Electronic money and banking: what should government's role be?

USA Today (Society for the Advancement of Education), May, 1997 by Michael N. Castle

"Congress and the executive branch must work together to monitor privacy issues, the security of electronic transfers, consistent standards, and public acceptance."

One of the duties of the House Monetary Policy Subcommittee is the oversight and authorization responsibility for the currency and coins produced by the Bureau of Engraving and Printing and the Mint. Along with the Federal Reserve System, these bureaus intimately are connected with and affected by the development of electronic money.

Money is a valuable franchise for the Treasury and the Fed. Billions of dollars are added to government accounts each year as a consequence of the seignorage booked from the difference between the production cost of paper and base metal monetary tokens and its value in the market. This ample cushion, sometimes even referred to as "profit" from operations, provides an effective independence from the authorization and appropriations process. This, in turn, places a heavier burden on Congress to assure that the stewardship of the public's money continues above reproach.

The point of this little digression is to underscore that the Fed and the Treasury have inherent conflicts of interest with the development of electronic money. Theoretically, they stand to lose $20,000,000,000 or so in annual earnings and a substantial measure of independence if electronic money were to supplant physical notes and coins completely. Thus, there is a certain irony in the fact that the Subcommittee was encouraged to look at the concept of stored value by the Director of the Mint in 1994.

At that time, we were trying to evaluate the arguments over whether we should replace the dollar bill with a dollar coin. It seemed to me that, while the dollar coin is a viable issue, by concentrating only on coins versus paper money, we could be refighting the last war.

It became apparent that Congress and the government should be studying what the future of money is in a larger sense. As a consumer, thought about how my own banking habits have changed since the advent of the automatic teller machine. The ATM greatly has reduced the need even to enter a bank to meet most daily banking chores. The initial discussion of stored value cards and other forms of electronic currency stimulated our interest in where this entire field was headed.

The goal of our work in the House Banking Committee has been to try to get ahead of the curve on the electronic banking issue, rather than have Congress react--and probably overreact--when a problem occurs on something it may have neglected. Our future of money hearings have introduced us to the entrepreneurs of this field and the various systems they are promoting. We received previews of how banking may be affected as personal, portable ATM equivalents are reduced to a plastic card with an embedded microprocessor. Law enforcement and regulator representatives testified regarding their concerns, and we viewed demonstrations of many ways in which banks and non-bank companies are likely to compete for customers in the near future.

The Committee also has learned a little of what is transpiring abroad. Standards and industry practices are being developed in foreign environments that have little similarity to our own. For instance, emerging market economies in China and Russia will not repeat our experience with paper checks and clearance procedures. While we continue to stuff business jets full of checks every night to fly them across the country for clearance before there has been too much float, they are leaping directly into stored value and electronic clearance procedures. So is Africa.

Countries lacking a hard-wired telecommunications infrastructure are moving directly to cell phones and satellite communication. What keeps the U.S. in the game, apart from the size of our economy, is our dominant position on the Internet. The central roles the Internet and American entrepreneurs and software houses are destined to play provide our edge as we move toward electronic money and banking. This edge needs to be protected and enhanced.

Our Subcommittee hearings have brought a growing appreciation that the ideal role for government in this new world should be to promote an environment where the private sector can experiment and fully realize the inherent market efficiencies of these new technologies. If we accept even a small portion of the promoters' enthusiasm as justified, we can expect to see a further transformation of the world economy and expansion in the direction of a unified world market. One set of prophets would have this all lead to some kind of libertarian utopia, where individual governments are humbled before the free flow of capital and commerce across political boundaries at the speed of light.

While this view might be just a little overstated or at least a bit premature. when I read of governments that are bent on regulating the Internet, I am reminded of King Canute. He commanded the tide to cease rising and then attacked the recalcitrant waves with his sword. This image encompasses the worst sort of regulatory mindset. Its imperatives are first to assert jurisdiction, then to build a bureaucracy, and finally to justify it all as protecting the public from unrealized potential dangers.