The Cash of the Twenty-First Century
D. Friedman and Kerry L. Macintosh
live in a world of monopoly moneys--in two senses. First, most people
find it convenient to use the same money as their neighbors; thus,
money is usually a geographic monopoly. Second, nations have found it
profitable to seize control over the money presses. As a result, the
geographic monopoly is generally held by the money issued by the
government that rules that particular piece of geography. The end
result is familiar to us all: Americans use dollars; Japanese use
yen; Britons use pounds; and so forth.
we move into the twenty-first century, online commerce and electronic
money will grow in importance. These and other technological
developments will undermine money monopolies, and increase the
likelihood that systems of competing moneys--both public and
begin by outlining the three basic functions of money, and the
characteristics that suit money to those functions. Next, we discuss
whether the monopoly moneys that are currently fashionable serve
those functions well. We then explore the changes that online
commerce, electronic cash, and other technological developments will
bring to trade and money. We evaluate five alternative paths that
monetary evolution may take in the future, and conclude that
competing public and private moneys are the most likely development.
Nations may oppose the emergence of private currencies, but will face
difficulty in maintaining their monopolies.
The Functions of Money
serves three basic functions: medium of exchange, unit of account,
and store of value (Smith & Wilson, 1997, p.
first the primary function of money--as a medium of exchange,
a way of avoiding the problems of barter. Suppose a contractor who
builds houses wants to buy food. In a world without money, he must
find someone who wants a house and has food--a lot of food, perhaps a
year’s worth or more--to offer in exchange. If a law professor
wants a car, she must find someone who wants to learn law and has a
car to give in exchange. This “double coincidence problem”--the
problem of finding someone who has what you want and wants what you
have--makes barter a clumsy form of trade, especially in a
complicated society with a wide variety of goods and
solves the double coincidence problem because it is a single good
that everyone will accept in exchange for goods or services. Thus, a
contractor or law professor can sell services to one person, and use
the money to buy food or a car from someone else.
order to serve as an effective medium of exchange, the money must be
widely accepted within the trading community. Our present system of
monopoly moneys meets that need reasonably well, although not
perfectly. If an American wants to make a purchase within the United
States, she knows that other Americans will accept her dollars. If,
on the other hand, an American travels to Europe on vacation, she
quickly learns that dollars are not so readily accepted overseas. She
must visit the exchange booth, and make the transition to another
system of monopoly money.
forms of money also have an additional characteristic that is useful
in a medium of exchange: anonymity. Traders wish, for a variety of
reasons, to control information about their activities (Friedman,
19__). Commodity moneys (e.g., gold coins) and paper
currencies (e.g., dollar bills) allow them to do so. Cash is
anonymous because it does not create transaction records. (One can
take down the serial numbers of notes used to make a payment, and
then attempt to trace them, but few people take the time and effort
to do so.) By contrast, credit cards and checks are not anonymous,
because they create a paper trail that can be traced.
second function of money is as a unit of account, a way of
stating and comparing prices and values. Here again, monopoly moneys
have had an advantage until now, since it is easier to compare the
prices charged by alternative sellers if they are all expressed in
the same units. For example, there is some evidence that the
introduction of the Euro is reducing price variance across European
markets by making comparison shopping easier between sellers located
in different countries (Macintosh, 1999, p. 665 n.33).
routinely make comparisons across time as well as space, judging the
price of an item by prices they have seen for similar goods in the
past. Hence an additional desideratum for a unit of account is price
stability. If the value of money changes rapidly, it becomes
difficult to use information about past prices to judge present
prices, raising the information costs of transactions. A further
reason for that desideratum is that a unit of account is used not
only to measure prices but to keep track of financial accounts--among
other things, to make it more difficult for firms, or the employees
of firms, to cheat their stockholders or creditors. That, too, is
harder to do if the value of the unit of account is changing
third and final function is as a store of value. Few people in
a modern society hold very much of their wealth as currency, since
other financial assets pay interest and currency does not. However,
in order to use money as a medium of exchange, we must hold some.
Thus, we desire money that maintains--or better yet increases--its
value. Ideally, money should either consist of a commodity with
stable or rising value, or be produced by an issuer that has an
interest in maintaining stable or rising value. For the same reason,
it is also desirable that money be difficult to
Monopoly Government Moneys: The Current
present conditions, monopoly government moneys serve two of the three
functions described above. Most transactions, at least in large
countries, occur between people using the same medium of exchange.
Most people observe most prices in units of account they can
government moneys perform the third function less well. Governments
are reasonably good at preventing counterfeiting, and have the power
to regulate money so that its value remains stable. But governments
also have the power to inflate their own moneys, and often an
incentive to do so—to cover deficits, redistribute wealth, and
stimulate the economy, among other goals (Solomon, 1996, p. 66).
Inflation and hyperinflation are ever-present risks of the current
system. And when government money becomes unstable enough to make
price comparisons difficult, its ability to function as a unit of
account is also impaired.
is some historical evidence that a competitive system does a better
job of maintaining the value of money than a monopoly system. Carlo
Cippola, in one chapter of a book on money and banking in the middle
ages and renaissance,
discusses what he calls “the dollars of the middle ages,”
the gold currencies that at various period served as the standard
coin for international transactions. He argued that the nations
issuing those currencies were constrained by the fear that if they
debased their currency, traders would shift to an alternative—from
the Bezant to the Dinar, or from the Florin to the Ducat.
another chapter Cippola offers evidence that silver coins, which were
to a significant degree national monopoly currencies, inflated over
time through debasement, although at a low rate by modern standards,
while gold coins did not. The obvious explanation, although not the
one he offers, is that the local issuers of silver coinage could to
some degree enrich themselves at the expense of their citizens by
debasing the coinage; the issuers of gold coinage, sometimes the same
states, could not, because gold was used largely for international
trade and they were constrained by the competition of alternative
gold coinages. That example suggests that a system of competing
moneys might provide more, not less, stability than a system of local
competing system of private moneys is also possible. Lawrence
H. White has documented the positive free banking experience in
nineteenth century Scotland. There, free entry and competition
yielded a stable banking and monetary system (White, 1984, P. 23-49).
However, the stability of a free banking system is constrained by the
fact that the notes, though privately issued, are debts denominated
in a monopoly money that is subject to government
famous economist Friedrich A. Hayek thought free banking did not go
far enough. He proposed a more radical solution: private companies
should issue moneys based on commodity standards of their own
choosing (Hayek, 1976, p. 21). He believed competition would give
private issuers adequate incentive to maintain the value of their
currencies (Hayek, 1976, p. 42-44).
Electronic Money and Online Commerce
payments by physically transferring objects, whether gold coins or
paper currency, works reasonably well in the physical world, but
encounters serious problems in online commerce. There is no practical
way to pass a twenty-dollar bill through a modem. Instead, we must
transact using intangible claims to payment.
cards allow us to do this. Unfortunately, credit cards pose certain
disadvantages, for sellers and buyers alike. On every transaction,
sellers must pay percentage fees that erode their profit margins.
They face the risk that buyers may attempt to reverse charges after
receiving goods or services. (Macintosh, 1999, p. 663). Meanwhile,
buyers who transmit credit card numbers online risk capture by
interlopers. Even though federal law strictly caps liability for
unauthorized charges, a stolen number can give a criminal the
foothold he or she needs to commit identity theft. Finally, and
perhaps most significantly, credit card transactions leave a paper
trail that can result in a loss of privacy for sellers or
money can provide the online economy with an alternative payment
system. A government--or a private company--can issue “coins”
or “notes” in the form of electronic information. Each
coin or note represents a claim against the issuer, and can be
redeemed in exchange for traditional money (e.g., dollars),
commodities (e.g., gold), or any other agreed item of value.
electronic money is just information, geographical constraints become
irrelevant. It is as easy to transmit electronic cash to someone on
the other side of the world as to someone next door. Moreover, once
electronic money is loaded onto the computer chips embedded in “smart”
cards, it can be used in real as well as virtual
a world of electronic money, sellers need not fear that buyers might
reverse credit card charges after goods have been shipped or services
received. Providers of online services can charge for access as it
occurs, using automated transaction systems. Buyers can trade free of
the worry that credit card numbers may be stolen.
unlike credit cards, which leave a paper trail, electronic money can
be designed to provide traders with the anonymity they crave. Imagine
an electronic currency that is encrypted so securely that the
parties--seller, buyer, and issuer--cannot identify each other. Such
fully anonymous electronic cash surpasses the privacy obtained with
paper bills, since a properly-designed set of encryption protocols do
not allow the equivalent of serial number tracing. 
the advantages, it seems likely that one or more electronic
currencies will come into use for online transactions--and, having
done so, will also become available for real space transactions
through payment technologies such as smart cards. But will the
currencies be monopolies--and if so, within what boundaries? Will the
issuers of the currencies be governments, or is the time ripe for
private companies to enter the money
How Will Technology Affect Money?
answers to these questions depend on technology. To explain why, we
discuss four factors: (1) the Internet and online commerce; (2)
computers that can perform complex calculations; (3) electronic
currency that is easy to create, manage and redeem; and (4) increased
bandwidth leading to real-time audio and video. Each factor will play
a role in determining the future of money.
- The Internet
makes online commerce possible; and online commerce makes it easy
to trade with people who are far away. As a result, geography and
nationality are becoming less important to trade and traders.
discussed above, our current system of monopoly moneys is based on
the premise that most trade takes place within geographic and
national boundaries. Online commerce attacks that premise at its
core. Americans trade, not necessarily with other Americans, but with
the Japanese, who, in turn, trade with the British, and so forth. In
the past, most international trade was handled by firms with the
organization and expertise to handle currency conversions—although
still at a cost. In the future, a large and increasing amount of it
will be by private individuals, for whom the cost and inconvenience
is considerably greater.
electronic money for the online environment is a challenge. What
medium of exchange will be widely accepted within a global
trading community? What unit of account will allow global
traders to compare prices with ease and confidence?
the absence of effective world government, it is hard to imagine who
might issue a global monopoly money. The European Union encountered
substantial economic and political difficulties in adopting the euro,
even though its member states had similar economies and cultures.
Surely, the United Nations could not manage the same feat for the
entire world. Many--perhaps most--nations would balk at granting the
U.N. the power to fund activities through the (electronic) printing
press and inflation.
different solution seems likely in the short term. Nations are well
aware that they earn seigniorage--that is, interest--on coins and
paper bills in circulation. Thus, as trade goes electronic, nations
will have ample incentive to issue their own monopoly moneys in
the Internet is flooded with alternative national moneys, traders may
find that exchanging from one to another is inefficient. Over time,
they may come to prefer one currency that seems to enjoy the widest
acceptance and greatest stability. Eventually, that one currency will
emerge as the de facto global monopoly money. For example,
dollars may come to dominate online commerce, just as English has
become the language of international trade, travel, journalism and
development will threaten the seigniorage income and national
prestige of other countries. Governments may respond by enacting laws
to prevent citizens from using electronic money other than their own.
But such restrictions will be difficult to enforce in a world of
competing moneys and strong encryption.
traders from other countries may also resist the electronic dollar.
At best, they may view the electronic dollar as an offensive form of
cultural imperialism; at worst, they may find themselves powerless to
intervene, as the United States uses its currency to advance its own
economic and political agenda (Macintosh, 1998, 758-64). If one
country has an effective monopoly over the issuing of world currency,
there is no reason to expect it to use that monopoly in the way that
best serves the needs of the people using its money. National
monopoly currencies have often been mismanaged for political reasons;
the risk should be even higher for an international monopoly
currency, since it is unconstrained by competition and most of the
people using it have no vote in the elections of the issuing
get around such problems, traders may shift to a system of
competing currencies based on the same
(Selgin & White, 1994). Such a system will sidestep the need for
a common medium of exchange or unit of account. To illustrate,
suppose multiple issuers (whether public or private) produce
electronic cash using gold as the base commodity. The currency of
reliable issuers will exchange at par--one Microsoft gold unit for
one Netscape gold unit, for example. The currency of unreliable
issuers (those unwilling or unable to redeem their own currency) will
trade at a discount. Moneys trading at a discount will be less
convenient and valuable, and will go out of use rapidly.
technology makes it easier to convert from one unit of account to
another. Electronic money is easy to store and transmit, reducing
the cost of exchange. These developments will lessen the need for
money monopolies, whether public or private.
far, we have assumed that a common medium of exchange and unit of
account will tend to be the most efficient form of money for the
Internet. In other words, we have assumed money monopolies will
continue to exist.
However, another path is possible, if computers eliminate or reduce
the transaction costs of making conversions among different units of
how a currency-transparent browser may work in the future. A Japanese
seller lists the prices of the goods he sells in yen on his web page.
A buyer in the United States accesses the page, seeking information
about goods and prices. His browser, noting that the prices are in
yen, automatically contacts the web site of his bank, checks the
current exchange rate, and makes the conversion from yen to dollars.
In other words, the seller writes his prices in yen, but the buyer
reads them in dollars--thus overcoming the unit of account problem.
our buyer decides to make the purchase, he still must convert his
dollars to electronic yen--the requested medium of exchange. His bank
will charge for this service. However, since it is relatively easy to
store and transmit electronic information, the cost of operating an
exchange service for electronic money should be much lower than the
cost of running an exchange service for paper money. Presumably, the
bank will react by lowering the exchange fee charged to the buyer. A
drop in exchange fees may reduce the pressure to use a common medium
this example, both buyer and seller are using government moneys. This
is the most likely scenario, given that most transactions still take
place in real space, using paper money. If a consumer has to keep
paper dollars in her pocket for everyday purchases, she may be more
likely to prefer electronic dollars for online purchases.
as the years go by, an increasing fraction of transactions will occur
online, and more and more real space transactions will take place
using smart cards and other electronic payment systems. This raises
the possibility that Americans may one day hold electronic yen for
use online--and in America.
radically, electronic money may pave the way for the world Hayek
envisioned. Private companies may begin to issue electronic
currencies that are based on different commodity standards. Moneys
designed for general use will compete directly with each other for
market share. Meanwhile, “niche” currencies will
circulate within particular trades. For example, if an online
community trades primarily in software, it may prefer currency that
maintains a stable purchasing power relative to software (Macintosh,
1998, p. 744-50).
either case, private companies will obtain a competitive edge by
designing their moneys for anonymous use. Many traders will prefer
currencies that protect against the prying eyes of both private
parties and government officials (Friedman, 1996, p.
many competing moneys, public or private, can commerce accommodate?
One of us (Friedman) believes that dozens, hundreds, or even
thousands of moneys are possible--not only in virtual space, but in
real space as well. He points out that the equivalent of a currency
transaction browser is harder to produce in a store than online, but
not impossible. For example, a customer might stroll through Safeway
wearing virtual reality goggles that automatically convert prices to
the desired units of account, or a lapel pin that informs the store’s
pricing computer what units that particular customer wants to see
prices displayed in. The other of us (Macintosh) is somewhat more
conservative. She speculates that most traders will continue to be
human beings--at least, in the short term. She believes that, for
psychological reasons, the average human being will be more
comfortable working with five or six moneys than five or six hundred.
might governments react to such monetary proliferation? As explained
above, some may ban competing moneys in an effort to protect
seigniorage and sovereignty. Moreover, governments are likely to
react badly to anonymous moneys that make it harder for them to
monitor compliance with tax, immigration, employment, or other laws
that affect trade. Realistically, however, the very feature that
makes such moneys threatening--encryption--may make it impossible for
governments to enforce the ban.
Technology will create conditions that tend to support monetary
stability. First, ease of entry into the business of issuing
electronic money will promote a healthy competition. Second, improved
communication will make it easier to check the reputation of the
issuer. Third, the ability to return electronic money for redemption
at the speed of light will reduce the ability of issuers to engage
successfully in hyperinflationary schemes. As a result of these
technological developments, private moneys will become more
attractive to the public.
return to the third function of money: store of value. People prefer
moneys that are stable. As evidence of this, consider what happens in
countries where the official local currency is inflated. Traders
begin to use foreign money as their preferred medium of exchange.
Efforts to outlaw foreign money are often ineffective, and tend to
create black markets. In some cases, foreign money emerges as a de
facto unit of account. For example, at one time it was common for
long-term rentals in Israel to be priced in dollars rather than
common charge leveled against the idea of private moneys is that they
will not be stable. Private companies will enrich themselves by
accepting value from customers, and then inflating the money supply
(Selgin & White, p. 1734-35).
way to reduce this risk is through competition among issuers. As
explained above, this is how private banks established a stable
monetary and banking system in Scotland during the eighteenth
competition is more likely in a world of electronic money, for
two reasons. First, entry into the business is relatively easy and
inexpensive. Issuers need not invest in gold, or manage bulky paper
bills. Second, online technology drastically reduces the cost of
information and communication. A user on one side of the globe can
check the reputation of an issuer on the other side (or have an
intelligent software agent check it for him in a fraction of a second
while deciding whether to accept a proffered
way to reduce the risk of inflation is through contract. An issuer
can promise to redeem its money at a minimum level of value expressed
in commodities or other currencies (Macintosh, 1998, p. 751-55). Here
again, technology makes the contractual solution work better. If an
issuer begins to inflate its electronic money, disgruntled users can
return the money for redemption at the speed of light (Browne &
Cronin, 1995, p. 105-06).
Increased bandwidth may lead to the rise of virtual communities
with their own idiosyncratic
bandwidth increases, and most Internet users gain access to real-time
audio and video, we may witness the emergence of virtual communities
defined by common interests or beliefs (Friedman, 1996, p. 216-17,
222-23). Given the nature of the Internet, these virtual communities
will have members from a variety of different countries. Rather than
employ the official currency of any one nation, members may prefer to
invent their own electronic money for circulation only within the
community. Use of the idiosyncratic currency will help the community
to form, express, and maintain its own identity. Moreover, by
encouraging members to trade with each other, the currency will build
solidarity (Macintosh, 1998, 788-94).
Five Possible Futures for Money
the foregoing arguments are correct, money faces five possible
- A world with the
same monopoly moneys we have now, but in electronic form.
Governments will enact laws outlawing the use of alternative
currencies, in an effort to protect seigniorage revenues, bolster
national prestige, and control the economic lives of their
citizens. However, these laws will be hard to enforce.
- A world with a
single electronic money for online commerce. This outcome could be
difficult to achieve in the absence of effective world government.
However, in a competition among different nations, one
currency--say, the electronic dollar--may emerge as the victor.
The resulting unitary system will eliminate the costs of currency
conversions, but might result in a poorly managed money and may be
perceived as culturally and economically oppressive.
- A world with a
single commodity base for a system of competing electronic moneys.
This system combines the benefits of competition with the
simplicity of a common standard. Its disadvantage is that the
single standard may not be the right one--and could be hard to
- A world of multiple
competing currencies, some public and some private, with a variety
of different bases, exchanging at changing rates. The optimal
number of currencies may depend on how effective computers are at
reducing or eliminating the costs of conversion and exchange. This
system will promote competition not only among moneys, but also
among monetary standards. If for some reason one standard turns
out to have advantages over another, issuers can shift
- A world with
multiple currencies and standards, each standard being identified
with a virtual community. This outcome is more likely if improved
bandwidth fosters the development of strong virtual
anxious to preserve their powers and prerogatives may push for
outcome 1. Powerful nations or groups of nations, like the United
States or the Europe Union, may push for outcome 2. However, we
conclude that technological developments, along with the
self-interest of users and enforcement difficulties, are going to
push us towards outcome 3, outcome 4, or possibly, given the
appropriate social developments, outcome
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[location of publisher]:
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. I haven’t checked what is in which of
Of course, the official money of a powerful country--say, the
dollar--could be used as the common base. But this solution is
subject to the same objections discussed immediately above. In
particular, if the United States government inflates the dollar,
dollar-denominated claims will suffer the same fate.