2018-02-23 18:58:03 +00:00
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---
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created_at: '2017-12-24T00:03:15.000Z'
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title: Electric currency could trash cash (1999)
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url: https://www.theguardian.com/technology/1999/nov/04/onlinesupplement
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author: monort
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points: 74
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story_text:
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comment_text:
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num_comments: 43
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1514073795
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_tags:
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- story
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- author_monort
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- story_15997072
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objectID: '15997072'
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---
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2018-03-03 09:35:28 +00:00
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He is the darling of Wall Street, credited with engineering America's
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longest post war economic expansion. But the man who holds the future of
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the world economy in his hands, Alan Greenspan, the head of the US
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central bank, is under threat.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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New technology has already changed the face of high street banking:
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branches have closed as customers have moved to telephone banking
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services and now the internet. The next internet revolution will put
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central bankers like Greenspan and Britain's Eddie George out of
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business. And the P45 may not be that far away.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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Forget the euro, the pound in your pocket could soon be replaced by
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virtual currencies and digital payment systems. Once money moves online,
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it moves out of the control of central banks, crippling their ability to
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run the economy. Greenspan and George will no longer be able to conquer
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inflation by putting up interest rates because holders of virtual money
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will be unaffected by changes in the cost of borrowing in the real
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economy.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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George's deputy, Mervyn King, has already seen the future. At a
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gathering of the world's top central bankers in Wyoming this August, he
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warned his colleagues that once they lost their monopoly over printing
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money, "the successors to Bill Gates would have put the successors to
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Alan Greenspan out of business."
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Online, the revolution has already started. Cyber loyalty schemes like
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[Beenz]('http://www.beenz.com'), [ipoints]('http://www.ipoints.co.uk')
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and [Flooz]('http://www.flooz.com') pay customers who visit internet
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sites in credits which can be spent online. Air miles, the original
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shopping loyalty scheme, is branching out from flights to other rewards.
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One [Canadian site]('http://www.airmiles.ca/english') offers everything
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from propane stoves to copper pans to collectors of its reward points.
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The British founder of Beenz.com, Charles Cohen, admits his brainchild
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isn't really money yet. It can't be downloaded or spent in the
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non-electronic economy and its purchasing power is limited by the number
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of sites which will accept it.
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But he foresees a world in which private electronic money becomes more
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popular than official money issued by central banks. "It will be less
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than a decade before private companies start issuing their own
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currencies," says Cohen. The consequences will be profound. "I wouldn't
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want to be working for the Inland Revenue when it happens."
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Technology is already making notes and coins redundant. We pay our bills
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over the phone or by direct debit. Plastic is replacing cash and cheques
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- cumbersome and expensive means of payment. But plastic money is still
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under control of the conventional banking system - at the end of the
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month when the bills arrive, we settle them through a transfer from a
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bank account.
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The real revolution will occur, according to King, when companies no
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longer need to use the banking system to settle their bills with each
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other. At the moment, when firms make big financial transactions, they
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settle them through the banking system. Because central banks set the
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rules for high street banks - how much money they need to have in their
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own bank accounts with the Fed or the Bank of England in relation to
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their outstanding liabilities - Greenspan and George have leverage over
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the whole financial system.
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When inflation threatens, central bankers react by making credit harder
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to get which slows the economy down. They raise the interest rates on
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loans to high street banks which pass on the increased costs to their
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customers. This has a knock-on effect throughout the rest of the
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economy, even though the reserves held with central banks are a very
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small part of the total money supply.
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But when companies can settle their bills with each other
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electronically, without needing to use the banking system, then central
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banks no longer control the levers of the economy. Digital payments
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systems will allow companies to instantly transfer wealth, without the
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risk of default. Once there is no need to use the conventional banking
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system, there is no need to use national currencies either.
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Imagine a world where Microsoft has its own currency - called Bills
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perhaps - backed by the wealth of the company. Companies trading with
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Microsoft could decide whether to invoice in Bills or dollars.
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Individuals might prefer to be paid in Bills if they think that
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Microsoft money will be less inflation-prone than the pound or the
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dollar. Using existing smart card technology, Bills could be downloaded
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into electronic wallets, which would allow them to be used in the real
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economy instead of cash or cheques.
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For the libertarian right, private money is a long-held dream which the
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internet may finally provide the technology to fulfill. "Money does not
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have to be created legal tender by governments. Like law, language and
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morals, it can emerge spontaneously. Such private money has often been
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preferred to government money, but government has usually soon
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suppressed it," wrote Frederich Hayek, 50 years ago.
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Legal tender - government control over printing money - is a fairly
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recent development in most countries. In the US, private banks issued
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money until the creation of the Federal Reserve in 1913. The Bank of
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England has held a monopoly over printing notes and coins since 1921,
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but the government did not control the money supply until Threadneedle
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Street was nationalised by the post-war Labour government.
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For libertarians, the monopoly of central banks has been a disaster. It
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simply allows governments to cheat their citizens by eroding the value
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of their savings through bouts of inflation. If there were different
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types of money in circulation, consumers could choose which they thought
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was least likely to loose its value over time.
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"Ultimately, the competition for the standard of value should be no
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different to the competitive market of multiple providers we see for
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toothpaste or for shoes," writes Jon W Mantonis, author of Digital Cash
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And Monetary Freedom.
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The internet offers the chance for individuals to escape from the
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government's monopoly. Developers of e-cash can issue it easily to a
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wide number of people, encryption technology is moving on to allow
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privacy and security, and, as e-commerce grows, the spread of the
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digital currencies will be guaranteed. The internet is an international
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network, so it makes sense for someone to develop a global currency to
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use on it, which would protect consumers buying across national
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boundaries from swings in national currencies.
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The time for e-cash has come, according to Mantonis. "Neither the US
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dollar, nor any other governmental unit has gained a foothold in this
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new economy. The monetary landscape is ripe and wide open and private
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currencies should infiltrate now."
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So far, Hayek's dream has yet to be translated into reality. Most sites
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advertising e-cash or digital money are encrypted credit card schemes of
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various descriptions which offer consumers a chance to pay securely
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using existing national currencies. Beenz and Flooz are more truly
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e-currencies but are too limited in circulation to compete with money.
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The real revolution will come when a big firm with global brand
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recognition decides to establish a currency. A firm like American
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Express which already has a money substitute - travellers cheques -
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would be a natural starting point, according to Mantonis. By running its
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own currency - an Amex - it could charge lower fees to merchants
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accepting its cards. "American Express will gain clout from the name
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association and brand identification that accompanies a pricing system,"
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writes Mantonis.
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Amexes could even come to replace existing currencies in countries prone
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to hyperinflation. This is not as far-fetched as it sounds. Several
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Latin American countries are considering abandoning their own
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inflation-ridden currencies for the comparative stability of the US
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dollar. Only the colonialist overtones of adopting the greenback as
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their national currency are holding back countries like Argentina. There
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would be no such hangups about adopting a credible private currency.
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Private currencies threaten not only to overturn the rules for managing
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the economy, but also to transform the face of government. Once payments
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go digital, it becomes more and more difficult for states to trace them
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and extract taxes from individuals.
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As the tax base shrinks, it will be harder for governments to pay for
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the services we take for granted, from health care to defence. To
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persuade people to pay their taxes, governments may have to make the
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connections more obvious between what we pay the state and what we
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receive in return.
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There are huge hurdles to be overcome before e-cash becomes a reality.
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What will companies use to back their currencies and who will determine
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the exchange rate between new currencies and existing ones? Will the
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advantages of the new currencies really outweigh the complexities of a
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having more type of money in circulation? Will they be more inflation
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proof than government money or will companies succumb to the temptation
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to "borrow" from their customers by increasing the supply and eroding
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its value?
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The chief danger of private currencies will be that companies can go
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bankrupt, while governments rarely do.
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Tim Congdon, chief economist at Lombard Street says he finds the theory
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that national currencies are in danger of extinction rather implausible.
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"There is effectively a government guarantee on deposits with a central
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bank. If you leave your spare cash with a big company you don't have
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that guarantee," he says.
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But the prospects for Greenspan and George look a little uncertain. As
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King told his colleagues in Wyoming, central banks may be at the peak of
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their power. "Societies have managed without central banks in the past.
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They may well do so in the future."
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