Tuesday, July 18, 2017

Money, Money, Money - from Jane Austen to Smartphones

Today being the 200th anniversary of the death of the great writer Jane Austen, the Bank of England unveiled the design of the new £10 note which bears her image (and for which part of the manufacturing process will take place at Wigton in Cumbria).

I very much welcome both the long-overdue recognition of an important writer and the role Cumbria is playing in modernising the British currency.

However, I think that another piece of news which I saw this week in the New York Times about money may have much more long term significance.

Paul Muzur has written that "In urban China, cash is rapidly becoming obsolete" and so are credit cards.

The article begins as follows

"There is an audacious economic phenomenon happening in China.

It has nothing to do with debt, infrastructure spending or the other major economic topics du jour. It has to do with cash — specifically, how China is systematically and rapidly doing away with paper money and coins.

Almost everyone in major Chinese cities is using a smartphone to pay for just about everything. At restaurants, a waiter will ask if you want to use WeChat or Alipay — the two smartphone payment options — before bringing up cash as a third, remote possibility.

Just as startling is how quickly the transition has happened. Only three years ago there would be no question at all, because everyone was still using cash."
Anyone interested in how our economy might develop in the future would be well advised to read the rest of this article which can be found here.

Writing as an economist, the potential economic significance of this goes WAY beyond what we may all find ourselves carrying to pay our bills.

Now I don't go all the way with those who believe that "fiat money" created by banks is a great disaster for our economy.

But they are absolutely right that through the change from a system where most transactions were carried out with notes and coin to one in which most are carried out by changing numbers in bank accounts, vast amounts of spendable money were created. It is also the case that poor regulation of that money can have serious consequences not just for first financial markets and then property markets but also for the whole of the rest of the economy.

There is similarly the potential for the creation of a system where most transactions are carried out using smartphones to create vast amounts of spendable money. If the companies who are doing it, and the financial regulators, are not on the ball about the consequences and the need to make sure that money is properly secured, the results could be 2007 all over again.

This should not be taken as a prophesy of doom. Most innovations have the capacity to bring great good if managed well, but harm if managed badly. The use of phones to pay many of people's bills is certainly an example.

I'm just suggesting we try to ensure that we take advantage of the early warning which has been provided because we have seen this happen first in China to be ready for it, and to have the right regulatory and corporate protection in place to go down a sound track if and when this happens in the West, not a risky one.


Anonymous said...

What and stop rampant capitalism going mad again, don't be silly. We are engaged in Brexit to do away with all these silly transnational agreements, Britain First remember, oh and whatever the Donald says.

Chris Whiteside said...

As I recall the ballot paper in the referendum referred only to whether Britain should leave the EU - not walk out of every international agreement we are part of. And I don't recall either side of the Brexit argument suggesting we should follow such a course.

Anonymous said...

No more Red Tape.

Chris Whiteside said...

Only the most extreme anarcho-capitalists take the "no red tape" argument to the point of not wanting any controls whatsoever on the legitimacy of money. I met a few such people in my student days but I've not heard anyone put the idea forward in the last couple of decades.

Anonymous said...

Let the market decide.

Chris Whiteside said...

You need a functioning means of exchange to have a functioning market and underwriting this is one of the things which even most small-government supporters (and all mainstream ones) recognise as one of the functions of government.