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Quote:The Future of Money In the Information Age

The Cato Institute's 14th Annual Monetary Conference, "The Future of Money in the Information Age," was held in Washington on May 23. Economists, bankers, entrepreneurs, and Federal Reserve Board officers discussed how electronic cash and other new technologies may change monetary activities and policy. Speakers included Lawrence H. White, professor of economics at the University of Georgia; Richard Rahn, president and CEO of Novecon Ltd.; Rosalind Fisher, executive vice president of VisaNet Services for Visa U.S.A.; William Melton, founder and CEO of CyberCash; David Chaum, founder and managing director of DigiCash; Bill Frezza, president of Wireless Computing Associates; and Scott Cook, cofounder and chairman of Intuit. Excerpts from their presentations follow.

Lawrence H. White: Suppose that analog currency (coins and paper money) does disappear from common circulation. Will that usher in a world without money, as some writers have suggested? No. Rather, it will "merely" undo the current government monopoly of currency. It will return us to a world where the commonly seen money is privately issued, as it was in sophisticated economies 150 years ago where gold coin was seldom seen outside bank vaults despite being the ultimate money of redemption for deposits and bank notes.

Richard Rahn: The electronic age, with virtually instantaneous international financial transactions and with encrypted confidential smart cards substituting for money, will make the taxation of capital transactions, interest, and dividends increasingly problematic. In an age in which most people can transfer money and pay bills with an ordinary telephone, enforcing taxation of those types of transactions will become virtually impossible. The cost of trying to tax them may well exceed the revenue collected and certainly will exact a price in terms of lost economic efficiency and lost privacy rights that exceeds the benefits of their continued taxation.

Government authorities cannot stop that worldwide revolution, because too many knowledgeable people are part of it. Censorship and regulation will not work, because progress in developing the means of evasion will always be far ahead of those who are trying to restrict it. In the same way that most totalitarian governments have largely given up trying to control the flow of information, because technology has made it an impossible task, governments will need to realize that the old central bank monopolies on the issuance of money will also go the way of the buggy whip.

Government officials have two choices: to redesign their tax and monetary systems to reflect technological reality or to try to create a system in which every investment and every expenditure every person makes throughout his life are known. In the new world of monetary freedom there is no middle ground. Either the government will know everything, or the government will only know what is voluntarily revealed. An all-knowing government is doomed to fail, practically and politically, and attempts to impose a "Big Brother" government could impoverish the nation and trample our liberties.

Most Americans are not aware of the broad powers that the government already has to pry into and control their monetary affairs. Many regulations have been enacted as part of the war on drugs and a general attempt to control "money laundering." The Treasury and other government departments have been holding meetings to determine the nature and form of regulation that they will attempt to impose on what they refer to as "cyberpayments." The danger is very real, but the battle for financial freedom is not yet lost. To win that battle, advocates of liberty will of necessity need to be involved with tax reform. The abolition of the income tax and its replacement with a low-rate noninvasive tax will take away much of the rationale for income and expenditure monitoring by the government.
In the age of the cyberpayment, we cannot both keep the present income tax system and enforce it and keep our liberty and privacy. Let us all work together to get rid of the income tax rather than rid ourselves of liberty.
On the other hand, in view of the highly regulated environment in which our members operate and the numerous safeguards that are already in place with respect to depository institutions, we are concerned that additional regulation in this area will stifle the innovations that are being developed. At the extreme, subjecting new payment products to government regulation could result in their premature death.

William Melton: In the consumer world, all that matters is liquidity--reliable, convenient, liquidity. Liquidity (the speed with which a marker is accepted as a valid medium of exchange) has a strong psychological component; indeed, its principal element is trust. Liquidity can only be produced from domains of trust, of which there are two kinds: the domain of actuarial trust and the domain of guaranteed trust.

Life insurance is an example of the former. Because they rely on actuarial tables, life insurance companies can trust that they will have a certain investment horizon for your policy, depending primarily on your age. Another example is a major grocery chain that is willing to accept checks from strangers because actuarial experience has shown that less than one-half of 1 percent of those checks will go bad.

As a national and, in fact, an international economy we are moving and must move toward actuarial trust. Indeed, modern financial markets spring from the sharing of risk and are actuarial by nature. Even the largest guarantors (governments) are subject to the statistical evaluations of those actuarial domains. Whereas the guaranteed domain of trust is compatible with hierarchical environments, the actuarial domain of trust is frequently found in a market economy.

Relying on an actuarial domain of trust, aggressive banks now routinely issue liquidity to customers whom they have never seen, on a nationwide basis. With the help of massive databases, sophisticated scoring techniques, and carefully delineated actuarial domains, banks issue billions of dollars of liquidity based solely on actuarial trust.

If chains of trust are the primary ingredient of liquidity, then the technology of digital signatures and digital certificates is indeed a breakthrough that allows maintenance of ever more subtle, more complex, and yet still reliable chains and domains of trust. The economic impact is to provide greater liquidity. Yet that additional liquidity is provided under the tight feedback loops of the market and thus is, on the whole, noninflationary.

The challenge of the marketplace and the newer forms of electronic liquidity is to continually lower transactions costs, continually increase convenience, and thereby enable new markets heretofore not possible. With strong actuarial feedback it is also the job of the market to match the supply of the new forms of liquidity with an equivalent supply of goods and services from both old and new markets.

I am extremely optimistic about the enabling power of increasing efficiency and convenience in payments systems and in the granting of liquidity. I am doubly optimistic about the power of the marketplace that is being born on the Internet, a marketplace where geography has largely evaporated and time is measured in baud rates. I believe that those combined efficiencies can bring society a new age of plenty and opportunity. We live in exciting times.

David Chaum: There are two different scenarios for electronic cash. One is what we might call a fully traceable world--others might call it Clipper cash or data fascism. Making ordinary consumer payments totally traceable by government would curtail all kinds of activities, peaceful and not so peaceful.

One way to do it--familiar from science fiction--would be to require the consumer to identify himself by some kind of biometric, like a fingerprint or retina scan. Once identified, the consumer could access his account and conduct transactions. Of course, there would be central records of all transactions, and a customer could be locked out of the system at any point.

Another way is a little trickier: to create a chip that is in effect a portable bank officer. Like a Clipper Chip, it would be a little black box that everyone would have to carry with him in order to access his financial accounts and records. The consumer would have no way of knowing just what was on the chip; it might be sending out encrypted messages revealing his transactions to all kinds of parties. It might even be programmed to discriminate against certain people or to enforce arbitrary rules. The consumer's lingering doubt about what's on that chip would have a chilling effect on society. I hope neither of those systems is implemented in the United States.

Another scenario would involve anonymous transactions. Of course, we already have anonymous transactions--using paper bank notes. Many people like paper dollars, but those dollars are very expensive. Perhaps 2 to 3 percent of the gross national product is tied up in maintaining the bank note payment system. Also, the paper dollar system makes possible counterfeiting, extortion, bribery, tax evasion, money laundering, and other criminal activities.

Some people think we have to strike a balance between the anonymous and fully traceable systems. But I think we can instead develop a system that offers the best of both worlds. We would use the line-signature payment technology that is being launched by Deutsche Bank and other major European banks and that we have on chip cards and in electronic malls. Under such a system, instead of receiving digital money from your bank, you would create randomly on your own computer serial numbers that could be hidden in a layer of encryption that only your own computer could unlock. Then you would submit money forms to your bank to be validated, remove the layer of encryption, and no one would know who you were when you spent that money. You would know whom you were paying, and you could always retroactively reveal the recipient of the funds. Thus extortion, bribery, and black-market trading would be no more likely with electronic cash than they are with checks because the recipient could always be traced by the payer and because the money would have to be deposited into a bank to be verified as valid. Each person's total revenue would be known--and subject to taxation--but not how he spent his money or his total wealth.

It will never be possible to transport wheat or steel across cyberspace, and real economies will always continue to produce and consume wheat and steel. But any product of man's mind can be communicated as a stream of digital bits. And it is exactly this sector of our economy--the information industries broadly defined--that is growing the fastest and producing the wealth on which the value of money will someday be based.

The pressing question, then, is, How might a political economy based on exchanging intangibles in cyberspace differ from a political economy based on exchanging wheat or steel in the real world?

First and foremost, privacy in cyberspace will not be an abstract political right based on the vagaries of geography, government policy, or cultural norms. In the future, electronic privacy will be an absolute algorithmic certainty. The day will inevitably come when the amount of effort required to breach the shield of privacy provided by low-cost, widely available encryption will exceed the value of such an attack by so many orders of magnitude that it will not be economically feasible to base public policy on such invasions. The governments of the world will have to live with the fact that they will be impotent to pry into many private economic affairs.

Second, cyberspace differs from our everyday world in that coercive force cannot be projected across a network. That is a discomfiting revelation to most legislators, who like to pretend that their power rests on the consent of the governed rather than the barrel of a gun. Sooner or later, however, any authority that asserts sovereignty over actions that take place entirely within cyberspace must resort to acts of physical coercion or threats thereof.
In practice, that means that ordinary people will be able to create and exchange wealth away from the prying eyes and grasping hands of sovereign powers. Imagine the consequences if a significant fraction of the world's most productive people engaged in unrestrained commerce within an economic system inherently immune from government scrutiny. The wealth produced--that is, the underlying products of their creative output upon which the value of money will be based--may never exist in the physical world. And since that wealth may not have to be exchanged for government fiat currency in order to be useful, there may be scant opportunity to seize it.

That possibility is going to be treated as a grave threat by most national governments. A battle for cyberspace most certainly lies ahead, and you can expect entrenched bureaucrats to do everything they can to demonize the new technology by associating it with pornographers, child molesters, and drug-money launderers. Imagine what would happen if the productive efforts of millions were invisible to the Internal Revenue Service, gone from the GNP statistics, blind to the balance of trade, and immune to social or industrial policy mandates.

Cyberspace, which promises to shield individuals from the ravages of coercive force and allow them to conduct their affairs in secure anonymity, will bring forth a burst of creative human genius not seen since the last time a new world was discovered. If Atlas Shrugged were written today, imagine how it might end.


So when the paper money will disappear?
And when the money as a measure will disappear?
It is just as likely that money will disappear as it is that computerization will lead to the "paperless office."