The following article I wrote having small economies in mind.
How much does it cost to produce paper currency?
In the United States, the Federal Reserve Board places an annual order with the Department of the Treasury’s Bureau of Engraving and Printing, which produces US currency and charges the Board for the cost of production. The print order in the budget for 2017 is $6.6 billion, and the currency budget is $726.6 million (this includes transportation and other related costs). That is equivalent to around 11%.
Venezuela, on the other side of the spectrum, is experiencing a different situation. Inflation there is around 2,300%, and the government is forced to print larger value notes. For this example, I have assumed that the costs of printing money in Venezuela is similar to the costs of printing money in the United States, although I predict it will actually be higher due to the lower volume and having to print the money outside of the country. Today, a 100 Bolivar note is worth around 3 US cents, which therefore is below the cost of production. In simple terms, if a note is worth less than 10 US cents, the local treasury, and with it the country, is losing money. In reality, that value will be even lower, as the average lifespan of paper money is 6 years and inflation consequently plays an important role
A call for a blockchain solution
In a world of blockchain and mobile phone technologies, it is time to think about changing the need for having to print money. Such a change bears many advantages. Not only do the costs of currency creation go down to zero, but changes can be implemented much faster, as the volume of available digital money is decided through a variable in a computer program.
This is something the world has experience in. Multiple countries are already extensively using digital money. For example, in Kenya, where the volume of digital money is equivalent to 44% of the country’s annual GDP (with 100 million transactions per year), the currency is called M-Pesa and is handled and created by a cell phone company. This means that 44% of the GDP is only indirectly controlled by the government. It can be even dangerous as a cell phone company is controlling a large part of how an economy is run; for example, the company can theoretically increase transaction fees on specific transactions for products it supports.
Taxes vs fees
In a digital economy, transactions are usually linked to fees. This means that not only are no costs linked to producing and transporting money, but digital money can generate a recurring revenue to the government.
Recently, two hurricanes caused huge damage to many countries in the Caribbean. To rebuild the country, the government in the Turks and Caicos reacted fast and intelligent by lifting import duties on vital supplies. Most of these countries are still struggling to rebuild their economies, and many have been forced to ask for financial support from the United States or Europe. If these countries had a digital monetary system, they could easily increase the available money supply for a time and in this way, rebuild the country much faster. For example, they could increase the volume by $10 million to rebuild the electrical grid immediately.
Will this increase in money supply not have an inflationary effect? Maybe, although I doubt it. Other policies have a much stronger effect on inflation. Two countries currently have hyperinflation: Zimbabwe and Venezuela. Zimbabwe proved that, in an economy heavily reliant upon commercial farming, taking all the farms away from the commercial farmers and giving them to people who don’t know how to farmer causes the complete collapse of the economy. There things got so bad that the last run of bank notes wasn’t worth the price of the ink necessary to print the next run of notes. Venezuela’s mistake was anti-marketism rather than that much vaunted local flavor of socialism. A bad economic policy can create inflation much faster than an increase in money supply. According to Richard Vague in his article “Rapid money supply growth does not cause inflation,” he reviewed 47 countries, generally from 1960 forward, and found that high inflation does not follow a rapid increase in money supply.
In a traditional economy, the money is put into circulation through banks. In a digital society, this will change, as users or citizen will have direct access to the system and will no longer have to go to a bank. While there can be disadvantages, the advantages are immense. On one hand, intermediaries become obsolete, and on the other hand, people who previously could not open a bank account will be able to access this system through, for example, opening an account through a cell phone application. Simple.
I often read that blockchain currencies can lead to increased corruption, because the crypto system is decentralized and anonymous, and it is difficult to trace who gave how much to whom on which day. This is incorrect in the case of a cryptocurrency controlled by the government, as such a system will not be anonymous and payments can easily be traced. It is digital and therefore traceable. Cash, on the other hand, is not traceable. In a transparent system, corruption involving money can be almost eliminated.