hn-classics/_stories/1999/15997072.md

created_at	title	url	author	points	story_text	comment_text	num_comments	story_id	story_title	story_url	parent_id	created_at_i	_tags	objectID	year
2017-12-24T00:03:15.000Z	Electric currency could trash cash (1999)	https://www.theguardian.com/technology/1999/nov/04/onlinesupplement	monort	74			43					1514073795	story author_monort story_15997072	15997072	1999

He is the darling of Wall Street, credited with engineering America's longest post war economic expansion. But the man who holds the future of the world economy in his hands, Alan Greenspan, the head of the US central bank, is under threat.

New technology has already changed the face of high street banking: branches have closed as customers have moved to telephone banking services and now the internet. The next internet revolution will put central bankers like Greenspan and Britain's Eddie George out of business. And the P45 may not be that far away.

Forget the euro, the pound in your pocket could soon be replaced by virtual currencies and digital payment systems. Once money moves online, it moves out of the control of central banks, crippling their ability to run the economy. Greenspan and George will no longer be able to conquer inflation by putting up interest rates because holders of virtual money will be unaffected by changes in the cost of borrowing in the real economy.

George's deputy, Mervyn King, has already seen the future. At a gathering of the world's top central bankers in Wyoming this August, he warned his colleagues that once they lost their monopoly over printing money, "the successors to Bill Gates would have put the successors to Alan Greenspan out of business."

Online, the revolution has already started. Cyber loyalty schemes like Beenz, ipoints and Flooz pay customers who visit internet sites in credits which can be spent online. Air miles, the original shopping loyalty scheme, is branching out from flights to other rewards. One Canadian site offers everything from propane stoves to copper pans to collectors of its reward points. The British founder of Beenz.com, Charles Cohen, admits his brainchild isn't really money yet. It can't be downloaded or spent in the non-electronic economy and its purchasing power is limited by the number of sites which will accept it.

But he foresees a world in which private electronic money becomes more popular than official money issued by central banks. "It will be less than a decade before private companies start issuing their own currencies," says Cohen. The consequences will be profound. "I wouldn't want to be working for the Inland Revenue when it happens."

Technology is already making notes and coins redundant. We pay our bills over the phone or by direct debit. Plastic is replacing cash and cheques

• cumbersome and expensive means of payment. But plastic money is still under control of the conventional banking system - at the end of the month when the bills arrive, we settle them through a transfer from a bank account.

The real revolution will occur, according to King, when companies no longer need to use the banking system to settle their bills with each other. At the moment, when firms make big financial transactions, they settle them through the banking system. Because central banks set the rules for high street banks - how much money they need to have in their own bank accounts with the Fed or the Bank of England in relation to their outstanding liabilities - Greenspan and George have leverage over the whole financial system.

When inflation threatens, central bankers react by making credit harder to get which slows the economy down. They raise the interest rates on loans to high street banks which pass on the increased costs to their customers. This has a knock-on effect throughout the rest of the economy, even though the reserves held with central banks are a very small part of the total money supply.

But when companies can settle their bills with each other electronically, without needing to use the banking system, then central banks no longer control the levers of the economy. Digital payments systems will allow companies to instantly transfer wealth, without the risk of default. Once there is no need to use the conventional banking system, there is no need to use national currencies either.

Imagine a world where Microsoft has its own currency - called Bills perhaps - backed by the wealth of the company. Companies trading with Microsoft could decide whether to invoice in Bills or dollars. Individuals might prefer to be paid in Bills if they think that Microsoft money will be less inflation-prone than the pound or the dollar. Using existing smart card technology, Bills could be downloaded into electronic wallets, which would allow them to be used in the real economy instead of cash or cheques.

For the libertarian right, private money is a long-held dream which the internet may finally provide the technology to fulfill. "Money does not have to be created legal tender by governments. Like law, language and morals, it can emerge spontaneously. Such private money has often been preferred to government money, but government has usually soon suppressed it," wrote Frederich Hayek, 50 years ago.

Legal tender - government control over printing money - is a fairly recent development in most countries. In the US, private banks issued money until the creation of the Federal Reserve in 1913. The Bank of England has held a monopoly over printing notes and coins since 1921, but the government did not control the money supply until Threadneedle Street was nationalised by the post-war Labour government.

For libertarians, the monopoly of central banks has been a disaster. It simply allows governments to cheat their citizens by eroding the value of their savings through bouts of inflation. If there were different types of money in circulation, consumers could choose which they thought was least likely to loose its value over time.

"Ultimately, the competition for the standard of value should be no different to the competitive market of multiple providers we see for toothpaste or for shoes," writes Jon W Mantonis, author of Digital Cash And Monetary Freedom.

The internet offers the chance for individuals to escape from the government's monopoly. Developers of e-cash can issue it easily to a wide number of people, encryption technology is moving on to allow privacy and security, and, as e-commerce grows, the spread of the digital currencies will be guaranteed. The internet is an international network, so it makes sense for someone to develop a global currency to use on it, which would protect consumers buying across national boundaries from swings in national currencies.

The time for e-cash has come, according to Mantonis. "Neither the US dollar, nor any other governmental unit has gained a foothold in this new economy. The monetary landscape is ripe and wide open and private currencies should infiltrate now."

So far, Hayek's dream has yet to be translated into reality. Most sites advertising e-cash or digital money are encrypted credit card schemes of various descriptions which offer consumers a chance to pay securely using existing national currencies. Beenz and Flooz are more truly e-currencies but are too limited in circulation to compete with money.

The real revolution will come when a big firm with global brand recognition decides to establish a currency. A firm like American Express which already has a money substitute - travellers cheques - would be a natural starting point, according to Mantonis. By running its own currency - an Amex - it could charge lower fees to merchants accepting its cards. "American Express will gain clout from the name association and brand identification that accompanies a pricing system," writes Mantonis.

Amexes could even come to replace existing currencies in countries prone to hyperinflation. This is not as far-fetched as it sounds. Several Latin American countries are considering abandoning their own inflation-ridden currencies for the comparative stability of the US dollar. Only the colonialist overtones of adopting the greenback as their national currency are holding back countries like Argentina. There would be no such hangups about adopting a credible private currency.

Private currencies threaten not only to overturn the rules for managing the economy, but also to transform the face of government. Once payments go digital, it becomes more and more difficult for states to trace them and extract taxes from individuals.

As the tax base shrinks, it will be harder for governments to pay for the services we take for granted, from health care to defence. To persuade people to pay their taxes, governments may have to make the connections more obvious between what we pay the state and what we receive in return.

There are huge hurdles to be overcome before e-cash becomes a reality. What will companies use to back their currencies and who will determine the exchange rate between new currencies and existing ones? Will the advantages of the new currencies really outweigh the complexities of a having more type of money in circulation? Will they be more inflation proof than government money or will companies succumb to the temptation to "borrow" from their customers by increasing the supply and eroding its value?

The chief danger of private currencies will be that companies can go bankrupt, while governments rarely do.

Tim Congdon, chief economist at Lombard Street says he finds the theory that national currencies are in danger of extinction rather implausible. "There is effectively a government guarantee on deposits with a central bank. If you leave your spare cash with a big company you don't have that guarantee," he says.

But the prospects for Greenspan and George look a little uncertain. As King told his colleagues in Wyoming, central banks may be at the peak of their power. "Societies have managed without central banks in the past. They may well do so in the future."