The Siege on the Greenback

By Josh McHugh
Forbes
Monday, September 8, 1997

http://www.forbes.com//forbes/97/0908/6005176a.html

IN A BUREAU OF ENGRAVING & PRINTING building just across the Potomac's Washington Channel from the Jefferson Memorial, printing presses the size of moving vans grind out sheets of dollar bills. Ink-spattered workers tend the machinery with screwdrivers and oilcans.

That operation, along with the green paper it produces, may soon fall victim to the computer age. If so, the federal government will lose a lucrative source of revenue. "The Federal Reserve is the most profitable business there is," says Walter Wriston, former Citibank chairman. "They don't have to pay for their inventory." Here's why: As long as the public holds paper money, it is, in effect, giving the federal government an interest-free loan. The dollars are simply a non-interest-bearing IOU issued by the Federal Reserve.

For most of recorded history monarchs and central banks have considered it their divine right to control the money supply. When they succeed in doing so, they can finance their operations in part by skimming some of the money. "Seigniorage" is what the economists call the process. In the old days seigniorage took the form of coin clipping;the royal mint would issue a sovereign with less than a sovereign's worth of gold in it. Nowadays seigniorage takes place when the government issues bills that erode with inflation.

In a digital world cybermoney becomes an ever-greater threat to the government's monopoly over dollar issuance.

Over the last three decades it has become easier to move and hold money in noncash forms. American Express first stole away some of the government's float by persuading tourists to replace paper money with travelers' checks. Later, instead of holding a no-interest checking account at a bank, which in turn holds a no-interest account at a Federal Reserve bank, you could own shares in a money market fund and use those shares like money.

Credit cards, too, cut down on the need to carry paper money.

Frequent-flier miles could be next. If the airlines made these mileage accounts freely transferable, they would turn into a dollar alternative that would hold their value much better than a greenback.

Next in the evolution of the dollar competitors: digital cash, exchanged over the Internet and stored on disk drives or microchip-enhanced smart cards. In principle the technology gives anyone with a server, a network connection and a command of cryptographic protocols the ability to mint money. Your unit of account doesn't have to be non-interest-bearing dollars; it could be a claim on a pile of interest-bearing Treasury bills or shares in the Magellan Fund.

The Internet's global reach solves the acceptance problems that private currencies used to encounter in the 19th-century days of free banking. And the Web is the perfect place to post a rating newsletter that could tell potential users whose currency is the most trustworthy or widely accepted.

Robert Hettinga, who runs the Boston Digital Commerce Society, predicts that digital cash will first gain currency as a medium for small on-line transactions, such as payments for downloading inexpensive software. Once people gain confidence in the banks that issue digital money and the software that moves it, they will trust them with larger sums.

Among the companies working on digital cash systems: Citicorp, Microsoft, Digital Equipment Corp. and Nomura. The systems all have one thing in common: The U.S. Treasury gets cut out of the float.

Could the federal government attempt to regulate or tax competing money systems away? The issuers could simply relocate to Zurich or Singapore.