Friction, fungible, checks

A naive model of actors in the economy treats them as a directed graph of buyers and sellers. Goods and services are exchanged for money along each link. In the primitive barter economy good and services flow both ways. In a barter economy it quickly becomes apparent that some goods and services can be exchanged more easily; that property is known as fungiblity. Chocolate is more fungible, bicycles made for two are less so.

The whole point of a cash economy is that it, like other standards, eliminates from the negotiation between buyer and seller some one variable and allows the negotation/barter to proceed more quickly. It lowers friction. We don’t live in a purely cash economy there are lots of alternative payment schemes. I have yet to met a small auto repair shop that won’t give you a discount for paying by check rather than credit card. If you really want to make them happy ask about the discount for cash. Years and years ago Click and Clack – from the radio show – would only take cash.

I hadn’t noticed before that the check clearing system can be viewed as a machine for converting checks which aren’t particularly fungible into bank deposits which are somewhat more fungible. In a sense the check clearing system is entirely powered by the differential between the fungiblity of the two systems.

The check clearing system has five players: the buyer and the seller, their two banks, and the clearing house. Back in the day the bankers would close at 3pm and after a bit they’d adjour to the pub to do their clearing. Presumably ale lowered the friction. If you arrange these five players in a circle the checks flow around the circle one way and the bank deposits flow in the other.

Of course all the other payment systems have an analagous infrastructure. We have assorted nouns for that infrastructure for example standard, platform, network each of which illuminates a different aspect of that structure. Because of the coordination required by the clearing house these systems tend to condense into powerlaw distributed systems with a few very powerful players.

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