such as Prudential Insurance’s “Egg”, 7 which has received deposits
of
more than £6 billion in less than two years.
4.2 Implications for Banking
Whatever other functions banks provide, whether these be credit creation,
intermediation or settlement, they all rely on the precision and objectivity of
their
record keeping. They also are all required to maintain a clear distinction
between
their own funds, which they seek to increase, and the funds they manage for
others, which they, are required to match and hold at net zero. On the other
hand,
as the case of LETS makes very clear, the essential banking function is that of
a
shared or centralised accountant and has a societal nature. Insofar as this
function
cannot devolve to the members or clients either individually or collectively, it
would always emerge as something we benefit from in common, contextual to
rather than part of a smooth-running economic life. This would be the case even
in private or marketised arrangements. Insofar as banks carry out other
functions,
however, none of them is as core as its bookkeeping service and none of them can
as reliably be assumed to belong to banking on a permanent basis. Goodhart
(2000) addressed this advantage of banks as well when as he mentioned the need
for portfolio selections consultancy that may sustain bank’s future in the
financial
markets. More importantly, the more money can be created outside the banking
system – in the financial markets, for example, or in the folksier LETS schemes
-
the less does it rely on bank deposits8.
E-money creates an opportunity to decrease the cost of banking in one way and
makes easy to handle portfolio management procedures by allowing to increase
3 The oldest established is the WIR system in Switzerland. Founded in 1934, it
now has over 60, 000 members
and an annual turnover in excess of 2, 500 million CHF.
4 www.mondex.com, www.mondexinternational.com, www.mondex.ca, www.mondexusa.com
5 www.beenz.com
6 Digicash has been one of the most famous proposals for e-cash, but the company
went into bankruptcy at
the end of 1998 and sold all intellectual property to Ecash Technologies, a
company that intends to exploit the
idea of e-cash.
7 www.egg.com.
8 See the discussion by Ben Friedman, The Future of Monetary Policy,
International Finance, November
1999.
16
the size of the number of customer and the service regions by allowing network
based solutions, with the power to ignore location dependence. This, at the end,
enriches end-users’ right to choose among financial service providers and
increase
competitive pressures on service providers though very flexible opportunities to
change the service providers to which proving the best service with the most
reliable data. These developments can only be reinforced by the fact that the
fixed
investment necessary for an Internet bank has fallen to around $1 million
(Gosling, 1999). This may suggest a ‘structural change’ in the establishment of
banks so as to reduce the barriers to entry to banking arising from the high
amount
of fixed and operating cost and limiting barriers to the expertise that banks
has
been accumulating for many years. Competition, as well, will be powered with
ease of entry so that any new establishment with expertise based solutions for
banking services with increased quality will get a better chance for success.
There is also the fact that, as a seemingly inevitable process in history, the
monetary base as a proportion of total money stock has been diminishing for
quite
a long time. Indeed, it may be that one of the important effects of e-money is
its
potential to change totally the traditional management of the monetary base.
Chart 1 shows UK trends since 1970 for the velocity (defined as total GNP
divided by total monetary base (GNP/M0)) and money multiplier (defined as
monetary base divided by total money stock (M0/M4)). In the period prior to
1990, the proportion of monetary base in the total money stock decreased to as
low as 4%, while velocity more than doubled to nearly 30.
Again, this decrease is not caused by e-money as such, but by improvements in
electronic payment instruments such as debit and credit cards and the
development of same-time financial applications such as direct credit and debit.
Indeed, it is not difficult to imagine that, in a perfectly digitalised or
electronic
payment infrastructure, in which all manner of transactions including micro
payments are effected through digital transfer of value from payer to payee, the
record keeping nature of money will enable the identification of any potential
lack
of demand (within the registered economy at least) for banknotes and coin as a
medium of exchange. Combined with such developments, which serve only to
further individualise our experience of the bookkeeping function of money,
emoney
can be expected to promote the growing trend towards what one can term
‘self-administered banking’ and ‘narrow banking’. Together with telephone
banking, online banking, mobile-phone banking, computer-based accounting, and
all other aspects of electronic finance, e-money enables and promotes the
individual person or organisation, household or firm, as the locus of financial
awareness and responsibility9. Banks and the banking system generally are
thereby rendered more and more a resource or tool and less and less the
determinant of their clients’ financial actions.
FOREIGN CURRENCY | EXCHANGE RATE | POUNDS TO EUROS
|
