Money is about to enter a new era of competition

Now, we are on the threshold of another tumultuous era. Cash is on the rise and the digital technologies that are replacing it can transform the nature and capabilities of money. Today, central bank money simultaneously serves as a unit of account, a medium of exchange, and a store of value. But digital technology could set those functions apart as some form of private digital currency, including some cryptocurrencies, gain traction. That shift could undermine the dominance of central bank money and trigger another wave of currency competition, one that could have lasting consequences for many countries – especially those countries with smaller economies.

In ancient societies, objects such as imitations, beads, and stones were used as money. The first banknotes appeared in China in the seventh century, in the form of certificates of deposit issued by reputable merchants who supported the value of banknotes with commodity or metal stores. precious. In the 13th century, Kublai Khan introduced the world’s first paperless paper money. His kingdom’s bills were valuable simply because Kublai decreed that everyone in his domain must accept them to pay for an agonizing death.

Kublai Khan’s successors were less disciplined than he was in controlling the issuance of paper money. Subsequent governments in China and elsewhere have yielded to the temptation of recklessly printing money to finance government spending. Such arbitrariness often leads to increased inflation or even hyperinflation, which in turn leads to a severe decrease in the quantity of goods and services that a given amount of money can buy. This principle is relevant even in modern times. Today, people trust a central bank to ensure widespread acceptance of its notes, but this trust must be maintained through disciplined government policies.

Timeline of currency history, pt 2


However, for many people, cash today largely seems outdated. It is becoming less and less common to deal with physical money literally as smartphones allow us to make payments easily. The way people in rich countries like the United States and Sweden, as well as people in poorer countries like India and Kenya, pay for basic goods has changed in just a few years. This shift could sound like a potential driver of inequality: if cash disappeared, one imagines, that could put the elderly, the poor and others at a technological disadvantage . However, in reality, mobile phones are almost saturated in many countries. And digital currency, if implemented properly, can be a big driver of financial inclusion for households with little access to formal banking systems.

Cash still has some life in it. During the covid pandemic, even as contactless payments become more common, the demand for cash has increased dramatically in major economies including the US, probably because people see it as a form of payment. safe savings. Many states in the US have laws to ensure that cash is accepted as a form of payment, something that will protect those who are unable or unwilling to pay through other means. However, consumers, businesses and governments in general welcome the transition to digital forms of payment, especially as new technologies have made them cheaper and more convenient.

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