When the euro was introduced in the late 1990’s, the process by which it was distributed into circulation—and the various Currencies it replaced were withdrawn from circulation—was a cost center for banks. In a sense the process was that of currency exchange; paper cash/coins as well as bank deposits denominated in DEM, FFR, ITL etc. were swapped out for EUR. This exchange process differed markedly, however, from conventional currency exchange transactions.
For starters it was involuntary, both for the citizen/customer and for the banks. One holding a quantity of money of the discontinued brand had to swap it for the new stuff or at some date certain would find his money no longer usable as a medium for buying things.
The banks, arguably, had the worse deal. Currency exchange conducted on a conventional commercial basis generates revenue for the provider of exchange services. Basically the provider "sells" any particular currency at a higher price than it "buys" it. Whatever inventory of currency is depleted by sales to some customers is replenished by buying it from other customers at a lower price.
[In every Currency exchange, both the provider and the customer are buying one Currency and selling another. Thus, providers of exchange services typically use the words "bid" and "ask" rather than "buy" and "sell" since this alternative nomenclature is both specific to the perspective of the provider and commonly used in other financial markets. I will introduce those terms in a subsequent post in this series.]
In the case of the euro, banks were obliged to swap out the old Currencies at par without assessing other fees to defray their own expenses.
This stands in marked contrast to the voluntary process by which Better Money will be introduced into circulation. The Better Money System follows the precedent of e-gold® which was the first Currency ever to be introduced into circulation via a currency exchange process conducted by independent providers of exchange services operating on a competitive for-profit basis.
The importance of Currency exchange
Because the Currency exchange process is so critical to the introduction and growth in usage of the Better Money system I propose to examine it in detail. A grasp of the principles of Currency exchange is crucial for understanding many of the subtleties of Better Money. One major component of Better Money’s process of automatic self-adjustment is driven by Currency exchange. Currency exchange is also pertinent to the process of integration whereby Better Money will become a vital part of the financial mainstream. An understanding of how Currency exchange works facilitates critical evaluation of existing institutions and of alternative payments innovations. Currency exchange even plays a key role in the most ambitious consequence I project, the impact that the emergence of Better Money may eventually have on the fiscal sustainability of governments.
In my next entry in this series I will describe basic abstractions common to all Currency exchange. Building on this in subsequent posts, I will differentiate the Better Money Roles of Exchange Provider, Depository Institution and Primary Dealer.
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