Will Cyberspace Change Monetary Policy?

July/​August 1996 • Policy Report

Will the information revolution lead to monetary institutions that protect freedom and privacy and limit the growth of government? That and other questions were the focus of the Cato Institute’s 14th Annual Monetary Conference, “The Future of Money in the Information Age,” held at the F. A. Hayek Auditorium on May 23.

This year’s conference, organized by Cato’s vice president for academic affairs James A. Dorn and supported by Corporate One, E*Trade Securities, Inc., and Forbes ASAP, was unique in a number of ways. For the first time, the Institute set up nine televideo sites across the United States — including New York City, Chicago, San Francisco, and Silicon Valley — featuring live video and audio interaction with the speakers. Furthermore, proving the Institute’s commitment to expanding its presence on the Internet, the luncheon speech by Scott Cook, chairman of Intuit, was broadcast live on the Internet. In all, the conference attracted more than 400 participants and was covered by, among others, The Economist, Forbes ASAP, Dow Jones TV, the Financial Times, Investor’s Business Daily, and Business Week.

In his opening address, Rep. Michael Castle (R‐​Del.), chairman of the House Subcommittee on Domestic and International Monetary Policy, stated that “the emerging electronic technologies and new business opportunities … will drive a worldwide commercial revolution projected to rival the Industrial Revolution.” However, if that projection is to become a reality, Castle warned, the private sector will have to prevent government from acting on “the natural bureaucratic imperative to regulate” the marketplace.

Fortunately, the emerging electronic technologies are already working on the side of private enterprise. According to Cato adjunct scholar and University of Georgia economist Lawrence White, the information revolution, by dramatically lowering transactions costs, will allow millions of U.S. citizens to have interest‐​bearing accounts with offshore banks, thereby creating pressure to remove inefficient regulations in the U.S. banking system. “Such a development, combined with anonymity, would enhance the prospects for the public’s turning away from government‐​issued notes and currency,” said White.

Privacy was also one of the main topics of discussion. Bill Frezza, president of Wireless Computing Associates, argued that “electronic privacy will be an absolute algorithmic certainty,” thanks to cryptology. Frezza dismissed government efforts to forestall the emergence of private‐​sector encryption as futile and concluded that “governments of the world will have to live with the fact that they will be impotent to pry into many private economic affairs.”

One of the leading cryptographers in the world, David Chaum, chairman of DigiCash, explained how cryptography can make E‐​money and E‐​commerce anonymous and thereby stimulate economic growth and protect freedom and privacy.

In the opinion of William Melton, CEO of CyberCash, as we move toward that system, the trust that makes liquidity possible will be based more or actuarial experience and less on a hierarchy of guarantees. The new system will be rules based and global, thus eliminating the moral hazard problem that hierarchical systems present. Melton concluded that the need for reliable tracking and statistical feedback in actuarial systems will not cause any loss of personal privacy because those systems are “interested in the epidemiological behavior of the actuarial group as a whole, rather than individual behavior.”

In his luncheon speech, Scott Cook, who called the conference audience “one of the most financially sophisticated audiences on the planet,” referred to money and payments systems as social conventions, subject to a great deal of inertia. Thus, instead of new payments systems that emerge overnight, we may well see existing payment systems evolve to deliver the benefits the Information Age makes possible.

In his concluding remarks, Dorn contrasted the current monetary universe, based on market‐​socialist principles, which is discretionary and highly politicized, with an alternative monetary universe, based on market‐​liberal principles, where rules “will have to be transparent, equally applied, and consistent with individual freedom if people are to have trust and confidence in the cybereconomy.” That new universe, which will appear in the marketplace and not as a result of a government decree, will reduce institutional uncertainty, Dorn added.

The role of the Federal Reserve and monetary policy in the Information Age was also discussed. George Selgin, a Cato adjunct scholar at the University of Georgia, suggested that the emergence of E‐​money would make it easier for the monetary authorities to adopt a rules‐​based monetary regime. “E‐​money,” Selgin said, “amounts to a technological end run, circumventing long‐​standing restrictions on private bank notes.” If that is the case and the stock of money is fully privatized, Selgin argued, the Federal Reserve could adopt a rule of maintaining the banking system reserve ratio constant.

The prospect that central bank notes and coin will not be in much demand in the 21st century was also raised by Jerry L. Jordan, president and CEO of the Federal Reserve Bank of Cleveland. Jordan said that “just as fiat money replaced specie‐​backed paper currencies, electronically initiated debits and credits will become the dominant payment modes, creating the potential for private money to compete with government‐​issued currencies.”

Other speakers included Rosalind Fisher of Visa U.S.A., R. Alton Gilbert of the Federal Reserve Bank of St. Louis, Richard Rahn of NOVECON, Bert Ely of Ely & Company, Sholom Rosen of Citibank, Catherine England of George Mason University, David Cronin of the Central Bank of Ireland, and Cato’s chairman William Niskanen.

The papers delivered at this conference will be published in a Cato book.