Posts tagged ‘fraud’

The crazy cost of cash

by David Birch

[Dave Birch] I interviewed Professor Leo van Hove from the Free University of Brussles (VUB) for a podcast today. He’s starting work on a project trying to obtain a systematic and accurate estimate for the social cost of cash in the European Union. As always, his depth of knowledge and informed assessment of the situation were second to none. He set me thinking, again, about the dynamics around cash. It’s crazy to carry on using it. The high social costs, the market-distorting cross-subsidies and sheer inconvenience mean that it ought to be vanishing, even though it’s actually gaining market in share in the U.K. I found some figures from the Bank of Portugal in European Card Review for something I was writing for the Digital Money Forum blog. Portugal has the highest ATM penetration in Europe, which is one of the reasons why cash is very expensive there, as these figures show. The only payment instruments that pay their own way in that market are direct debits and credit cards. All other payment instruments lose money and cash costs about 25 times as much as it brings in. In other words, there is a massive cross-subsidy to cash from other parts of the banking business, which loses about €1.77 every time someone deposits cash in a bank branch (or withdraws it). No wonder it seems inexpensive to the retailers, who bear none of this cost. The big picture is that payments cost 0.77% of Portugal’s GDP (against the 0.5% average for Europe as a whole) and revenues only bring in about two-thirds of the costs. Isn’t there an old saying about holes and digging? When is cash going to be priced correctly?

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Technology is progressive, finance is cyclical

by David Birch

[Dave Birch] You might be familiar with the demise of Northern Rock (or Northern Crock as it is now known the length and breadth of the UK), the collapse that marked the start of the current financial crisis so far as the British were concerned. But you may be less familiar with the story of Benjamin and Abraham Goldsmid who formed a partnership in London at the turn of the nineteenth century. They started off as brokers and as foreign exchange dealers but, as told in E. Victor Morgan’s splendid “A History of Money” (Penguin, revised edition 1969), they moved on and began trading on their own account.

Aaron, the second son of Benedict Goldsmid, of Hamburg, settled in Leman Street, Goodman’s Fields, near Whitechapel Church, as a merchant… His son George was the father of two sons, Abraham and Benjamin Goldsmid, who, by their splendid capacities for business, strict integrity, and singular good fortune, succeeded in raising their firm from competitive obscurity to be the head and front of Change Alley.

[From The Rise of the House of Goldsmid]

They became well known as financiers and philanthropists who, as associates of the British prime minister William Pitt the Younger, provided financial support to the admirable cause of campaigns against the French during the Revolutionary Wars of 1792–99.

They were the first members of the Stock Exchange who competed with the bankers for the favors of the Chancellor of the Exchequer, and succeed in diverting into more legitimate sources the profits hitherto absorbed by the bankers.

[From The Rise of the House of Goldsmid]

I absolutely love that Victorian turn of phrase “diverting into more legitimate sources the profits hitherto absorbed by the bankers” and intend to use it on every occasion possible from now on. Anyway, the Goldsmids began to use short-term bank credit to fund long-term loans, a business that was splendid for some years, until the value of their assets fell in the market (their assets were government bonds) and the partnership collapsed in 1808 with massive debts. Rather than get paid off with a massive golden parachute and a huge pension, as is the fashion today, Benjamin adopted the more honourable exit strategy and hanged himself. His brother Abraham took over the business but then shot himself at Morden Lodge two years later in 1810. One parallel with modern times is that the government were big losers: the partnership owed nearly half a million pounds to the Exchequer (and this was back in the days when half a million pounds was serious money) as well as large amounts to other banks and creditors.

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