Systems of payment - past and future

The history of money tells us a lot about what money is and the values we ascribe to it. In this chapter, we explore the concept of money, payment in the past and where technology may take payment systems in the future.

The concept of money

Money is a means of exchange. The concept of money only succeeds if it meets a number of properties. It must be:

• acceptable
• durable
• portable
• divisible
• difficult to copy
• reasonably scarce

Your payment must be acceptable as a means of exchange before it has any value. Both you and the vendor must agree on the value of the means of exchange. If you went overseas and tried to pay for something in Australian dollars when the vendor would only accept US dollars, then your money has no value for that vendor.

Money is durable, that is, able to last. Australia's polymer banknotes and coins withstand wear and tear that paper banknotes cannot, which makes it ideal as a medium of exchange. With the advent of electronic banking, durability is not as important as it was in the past.

Money must be portable, that is, you must be able to carry it with you to exchange. In using systems such as debit and credit cards, we can carry around much larger amounts of money than we could have physically carried in the past. One drawback is that you may spend more money because you can carry more around.

You should be able to pay the exact amount for a product or service by either giving the exact amount or by giving a larger amount and receiving change, therefore money must be available in divisible units. It would be no good if you had a bar of gold to pay for an item worth only half a bar of gold.

To prevent counterfeit money from being unlawfully created and distributed, a means of exchange must be difficult to copy. Australian banknotes feature a complicated design and are made of polymer with a clear window, which is difficult to replicate. Other countries' banknotes often feature watermarks or metallic thread to prevent forgery.

The value of money comes from its scarcity, that is, its uniqueness or rarity. Note Printing Australia (NPA) and The Royal Australian Mint (RAM) produce our banknotes and coins respectively, under instruction from the Reserve Bank of Australia (RBA), which controls the availability of money and its distribution. The government holds the Reserve Bank accountable for monetary policy and financial system stability.

Inflation

Inflation is the decline in the value of money, usually related to its scarcity. When we ascribe a value to money, we give it a certain purchasing power, for example, one dollar equals one chocolate bar. If the Reserve Bank decided to double its production of money, while the production of chocolate bars remained the same, then the money would lose its scarcity in relation to the chocolate bar. When this happens, the price of the chocolate bar increases to two dollars. Notice how one dollar no longer buys as much as it used to because inflation has affected the value of a dollar.

Barter

Throughout history, many societies around the world worked on a system of exchange called barter, where one party would exchange goods or services for the goods or services of another. If you were good at catching fish and your neighbour could climb trees to gather coconuts, you might exchange a certain number of fish for a certain number of coconuts. Barter worked as long as both parties agreed to the exchanged items, also known as a 'double coincidence of want', that is, the exchange met a mutual desire for the others' product or service.

The main disadvantage of the barter system is that there may not be a mutual agreement about the exchanged goods - for example, you may not like coconuts. If you preferred bananas but the banana grower did not like fish, then the system would not meet your needs. Inflation may also become an issue if the good that you trade changes in availability (fluctuates) such as if there were an abundance of fish but a scarcity of bananas. Three fish might be equivalent to one banana but if the banana grower did not want any fish, then the fish would be worthless.

With reference to the properties of money that we explored above, you can see that barter did not always meet the requirements of a means of exchange. All sorts of things have met these requirements in the past; in the early days of the British settlement of Australia, rum was a scarce resource used as a means of payment. Other monetary items include shells, feathers, gems and gold.

The future

Technology has already changed our systems of payment in so many ways, mostly by giving us unprecedented access to sources of money - our own and that which we can borrow - increasing the ways in which we can make payments.

Cards allow us to pay via direct debit or via credit, the internet increases the availability of products we can buy and a mobile phone provides yet another way to purchase items, such as with mobile phone connectivity to vending machines.

Although we are not able to predict what the future will bring in terms of new systems of payment, the public will welcome any convenient method of transaction that gives access to as much money as we can afford, as long as there is a priority on security features, to prevent fraud, and retention of privacy, to prevent identity theft.