Will a virtual currency, transferred over the Internet, make hard cash redundant? Charlotte Denny investigates
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 United States Federal Reserve, 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.
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 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. 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.
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. “I wouldn’t want to be working for the inland revenue when it happens.”
The real revolution will occur, says 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, Greenspan and George have leverage over the whole system.
When inflation threatens, central bankers 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. 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, such private money is a long-held dream.
“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 Thread- needle Street was nationalised by the post-war Labour government.
“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, and, as e-commerce grows, the spread of the digital currencies will be guaranteed.
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 – traveller’s cheques – would be a natural starting point, according to 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 dollar. Only the colonialist overtones of adopting the greenback as their currency are holding back countries like Argentina. There would be no such hangups about adopting a credible private currency.
The chief danger of private currencies will be that companies can go bankrupt; 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.”
ENDS