avatar

Let’s not get rid of our wallets just yet

by Kurt Schuler August 13th, 2012 9:56 pm

The idea of purely electronic money, without notes and coins as hand-to-hand currency, has received attention not just for its potential convenience, but also for its potential to extend the range of central bank control in monetary policy, which some people consider a good idea.

I see three drawbacks. First, are we so confident in our computer systems, including the electric power that they run on, that we don’t want any backup? Imagine the recent north Indian power blackout, or the U.S. mid-Atlantic blackout, lasting for a month. Unlikely, but not so unlikely that it needs no emergency plan.

Second, a forced switch to an all-electronic currency means a forced reduction in financial privacy. Maybe, as Oracle Computer founder Larry Ellison has said in a broader context, “The privacy you’re concerned about it largely an illusion.” If so, it is an illusion I wish to try to preserve a while longer.

Finally, it ignores consumers. If people want purely electronic money, the costs of provision are low, and there are no legal obstacles to purely electronic money, that’s what they will get. If people continue to hold notes and coins, it means that hand-to-hand currency provides services for which purely electronic money is not a perfect subsitute.

(Hand-to-hand currency is disproportionately used in illegal activities. It is an argument for another time to what extent switching to purely electronic money would reduce illegal activities. Payment for illegal activities can still occur outside the formal financial system without cash.)

8 Responses to “Let’s not get rid of our wallets just yet”

  1. avatar CKalina says:

    This is a level of control I will never want to give away. Not just NO but Hell NO!

  2. avatar Peter Surda says:

    Enter Bitcoin. Bitcoin has an abstract definition, and is form-invariant, i.e. can exist in practically any form, electronic or not. That includes coins (e.g. Casascius coins, http://www.casascius.com ) and paper, and anyone can produce them based on customer demand (3). The company behind http://www.bitcoincard.org is developing smart cards that use a mesh network and solar/kinetic charging, so it can work electronically even if the power grid / mobile phone network fails (1). While Bitcoin is not anonymous, with a bit of effort it can be used in ways that obfuscate the flows (e.g. various mixers), and some of its forms (such as the aforementioned coins) are similarly anonymous as fiat coins (2).

    One thing to remember is that Bitcoin is at a very early stage of development, and end users might not be able to get the service maturity they are used to. It's a bit like the early internet or the early linux. Bitcoin is not even 4 years old. When linux was 4 years old, I didn't even know it existed.

  3. avatar Eitan says:

    Seems to me that the issue of purely electronic money is orthogonal to the issue of centralization. Bitcoin is a purely electronic money which is highly decentralized. From what I understand having an account at the Federal Reserve is a purely electronic money (at least for member banks) which is highly centralized. The issue of blackouts surely is something to be concerned about, not only with money but with all the highly valuable information which today is stored electronically, which ought to imply that it's something people have already thought about. As to privacy, it does not automatically follow that electronic money must have less privacy than physical money. Again, consider bitcoins, which while perhaps not as private as people might like thanks to sophisticated network analysis, is at least private enough to be the currency of a wildly successful online anonymous market, the Silk Road.

  4. avatar Warren says:

    First: Hand to Hand money is clunky can't you guys just say "cash"? Outside of economists when was the last time you ever heard some use "hand to hand currency"? Seriously. At a garage sale or flea market no one would ever, or has ever said, "no checks, hand to hand currency only."

    "Cash" is one of the all-time great words. If there was a hall-of-fame for words "cash" would be a founding inductee so could you consider a change of terms?

    Second: Yes, absolutely there needs to be both notes and coins circulating. Not only for privacy and other purposes but also because in the right hands notes and coins can be little works of art. Not current U.S. cash but in other places and other times. Some examples: http://www.britishnotes.co.uk/news_and_info/irishlatest_news/index.php (the whole site is nice.)

    It may sound trivial but having attractive banknotes is important. It adds a little something to life in the same way that good design generally does.

  5. avatar rajputvj says:

    I must say the idea of an electronic currency seems to be a horrible idea in this particular time period. By having an electronic currency we simply do not have financial security, and in this age where privacy is very important to us and computers can be hacked with ease, there simply seems to be a lack of financial security involved by this switch. Yes, i will say that relying on electric power to store data of finances provides convenience; as we do not have to worry about holding these coins and dollar bills, but i don't think that security and market stability can be gambled on that. Like Schuler, i can see the problems involved with having to rely on electric power for storage of currency. For instance, if we run into a situation where a city loses power, then we lose our purchasing power. The simple trade-off we face is our perception of financial security (keep using the cash method) or prevent illegal activities from misuse of hand to hand money. To me this idea of switching to electronic currency is coming up too soon. I think the change will gradually occur, but given the minimal benefits we receive by switching to this form of currency RIGHT NOW, it simply seems unattractive.

  6. avatar Tshepherd2002 says:

    "are we so confident in our computer systems, including the electric power that they run on, that we don’t want any backup? Imagine the recent north Indian power blackout, or the U.S. mid-Atlantic blackout, lasting for a month. Unlikely, but not so unlikely that it needs no emergency plan."
    I feel like this shouldn't be considered a drawback or a problem, we have so many ways to prevent a black out from having any impact on the electric currency system. Such as having back up emergency servers spread out to prevent such a catastrophe from occurring.

    "a forced switch to an all-electronic currency means a forced reduction in financial privacy. Maybe, as Oracle Computer founder Larry Ellison has said in a broader context, “The privacy you’re concerned about it largely an illusion.” If so, it is an illusion I wish to try to preserve a while longer."
    This I completely agree with, our privacy will be gone. It would be easier for our government to throw more taxes, regulations, and restrictions on any commodity.

    I do not think we should have a pure electronic currency system currently.

  7. avatar W.E. Heasley says:

    The use of currency is argued as a high cost maintenance item in that paper currency wears and must be replaced, the cost to create coin [the penny example], etc. The use of electronic currency is argued as a super low cost maintenance item.

    However, what is the real cost of electronic currency? Is it the panacea depicted by: “…in the push of a button”? Does that “push of a button” not come with costs? Every bank has a web site which costs to create and maintain. Using electronic banking attracts hackers that must be fended off and occasionally do hack causing more costs. On the consumer end items such as Life Lock must be purchased as prudent measures along with more advanced computer security software. General fraud related to lost electronic cards/stolen electronic cards. The cost to create the physical debt/credit cards. Swipe fees anyone?

    The point being, electronic currency transactions are depicted by many as low or almost zero cost when in reality many, many costs are glossed over. That the real cost is much greater than the zero cost panacea depicted by: “…in the push of a button”.

  8. avatar Martin Brock says:

    The privacy argument doesn't persuade me. In modern terms, a monetary system is a system of indirect exchange, the exchange of goods for entitlement to different goods in the future. Such a system requires transparency rather than privacy. If you want privacy, barter with gold or silver. You don't need modern money for that.

    Extending central bank control obviously doesn't interest me, but I suppose electronic money can have the opposite effect as well. I doubt the ultimate efficacy of Bitcoin, because as a standard of value for extending credit, it's too much like gold (scarce, durable and easily hoarded); however, Bitcoin hardly extends central bank control.

    Backup is a salient point, but the sort of electronic money I favor ultimately involves redundant, decentralized records and peer-to-peer networking. A widespread power failure concerns me less if a battery can power my electronic device and its memory is non-volatile and its records also exist securely in the cloud. Despite its other weaknesses, Bitcoin is establishing the feasibility of a decentralized approach.

    Needless to say, I don't want a forced switch to any monetary system, including a gold standard. No monetary system I favor ignores free consumers, but let's not forget that most money is electronic already. No one forces me to pull out my debit card rather than cash or to accept direct deposit of my pay check or to shop at Amazon.com. Consumers are already choosing electronic money in droves.

    Presumably, Bitcoin is disproportionately used in illegal activity, and if it isn't now, it will be eventually.

Leave a Reply

You must be logged in to post a comment. Login now.