Rethinking Money: Breaking Up Currencies
from the different-purposes dept
I remember when I was quite young, my father predicted to me that we’d probably see the end of cash within our lifetimes, as all money would move to electronic money in the form of credit cards (or credit card-like interfaces). Every so often this idea has been discussed, but it usually gets shot down by those who like the anonymity of cash (which is one reason why some governments don’t like it). So it’s interesting to hear via Slashdot that an Estonian economist is recommending that the country go completely electronic as it adopts the Euro. I would imagine there are some issues with doing so (including the fact that cash and coins from other Eurozone countries would inevitably bleed in).
That said, there have been a few other stories lately that have me thinking about the future of money, and I actually could see a way that countries could move in this general direction without actually getting rid of cash entirely. Last year, we wrote about the question of whether or not the world would move to a single world currency, while simultaneously considering whether or not we’d actually start to see growth in very localized currencies, which are increasingly common in various cities to encourage people to shop locally. Again, neither situation seemed ideal, but were definitely interesting to think about.
Recently, however, Umair Haque wrote up an interesting post, positing that money could be split into three types of currencies which serve three separate functions. The idea is not to break them up by region — as described above — but by function. Umair’s writeup is a bit opaque, but he notes that currency is used as a store of value, as a medium of exchange and as a unit of account, but those functions can be separated. The end result, would be as follows:
You have three kinds of notes in your wallet. The first you use at the grocery store. The second, at the bank and in the financial markets. The third, between your employer, the state, and public services. Each has very different volatilities and trajectories, because each has very different levels of supply, demand which are, crucially, independent from one another–but interdependent on real wealth, long-run productivity, etc.
Now, this may be difficult to comprehend in the abstract. How would that actually work and why would each have different volatilities and trajectories? Well, the good news is that we actually have a real world example of this. A few weeks back the always excellent Planet Money team at NPR did a wonderful episode on how “fake money” saved Brazil from rampant inflation. The story is fascinating, and I highly recommend listening to it. But, it was basically a simplified version of what Haque is suggesting. Brazil had crazy inflation, so crazy that every day, stores had to remark their entire stock to raise prices, and people would rush ahead of the clerk with the price stickers to get “yesterday’s” prices.
The way Brazil “solved” the issue was to effectively issue a made up new currency to handle some functions of money: mainly the unit of account. You couldn’t actually get paid in it, or pay with it, but all the goods in all the stores were suddenly priced with it. Then, rather than having to change the prices every day, each day, the government would put out a rate card with the exchange rate, and people would work off of that. Now, you might say this shouldn’t make a difference, but it actually did. It got people thinking in terms of the new “stable” rates, and got them past their general distrust of monetary value. (One side note: this upset some of the wealthy, who were simply making a ton in interest — and they complained about how this new system meant they actually had to innovate and invest to make money — which reminded me of certain industries in the US who like to avoid innovating and investing themselves…).
Either way, you had a situation where the currency for prices was perfectly stable at the same time the other currency was still dealing with massive inflation. As Haque points out, you have different currencies with different volatility. Eventually, Brazil switched entirely over to this new currency and made the fake currency a real currency, but there’s no reason why you couldn’t keep multiple currencies, and break them up into a third bucket as well, as Haque suggests.
I can definitely see how there could be some value in doing so, providing a lot more flexibility, and removing certain risk elements. However, I do wonder if the greater level of confusion might be a problem for many, and lead to huge potential arbitrage opportunities, where the more financially sophisticated folks took advantage of much less financially sophisticated individuals, to swap these different levels of currency around. I’m not convinced either way on this, but it does seem fun to think about the possibilities…