Filed Under: Cash and cash replacement, Money

The problem of change

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[Dave Birch]  I was reading a comment on a blog about how cash is free (this was shortly after I’d been charged $5 by a Wells Fargo ATM to draw out cash that I didn’t want) when I saw this.

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That’s an interesting idea – perhaps it provides a solution to the impasse between the European Commission’s bonkers directive on legal tender (which attempts to force retailers in Europe to accept €500 notes) and the national bodies charged with payments efficiency. Simply allow any retailer required to provide more than €20 in change with the right to handover a gift card instead…

Well, maybe not. But we do need to get rid of cash to stop all of this nonsense. The big problem of small change (as explored in the definitive work on the topic The Big Problem of Small Change) comes to the fore again, as it always does as we move from one monetary order to another. The problem — of finding substitutes for expensive, inconvenient or even non-existent change — is not limited to the problem of the amount in the till. In some economies, it just doesn’t exist, as in Zimbabwe.

There are no coins in circulation, so small-scale retail trade is conducted in $1 bills. These bills circulate to the extent that they are barely recognisable. Now, for the wealthy, this doesn’t matter. If you buy a bottle of scotch and get a pack of chewing gum in change, you don’t really care. But if you are living on $1 per day, then the absence of change is a real problem.

[From Up a gum tree]

Of course, in advanced countries, the idea that chewing gum can serve as change is vanishing, because the mobile phone has arrived as a viable implementation of cash, as in Zimbabwe.

Aiming to provide a new solution to the lack of currency in Zimbabwe, local startup Yo Time offers an internet platform that allows retailers to give change in the form of mobile airtime instead.

[From In Zimbabwe, retailers give shoppers airtime instead of change | Springwise]

Brilliant. And if they can do that in Zimbabwe, then in Europe we ought to be able to load a gift app on a mobile phone just as easily. Since no-one wants small change anyway, getting rid of it should be easy. Provided, that is, there’s a viable alternative. As I wrote last year, this is a problem that has to be tackled in general, not just in the extreme cases such as Zimbabwe, Argentina (where there’s no cash for public transport) and US (where, apparently, you can get five years in jail for melting down coins). The solution might be to look for alternatives from the private sector. Forum friend George Selgin gave an excellent talk on this at the Digital Money Forum in 2010, exploring the transition to industrial-age money.

In his excellent book “The Birmingham Button Makers”, Professor George Selgin explains how the British economy faced that same problem during the industrial revolution.

[From Digital Money: What is cash actually for?]

Since there was no change in circulation, private companies stepped in to create copper “token money”. Once this was established, then the state started producing copper coins using the new technology.

You can see the parallel: a paradigm shift that transforms the way that wealth is created is hampered by the money of the previous era so private enterprise steps in to find a new and more efficient means of exchange, which scales, until we get to the point where the government steps in to provide the public good and minimise transaction costs.

[From Digital Money: Making a silk e-purse]

As an aside, the US faced a similar problem around the same time and the solution there was to have municipalities, banks and in some cases churches print up “copper notes” that were circulated instead of coins. Anyway, my point is that there is a line of argument that says the provision of the circulating medium of exchange is a public good which is why it is undertaken by the state instead of by private companies. It cannot be done at a profit, but it is necessary for commerce and trade to flourish, so perhaps a public solution is best. There’s a post on PYMNTS that invites a response on the same topic.

What’s your take on George’s message? When you look into your crystal ball, what does the future relationship between the Fed and electronic payments look like?

[From Commerce 3.0 – Should The Fed Be Involved in Retail Payments? | PYMNTS.com]

Perhaps the Fed should look north! In Canada, where the report from the Task Force for the Payments System Review has just been release, the Royal Canadian Mint (who were kind enough to come to London to present at the 15th Digital Money Forum last month) have taken another step toward a more rational payment system by scrapping the penny.

Finance Minister Jim Flaherty was talking about the Canadian penny and why the Royal Canadian Mint will end its production this fall as part of his austerity budget.

[From The penny drops _ Canada to kill its one-cent coin, calling it a costly nuisance – The Washington Post]

In reality, scrapping the penny simply recognises the reality of its use. No-one wants pennies, and it is utterly pointless to produce them.

In Toronto, Mary Pascale, who co-owns a gourmet food shop, agreed the penny was a nuisance and said she already rounds out prices to the nearest 5 cents. Otherwise “it takes time to count all the change.”

[From The penny drops _ Canada to kill its one-cent coin, calling it a costly nuisance – The Washington Post]

In many countries, merchants and consumers alike have simply given up using small coins (such as the one- and two-cent euro coins) whether the mints produce them or not. But not the US.

A tiny detail of President Barack Obama’s budget to allow the U.S. Treasury Department to make coins out of cheaper materials made us wonder: how much are those metal disks accumulating in our change jars worth? The Washington Post reported the proposal was made becuase pennies cost 2.4 cents to make and nickels 11.2 cents because they are no longer made of straight copper and nickel.

[From How Much is America’s Spare Change Worth? – National – The Atlantic Wire]

Seriously – what is the point of making pennies? Coins are a total waste of time and money.

In 2011, it produced 8.2 billion coins, including 4.939 billion pennies and 990 million nickels.

[From How Much is America’s Spare Change Worth? – National – The Atlantic Wire]

What a super tale of government procurement. That means that US Mint lost at least 1.4 cents times 8.2 billion pennies ($114m) and 6.2 cents times 990m nickels ($61m), or approximately $175m, producing coins that nobody (except Coinstar!) wants. But there was another announcement from Canada that should also be attracting attention in the US. The Canadian mint has started to explore the idea of the public provision of an electronic alternative to cash. 

…the Mint quietly unveiled its digital currency called MintChip. Still in the research and development phase, MintChip will ultimately let people pay each other directly using smartphones, USB sticks, computers, tablets and clouds. The digital currency will be anonymous and good for small transactions — just like cash, the Mint says

[From Royal Canadian Mint to create digital currency – thestar.com]

The folks at MintChip were kind enough to invite me to be a judge for the developer competition (which has been fully subscribed I’m afraid so you can’t register for it any more) and I’m really looking forward to it and also looking forward to sharing some of the idea here on the blog. 

The Royal Canadian Mint MintChip Challenge invites software developers to create innovative digital payment applications using MintChip, a R&D phase technology available only to challenge participants. Developers and the public are also encouraged to share ideas for how a digital currency can be used. Winners will receive approximately $50,000 in gold from the Mint as well as promotional exposure.

[From The MintChip Challenge]

The reason that I’m fascinated by the MintChip experiment is not because of the technology (which is based on the use of tamper-resistant chips to store electronic value) but because of the idea that its the Mint that is proposing to issue e-cash instead of metal cash and perhaps that is what it will take to start the transition to a cashless, efficient, commercial environment.

[Please note: Consult Hyperion have provided paid professional services in connection with the MintChip project.]

These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers

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