Summary of incomplete research essay.
The first electronic money was sent nearly a century and a half ago by telegraph. Today, due to revolutions in computer and telecommunications technologies, trillions of dollars change hands electronically every day. Most of our money exists only in electronic form, a fact we sometimes forget because of the dominance of cash in numerous small everyday transactions. Even cash, however, is likely to become increasingly electronic in the near future.
There has been a close relationship between the rise of the nation state and the rise of government-issued national monies. Libertarian economist Friedrich von Hayek argued in the 1970s that the government monopoly on the issue of money should be abolished, allowing private companies (probably banks) to issue money - not merely in national currencies as has been done in the past, but in their own private currencies. His rationale was his belief that governments cannot issue money without yielding to the temptation to inflate it, but private firms would be more likely to maintain a stable currency because it is in their interest to do so.
But money has increasingly become privatized anyway, though not in the way that Hayek suggested. Although electronic money is still denominated in national currencies, it is now largely privately controlled money, circling the globe beyond the influence of governments.
Since the rise of the nation state was closely linked to the rise of national currencies, it makes sense that in a world of privately controlled, global, electronic money, the nation state would decline in importance. This, I argue, has already been happening, through two closely linked phenomena - the technological revolution, and the deregulation of finance.
The impetus for financial deregulation was, to borrow a term from geographer Ron Martin, "the uneven geography of market regulation." In other words, international finance in the form of foreign-held currencies, mainly dollars, known as Eurocurrencies, moved to locations in the globe where banking was less regulated - at first London, and later such offshore banking havens as the Cayman Islands. This set in motion a competitive deregulation dynamic, in which other financial markets, including eventually the U.S., had to reduce their own financial regulations in order to keep capital from moving offshore. Competitive deregulation and offshore competition could not have assumed such an important role without advances in computer and telecommunications technologies.
In this essay, I argue that the same dynamics of competitive deregulation and offshore financial competition that influenced wholesale finance in the 1970s and 1980s, will move into retail finance and consumer commercial transactions in the late 1990s and 2000s. Various forms of privately issued electronic cash will increase in importance, and the result will be further decline in the role of the nation state. Ultimately, we may have to contend with Hayek's dream of privately issued currencies that are used freely throughout the world, and are not tied by laws to any particular government or territory. I will examine some of the possible social implications of such a system, as well as look at other possible scenarios that might evolve.
Money is no longer based on objects with intrinsic value such as implements, jewelry, gold or silver. It is simply a lot of IOUs that people exchange for goods and services. The only reason they have value is because people believe in them.
Money is "created" through the banking system, which takes in deposits, and lends these out. Because many people leave their money in the bank, banks can lend the same money a number of times over, subject only to reserve requirements.
The money system is not politically neutral. The insistence of Hayek and others on "sound money" policies reflects the interests of creditors, who want to be repaid with money that has not inflated and therefore lost value.
There has also been a trade-off in any monetary system between the independence of the nation state to pursue its own monetary policies, and the interests of the international system in monetary stability. In the era of the classical gold standard and British imperial rule, the international stability of the system was most important. At other times, such as during World War I and in the 1930s, after the Great Depression struck, the need for international stability was abandoned, and states pursued autonomous monetary policies. State autonomy reached a peak when policies of British economist John M. Keynes were adopted, after laissez-faire policies and banking interests were discredited by the Depression. Goals such as full employment assumed greater importance, and the nation state's role was strengthened by the implementation of welfare state policies.
The Bretton Woods conference, held in 1944 as World War II was beginning to wind down, was an international conference aimed at establishing a new international monetary order for the post-war world. It tried to reconcile a number of goals, some of which were contradictory. It sought to provide liquidity to the system to prevent the recurrence of the Depression. It aimed to allow states to pursue Keynesian stimulative policies aimed at smoothing out the business cycles, and maintaining close to full employment. It also tried to provide a stable international monetary system, by fixing the exchange rate between gold and the U.S. dollar, and the exchange rates between dollars and other currencies. It aimed to further international trade, while imposing some limits on movement of capital for speculative purposes and capital flight - an aim that was resisted by banking interests. Finally, it recognized American financial dominance, and it rejected some of the more ambitious goals of Keynes for an international central bank and international reserve currency.
The system had at least one serious flaw, identified by economist Robert Triffin. The United States had to keep exporting dollars in order to inject liquidity into the global system. This was done through the Marshall Plan, military spending, and foreign investment. But the export of dollars in the form of balance of payments deficits would eventually undermine confidence in the dollar, leading foreigners to demand payment in gold. In fact this is exactly what happened through the 1960s until in August 1971, President Richard Nixon abruptly ended convertibility of dollars for gold, and this action led to the breakdown of the fixed-exchange-rate system.
The dollars that had been accumulating abroad, mainly in Europe, formed the basis of the Eurocurrency system. Banks in London and elsewhere made numerous international loans to corporations in dollars, but because these took place outside the U.S., they were able to avoid American banking regulations, such as those specifying reserve requirements or limiting interest rates. This allowed an enormous pool of dollars to develop and expand beyond the control of the American government and Federal Reserve. With the flow of dollars into the oil exporting countries in the 1970s, the Eurocurrency system mushroomed. Offshore banking also proliferated, forcing the U.S. and other countries to reduce their banking regulations in order to compete for capital.
There has long been an argument between proponents of floating exchange rates such as Milton Friedman and proponents of fixed exchange rates such as Charles Kindleberger and others. The Nixon decision in 1971 led to floating rates, but contrary to Friedman's predictions, exchange rates became more volatile due to increasing financial speculation - not less volatile, as Friedman predicted. Volatile rates increased exchange risks for long-term investors in industry. To insure against these risks, and to provide action for speculators, a number of markets for derivative products such as options and futures in exchange rates developed. It has reached the point today where $1 trillion is traded every day on exchange markets - most of it as speculation and hedging, and only a small proportion for real currency exchange needs such as investment in foreign countries.
These exchange markets are both global in nature and operate at very high speeds. They owe their existence to the electronic nature of modern money, allowing money to move anywhere on the globe instantly, and allowing traders to profit from arbitrage trading, gaining from very small differences between markets.
The speculative markets and rapid capital flows were feared by Keynes and American negotiator at Bretton Woods, Henry Dexter White. Such markets and capital movements, they felt, would undermine the monetary autonomy of nation states. In fact, that is exactly what has happened. States have been less able to pursue independent monetary policies, and when they have tried, they have suffered from capital flight and rapid depreciation of their currencies.
The term "cyberspace" was coined by novelist William Gibson in 1984. It has come to mean the global system of computers linked together by large networks. The Internet is the most popular and far-reaching of these global networks, but cyberspace includes many other networks, both separate from and linked to the Internet.
Cyberspace has its own geography - one that links "virtual communities" of people around the world, and which crosses international borders without stopping at checkpoints, transcending territory in the tradition sense. This has profound implications for the nation state and its ability to regulate commerce and the flow of information.
Some officials with national governments in Canada and Europe want to regulate content for national purposes, while repressive governments such as China's and Singapore's want to keep out political criticism and even "soft" pornography. The United States brought in legislation early in 1996 prohibiting "indecent" material in cyberspace, although the law was later struck down in court on constitutional grounds. In all of these cases, governments have tried to treat the Internet the same as national radio and television broadcasting systems, without recognizing that its decentralized, grassroots, and borderless nature makes it fundamentally different.
There are three main obstacles national governments face in trying to regulate the Internet:
Of these, political opposition is only a factor in some countries, such as the United States, which have a strong tradition of free speech. Even there, the widespread public perception that pornography is rampant on the Internet, and ignorance of the technology, make political opposition to government control relatively weak.
Jurisdictional and technical problems are much more formidable. Information can be placed on the Internet in jurisdictions where it is legal, and viewed where it is illegal. There are numerous technical problems that governments face in trying to regulate content, such as the vast amount of information, the decentralized design of the Internet, anonymity, encryption, and the cyber culture that takes a dim view of government interference and involves many people skilled at using technology to evade regulation. Efforts at censorship may only have limited success and only in the short term. Should nation state efforts to control content be stepped up, it is likely that offshore "data havens" will develop in the same way that offshore banking developed to evade regulation of Eurocurrencies.
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full-text preliminary draft of Chapter 5]
Cash is the only form of money that is not yet electronic. It remains very important in terms of the number of transactions which use cash, even though the value of these transactions tends to be small. Most use of cash is for purchases under $10 and larger transactions in the underground economy, where it provides anonymity.
Retail finance has increasingly become more electronic, with developments such as cheque clearing, credit cards, automated teller machines, and debit cards. More recently, banks have brought in automated telephone banking, and they are now introducing home computer banking.
The next major development is likely to be stored-value cash cards. These are already widely used in Europe and Japan for specific purposes such as telephones and transit, but use of all-purpose stored-value cards has been more limited, and is currently the subject of a number of market trials. Stored-value cards work on a number of different models and use different technologies. Some provide anonymity, raising concerns about use for drug money laundering and other black market activities. Others don't provide anonymity, raising concerns about invasion of privacy. Some allow transactions between individuals, while others are restricted to dealings with merchants. These cards will reduce the money governments gain from seigniorage when they produce cash. In this and other respects they increase the move towards privatized money.
Virtual banking and virtual shopping are likely to have a bigger effect on the nation state. Increasingly consumer banking products will be offered electronically from offshore, thus evading national regulations and raising jurisdictional questions. This is likely to lead to the kind of competitive deregulation dynamic that occurred as a result of the Eurocurrency market growth. It also increases opportunities for tax evasion. Virtual shopping, though limited to certain types of products, will have a major impact on retail business, and also on governments' abilities to collect sales taxes. Though only a small minority of the population currently shops in cyberspace, this is likely to change as computer, television, and telephone technologies converge, resulting in new forms of mass media which cross international borders.
Electronic money and other current trends are increasing the privatization of money, and reducing the monetary role of nation state governments. Because of the relationship between national money and nation-state governments, the decline of one means the decline of the other. Electronic commerce across borders increases the likelihood that international currencies will develop, or at least that people will increasingly deal in multiple national currencies.
The role of the dollar in international commerce may be affected by the relative decline of the United States, or it may evolve into more of an international currency increasingly beyond the control of the Federal Reserve. A big question mark is the Euro, which may replace national currencies in Europe, or may be delayed indefinitely due to concerns about national sovereignty. Whatever happens, it is likely that currencies will increasingly become separated from national territories and nation-state governments.
Hayek's vision of privately issued competing currencies is one possibility, though many questions are raised about the stability and political accountability of such a system. Just as globalization has led to a counter tendency of localization, it is also possible that local currencies may emerge, allowing smaller economic regions to develop their own monetary policies. There are problems when currencies are not based on any real economy of goods and services, and confidence in any monetary system can be quickly undermined - especially one based on invisible electrons and photons.
To the extent that regulation is desirable, whether to maintain stability of the system, to resist international organized crime, or to assert democratic control, it will be necessary to develop new supranational institutions and regimes. The nation state is increasingly ineffective in a world of global telecommunications, global finance, and privately controlled electronic money.
Richard McGuire was a graduate student in Political Economy at Carleton University in Ottawa, Canada at the time of this research. He may be contacted by e-mail at: rmcguire@canajun.com
© Copyright Richard McGuire 1996