The Future of Money in the Information Age
edited by James A. Dorn
The information revolution has changed the lives of many.
Instead of making expensive long-distance phone calls, people can now
converse by e-mail for pennies, and instead of having to go to physical
locations such as libraries to gather information, we can now use the
World Wide Web to find what we need. The changes have already been
extraordinary and promise to be even greater in the future.
One area that has just begun to be affected by the information revolution is the financial industry. The impact that the Internet and similar techologies will have on it is going to be enormous. James A. Dorn, Cato's vice president for academic affairs, in his preface to the new Cato book The Future of Money in the Information Age, makes that point clear. "The basis of the new monetary universe is sand rather than a Federal Reserve note. The advent of e-money offers the possibility of privatizing the supply of currency, paying interest on small deposits, and making offshore banking accessible to many individuals. In the future, government fiat money may disappear as people choose to hold digital money issued by private firms rather than non-interest-bearing paper money issued by central banks."
The book, edited by Dorn, contains an introductory essay by the editor, 16 papers that were presented at Cato's 14th Annual Monetary Conference on May 23, 1996, and 2 new essays, one by Federal Reserve chairman Alan Greenspan and one by Lawrence Gasman, director of telecommunications and technology studies at the Cato Institute. Contributors examine the regulatory climate; the impact of e-money on taxation, banking, and monetary policy; and the problem of maintaining privacy in the new monetary universe.
In the first section, "Electronic Commerce and Monetary Evolution," Lawrence H. White of the University of Georgia argues that if issuers of digital currency could promise privacy and safety and pay interest, there would be sufficient reason for individuals to use digital money instead of government fiat money. That change, White maintains, would not necessarily mean the end of central banking and a shift from the current monetary system. Digital money could be made convertible to U.S. dollars.
Alan Greenspan, in the lead essay in the second section, argues that the Federal Reserve must not act too hastily to regulate e-money. In the case of the electronics payments system, Greenspan emphasizes that "the private sector will need the flexibility to experiment, without broad interference by government. Government action can retard progress, but almost certainly cannot ensure it."
David Chaum, founder and managing director of DigiCash, argues that a system of "data fascism," in which every electronic transaction is traceable, is clearly not desirable, but neither is perfect anonymity. He maintains that blind-signature technology, the use of encryption to generate secure digital signatures, offers the solution to that problem. With blind-signature technology, Chaum argues, the crimes associated with the use of paper currency--extortion and bribery, for example--will be "no more likely than they are with checks today." On a similar topic, William Melton, founder of CyberCash, maintains that technological advances in cryptography will create greater trust and efficiency in the electronic payments system and enable financial markets to provide greater liquidity without inflation.
In their essay, Jerry Jordan and Edward Stevens of the Federal Reserve Bank of Cleveland maintain that e-money will eventually crowd out fiat money. They contend that financial innovation is likely to reduce the demand for bank reserves to near zero, but that will not, and should not, necessarily reduce the Fed’s control over the money supply. "The reliability of monetary policy," they argue, "depends not so much on the amount of [central-bank] money demanded as on the predictability of that amount."
In contrast, Catherine England of George Mason University argues that a system of private competing currencies would be sustainable and far more desirable than the current system of central banking. In the future, she predicts, "what is 'money' will be determined by what buyers and sellers accept and use as money rather than by government definitions." And that, she maintains, will be a positive change because the "history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception."
