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Beginning of end for cash - World Money - Digital Money

3 articles on the future of money



by Wendy Vukosa - UK METRO, Dec. 20, 2000


IT COULD prove to be the death knell of notes and coins.

Singapore is to phase in e-money and force all its businesses to accept it as legal tender by 2008.

Financial transactions will be made using money stored on computer chips. Cash will be a thing of the past as money changes hands electronically using digital pulses transferred through mobile phones, hand-held computers and even watches.

A shopper will be able to point a mobile phone at an item to register the price. The phone would check the shopper's bank balance on the Internet and deduct the money from the account if it was told to buy the item. Singapore's government says the move will save a small fortune on the labour, security and transportation costs involved in making and moving notes and coins.

'The physical notes and coins will be a thing of the past,' said Low Siang Kok, currency director at Singapore's Board of Commissioners of Currency. .There's no point in fighting technology.

If you want to give your kids pockel money, you pass it to them by phone. They can use it for bus fares, in the school cafeteria, or whatever.' E-money will differ from credit or debit cards, which are commercial products issued by banks, he said, arguing thal it would also be safer to carry around and could be protected by passwords, codes and other security features.

Singapore's government is a strong believer in e-commerce and is setting up a high-speed broadband Internet network to link all homes, schools, businesses and government offices electronically.




FORBES MAGAZINE, November 1998


MUCH OF THE ECONOMIC turbulence in the world today comes from wildly unstable currencies. The whole Asian thing began with the collapse of the Thai baht in the summer of 1997. The hedge fund mess is also largely the fault of currency fluctuations. Why do we have close to 175 little currencies, few of which anybody trusts?

FORBES columnist and economist Steve Hanke is a well-known advocate and, indeed, architect of currency boards. A country with a currency board ceases to have an independent monetary policy and for all practical purposes ceases to have its own currency. It ties its currency to a major foreign currency—today either the U.S. dollar or the German mark.

Take the Argentinean peso. It still exists with a local hero's mug on it, but behind every single peso one U.S. dollar is held at the central bank, which has been stripped of most of its old powers. Locals and foreigners can freely exchange pesos for greenbacks at a permanently fixed one-to-one rate. Pesos are literally as good as dollars because the Argentinean central bank can't print an additional peso unless it receives another dollar to back it.

This imposes upon the currency board country the same kind of discipline the old gold standard did. A currency board doesn't do away with economic ups and downs, but it does eliminate the distortions caused by currency fluctuations. It makes cross-border investing a lot safer and more predictable.

Here FORBES Editor James W. Michaels quizzes Hanke on how currency boards work.


FORBES: Steve, why do we have these 175 silly little currencies, with their tendency to destabilize international trade and investment?

Hanke: Because the IMF has promoted the idea of independent central banks. But the world is moving toward having just a few currencies. Already as much as 70% of all U.S. currency and 40% of the German marks are being held abroad, mostly by foreigners who don't trust their own money. And more and more small countries are considering following in the footsteps of Bulgaria and Estonia, which have adopted currency boards, unifying their currencies with a strong anchor currency.

As this happens, we get back to where we were before World War I, when we had the gold standard. Virtually the whole world was on gold. We had a unified currency—gold. Most currencies could be redeemed for a fixed amount of gold. Today most countries have independent monetary policies. That wasn't the case under gold. We had stable prices with the discipline of the gold standard. About the only time you had financial crises was when you had a war or a revolution.

For the sake of those whose Econ 101 is rusty, explain how that worked.

If the government was shaky or maybe a country's economic policy wasn't headed in the right direction, gold would flow out of the country and go to New York or London. Since the local currency had to be backed by gold, the outflow of gold meant fewer units of the local currency would circulate, and that would shove your interest rates up and you went into a slump.

Hence you still had fluctuations and business cycles. But currencies were stable. For years the British pound was worth about five U.S. bucks. Pesos and francs and lire, you name it, were stable in relation to each other. When you invested abroad, you still had plenty of risks, but at least you didn't have the added risk of fluctuating currencies.

People say that the gold standard is something of a myth, that it didn't operate as well as those who are nostalgic for it say it did.

Well, it was a myth in the sense that there were always politicians trying to get the shackles off, but this was pretty much a futile exercise. They did a lot of squirming but they really were constrained by the system.


Safety in greenbacks

Lousy currencies stimulate demand for U.S. dollars around the globe.


Does the coming of the euro bring the world closer to a unified currency system?

Europe will have a monetary union with one currency, the euro. The European Central Bank will call the shots. That will put an end to each country pursuing an independent monetary policy. That's not global unification, but it's currency unification on a continental scale.

The euro is going to have all kinds of problems at the start. It's not going to be a smooth thing. The Italian communists are revolting against the tight budget required for Italy to join in. But monetary union will happen.

The euro is also causing neighboring countries to get into the currency unification act. Europe will lock its currencies together on Jan. 1, 1999. This is starting to put pressure on the central and the eastern European countries to unify.

One of the first outside countries to enter the European Union will be Estonia. Estonia helped pave the way by installing a currency board in June of 1992. Their anchor currency is the German mark. Now Bulgaria has a currency board that also uses the mark as an anchor. That's just the beginning. You've got 10 to 15 countries right around the eurobloc, and they will also probably hitch to the euro. I anticipate that Turkey will ultimately adopt a currency board so that it can position itself to get into the European Union.

We notice that even the Mexicans, hypersensitive though they are to any hint of domination by the U.S., are starting to talk about a dollar- based currency board to check the peso's relentless slide.

But how solid a rock is the U.S. dollar? Go back to the late 1970s and early 1980s, when inflation in the U.S. was relatively high. In France, the restaurants wouldn't accept American money. Who wants to tie their currency to a lousy one?

That's why I don't advocate becoming wedded to a single currency. Ultimately, I believe there will be maybe three currency blocs—the dollar, the euro and perhaps the yen. With currency competition, other countries can decide which one they want to tie their own currency to.

The different blocs will compete and keep each other honest. If one of the big players gets sloppy, lets inflation get out of hand or adopts policies that are bad for business, people would drop that currency and move into the others.

The three big currencies could still fluctuate against each other?

Yes, but there would be tremendous pressure on all three to adopt policies that would maintain their parities. If the dollar started to slip against the other two, that would send a sharp signal that Washington was doing something wrong. We would have to tighten up and discipline the money supply. Incidentally, I'm leery about everybody joining a formal monetary union, where you have no exit option.

I would prefer a system where countries could choose and switch. If you don't like the euro as an anchor currency, switch to the dollar, and vice versa, under specified rules, of course.

Why has it taken so long to get any kind of currency unification in an era when countries are harmonizing their tariff policies and even their tax policies?

Politicians don't like giving up their own monetary policies. They don't like to be told to keep the handcuffs on and to avoid launching politically expedient spending programs.

It's significant that Argentina was one of the first countries to go to a currency board system in the modern era. For the Argentineans, the inconvenience of monetary handcuffs was a small price to pay compared with the years of pain and stagnation inflicted by hyperinflation. The present crisis is forcing many countries that once rejected currency boards to take a second look.

In spite of the mess in Asia, the present post-WWII patchwork system worked pretty well until recently.

The present nonsystem hasn't worked all that badly for the big industrial countries, but the other 175 countries, where most of the population of the world lives, have been afflicted with very low quality money that's literally melted away in their pockets. This disguised confiscation has slowed economic progress. It's especially tough on these developing countries because they badly need foreign capital to leverage their abundant labor, but the foreign capital stays away having been burned by past currency collapses.

How much of a role has computer technology played in hastening the adoption of unified currencies and currency competition?

Tremendously. Let's say you've got foreign exchange controls. Now with a click of a mouse you get around them. Suppose a government threatens to impose a wealth tax? Click. Your assets are in the Chase Manhattan Bank in New York.

With the Internet, more and more banks will operate internationally. More and more people will be using offshore accounts—not just those who can afford a plane ticket to Switzerland or Panama. Now anyone who can afford a thousand bucks for a computer can laugh at currency controls.

Unified currencies are going to help expand these truly international banks. That would be the best thing that could happen, particularly in a place like Russia where people really don't get banking services. The Russian banks aren't in the business of banking. They're in the business of robbing the government.

You could say the same thing about the Japanese banks except they are in the business of robbing Japanese consumers and savers rather than foreigners. . . .

Well, I read in the papers that Citibank is booming in Japan because the locals are worried about Fuji Bank.


Suppose a government threatens a wealth tax. Click! Your assets are in the Chase Manhattan Bank in New York. Anyone with a computer can laugh at currency controls.


Do unified currencies mean one world, with the United Nations ordering all of us around? Is currency unification the beginning of the end of national sovereignty?

Not necessarily. That's one of the beauties of currency boards, as with the old gold standard. Heck, the gold standard days were the heyday of national sovereignty but not monetary sovereignty. With currency boards you can have currency unification without political unification. When it tied the peso to the dollar Argentina gave up its control over monetary policy, but it did not otherwise surrender national sovereignty.

With monetary union, such as you are going to have in Europe and such as you have in the U.S., it's a different ball game because it isn't easy to opt out; just ask Jefferson Davis. California and Iowa would have to secede to get out of our monetary union. Argentina could switch and anchor to the euro if it wanted to, or even to the yen. It has an exit strategy that does not involve crashing its currency or giving up national sovereignty. That's why the currency board exit option is so attractive and why it will promote currency competition.

If you standardize on two or three currencies, why bother having pesos and rupees and rand and all that paper?

Sops to national pride in part. Also, when the pesos are backed with bucks, the local central bank can earn interest on its dollar reserve holdings.

What does currency unification mean for investors and business-people?

They will be able to invest internationally without the risk of a devaluation. No more expensive hedging. You will be able to count on developing countries holding to responsible economic policies. You usually run a more or less balanced budget when you've got a unified currency. That means government spending is more or less under control, and you are selling less government paper and leaving more money for private investment.

Thus once you put in a currency board, your interest rates go way down in a hurry. Look at Bulgaria. In 1997 the Bulgarian Brady bonds were the best-performing Brady bonds in the world because this little country went to a currency board system.

In that sense, this will be even more of a benefit for the poorer countries than it will be for the richer countries. It'll lower their cost of capital.

Of course, those screwball local currencies prevent capital accumulation in these countries. People save and inflation confiscates the savings.

With no more shaky currencies to kick around, George Soros would have to go back to writing windy books nobody reads.

Precisely. Money will flow in response to investment opportunities and not in response to rumors of devaluation and speculative flows. As I see it, currency unification is an optimistic scenario.




TIME MAGAZINE, By Jame W. Michaels (1997)

There are few permanent rules in the world of finance--maybe only one: make money--and even those are starting to come unbuttoned. In the past 10 years, decades of regulations--such as the Glass-Steagall Act, passed in the Depression to help limit risk following a banking-system failure--have been all but abandoned, a testament to the fact that all markets move on--and none faster than money markets. The last time this happened was in 1982, when the Garn-St. Germain Act repealed old regulations and allowed savings and loans to graze for investments in areas like real estate and mineral development. The result was an unmitigated disaster, with taxpayers getting stuck with a $500 billion mess.

What are the risks associated with a brave new world of Cayman Island trust funds and retirement accounts built on leverage? No one yet knows. But some suspect. Sholom Rosen, vice president of emerging technologies at Citibank, has what may be the perfect mantra: "It's definitely new, it's revolutionary--and we should be scared as hell."

The fundamental idea driving this revolution is that technology and finance have become one and the same. As William Niskanen, chairman of the Washington-based CATO Institute, puts it, "The distinction between software and money is disappearing." And nowhere is that truer than in the world of cold, hard cash.

Paper money is, in its way, amazing stuff. It is, for instance, easily transferable and widely accepted. You can pay the baby sitter without even thinking about the complex financial dynamics underlying the transaction. Cash--especially U.S. dollars--is also portable, storable and exchangeable. (Just ask the thousands of Russian mafiosi who pay for nearly everything with crisp $100 bills.) And it holds up pretty well. If you're afraid of banks, you can still grab a coffee can, dig a hole in the backyard and have a pretty secure deposit. But paper cash does have some awful drawbacks. Lose it and it's gone; sit on it and it may lose its value overnight: think about what just happened in Asia, or earlier in South America.

Enter electronic cash. The idea of digital money is simple enough: instead of storing value on paper, find a way to wrap it in a string of digits that's more portable and (most important) smarter than its paper counterpart. Smart money? Well, yes. Because digital cash is endlessly mutable, you can control it much more precisely than paper money. Think about the $2,000 check you send to your daughter at college for expenses. How is that money really spent? Books...or beer? Electronic cash takes that relatively simple transaction--passing an allowance--and makes it into a much more intelligent process. And one that hardly requires something as old-fashioned as a bank.

For starters, you can send the money over the Internet encoded in an E-mail instead of sending a check. This saves you the trouble of balancing the checkbook at the end of the month, and it gives you the option of transferring the money from wherever you want: mutual fund, money market, even an old-fashioned checking account. Your daughter can store the money any way she wants--on her laptop, on a debit card, even (in the not too distant future) on a chip implanted under her skin. And, perhaps best of all, you can program the money to be spent only in specific ways. You might instruct some of the digits to go for books, some for food and some for movies. Unless you pass along a few digits that can be cashed at the local pub, she'll have to find someone else to buy the drinks.

Smart, digital cash may also address some of the other problems of paper money. If you lose your digital cash, for example, you will be able to replace it instantly by asking your computer to invalidate the disappeared digits and replace them with a fresh set. And unlike paper money--which stops earning interest as it shoots out of the ATM slot--smart money can keep earning interest until the moment you spend it.

This "cash-interest phenomenon" may sound trivial, but it's a link to a whole other revolution in finance: the dissolution of the government monopoly on money. After all, if some small bank in Luxembourg or Belize is willing to pay you more interest on your digital cash, who are you to argue? As long as the bank's digits are widely accepted, there is no need to stick with government-issued numbers. Government money will still exist, but so will dozens of other currencies, each tailored to a specific need and endlessly convertible and exchangeable. The best money, in short, will be the smartest money. Says Howard Greenspan, president of Toronto-based Heraclitus Corp., a management consulting firm: "In the electronic city, the final step in the evolution of money is being taken. Money is being demonetized. Money is being eliminated."

Maybe. Digital cash, for all its charms, is still climbing a tough road to acceptance. "Between 40% and 50% of transactions today use cash and checks," says Steve Cone, an executive at Fidelity Investments. "The percentage is going down, but slowly. It's like Chinese water torture." And there are plenty of folks who still like cold cash just fine. Says economist Bruce Skoorka: "Look, every day there's a guy who shows up at a bank in Bogota with a big box full of cash. You think he wants to travel with a traceable digital-cash card?"