In Part 1 of this post I suggested that there is not an obligatory connection between strategies for maintaining price stability and the exchange value of the money used as a settlement medium. I insisted on using the term settlement balance, which sounds like (and is) bank jargon, as an alternative to other terms used to refer to a money balance. My reason for using bank terminology is that I want to use the treasury operations of banks as a model of how businesses and individuals manage their balance sheet.
A bank may be defined as an institution allowed to borrow from the public (accept/create/raise deposits) without prospectus in order to fund its own asset portfolio. The bank generates the bulk of its revenue through treasury operations, seeking a net rate of return from its investment portfolio (loans, securities) that is higher than its cost of borrowing (the interest it pays to attract deposits). The bank maximizes revenue by being as fully invested as possible, maintaining only enough money (vault cash, deposits at its correspondent bank or the central bank) to support the anticipated liquidity demands of withdrawals or (especially) participation in payment systems. The money, the non-interest bearing fraction of assets held against immediate demands for liquidity, is what I am referring to as a settlement balance (see BIS usage of the term in the context of large-value payment systems).
This term settlement balance refers to the fact that all day long the bank sustains inbound and outbound flows as its depositors order payments to people who bank at other institutions but also receive payments. The inbound and outbound payment system related flows cancel each other out to a large extent so that at the end of the daily payment cycle the bank might make or receive a single net payment that serves to settle (extinguish, with finality) any residual payment related liabilities.
It is in the interest of banks to economize on reserves - to hold the least possible amount of money as settlement balances - in order to be as fully invested as possible. [I'll return to this thought below when I describe the benefit of settlement efficiencies.]
Non-financial businesses and regular people/households do this exact same thing.
With non-financial companies the term settlement balance is not commonly used to refer to their uninvested money. Instead, the rather sloppy term "cash" is used, as in "sitting on a mountain of cash". Cash is one of those unfortunate words with multiple semantic usages. Sometimes the word is used to emphasize the anonymity of bearer media such as Federal Reserve Notes. For this discussion though I am pointing out that cash is often used as a label not only for uninvested money, but also for financial instruments of very short maturity such as the overnight sweep accounts that are the mainstay of so-called cash management. A vanishingly small proportion of any major company's assets are held in the form of money-as-distinguished-from-investment and the rest is in fact invested in a way that takes into account the possibility of drift in the value of the unit of account. The actual money part, the settlement balances, as with banks, are held only to meet immediate, essentially same-day, requirements such as stocking cash register drawers and making sure there is cover for outbound payments through the banking system.
Operating in a multi-currency environment complicates things, but only a little... provided we are talking about adding e-gold as an additional alternative payment option. If there are inbound and outbound e-gold payments (with payment amounts specified in the units the company normally uses for its bookkeeping) the average settlement balance held in the e-gold account is continually and automatically being marked to market as it is drawn down and replenished.
Not to belabor it but people and households (in advanced economies) economize on reserves too.
The major factor that enables a diminishing role for money is efficiencies in payment systems. The Clearing House Interbank Payments System (CHIPS) processes over 350,000 (large value) payments a day with a gross value of $2 trillion, 96% of it settled intra-day, achieving a 500/1 ratio of payment throughput / money used to prime the process.
To briefly recap, in advanced economies, thanks to sophisticated payments infrastructure, the role of money is diminishing. Banks, non-financial companies and households can hold a higher proportion of their wealth in investments that, in normal market conditions, can offset changes in the purchasing power and relative exchange value of whatever medium of payment they happen to use.
The majority of people in the world though - people who live in developing countries (or lower economic strata in advanced countries) - remain excluded from these efficiencies. They are mired in the cash economy. Remote payments under the constraints that exist in less developed economies require the use of expensive and inflexible intermediaries.
The emergence of e-gold, which enables direct end user access to a highly efficient settlement platform without the costs and delays introduced by an obligatory financial intermediary, will change all that. Just as cell phones enabled people worldwide to skip a generation - bypassing the queue for a landline - e-gold enables payment efficiencies that eliminate the need for banks to build a branch (or even an ATM) in every village.
To tell this story requires further elaboration of the role of settlement. The same efficiencies that e-gold affords to poor villagers, enabling secure and low cost access to world markets, will enable banks or other financial intermediaries to extend innovations in domestic payment systems to a global multi-currency environment.
Please bear with me. It is a difficult tale to relate linearly. It will be easier to see the whole picture when the components can all be joined by hyperlinks.