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Banking's (And Money's) Digital Future

By Shann Turnbull

Will national banks become irrelevant dinosaurs with the introduction of digital cash? Will there be a role for central banks?

The future of banking is dependent upon the future of money. And the future of money promises that it will become digital information, like everything on the Internet.

In fact, bank money has been kept in a digital form since the introduction of computers. The transfer of money in digital form is an even older phenomenon, dating to telegraphic messages using Morse and other codes. Modern codes are now used to make transfers from one bank computer to another via phone lines and radio links.

In a few years, nearly everyone with a bank account will have access to technology superior to what is currently in use by banks for making secure electronic transfers. The home TV and/or computer will be able to transmit as well as receive coded messages. Electronic purses, in the form of smart cards, will store digital cash which will be replenished in the home through a computer. In this way, homes will obtain their own automatic teller machines.

Fundamentally, money provides a means of communication. In modern market economies prices are used to signal what people want to buy and sell. One great advantage of organizing production, consumption, saving and investment through communication of prices is that this represents a simple signal which can be communicated globally and be widely understood. However, it is becoming less relevant every day to use a single number to signal what people want to buy and sell and to consummate a transaction.

Price information, per se, is growing obsolete because:

  1. Price is increasingly determined by the nature and quality of the goods or service traded; more information thus needs to be communicated to consummate a transaction.
  2. Goods and services are becoming ever more varied, with consumer-determined options requiring more information.
  3. Increasingly, buyers require information about the integrity and stability of the vendor with a view to guaranteeing performance and providing after-sales service; vendors likewise want information about purchasers in order to provide after-sales service.
  4. Transactions are increasingly dependent upon the provision of credit directly by the vendor or through a third party such as a bank and/or credit card organization. This requires that more information be communicated by the various parties both before and after transactions are made.
  5. Buyers and sellers are becoming increasingly interested in obtaining information about the content and process of producing the goods and services. Such concerns are not just those of conservationists, greens and ethical investors but also of governments.
  6. The cost of providing information to initiate and consummate transactions has been rapidly decreasing with the ubiquitous spread of digital communication.

The relevance of money in mediating economic transactions has also diminished as a result of the substantial decrease in the cost of providing nonmonetary information. It is becoming increasingly feasible and attractive for interest groups and consumer loyalty programs to establish both their own information networks and units of value to mediate transactions.

Home computers have facilitated the creation of Local Exchange Trading Systems with their own units of value in numerous communities over the last 15 years. Home computers have also made it practical to establish and maintain local paper currencies, as illustrated in Ithica, N.Y. More significantly, communication technology is widening the use of barter cards created by commercial organizations.

Coinciding with this bottom-up alternative money and banking system is the top-down alternative evolving from loyalty programs of major corporations. These programs provide credit to purchase the goods and services of the promoters and their strategic allies. Green stamps and fly-buy points issued by airlines and their associated rental car and hotel chains are an example. These credits are redeemable in real goods and services, unlike the artificial credits created by governments and their central banks.

Technology will make it possible for new types of mediation between buyers and sellers to produce alternative currencies. An example cited in World Citizen News for September 1992 involved the financing of renewable power generators by issuing energy dollars redeemable by customers. Other examples of ecological currencies with negative interest rates were described in WCN for June/July 1994.

The Internet is making it possible for all types of interest groups and commercial strategic alliances to mediate their transactions directly and/or allow new types of non-bank intermediaries to mediate their transactions. Non-bank credit card organizations illustrate how such intermediaries emerge.

The problem for banks is that they see themselves as being in the financial service business rather than mediating a communication business. This problem is reinforced by the nature of their physical and intangible assets which they have developed over the years. Home self-service banking will make many bank assets and staff redundant. However, cyber-banking will require new types of services, institutions and employment.

It was unthinkable, even 10 years ago, that a small software producer like Microsoft could challenge the dominance of IBM. Likewise, it is today unthinkable that the whole banking industry could suffer a decline similar to IBM's.

Just as it is impractical for governments to attempt to control pornography on the Internet, it will also not be possible for governments to control financial information. Transfers of value will occur directly between buyers and sellers, savers and investors, without being mediated by a bank. In this way central banks will also be by-passed. The advance and spread of banking technology to every home and radio-linked portable computer will introduce a degree of financial deregulation far beyond that envisaged by most economists.

Decentralized cyber-banking will introduce real competition in the financial markets to discipline governments and change the role of their central banks. Existing private banks will wither unless they can provide new types of financial mediation which will be required for cyber-banking to develop in a meaningful way.

The good news for governments is that they will be forced to reclaim the role of creating official money and credit for their central banks and for licensed banking systems. This will allow governments to obtain interest-free credits to substantially reduce the cost of infrastructure projects.

The bad news for governments is that their official currencies will be competing with numerous unofficial cyber-currencies. Central governments will no doubt continue to force the use of their official currency as "legal tender" for collecting taxes and paying for government purchases. However, governments will be forced to compete with other domestic currencies to purchase official or unofficial foreign currencies.

The value of official money relative to other currencies will depend solely upon the government sector's terms of trade with the rest of the world. Governments will lose the ability to capture by fiat all the foreign exchange earning of the private sector in their national economy. This will force governments to balance their budgets in order to maintain the value of their currencies relative to unofficial currencies being used in the domestic economy.

Market forces will replace government monetary policy, disposing of the settings and levers so popular with politicians. Inflation will be controlled by competition between currencies, as described by Nobel Laureate Professor Frederick Hayek in his 1976 monographs, "Choice in Currency: A Way to Stop Inflation" and "Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies."

Besides introducing competing concurrent currencies, cyber-banking will also make it feasible to introduce money with quite different properties-for example, money which requires a fee for its usage to create negative interest rates and/or money with a use-by date. Historical experience with these types of money indicates that cyber-banking will drive down interest rates and deliver other benefits.

However, if you own shares in an existing bank, you may be at risk. Shann Turnbull is an economic consultant to the World Government of World Citizens. He can be reached at P.O. Box 266, Woollahra, Sydney, NSW 2025, Australia.


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