The Fiscal Frontier

Over the past three millennia, money has had many incarnations, but none--most likely--as strange as what is yet to come. We asked a group of thinkers to cast their eyes toward the future and describe what they envision.

Thursday, October 01, 1998
Philip Davis, professor emeritus of applied mathematics, Brown University
There are so many new commercial electronic, computer-driven products available these days that their technological aspects bore me to tears. Despite the fact that some of them--voice identification, for example--have a considerable, often deep mathematical underlay, what interests me now is what these products will do to and for society.

Money is one of the first and most pervasive of all the mathematizations that civilized society has adopted. If one excepts--these days--the vast amount of computation that occurs in data transmission and signal processing, then probably the bulk of all computations done relates to money. The progression toward more and more abstract, virtual, or meta-moneys, toward the transfer, conversion, unification, and diversification of money will go on ceaselessly.

What is underdiscussed, particularly among technologists, is what the pluses and minuses of this trend will be for human behavior and daily life. The pluses stand out more than the minuses: what a convenience it is to have atms available; how wonderful it would be not to have to change money (and lose 10 percent) every time you cross a European border. Every money product is on the market, and it lives or dies by the market. Do you want to talk directly to a gas pump when you fill up instead of shoving in a piece of plastic? The technology is here, but does anyone want it?

Further questions include: What is the psychological relation between the possession of virtual money and the ownership of real property? What are the job prospects for the millions of employees who handle money when computerization throws them out of work? Will on-line shopping destroy department stores, malls? Great? Yes? No? Local bookstores are already seriously threatened. As money becomes more and more virtual, what happens to the inequalities in access to it? Can the automatized buying and selling of stock shares or futures lead to instabilities and market crashes? Anyone with a bit of imagination can devise answers to these scenarios, but the "law of unanticipated consequences" always lurks around the corner.

Chris Gregory, professor of anthropology and archeology, Australian National University
Historically, the natural properties of gold and silver made them ideal stores of value. The silver to gold ratio of around 12 to 1 was one of the great constants of commercial history, and in this century, gold has reigned supreme. It provided the backing for the U.S. dollar from 1934 to 1971. Gold prices soared in the late 1970s, but in the 1990s the trend has been downward. Has gold's long reign come to an end?

No, say the gold producers, who continue to sing the praises of gold for obvious, profit-motivated reasons. But they are worried. While gold remains a monetary reserve asset, their economic future is secure. But if the central banks sell off the 34,000 tons they keep in their vaults, then the gold industry is finished. The currency traders have developed a technologically superior instrument of commercial exchange--their money is invisible, it moves at the speed of light, and it earns interest--and central banks are beginning to exchange their relatively unprofitable gold stocks for reserves of this kind.

Yet this is the crux of the issue: gold remains the most reliable bridge from today into tomorrow's uncertain future. The Reserve Bank of Australia, which recently sold two-thirds of its gold stock, reckons that around 5 percent of reserves is sufficient for this purpose. Other banks differ. The Bank of France, renowned for its pro-gold stance, owns 3,000 metric tons of gold, which accounts for some 60 percent of its foreign reserves. The European Central Bank, the maker of the forthcoming euro, has decided that it will keep 10 to 15 percent of its reserves in gold. The average for all countries was more than 50 percent over the period from 1960 to 1990. Since then it has fallen to around 30 percent.

What is the correct proportion? There is no single, economically sound answer, because the fundamental reason central banks hold gold is political. Gold hoards are a recognition that while peaceful trade is the basis of the wealth of nations, war is always a possibility. Gold thrives on war because when the guns have stopped firing it is the only generally acceptable standard of commercial value. Gold, then, will remain as the sovereign form of money for as long as war between people remains a possibility. Gold money is a symbol of the dark side of our human nature, an indestructible reminder of our capacity to destroy. Alas, the more pessimistic our view of the commercial future, the more golden it will be.

Paul Kocher, president of Cryptography Research
Money has traditionally been protected against theft and forgery by ink signatures, intricate printing on banknotes, and other physical mechanisms. Law enforcement has been able to catch and prosecute criminals often enough that forgery and other attacks are relatively rare. In an electronic world, the rules are different. Unlike physical banknotes and signatures, data can be copied easily. Also, cyberthieves can operate invisibly from anywhere, making physical arrest and prosecution difficult or impossible.

Cryptography, the science of codes, can overcome these problems and make true digital money a reality. Using cryptography, it is possible to produce "digital signatures" that can securely authenticate transactions and make payment data useless if stolen. Traditional credit cards, checks, and eventually cash will be replaced by smart cards, which carry cryptographically protected digital money that can be used everywhere from conventional shops to Web sites around the world. These transactions will be inexpensive, making micropayments--transactions of a few cents or less--practical, enabling new services from news, telecommunications, and music to pornography and gambling.

While new antifraud measures are clearly beneficial, another use of cryptography, encryption, is controversial. Encryption technology can make electronic money private and anonymous. On the one hand, the fbi supports current laws that prevent American companies from exporting secure encryption products without special government-access backdoors. On the other hand, privacy advocates point out that criminals can already buy strong encryption products from dozens of non-U.S. companies, and they fear that even if America never has another McCarthy era, other countries will inevitably use backdoors to identify and monitor dissidents.

In addition to complicated privacy issues, challenging technical hurdles remain. Cryptographic keys are difficult to manage securely. Every year researchers (and criminals) discover new problems and attacks. Breaking a cryptosystem is far more difficult than robbing a physical bank but potentially far more profitable for those who succeed--I predict that the first multibillion-dollar heist will occur before the year 2010.

Jack Weatherford, professor of anthropology, Macalester College
If we take the long view of history, money was not necessary until very recently. Soon--though not in our lifetime--the money phase of history will pass, and money as we know it will become one of those quaint curiosities of the past, along with quill pens and sundials.

Already cash has become the domain of poor people and poor nations. The poorer the country (such as many in Africa and Central Asia), the greater the percentage of cash transactions. Similarly, in the richer countries, only the poor and criminals use large amounts of cash. Both the government and business are working to stigmatize the use of cash in any but the smallest amounts. And checks are on the verge of obsolescence. Only Americans still use checks in large numbers (about two-thirds of all checks written in the world are from the United States).

In the future, everyone will be issuing currency--banks, corporations, credit card companies, finance companies, local communities, computer companies, Net browsers, and even individuals. We might have Warren Buffett or Bill Gates money. The future will produce thousands of forms of currency. Some of them will be based on commodities such as gold, land, or sugar. Others will be shares in institutions or corporations, and many will simply be based on faith and performance.

With the many new forms of currency, the difference between barter and money systems will become blurred. The electronic money world looks much more like the Neolithic world economy before the invention of money than it looks like the market as we have known it in the past few hundred years.

Paul Krugman, professor of economics, MIT
It seems pretty likely that checkbooks and cash will eventually wither away: Why shuffle pieces of paper when a chip on a card can do everything instead? But my guess is that there will still need to be a distinction between "cash" in the sense of balances on prepaid cards and transactions of the credit card type--just because there will be a lot of small transactions in which neither buyer nor seller wants the buyer's creditworthiness to be an issue.

There will probably not be a universal currency for a long time. The fact is that markets in goods are still very far from globalized. Most of what a Japanese resident buys is made in Japan; most of what an American buys is made in America--and this will be true for a long time to come. And as long as goods markets are quite separate, there is a big advantage to maintaining separate currencies so that prices can be stable in each country without forcing the price of, say, a sandwich always to move in tandem everywhere in the world.

Corporations will not issue their own currency. The whole point of a currency is that it can be used without asking who it came from--you don't check a dollar bill to see whether it came from Philadelphia and demand a 3 percent premium because Philly's credit rating is a bit shaky. What everyone wants is an anonymous, reliable medium of exchange; given a chance, they will always prefer one backed by the government.

Money--this is an old analogy--is like a lubricant. It doesn't produce anything in itself; it's just something that helps the rest of the economy run smoothly. So the best monetary system is the one you don't notice. I guess ideally electronic commerce would simply reduce economic friction so that common events today--people finding that a desirable transaction is prevented by shortage of cash, or that inflation or deflation makes it hard to tell what is a good deal--will become rare. And it's true that e-money will solve some problems of a hard-cash economy, just as paper money solved some of the problems involved in transporting and storing gold and silver coins. On the other hand, just like paper money, it will probably create new problems; in particular, one can imagine that a system of purely virtual money might be subject to severe instability. We'll just have to see how it turns out.

Marvin Minsky, professor of computer science, MIT
As you know, money was invented to avoid the trouble and expense of barter--by using the idea that all personal utilities can be placed on a uniform, universal scale. Of course, that's really ridiculous, but it did save humanity a huge amount of trouble and energy.

With fast computers and huge memories, we could have a nonlinear database that would better understand what each person has and wants. Then, by using complicated game theory-related computations, it might turn out that in general everyone would get more (in terms of their personal values) for the goods that they are willing to "sell."

However, I don't think anyone will care that much--at least in the distant future, because once the intelligent robots come, we could all be as wealthy as kings.


Cash (denominations of $1 or more) will indeed disappear. Probably the most cogent reason cash will disappear is that it is the greatest lubricant for crime ever invented. Without cash, with all transactions recorded, how can drug trafficking survive? Bribery? Bank holdups? Muggings? Some serious thinking will convince anyone that the absence of cash will very seriously complicate the profit margins of crime. Of course crimes of passion will persist. To replace cash, banks will become quasi government offices with all their major functions intact but with the obligation of handling the electronic transfers of credit. The id could be the thumbprint. A compact, inexpensive skin moisture analyzer will instantly identify the purchaser of, say, a basket of supermarket products. There must be a system of alarms and flags set up to detect anomalous activity. There will be a continuous contest between the white hats (law enforcement people) and black hats (people who will try to beat the system). However, these will now be largely white-collar crimes. Our streets will be safe. A fellow pointing a gun at you won't be able to coerce you to transfer all your money--oops, credits--to him since the transaction is recorded.

Currency, except for small change, will disappear. Your wealth will be recorded in zeros and ones of electronic data, as so much of it is now. It is as if all people use credit cards but the transfer of credits is instantaneous. Income tax forms disappear, your tax is automatically computed from the record of debits and credits, as well as other data connected to your file. Since some $500 billion a year is uncollected today, taxes will be lower because most of this will be recovered.

The system of electronic currency will never be acceptable unless the laws protecting privacy are greatly strengthened. Cash facilitates anonymous transactions that people are unlikely to give up. So laws regarding crimes like gambling and prostitution must be reexamined.

Implementing electronic currency will in itself be interesting. The government will have to be very forgiving of the rural person who trusted the mattress more than the bank. But a huge amount of illegally obtained cash will never be turned in. The sources of that money will vary from the drug lord to the bribe taker to the tax-cheating "cash only" doctor, lawyer, and small-business person. Eliminating this loss creates a windfall for the Treasury (estimated as hundreds of billions of dollars); it can pay for the millions of terminals that will do the job of informing the regional computers to transfer funds. Clearly we'll need electronic backups and protection. This can be achieved if the white hats are smart physicists! Of course, people will be very concerned that their money is in the form of zeros and ones in some electronic data storage device, but not to worry. Nothing can go wrong, go wrong . . . argh!

Robert Sapolsky, professor of neuroscience, Stanford University
Some money-related events will be perfectly predictable--Alan Greenspan will figure in nursery rhymes, Bill Gates's name will be invoked jocularly as a threat when children balk at baths. But some changes will be quite surprising. For example, three generations from now, your average bank teller will dress as a samurai swordsman.

In the nineteenth century, France was culturally dominant; all things French epitomized elegance, and wanna-bes in the hinterland (for example, the czarist court) spoke French instead of their own language. By early in this century, British cultural dominance was such that the young Gandhi, for example, would aspire to dress like a London barrister. By now, stylish university students from Nairobi to Kuala Lumpur long to look like an American cowhand, and blue jeans are the universal symbol of American cultural hegemony.

Despite Japan's current economic hiccups, the next century will belong to it, and enough time will have gone by for the historical mantle to be passed--the young worldwide will not only want Japanese electronic items but, finally, Japanese culture as well. This will require enough generations of economically indulged Japanese kids to produce someone sufficiently disaffected and weird to become it--the next Elvis or James Dean--galvanizing the young with whatever bizarrity s/he has come up with. Throughout America, young stylish professionals will dress as Ainu fishermen or some manner of neo-samurai warriors (an effect that will be oddly reminiscent of Ringo in his Sergeant Pepper phase but with broadswords); wasp teenagers will plague their parents with tearful demands to keep up with the trendsetters and get epicanthic fold surgery on their eyelids; kids will speak among themselves in pidgin Japanese.

Naturally, the world's currency will be some electro-yen marvel, such that all finances, down to getting a pack of gum out of a vending machine, can be handled electronically, with identities insured with flawless systems that rapidly analyze dna sequences, nose smudge patterns, and so on. In principle, the act of spending money will seem as detached and automated as racking up an electric bill, with some omnipotent and rarely thought of meter ticking away. In reality, however, the very efficiency and detachment of it will give rise to a paranoid dis-ease about what sorts of mistakes and shenanigans are going on behind the scenes. The very perfection of the identification system will guarantee urban myths about guys bankrupted when some techno-schnook stole their pheromone signature and racked up huge bills buying antique cds and commemorative gold medallions for the Madonna centennial.

As a result, absolutely no one will actually use such electronic money.

One segment of the population will have shifted to an underground currency with an emphasis on concreteness. Business will be conducted with large stone coins; the more unwieldy, the more reassuring. Much of the rest of the population will have switched to barter. In so doing, they will have discovered a limitation of barter, namely that it is difficult to obtain a rare and very costly item or service if there must be immediate exchange (for example, baking 20,000 pound cakes in exchange for a kidney transplant). Instead reciprocity must be over time, demanding repeated interactions with a relatively small population of people. As a result, small village life will return, and in a subset of people this will eventually be taken to its logical extreme. Settling in the extensive open tracts of grassland in the American west (emptied when mad cow disease scares cause a cattle industry collapse), they will return to hunter-gatherer life, replete with animism, circumcision rites, and so on. Few modern amenities will be tolerated beyond dental floss and watching the occasional Seinfeld rerun. Villages will be matrilocal, and each will contain one good ethnic restaurant that is baby-friendly. A clean, safe subway system will connect the grid of villages, and rides will be free during the migratory seasons of large mammals above ground. Villagers, quite rightly, will view this as a golden age.
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