| From: | "J.D. Falk" <jdfalk@****.CAIS.COM> |
|---|---|
| Subject: | Cybereconomics and government. (fwd) |
| Date: | Thu, 26 Jan 1995 17:35:50 -0500 |
political DigitaLiberty mailing list is *also* digital money. Here's a
good posting on the subject....
---------- Forwarded message ----------
Date: Thu, 26 Jan 95 14:04:13 EST
From: QUANTALYT@***.com
To: Multiple recipients of list <digitaliberty@*******.com>
Subject: Cybereconomics and government.
Subj: Basic Economic Changes.
To: DigitaLiberty@*******.com
Basic Economic Changes in International Finance, cont. The Coming Creation
of Private Money and the Expansion of Credit, or, The Loss of Control by The
Federal Reserve Over Money and Credit Creation in Favor of Control by
Individuals.
By Arthur J. Carp (quantalyt@***.com)
Copyright, 1995. All rights reserved.
The following is a continuation of a series of articles discussing
repercussions of the launch of the cybereconomy.
The cybereconomy is rapidly moving towards reliable two-way encryption of
messages, which is initially intended to create a secure enough environment
to permit credit card use over the Net. However, this may prove to be, over
the intermediate and long term, a minor portion of the cybereconomy of the
Net. To understand what will be coming to the Net, we need to look backwards
to the 19th century, and the development of money in the United States.
Prior to the creation of the Federal Reserve banking system in 1913, banks
chartered as National Banks had the right to issue their own paper currency,
backed by holdings typically of gold, but also by silver. First City Bank,
the predecessor of Citibank, was a major issuer of notes, samples of which
may be seen on public display at the Federal Reserve Bank of New York.
People accepted this money for goods and services on faith - the belief that
they could always go through the exercise of bringing it to the issuing bank,
and redeeming (exchanging) it for the appropriate quantity of gold or silver,
depending on the exchange terms of the note.
The creation of the Federal Reserve banking system, aside for providing a
lender of last resort to the banking system, ended the practice of the
private issuance of money. Instead, Federal Reserve Notes were, and are
issued. Originally, these were backed by gold (Gold Certificates); later,
after the U.S. dropped the Gold Standard during the Depression, they were
backed by silver (Silver Certificates), and in 1964, when the U.S. dropped
backing by silver, they became backed by the full faith and credit of the
United States of America. Clearly, money issued by fiat, based on faith,
does, in the case of the United States, work. How well is a matter of some
dispute, but nevertheless, it does provide a medium of exchange accepted by
hundreds of millions of people world-wide.
The creation of the Net, and secure two-way communications on it, will change
all of this. Instead of the issuance of money by the Federal Reserve, and
the creation of credit by banks and other financial intermediaries,
individuals and businesses will be able to create money and credit at will.
Money creation can be a simple as Customer A buying from Vendor Z, and paying
for it in "A" notes, which can be redeemed at "A" for goods or
services.
While this may at first look very similar to a barter arrangement, it is
not. First, the transaction is not a spot transaction for each side, which
would be the hallmark of classic barter transaction, where each side
exchanges something other than a promise to pay. (A promise to pay is
money.)
Second, the type of money which is created through this transaction can have
either wide currency (widely circulated), or restricted. At the narrowest
level, the private money ("cyberbucks", "cycash") created through a
private
two-way transaction is only of use between the two counterparties. However,
if the issuer of cyberbucks has a wide variety of vendors and customers, and
agrees to allow its cyberbucks to be transferrable, then a new form of money
supply can, and will, develop. Note that there can be different classes of
money from the same issuer, with different levels of transferability to other
parties. Restricted cybermoney from a given issuer would have a lesser
buying power than broadly transferable cybermoney. The cybermoney can, and
will be, issued securely using now available two-way encryption algorithms
which guarantee authenticity and amount.
If the issuer were widely accepted, such as a mythical
The Bank of Bongo, to take an example, Bongo Bucks could be issued against
reserves of Dollars. The percentage of reserves would be unregulated for
cyberbucks would be unregulated, and unregulatable by the Federal Reserve,
unlike the situation of physical banks. Just as people send checks, rather
than cash through the mail, Bongo Bucks would serve as payment. But unlike
checks, which are returned to the issuing bank and account for payment, Bongo
Bucks, assuming that they are unrestricted, or minimally restricted, would
freely circulate from user to user for payment of goods and services
initially on the Net.
However, there is no systemic reason why payment for off-Net goods and
services could not be done using cybercash from our mythical issuing bank.
Again, because two-way encryption guarantees authenticity and amounts,
cycash can move without crossing paths traditionally looked at by taxing and
monetary regulatory authorities. Thus, we now have the means to develop a
completely parallel world-wide economy, or at least wherever the Net reaches,
without possible successful intervention by governments. There are several
very strong incentives for individuals and business to do so: no taxes on
transactions, including income tax, sales tax, use tax, excise tax, or
tariffs; heightened privacy; and for users of cybercash in countries with
restrictions on owning foreign currencies, a way to protect assets from
depreciation caused by governmental actions. An excellent example of the
need to hedge against government actions is the recent Mexican financial
crisis, which has cost Mexicans forced to hold Pesos by their government,
about 40 per cent of the value of their holdings when compared to the U.S.
Dollar. Untraceable cycash would have been highly welcome instead of Pesos
as a medium of exchange, and of savings.
With the rise of cycash and a cybereconomy, even if it does not have linkages
initially to the outside world, there will also doubtlessly develop a pool of
savings, and bank-like intermediaries which will take deposits of cycash, pay
interest on them, and lend the cycash out for investments in Net-based
projects. Some examples of purely Net-based projects might be database
programming; database population and quality control; communications setups
such as the creation of World Wide Web pages for business and associations;
database searching; software development; and publications. These
activities are done on computers for computer driven activities. However,
once these types of activities are reasonably well established on the Net,
there will inevitably be a developmental step in the form of "leakage" of
cycash into the physical world for the purchase of computer hardware and
software packages. From this type of linkage we can readily envision a
broader "leakage" into other physical world goods and services, paid for with
cycash.
With the rise of bank-type institutions on the Net, there will also be a
disproportionate increase in fraud, unless investors of cycash insist on
audited financial statements with electronic signature verification of the
auditors. However, this will be difficult to do; most of the "banking"
servers are likely to be either offshore, physically located in areas legally
unreachable to U.S. or other governments' regulatory or tax bodies, or only
available anonymously. Auditing will therefore be difficult to outright
impossible, as will government regulation, as noted above. Therefore, it
will not take long for cyberfraud to develop as a new class of crime, without
the legal recourse and punishments available in the physical world. In spite
of this barrier to acceptance, because cycash can be encrypted to insure
authenticity and amount, it will develop as a medium of exchange (money) and
credit.
As these cycash funded financial institutions grow, and as individuals amass
cyberwealth, we can expect to also see an explosion in money supply and
credit, which will also effect the physical world, via the above discussed
"leakage". This, in turn, means that at some time in the future, the Federal
Reserve Bank's traditional inflation fighting tools to ration money and
credit will cease to function well. To effect the cybereconomy, especially
in its early days when rapid growth will be the norm (growth rates in excess
of 10 per cent, per annum), the Fed and other central banks will have to
boost rates far beyond what would be necessary to cool off the physical
economy. I envision this happening in the late 1990's, as the cybereconomy
by that time should have a sufficient large internal development that leakage
will be fairly wide-spread.
Because of the central bank authorities' inability to regulate activity on
the Net, the traditional tools of central banking will cease to be very
effective at all probably by the year 2010, by which time the physical world
component of the world economy will be unable to tolerate the type of
interest rates needed to attempt to slow down credit and money growth in the
cybereconomy. Gold and silver, as a result, should make a comeback in the
physical world as currencies and stores of purchasing power. One way to
negate this scenario would be the rise of an oligarchy of cyberbanks whose
cycash is universally accepted, and who also are collectively sufficiently
self-disciplined and in agreement to target money and credit growth levels -
not interest rates on cyberdeposits. Since ANYONE will be able to issue
cycash with various levels of acceptance (assuming that the issuer permits
his cycash to be freely convertible and transferable),
