As mentioned in the last post here, Mervyn King is not just a stuffy central banker: he comes up with radical ideas in economics. Here’s one he produced some time ago (in green). (H/t Mike Norman).
“There is no reason products and services could not be swapped directly by consumers and producers through a system of direct exchange – essentially a massive barter economy. All it requires is some commonly used unit of account and adequate computing power to make sure all transactions could be settled immediately. People would pay each other electronically, without the payment being routed through anything that we would currently recognize as a bank. Central banks in their present form would no longer exist – nor would money.”
Interesting idea, but I think it’s flawed. Certainly “computing power” could get rid of a substantial proportion of transactions done with money. But there is a problem, as follows.
What about relatively large transactions (e.g. buying a house or car) where the purchaser wants to save up in order to be able to make the purchase? If the purchase makes shoes for a living for example, they could store up thousands of shoes and then purchase the house or car with the stockpile of shoes. But that’s hardly practical.
Money is a far more convenient form of saving for the above sort of transaction. As to whether the money is plonked in a bank, that’s a separate issue: the money COULD BE hoarded under a matress.
To be more exact, computing power could get rid of a well known problem with barter: the so called “coincidence of wants” problem. That’s the fact that if you make shoes for living and want ice cream, the ice cream seller will not necessarily want shoes – or shoes of the type that you produce. But computing power does not get rid of the above “saving” problem.