Schenk LSE Historical Reflections

Historical Reflections on the Transition between Money Technologies Professor Catherine R. Schenk University of Oxford U...

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Historical Reflections on the Transition between Money Technologies Professor Catherine R. Schenk University of Oxford Uses of the Past in International Economic Relations 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

Notes and Coin FinTech: Card Payments Mobile Payments etc

Store of Value

Unit of Account

Gold (safe haven)

National Currency Global Currency?

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

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

Grasberg mine Indonesia (13,000 feet deep)

Bitcoin mining is not directly extractive – also providing settlement system

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

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) 90.0

80.0

1955

1970

70.0

50.0

Sterling US$ Other

40.0

30.0

20.0

10.0

19 82

19 80

19 78

19 76

19 74

19 72

19 70

19 68

19 66

19 64

19 62

19 60

19 58

19 56

19 54

19 52

0.0 19 50

Percent

60.0

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

07-2018

01-2018

07-2017

01-2017

07-2016

01-2016

07-2015

01-2015

07-2014

March 2002

01-2014

07-2013

01-2013

07-2012

01-2012

07-2011

01-2011

Emerging Market Economy Crises 1990s

07-2010

July 2008

01-2010

07-2009

01-2009

07-2008

01-2008

90

07-2007

01-2007

07-2006

01-2006

07-2005

01-2005

120

07-2004

01-2004

07-2003

01-2003

07-2002

01-2002

130

07-2001

01-2001

07-2000

01-2000

07-1999

01-1999

07-1998

01-1998

07-1997

01-1997

07-1996

80

01-1996

07-1995

01-1995

07-1994

01-1994

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

140

End of Quantitative Easing October 2014-

Great Moderation

110

100

Quantitative Easing November 2008- October 2014

70

60

50

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 (196181)

• 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 DoverCalais/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

0 30 Jun 82 31 Jan 83 31 Aug 83 31 Mar 84 31 Oct 84 31 May 85 31 Dec 85 31 Jul 86 28 Feb 87 30 Sep 87 30 Apr 88 30 Nov 88 30 Jun 89 31 Jan 90 31 Aug 90 31 Mar 91 31 Oct 91 31 May 92 31 Dec 92 31 Jul 93 28 Feb 94 30 Sep 94 30 Apr 95 30 Nov 95 30 Jun 96 31 Jan 97 31 Aug 97 31 Mar 98 31 Oct 98 31 May 99 31 Dec 99 31 Jul 00 28 Feb 01 30 Sep 01 30 Apr 02 30 Nov 02 30 Jun 03 31 Jan 04 31 Aug 04 31 Mar 05 31 Oct 05 31 May 06 31 Dec 06 31 Jul 07 29 Feb 08 30 Sep 08 30 Apr 09 30 Nov 09 30 Jun 10 31 Jan 11 31 Aug 11 31 Mar 12 31 Oct 12 31 May 13 31 Dec 13 31 Jul 14 28 Feb 15 30 Sep 15 30 Apr 16 30 Nov 16 30 Jun 17 31 Jan 18 31 Aug 18

Percent

Notes and Coin as a Percentage of M4 1982-2018

9

8

7

6

5

4

3

2

1

Currency Checkable Deposits Demand Deposits Non-M1 Components of M2

2018-08-01

2017-07-01

2016-06-01

2015-05-01

2014-04-01

2013-03-01

2012-02-01

2011-01-01

2009-12-01

2008-11-01

2007-10-01

2006-09-01

2005-08-01

2004-07-01

2003-06-01

2002-05-01

2001-04-01

2000-03-01

1999-02-01

1998-01-01

1996-12-01

1995-11-01

1994-10-01

1993-09-01

1992-08-01

1991-07-01

1990-06-01

1989-05-01

1988-04-01

1987-03-01

1986-02-01

1985-01-01

1983-12-01

1982-11-01

1981-10-01

1980-09-01

1979-08-01

1978-07-01

1977-06-01

1976-05-01

1975-04-01

1974-03-01

1973-02-01

1972-01-01

1970-12-01

1969-11-01

1968-10-01

1967-09-01

1966-08-01

1965-07-01

1964-06-01

1963-05-01

1962-04-01

1961-03-01

1960-02-01

1959-01-01

USA Components of M2 1959-2018

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

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

Greece 2015

Hong Kong 2008

2007

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?