FYI... Louis ------------------------------ From: turf@gelac.lasc.lockheed.com (Brian McInturff) Wed, 14 Dec 94 06:31:57 EST To: libernet@Dartmouth.EDU Subject: E-cash is here 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 Louis James Center for Market Processes 4084 University Dr., St. 208 Fairfax, VA 22030 tel: 703-934-6970, e-mail: cmp@gmu.edu