[506] in libertarians
E-Cash Economist Article
daemon@ATHENA.MIT.EDU (Vernon Imrich)
Thu Dec 15 10:00:06 1994
To: libertarians@MIT.EDU
Date: Thu, 15 Dec 1994 09:58:40 EST
From: Vernon Imrich <vimrich@MIT.EDU>
Date: Wed, 14 Dec 94 06:31:57 EST
From: turf@gelac.lasc.lockheed.com (Brian McInturff)
Subject: E-cash is here
To: libernet@Dartmouth.EDU
Reprinted without permission from alt.politics.libertarian >>>>>>>>>
In a recent issue of _The Economist_ (26 November 1994 pages 25-30)
there is an article entitled _Electronic money: so much for the cashless
society_ which makes the claim that "the transformation of the Internet
from a huge virtual community into a huge virtual economy may herald
the age of electronic money - and with it, headaches for traditional
banks and regulators." The article refers to Internet as "that rare
thing, a vast market visibly hungry for a fairly well defined product."
It describes various experiments with forms of electronic payment and
discusses their possible long-term implications.
The Economist article quotes Lee Stein, the Californian entrepreneur
behind First Virtual Holdings (which claims to be the world's first truly
electronic bank) as asserting that "unless the Internet embraces commerce,
it runs the risk of going the way of CB radio. If people aren't making
money, they won't add value and this won't work."
The implications of such a change would be likely to run far deeper than
their effects on information gathering. One of the points discussed in
the Economist article is whether digital cash should be a proxy for
money or whether it should be acceptable as money in its own right.
The latter would, according to the article, be unpopular with governments
who have always regulated banking activities carried out within their
countries. "If people who log on to the Internet are localised
geographically and thus subject to a particular set of national laws,
the traffic that they create on the Internet is not very obviously
anywhere at all." Looking further ahead the article suggests "ideally,
the ultimate e-cash will be a currency without a country..."
If digital cash does become a reality it is unlikely to remain a mere
proxy for real money indefinitely. For a detailed discussion of the
lessons of history see:
Davies, Glyn _A history of money from ancient times to
the present day._ Cardiff: University of Wales Press, 1994.
696 pages ISBN 0 7083 1246 2.
(At this point I should declare an interest - the author is my father).
In his _History of Money_ Glyn Davies avers that "money can perform many
functions in similar ways and similar functions in many ways. As an
institution money is almost infinitely adaptable... Money designed for one
specific function will easily take on other jobs and come up smiling. Old
money very readily functions in new ways and new money in old ways: money
is eminently fungible." Yet that does not mean that new money cannot have
profound new effects for he points out that "once a new money habit is
adopted... or an existing monetary instrument is given extended use... a
permanent lift is given to the potential money supply, thus acting as a
`financial ratchet', more easily raised than reduced."
Paper money was originally simply a proxy for the real thing. British
banknotes still carry the phrase "I promise to pay the bearer on demand
the sum of x pounds" (where "x" is the denomination of the note) with the
signature of the chief cashier of the Bank of England underneath.
However, one unintended effect of the adoption of paper money was to make
hyperinflation possible (e.g. the Continentals of the American Revolution,
the Confederate banknotes of the US Civil War, and German notes after
World War I). China which invented paper money had abandoned it, before
its widespread adoption in the West, for that very reason.
In the final chapter of the book the question of "free trade in money
in a global cashless society" is considered. The economist Friedrich
Hayek
advocated the "de-nationalisation" of money i.e. the removal of all legal
obstacles preventing individuals using whatever form of money they wanted.
In that way, so he claimed, the market would produce the best forms of
currency. Although Hayek was an important influence on many right wing
politicians, including Margaret Thatcher, no government has been willing
to
go that far in giving up the state's control of money. However, the
Economist
article suggests that the advent of electronic cash could lead to
privately
issued currencies competing with official state currencies.
The last time the state's monopoly over money creation was seriously
weakened was when paper money was introduced and quite apart from the
economic effects, that also helped to cause profound political changes
as the following quotations from _A History of Money_ show.
"Technical improvements in the media of exchange have been made for
more than a millenium. Mostly they have been of a minor nature, but
exceptionally there have been two major changes, the first at the end
of the Middle Ages when the printing of money began to supplement the
minting of coins, and the second in our own time when electronic
money transfer was invented... The first stimulated the rise of banking,
while the second is opening the way towards universal and instantaneous
money transfer in the global village of the twenty-first century."
"One of the most significant but insufficiently noted results of these
two major kinds of invention is the fundamental reduction they bring
about in the degree of governmental monopoly power over money. When
coins were the dominant form of money, monarchs were jealous of their
sovereign power over their royal mints. Paper money allowed banks to
become increasingly competitive sources of money, a development which
led not only to significant macro-economic changes but also facilitated
contemporary revolutionary constitutional changes. It was no accident
that the Whigs, who supported the limited constitutional monarchy of
William and Mary were prominent in promoting the Bank of England."
(page 646)
"Similarly in the era of electronic banking `national' moneys are
becoming increasingly anachronistic as millions of customers,
irrespective of their country of domicile, are eagerly offered a
variety of competing financial institutions in a variety of competing
currencies. They are spoiled for choice - and national money monopolies
are thereby also being `spoiled', in the sense of being reduced in
effectiveness. The monetary authorities always try to reassert their
monopolistic power - in economic jargon, to make sure that money is
exogenously created - as opposed to money supplies produced elsewhere
by the working of market forces - or `endogeneously' as the economists
describe the process."
(pages 646-7)
"The fact that more than half of the total money supply was now being
created, not by the nint under the dictate of the monarch, but rather
by the London money market and provincial bankers gave rise to the
most profound constitutional consequences. First, in order to carry
out his more burdensome civil and military duties, the monarch, after
a painful but vain struggle, had been forced to call parliaments annually.
Secondly because of the state's need to supplement taxes regularly and
substantially with various forms of short-, medium- and long-term
borrowing, the state had been forced to take into account the views and
interests of the moneyed classes and the nature of the institutions
which its borrowing had very largely brought into being. The national
debt not only created the Bank of England but also virtually created
the London money and capital markets in recognizably modern form long
before an equity market in industrial shares became of importance."
(page 280)
"For the first time in history money was being substantially created,
not ostentatiously and visibly by the sovereign power, but mundanely
by market forces..."
(page 281)
If experiments with digital cash prove successful the ramifications may
ultimately extend to all forms of economic activity and have profound
implications for the development of society in every country of the globe,
just as the development of paper money did.
Roy Davies Telephone 0392 263884
The University Library FAX 0392 263871
University of Exeter
Stocker Road Internet Roy.Davies@exeter.ac.uk
Exeter EX4 4PT
UK
<<<<<<<< Reprinted without permission from alt.politics.libertarian
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