Continuing on from yesterdays article On currencies, virtual or otherwise I thought I’d look at the US dollar. I’d argue that the US$ is not just one but more like thousands of different competing currencies
Is $100 in cash the same as $100 in my bank account or as part of my PayPal balance? Not really? They aren’t fungible between each other. $100 in cash can be converted to $100 in my bank account fairly easily, but it’s not the same thing.
$100 cash can buy me a case of wine in my local wine store, but it can’t buy me server hosting. So they aren’t directly fungible. There may also be a cost of swapping between $100 in cash and $100 in my bank account, such as ATM and other bank fees.
We can all agree that a $100 bank note is a real US$ issued by the federal reserve. But the $100 in your bank account, while denominated in US$ is actually a different beast all together.
Here is a small set of properties of 4 currencies that you could all label US$:
|USD Bank Note||USD Bank Account||PayPal USD||Starbucks Card|
|Promise||Legal tender for all debts public and private||On demand exchange for USD Bank Notes||Easy deposit to my bank account||Redeem for Coffee|
|Backing||(some small percentage) in foreign currency and gold reserves||0-10% USD Federal Reserve credits||100% in USD Bank Accounts||Deferred revenue|
|Transferability||anyone in same location||to other account holders in same bank||to most people in industrialized world||Starbuck stores and physical transfer of cards|
|Transfer method||Bearer||Book entry||Book entry||Book Entry/Bearer|
|Storage cost||none for small amounts, safe for large amounts||fees||none||none|
|Transfer cost||none for small transactions, Brinks, security guards for large transactions||fees||fees||none|
There are distinct advantages and applications for each of these 4 types of currencies. Each one may have more or less value to you or your business in a given moment. Banks, PayPal etc essentially make money of this difference in value through transaction costs and arbitrage.
I would even argue that every single bank issues multiple kinds of currency. The balance of a checking account at Ocean Bank in South Florida has different properties as one in CitiBank. For one it’s easier to deposit into a CitiBank account while being in the other part of the country than it is to do so with a local bank like Ocean Bank. A local bank like Ocean Bank might actually have other benefits such as access to local loan managers, that might be more important to you.
Back during the days of Free Banking banks and other businesses actually issued competing paper currencies. These were mostly freely traded at a 1 to 1 value, but if there was a rumor about problems at a bank the value could fluctuate between them. In the days before the FDIC there actually was a real trust difference between having your money in different banks. That is why old fashioned banks often had impressive architecture to show how trustworthy they were.
The traditional non cash payment as used today is generally a complex chain of value transfers between multiple competing currencies. PayPal transparently does this in the background for payments over your PayPal balance. These payments make these competing currencies all seem like one.
In tomorrows post I’ll focus on some of the above currency properties and how they also apply to virtual currencies.