By The Perryman Group

An easy to use, efficient method of purchasing goods and services is essential to a well-
functioning economy. Payment methods have evolved throughout human history, from barter
to primitive forms of money, to full-bodied coins and precious metals, to bank notes, to
national fiat currency and checks. Each advance has brought with it more economic efficiency,
productivity, and integration. More recently, various types of electronic payment mechanisms
have become an increasingly large share of total transaction volume. Electronic payments are
highly efficient, offering advantages such as speed, reduced costs, and accuracy. These
enhancements have contributed significantly to the expansion of the US economy, increasing
liquidity and stimulating personal consumption.

The essential rationale for the theory that improved efficiency in transactions processing
generates economic benefits lies in two basic concepts, both of which have been known since
long before economics emerged as a discipline. Initially, the basic notion that economic agents
(such as consumers, producers, and investors) respond to incentives is relevant. As
transactions costs are reduced, there is an incentive to engage in exchange more frequently.
This notion has been widely accepted for many millennia. In fact, Aristotle wrote extensively
about it.

The second key idea is the “equation of exchange,” which notes that the product of the
quantity of money and its turnover rate (velocity) equals the total volume of activity that can be
supported. This expression was actually posited by astronomer Nicolaus Copernicus in the
early 1500s and explored at length by philosopher John Locke in the late 17th century. It was
formalized into economics in the early 19th century and, although often identified with the
Monetarist school of thought, is actually fundamental to all major strains of economic analysis.
For present purposes, it illustrates that improvements in the technology available to process
transactions allows more activity to occur with a given money supply.

As would be expected, the velocity of money has tended to generally improve over time as new
innovations are implemented (there has been a recent cyclical reversal in this pattern, as the
Great Recession brought massive infusions of money during a period of declining output
followed by very sluggish growth). By far the most significant contributor to the improvements
in recent decades has been the introduction of the various aspects of the electronic payments
system.

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