The Cash of the Twenty-First Century

I. INTRODUCTION We live in a world of monopoly monies--in two senses. First, most trade takes place between people who are physically close to each other; thus, money is usually a geographic monopoly. Second, nations have found it profitable to seize control over the money presses. As a result, governments are the primary issuers of money. The end result is familiar to us all: Americans use dollars, Japanese use yen, the British use pounds and so forth. As we move into the twenty-first century, on-line 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 monies--both public and private--will emerge. We begin by outlining the three basic functions of money and the characteristics that suit money to those functions. Next, we discuss whether the monopoly monies that are currently fashionable serve those functions well. We then explore the changes that on-line 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 monies are the most likely development. Nations may oppose the emergence of private currencies, but will face difficulty in maintaining their monopolies. II. THE FUNCTIONS OF MONEY Money serves three basic functions: medium of exchange, unit of account and store of value. Consider 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 services. Money 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. In order to serve as an effective medium of exchange, the money must be widely accepted within the trading community. Our present system of monopoly monies meets that need reasonably well, although not perfectly. For example, if an American wants to make a purchase within the United States, she knows that other Americans will accept her dollars. Indeed, federal law makes dollars legal tender for all debts, public and private. (1) If, on the other hand, an American travels to Europe on vacation, she quickly learns that dollars are not accepted overseas. She must visit the exchange booth and make the transition to another system of monopoly money. Most 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. (2) Commodity monies (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. The second function of money is as a unit of account, a way of stating and comparing prices and values. Here again, monopoly monies 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. …