Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing

Abstract

The payments system, the means of conducting transactions in an economy (Hume's oil), has undergone tremendous change over the centuries. Commodity money was replaced by fiat (usually paper) money, reducing transportation and storage costs. The invention of checks to supplement fiat money further reduced transportation and storage costs, lessened the problem of theft, and provided a record of transactions. Most recently, the advent of electronic payment instructions has greatly reduced the time and handling costs associated with checks. Between the great evolutionary leaps forward that gave rise to new forms of payment instructions, smaller degrees of gradual evolution occurred within each payment mechanism, refining and improving them, and reducing the costs associated with their use.