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Electronic Money: New Day or False Dawn? (1)

The world is becoming increasingly addicted to doing business in cyberspace, across the Internet and World Wide Web. As electronic commerce (e-commerce) expands, it seems only a matter of time before various innovative forms of money, based on digital data and issued by private market actors, begin to substitute in one way or another for state-sanctioned banknotes and checking accounts as customary means of payment. The era of electronic money will soon be upon us.

Though difficult to predict in detail, the effects of electronic money are sure to be both manifold and profound. In this article I focus on one critical dimension: the potential impact of electronic money on national monetary management. At issue is the effectiveness of monetary policy as an instrument of macroeconomic control. What will the advent of electronic money mean for the capacity of central banks to sustain price stability and promote growth?

Remarkably, this momentous question has until recently received relatively little attention in the formal literature, (2) though casual commentary abounds. Preliminary positions were staked out early. At one pole we find Stephen Kobrin (1997), a professor of international management, who sees a new day dawning in the governance of money. As he puts it: "Private e-currencies will make it difficult for central bankers to control - or even measure or define - monetary aggregates.... At the extreme... currencies issued by central banks may no longer matter" (Kobrin 1997: 71). More recently, Kobrin's view has received implicit endorsement in a noteworthy article by economist Benjamin Friedman, who argues that with the development of e-money, monetary policy is at risk of becoming little more than a device to signal the authorities' preferences. The central bank, in Friedman's words, is becoming no more than "an army with only a signal corps" (Friedman 1999: 321). At the opposite pole we find political scientist Eric Helleiner (1998), who sees not a new day but a false dawn. Fears for the future of monetary policy may be overstated, he contends, if not totally misleading. To the contrary, "new forms of electronic money are unlikely to pose a significant threat to the power of the sovereign state" (Helleiner 1998: 399-400). Helleiner's view has been implicitly endorsed lately by several economists, including Charles Freedman (2000), Charles Goodhart (2000), and Michael Woodford (2000). (3) In Woodford's words, concerns "for the role of central banks are exaggerated.... Even such radical changes as might someday develop are unlikely to interfere with the conduct of monetary policy" (Woodford 2000: 6).

These alternative perspectives could not be more divergent. Who is right? The aim of the following discussion (4) is to move beyond preliminary prognostications to attempt a more systematic exploration of electronic money's prospective challenge to the traditional authority of central banks. The main goal of monetary policy is to keep the level of aggregate expenditure in an economy broadly consistent with production capacity; in other words, to guide the ship of state between the Scylla of rampant inflation and the Charybdis of prolonged recession. If electronic money can be expected to have any impact at all on the effectiveness of policy, it will be through its influence on the linkages between central-bank decisions and private-market spending. Analysis suggests that eventual outcomes will be closer to the spirit of the predictions by Kobrin and Friedman than to the sanguine view expressed by Helleiner and others.

I begin in the first section with a basic primer on the essential characteristics of electronic money: what it is, how it operates, and what it is likely to look like in the future. The next section then provides some needed historical perspective, briefly reviewing the longer-term evolution of currency systems and norms of monetary management. The rise of electronic money, it is clear, is no anomaly in historical terms and indeed may be regarded as an entirely natural development in the context of today's rapidly globalizing world economy. The main discussion comes in the third section, where I examine the mechanics of how monetary policy works under alternative conditions of currency availability. Analysis suggests that the challenge of e-money differs significantly depending on what countries we are talking about. In the many economies around the world where central bankers are already experiencing increased difficulty in controlling monetary aggregates, owing to accelerating cross-border competition among currencies, the main impact of electronic money will be simply to add to the intensity of that competition. By contrast, in the traditional reserve centers - the United States, "Euroland" (home of the new euro), and Japan - the threat to state power appears distinctly greater and will demand real adjustments by policymakers.

I. A Basic Primer

Electronic money is an idea whose time, it seems, is about to come. Around the globe, entrepreneurs and institutions are racing to develop effective means of payment for the expanding realm of e-commerce. The aim is to create units of purchasing power that are fully usable and transferable electronically: "virtual" money that can be employed as easily as conventional currencies to acquire real goods and services. Soon all of us will have little choice but to learn what electronic money is and how it operates. (5)

What is it?

Electronic money (also variously labeled digital currency, computer money, or e-cash) presently comes in two basic forms, smart cards and network money. Both are based on encrypted strings of digits - information coded into series of zeros and ones -- that can be transmitted and processed electronically. Smart cards, a technological descendant of the ubiquitous credit card, have an embedded microprocessor (a chip) that is loaded with a monetary value. Versions of the smart card (or "electronic purse") range from simple debit cards, which are typically usable only for a single purpose and may require online authorization for value transfer, to more sophisticated stored-value devices that are reloadable, can be used for multiple purposes, and are off-line capable. Network money (6) stores value in computer hard drives and consists of diverse software products that allow the transfer of purchasing power across electronic networks.

Both forms of electronic money are still in their infancy. Earliest versions, going back a half decade or more, aimed simply to facilitate the settlement of payments electronically. These have included diverse card-based systems with names like Mondex and Visa Cash as well as such network-based systems as DigiCash (later eCash), CyberCoin, and NetCash. Operating on the principle of full prepayment by users, each has functioned as not much more than a convenient proxy for conventional money - in effect, something akin to a glorified travelers check. Few have caught on with the general public, and many have already passed into history. (7)

More recent versions, mostly network-based, have been more ambitious, aspiring to produce genuine substitutes for conventional money. Most widely advertised in the United States (using Whoopie Goldberg as a spokesperson) is Flooz, a form of gift currency that can be used for purchases from a variety of web sites. Other examples include Beenz, Cybergold, and (in Britain) iPoints. (8) All can be obtained by means other than full prepayment of conventional money, usually as a reward for buying products or services from designated vendors. Like the green stamps of an earlier era or the frequent-flyer miles of today's airline industry, each can be held more or less indefinitely as a store of value and then eventually employed as a medium of exchange.

The difference between the earlier and more recent versions of e-money is vital. Earlier experiments like Mondex or Digicash merely added to the velocity of circulation - the flow of transactions using the existing money stock. Liquidity was enhanced, but payments still required settlement through the commercial banking system, debiting or crediting third-party accounts. Hence no fundamental threat was posed to the authority of central banks, which retained ultimate control of the clearing mechanism. With later ventures like Flooz or Beenz, by contrast, a potential exists for the creation of entirely new clearing mechanisms, quite independent from the existing money stock. New circuits of spending, based on alternative media of exchange, can evolve that make no use at all of a country's traditional settlement system - "rootless" money "circling in cyberspace indefinitely," as one source puts it (E. Solomon 1997: 75).

Though none of the newer units has yet been adopted widely, (9) smart cards and network money clearly have the capacity to grow into something far more innovative, given sufficient time and ingenuity. Certainly the incentive is there. Electronic commerce is growing by leaps and bounds, offering both rising transactional volume and a fertile field for experimentation. The stimulus for innovation lies in the promise of seigniorage: the alluring profit that can be gained from the difference between the cost of creating money and the value of what that money can buy. To coin a phrase: Money can be made by making money. That motive alone should ensure that all types of enterprises and institutions - nonbanks as well as banks - will do everything they can to promote new forms of e-currency wherever and whenever they can. In the words of a noted historian of money:

The companies that control this process will have the opportunity to make money through seigniorage, the traditional profit governments derived from minting money. Electronic seigniorage will be a key to accumulating wealth and power in the twenty-first century (Weatherford 1997: 245-246).

Central to the accumulation of electronic seigniorage will be the ability of these companies to find attractive and, more importantly, credible ways to offer smart cards or network money on credit, denominated in newly coined digital units, in the same way that commercial banks have long created money by making loans denominated in state-sanctioned units of account. The opportunity for virtual lending lies in the issuers' float: the volume of unclaimed e-money liabilities. Insofar as claimants choose to hold their e-money balances for some time as a store of value, rather than cash them in immediately, resources will become available for generating income through credit creation. All that income will of course go to the issuers themselves, except for any costs associated with promotion of their new units of purchasing power.

Critical issues

The process will not happen overnight, of course. Quite the contrary, the emergence of e-money as a genuine rival to conventional currencies actually is apt to be quite slow and could take most of the next century to be completed. To begin, a number of tricky technical issues will have to be addressed, including inter alia adequate provisions for security (protection against theft or fraud), anonymity (assurance of privacy), and portability (independence of physical location). None of these challenges is apt to be resolved swiftly or painlessly.

Even more critical is the issue is trust: how to command confidence in any new form of money. Many believe that general acceptability can derive only from the sovereign power of the state, as the German economist George Knapp contended nearly a century ago (Knapp 1905). According to Knapp's "state theory of money," all money is a product of law and dependent for its validity on formal ordinances, such as legal-tender laws (specifying what currency must be accepted in payment of a debt) and public-receivability provisions (specifying what currency may be used to pay taxes or satisfy other contractual obligations to the state). But that is an unduly restrictive view of actual usage, which in fact admits of a much wider range of influences. At its most fundamental money is a social institution, resting on the reciprocal faith of a critical mass of transactors (Dodd 1994; Zelizer 1994). Confidence ultimately is socially constructed, based implicitly or explicitly on an intersubjective understanding about an instrument's future value and usability, and may well reflect nothing more than the gradual accumulation of competitive market practice. Money is whatever people come to believe will be accepted by others, for whatever reason. Numerous examples of monetary history -- from the playing-card currency that circulated in France's North American colonies in the seventeenth and eighteenth centuries to the cigarettes and chewing gum that served as popular media of exchange in post-World War II Germany -- demonstrate that state power is by no means the only source of trust in a money (Weatherford 1997). Past experiences of free banking across a broad span of countries, from Scotland to Australia, give ample evidence of the capacity of private issuers to promote general acceptability for their product (Dowd 1992).

Of course, that does not mean that promoting trust in newly created electronic monies will be easy, given the inertias that generally typify currency use. Monetary history also demonstrates that there tends to be a good deal of market resistance to rapid adoption of any new money, however attractive it may appear to be. Recall, for instance, how long it took the U.S. dollar to supplant the pound sterling in international currency use, even after America's emergence a century ago as the world's richest economy. As Paul Krugman has commented: "The impressive fact here is surely the inertia; sterling remained the first-ranked currency for half a century after Britain had ceased to be the first-ranked economic power" (Krugman 1992: 173). Similar inertias have been evident for millennia in the prolonged use of such international moneys as the Byzantine bezant and Mexican silver peso long after the decline of the imperial powers that first coined them (Cohen 1998: ch. 2). It has also been evident more recently in the continued popularity of America's greenback despite periodic bouts of exchange-rate depreciation. Such immobilism seems very much the rule, not the exception, in currency relations.

Inertia is promoted by two factors. First is the pre-existence of already well established transactional networks, which confers a certain natural advantage of incumbency. Switching from one money to another necessarily involves a costly process of financial adaptation, as numerous economists have emphasized (Dornbusch et al. 1990; Guidotti and Rodriguez 1992). Considerable effort must be invested in creating and learning to use new instruments and institutions, with much riding on what other market agents may be expected to do at the same time. As attractive as a given money may seem, therefore, adoption will not prove cost-effective unless others appear likely to make extensive use of it too. In the words of Kevin Dowd and David Greenaway: "Changing currencies is costly -- we must learn to reckon in the new currency, we must change the units in which we quote prices, we might have to change our records, and so on.... [This] explains why agents are often reluctant to switch currencies, even when the currency they are using appears to be manifestly inferior to some other" (Dowd and Greenaway 1993: 1180).

Second is the exceptionally high level of uncertainty that is inherent in any choice among alternative monies. Since, as indicated, the appeal of any money ultimately rests on an intersubjective understanding, one can never truly be sure of its future value or usability. Uncertainty thus encourages a tendency toward what psychologists call "mimesis": the rational impulse of risk-averse actors, in conditions of contingency, to minimize anxiety by imitative behavior based on past experience. Once a currency gains a degree of acceptance, its use is apt to be perpetuated -- even after the appearance of powerful new challengers -- simply by regular repetition of previous practice. In effect, a conservative bias is inherent in the dynamics of the marketplace. As one source has argued, "imitation leads to the emergence of a convention [wherein] emphasis is placed on a certain 'conformism' or even hermeticism in financial circles" (Orléan 1989: 81-83).

So far, the conservative bias of the marketplace has proved a serious obstacle to the successful introduction of electronic money. But it is by no means an insuperable barrier. Quite the contrary, in fact. As the volume of electronic commerce continues to grow, it seems almost inevitable that so too will recognition and trust of cyberspace's diverse new means of payment. Something else we learn from monetary history is that even if adoption of a new money begins slowly, once a critical mass is attained widespread acceptance does tend to follow. Confidence in new e-currencies can be enhanced through effective marketing programs or with clever advertising techniques. Most of all, success will depend on the inventiveness of issuing companies in designing features to encourage use. These bells and whistles might include favorable rates of exchange when amounts of electronic money are initially acquired; attractive rates of interest on unused balances; assured access to a broad network of other transactors and purveyors; and discounts or bonuses when the electronic money rather than more traditional currency is used for purchases or investments. Sooner or later, at least some of these efforts to whet user appetite can be expected to achieve success.

Most critical of all is the question of value: how to safely preserve the purchasing power of electronic money balances over time. Initially at least, this is likely to require a promise of full and unrestricted convertibility into more conventional legal tender - just as early paper monies first gained wide acceptance by a promise of convertibility into precious metal. (10) But just as paper monies eventually took on a life of their own, delinked from a specie base, so too might electronic money one day be able to dispense with all such formal guarantees as a result of growing use and familiarity. That day will not come soon, but it does seem the most plausible scenario of the more distant future given present trends. As The Economist speculated a few years back, over the long term "it is possible to imagine the development of e-cash reaching [a] final evolutionary stage... in which convertibility into legal tender ceases to be a condition for electronic money; and electronic money will thereby become indistinguishable from -- because it will be the same as -- other, more traditional sorts of money" (The Economist 1994: 23). Once that stage is reached, perhaps one or two generations from now, we could find all sorts of new currencies competing for acceptance in the marketplace. For banker Walter Wriston, the future has already arrived:

The Information Standard has replaced the gold-exchange standard.... As in ancient times, anyone can announce the issuance of his or her brand of private cash and then try to convince people that it has value. There is no lack of entrants to operate these new private mints ranging from Microsoft to Mondex, and more enter every day (Wriston 1998: 340).

How many?

How many electronic currencies might eventually emerge? Almost certainly it will not be the "thousand of forms of currency" predicted by monetary historian Jack Weatherford, who suggests that "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 Buffet or William Gates money" (Weatherford 1998: 100). Colorful though Weatherford's prediction may be, it neglects the power of economies of scale in monetary use, which dictates a preference for fewer rather than more currencies in circulation.

The appeal of any money, economists agree, is a direct function of the size of its functional domain. As Dowd and Greenaway write: "The value of a particular currency to a user depends on how many others use it as well" (Dowd and Greenaway 1993: 1180). Central to this point is the issue of transactions costs: the expenses associated with search, bargaining, uncertainty, and enforcement of contracts. Transactions costs are inversely related to the number of market actors willing to accept a given money in payment. The larger the size of a currency's transactional network, the greater will be the economies of scale to be derived from its use -- what theorists call money's network externalities - and hence the greater will be the incentive to reduce rather than increase the total number of monies in use. No doubt there will be much experimentation in the expanding realm of cyberspace, and thousands of forms of e-currency might indeed be tried. But after an inevitable sorting-out process, the number of monies that actually succeed in gaining some degree of general acceptability is sure to be much lower. Many nascent currencies, unable to compete effectively, will simply disappear (just as many of the earliest versions of e-money have already done).

But neither is it likely that the number of monies will be reduced to as few as one, as economist Roland Vaubel has contended, exclusively stressing the power of economies of scale. In his words: "Ultimately, currency competition destroys itself because the use of money is subject to very sizable economies of scale.... The only lasting result will be ... the survival of the fittest currency" (Vaubel 1977: 437, 440). In fact, economies of scale are not the only consideration that matters, as modern network theory teaches (Thygesen et al. 1995: 39-45). Of equal importance are considerations of stability and credibility, which suggest that the optimal number of monies will actually be significantly greater than one.

In network theory, two distinct structures are recognized in the configuration of spatial relations: the "infrastructure," which is the functional basis of a network; and the "infostructure," which provides needed management and control services. Economies of scale, by reducing transactions costs, obviously promote a consolidation of networks at the level of infrastructure, just as Vaubel argues. But at the infostructure level, by contrast, the optimal configuration tends to be rather more decentralized and competitive, in order to maximize agent responsibility. Some finite number of rival networks will counter the negative effects of absolute monopoly, which frequently leads to weakened control by users and diluted incentives for suppliers. Hence a rational trade-off exists between transactional efficiency and currency stability, generating an incentive for diversification among market agents that will tend toward an equilibrium outcome somewhat short of complete centralization. Once electronic money gains widespread acceptance, a smallish population of currencies is far more likely than a single universal money.

II. Historical Perspective

The notion of a multitude of currencies, many of them privately issued and all competing actively for market acceptance, is obviously at variance with conventional understandings of currency systems and monetary management. For most people, money is strictly national and effectively insular - each currency sanctioned by the sovereign state and exclusively used within a country's territorial frontiers for all standard monetary purposes (medium of exchange, store of value, unit of account). In fact, as I have argued elsewhere (Cohen 1998), nothing could be further from present-day reality. Intense cross-border competition among currencies already exists in many parts of the world. In that context, the advent of electronic money can hardly be considered anomalous.

At issue is what I call the geography of money: the broad configuration of global currency space. Over the centuries monetary geography has changed repeatedly under the influence of economic, technological, and political developments. Today it is changing yet again in ways still not fully appreciated.

Conventional understandings

The conventional understanding of monetary geography is quite simple. Currency domains are assumed to coincide precisely with the political frontiers of nation-states, with few exceptions, and governments are believed to exercise exclusive control over the issue and circulation of money within their own territory. At the heart of this understanding, reflecting contemporary norms of political legitimacy, is the principle of absolute monetary sovereignty. Currencies are and, it is thought, should be strictly territorial -- One Country/One Currency. Money is properly the monopoly of the state.

It is easy to see the practical advantages of a territorial currency. Within any given country, network externalities will be maximized when there is but a single money in circulation. It is also easy to see why a monetary monopoly might be highly prized by governments. Genuine power resides in the command that money represents. In fiscal terms a territorial currency offers a potentially rich source of revenue, seigniorage, to underwrite public expenditures - an advantage that is of particular value in moments of crisis or threat to national security. Politically, it embodies a potent political symbol to promote a sense of national identity as well as a practical means to insulate the nation from foreign influence or constraint. Most importantly, in the opinion of most specialists, a monetary monopoly provides a powerful instrument to help manage the macroeconomic performance of the economy. That is monetary policy in the traditional sense of the term and the main focus of this article.

What is often overlooked, however, is how historically exceptional all this is. In practice, territorial currencies have existed for less than two centuries. Prior to the 1800s no government even thought to claim a formal monopoly over the issue and use of money within its political domain, and macroeconomics had not even yet been invented. Cross-border circulation of currencies was not only accepted but widespread, monetary policy as such did not exist, and private monies were commonplace. As Helleiner (1997) has perceptively reminded us, the notion of absolute monetary sovereignty really began to emerge only in the nineteenth century with the formal consolidation of the powers of the nation-state in Europe and later elsewhere. Monetary instruments were standardized, circulation of foreign monies was banned, and legal-tender status was reserved to the national currency alone. The era of territorial money reached its apogee in the middle of the twentieth century with the invention of exchange and capital controls and the emergence of activist central banks.

Since World War II, by contrast, the tide has clearly reversed. The trend today, quite decisively, is back away from monetary insularity, as exchange and capital controls have gradually fallen out of favor. Increasingly, we see greater and greater direct competition among currencies, regardless of the preferences of governments that would still wish to maintain an independent monetary policy. Money is once again becoming deterritorialized, much as in the centuries prior to the era of territorial currency, making conventional understandings of monetary geography increasingly obsolete.

Currency deterritorialization

Currency deterritorialization is part and parcel of the accelerating globalization of world economic affairs. Driven by deregulation as well as the pressures of competition and technological innovation, financial and monetary systems have become increasingly integrated, effectively broadening the array of currency choice for many transactors and investors. Despite government efforts to preserve traditional monetary monopolies, currencies now compete directly for market confidence and allegiance. As a result, monetary domains today diverge more and more sharply from the legal jurisdictions of states and are defined more by the networks of market actors that use them than by the territorial frontiers of the governments that issue them.

Leading the process of deterritorialization are a few select monies - including, most prominently, the U.S. dollar, the Deutschmark (the DM, now being succeeded by the euro), and the Japanese yen -- which have come to be employed widely outside their country of issue for transactions either between nations or within foreign states. The former is conventionally referred to as "international" currency use (or currency "internationalization"); the latter is described by the term "currency substitution," involving domestic circulation of foreign banknotes as well as local holdings of foreign-currency deposits, and can be referred to as "foreign-domestic use." Both currency internationalization (CI) and currency substitution (CS) are the product of intense market rivalry -- a kind of Darwinian process of natural selection, driven by the powerful force of demand. Reciprocally, an even larger number of monies now routinely face growing competition at home from currencies originating abroad.

The evidence of accelerating cross-border competition is unmistakable (Cohen 1998: ch. 5). The clearest signal of the rapid growth of CI is sent by the global foreign-exchange market where, according to the Bank for International Settlements (1999), average daily turnover has accelerated from $590 billion in 1989 (the first year for which such data are available) to $1.5 trillion in 1998 -- a rate of increase in excess of 25 percent per annum. Even allowing for the fact that much of this activity is accounted for by inter-dealer trading, the pace of expansion is impressive. The dollar is the most favored vehicle for currency exchange worldwide, appearing on one side or the other of some 87 percent of all transactions in 1998 (little changed from its 90 percent share in 1989). The DM appeared in 30 percent of transactions and the yen in 21 percent. The dollar is also the most favored vehicle for the invoicing of international trade, where the greenback has been estimated to account for nearly half of all world exports (Hartmann 1998) -- more than double America's share of world exports alone. The DM share of invoicing in recent years was fifteen percent (roughly equal to Germany's proportion of world exports); the yen's share, five percent (less than half of Japan's proportion of world exports).

A parallel story is evident in international markets for financial claims, including bank deposits and loans as well as bonds and stocks, all of which have grown at double-digit rates for years. Using data from a variety of sources, Thygesen et al. (1995) calculated what they call "global financial wealth": the world's total portfolio of private international investments. From just over $1 trillion in 1981, aggregate cross-border holdings quadrupled to more than $4.5 trillion by 1993 -- an expansion far faster than that of world output or trade. Again the dollar dominated, accounting for nearly three-fifths of foreign-currency deposits and close to two-fifths of international bonds. The DM accounted for 14 percent of deposits and 10 percent of bonds; the yen, 4 percent of deposits and 14 percent of bonds. More recently, the International Monetary Fund (1999) put the total of international portfolio investments (including equities, long and short-term debt securities, and financial derivatives) at just over $6 trillion in 1997.

The clearest signal of the rapid growth of CS is sent by the rapid increase in the physical circulation of these same currencies outside their country of origin. For the dollar, an authoritative Federal Reserve study (Porter and Judson 1996) put the value of US banknotes in circulation abroad in 1995 at between 55 and 70 percent of the total outstanding stock -- equivalent to perhaps $250 billion in all. The same study also reckoned that as much as three-quarters of the annual increase of U.S. notes now goes directly abroad, up from less than one-half in the 1980s and under one-third in the 1970s. Appetite for the greenback appears to be not only strong but growing. Using a comparable approach Germany's Bundesbank (1995) has estimated Deutschmark circulation outside Germany, mainly in East-Central Europe and the Balkans, at about 30 to 40 percent of total stock at end-1994, equivalent to some DM 65-90 billion ($45-65 billion). The Deutschmark's successor, the euro, is confidently expected to take over the DM's role in foreign-domestic use once euro notes enter circulation in 2002 and perhaps even to cut into the dollar's market share. And similarly, on the other side of the world, Bank of Japan officials have been privately reported to believe that of the total supply of yen banknotes, amounting to some $370 billion in 1993, as much as ten percent was located in neighboring countries (Hale 1995). Combining these diverse estimates suggests a minimum foreign circulation of the top currencies in the mid-1990s of at least $300 billion in all -- by no means an inconsiderable sum and, judging from available evidence, apparently continuing to rise rapidly.

The evidence also appears to suggest that a very wide range of countries is affected by the phenomenon, even if the precise numbers involved remain somewhat obscure. According to one authoritative source (Krueger and Ha 1996), foreign banknotes in the mid-1990s accounted for twenty percent or more of the local money stock in as many as three dozen nations inhabited by at least one-third of the world's population. The same source also suggests that, in total, as much as one-quarter to one-third of the world's circulating currency was recently located outside its country of issue.

So far, of course, the growing competition among currencies has been limited to state-sanctioned monies only. Private monies do also exist, both domestically and internationally, to rival the official issue of central banks. But none, as yet, has had an impact on monetary affairs that might be described as anything more than marginal. At the domestic level, diverse local currencies circulate in a number of countries (L. Solomon 1996). Such monies, however, are really little different from institutionalized systems of multilateral barter, and none trade across national frontiers. At the international level, private substitutes for state monies have long existed in the form of what economists call "artificial currency units" (ACUs) -- non-state alternatives designed to perform one or more of the standard roles of money (Aschheim and Park 1976). Traditionally, though, most ACUs have functioned mainly as a unit of account or store of value, rather than as a medium of exchange, thus posing little direct threat to more usable state-sanctioned currencies. In recent years the only non-state form of money that has been used to any substantial degree in international markets is a pool of privately issued assets denominated in ECUs, the European Union's old European Currency Unit that came into existence with the European Monetary System in 1979 (now replaced by EMU). Despite having attained limited success in global financial markets, however, the ECU was never widely accepted for private transactional purposes. The IMF's Special Drawing Rights (SDRs) are also a form of ACU but for official use only, to be traded among governments or between governments and the Fund.

However, this does not mean that the competition could not be widened further to include private monies as well. That is where electronic money comes in. In a world already increasingly accustomed to choice among currencies, there seems little that is anomalous in adding new and potentially attractive virtual monies to the menu. Quite the contrary, taking a long view, the development of e-money seems more like the closing of a circle following what was, in historical terms, a relatively brief interlude of national currency monopolies. (11) Monetary geography today is rapidly harking back to the deterritorialized model that existed prior to the era of territorial currency - "back to the future," as one source (Craig 1996) has quipped, alluding to the popular film of the same name. (12) From this perspective, the prospect of electronic money appears not only natural but inevitable.

III. Consequences for Monetary Policy

This brings us to our main topic. How will all this affect the ability of central banks to manage the macroeconomic performance of the economy? Monetary policy, arguably, has already been significantly compromised in many countries by the deterritorialization of state-sanctioned currencies. The question is what additional complications, if any, are added by the introduction of electronic money. Analysis suggests that the answer will differ significantly depending on what countries we are talking about.

How monetary policy works

To begin, consider how monetary policy works with a traditional territorial currency. The goal of monetary policy, to repeat, is to keep aggregate spending generally in line with production capacity. Since the level of expenditures (nominal demand) cannot be controlled directly, the trick is to find some way to accomplish the same objective indirectly. Central banks seek to do this by managing the overall stock of money in circulation.

A major problem, of course, is the fact that not all of the money stock can be controlled directly. Monetary aggregates can be calculated in a number of ways, from the core measure M0, comprising notes and coins in circulation ("central-bank currency"), to M1, which adds conventional checking accounts (demand deposits), to even broader measures including other "reservable" deposits (M2) and progressively less liquid classes of financial claims (M3, M4). Only notes and coins come straight from state authorities. This aggregate, however, is far too narrow a measure for the purposes of monetary policy and in any event is greatly overshadowed by the mass of deposits in most economies. Yet deposits -- otherwise known as bank money -- are created not by the central bank but by commercial banks, based on the availability of reserves. The challenge for central banks, therefore, is to develop instruments that can effectively guide the process of deposit creation.

Typically, these instruments aim to exercise influence over bank reserves, on the assumption that such influence in turn will condition the public's overall access to credit. The most popular tools of monetary policy are open-market operations, which control the total quantity of reserves, and discount-rate policy, which controls the price at which reserves are traded among banks or between banks and the central bank. Open-market operations involve purchases and sales of widely traded financial claims, usually government securities, by the central bank with the market in general. Discount-rate policy involves the interest charged by the central bank for providing reserves directly to the banking system, either through lending at a "discount window" or through rediscounting or purchasing assets held by banks.

In fact, therefore, the series of links in monetary policy - what economists call the transmission mechanism of monetary policy -- is fairly lengthy, running from (1) open-market operations and the discount rate to (2) bank reserves to (3) deposit creation to (4) aggregate expenditures. Two key implications follow. First, since none of the links in the transmission mechanism is purely mechanical, there is ample room for slippage between central-bank decisions and the actual behavior of spending. Monetary policy is hardly a matter of merely turning a tap on or off. And second, since none of the links can be by-passed, there is ample room for long lags as well in the ultimate impact of central-bank decisions. As a vehicle for the implementation of public priorities, monetary policy is hardly swift either.

Still, so long as the state's own currency is the only money available, the central bank has adequate reason to believe that its decisions can be broadly effective in steering macroeconomic performance. Control of the monetary aggregates may be neither precise nor immediate. But in the absence of any attractive substitutes for the national currency, nominal demand has little option but to adjust, more or less in proportion, to variations of available supply. The connection will be looser, admittedly, in the event of upward movements of money supply; central banks, it is said, find it difficult to "push with a string." But the connection will most certainly be tight with downward, contractionary movements. The key is the central bank's presumed monopoly over the reserves that back bank money. A territorial currency maximizes the practical impact of monetary policy (especially restrictive policy).

Implications of deterritorialization

Now consider the implications of deterritorialization. Quite obviously, once market agents gain a choice among currencies, the direct connection between nominal demand and the supply of national money is broken. The central bank may still be able to exercise a degree of influence over the stock of its own currency, however measured. But to the extent that transactors and investors have access to alternative currencies, variations of reserve supply will now have correspondingly less effect on the overall level of spending. The practical impact of monetary policy becomes attenuated, and the economy becomes more vulnerable to frequent bouts of inflation or recession (or perhaps both - stagflation).

It is important to stress where the root of the challenge lies. Analytically, we may distinguish between two key questions -- what we may refer to as the separate issues of control and autonomy. Control refers to the central bank's technical capacity to manage the money supply. Can officials generate increases or decreases in the stock of its own currency at will? Autonomy, by contrast, refers to the central bank's policy capacity to manage demand. Can officials generate increases or decreases in aggregate expenditures at will? The challenge of deterritorialization, clearly, is to central-bank autonomy rather than control. Deterritorialization infringes neither the link running from the instruments of monetary policy, open-market operations and discount rate, to bank reserves; nor the link from bank reserves to deposit creation. The central bank's ability to control monetary aggregates denominated in the nation's own monetary unit, therefore, is not directly affected. Rather, it is the link with expenditures that is infringed - the autonomy of monetary policy -- owing to the competitive threat posed by the availability of other monetary units within the country. Substitute currencies mean alternative circuits of spending, affecting prices and employment, and alternative settlement systems that are not directly affected by the traditional instruments of policy. As Friedman puts the point, "currency substitution opens the way for what amounts to competition among national clearing mechanisms, even if each is maintained by a different country's central bank in its own currency" (Friedman 1999: 335). The greater the intensity of competition from currencies originating abroad, the weaker will be the effectiveness of conventional monetary policy at home.

For some economists, inspired by the ideas of the late Nobel laureate Friedrich Hayek, a weakening of central-bank authority would not be at all undesirable. Quite the contrary, in fact, given past abuses of state monetary monopolies. Once having learned to appreciate how easy it was to finance public expenditures via money creation, governments have often succumbed to the temptation to extract more seigniorage than the economy could bear, resulting in price increases and even hyperinflation. Technically, seigniorage derives from the fact that the central bank pays no interest on its liabilities while earning interest on its assets. The difference is pure profit for the monetary authority. As such, seigniorage is not necessarily inflationary. But it obviously can become an "inflation tax" on the general population if money creation is not curbed in some way. For Hayek (1990), the surest way to curb inflation was through the discipline of market competition. Macroeconomic performance would be improved, he contended, if state control of money could be wholly erased, instead leaving currencies to be created solely by private financial institutions. Following his lead, others have argued forcefully for a system of effectively deterritorialized money shaped exclusively by market forces (13) -- denationalized money, to use Hayek's own label.

Little evidence exists, however, to indicate that unrestricted currency competition would necessarily produce better outcomes than traditional central banks; and there is much evidence to suggest that results could be much worse, were rivalry for seigniorage to lead to even greater inflationary pressures. The real problem lies in the underlying character of financial markets, which of course includes the market for money. Inherent in all financial markets, as Charles Kindelberger (1989) has classically demonstrated, is an interdependence of expectations that tends to lead to both herd behavior and multiple equilibria, making the economy painfully vulnerable to manias, panics, and crashes - precisely the sorts of instabilities that central banks were invented to restrain. The challenge to the autonomy of monetary policy is not at all inconsequential.

In fact, the challenge of deterritorialization represents a fundamental change in the nature of monetary governance - a transformation that I have previously characterized as the equivalent of a market shift from monopoly to oligopoly (Cohen 1998). Despite their loss of exclusive control of money supply, their local monopolies, states do still retain an ability to influence nominal demand insofar as they can successfully compete, inside or across borders, to sustain use of their own currency rather than others; that is, insofar as they are able and willing to fight for market share, not unlike rival firms in an oligopolistic industry. With deterritorialization, therefore, monetary management is qualitatively transformed. Where once the link with aggregate expenditures could be taken for granted, now use of a currency must be cultivated and preserved. Where once central banks felt they could act with unquestioned authority, now they are impelled to develop and implement diverse marketing strategies designed to shape and manage demand for money.

Monetary policy, in short, has become something akin to a contest for market loyalty. The targets of policy are the users of money, at home or abroad. The aim of policy is to sustain or enhance a national currency's use, almost as if monies were like goods to be sold under registered trademarks. As economist Robert Aliber once quipped, "the dollar and Coca-Cola are both brand names.... Each national central bank produces its own brand of money... Each national money is a differentiated product... Each central bank has a marketing strategy to strengthen the demand for its particular brand of money" (Aliber 1987: 153). Demand may be encouraged by investing in a currency's reputation, with the government acting to enhance confidence in the money's continued value and reliability; or, alternatively, use might be compelled by legal-tender restrictions, public-receivability provisions, or various measures of financial repression, up to and including the now less fashionable options of exchange or capital controls.

The contest, moreover, is universal. As deterritorialization accelerates, no central bank can fully escape the oligopolistic struggle, no matter how competitive or uncompetitive its particular brand of money may be. Rivalry is not limited merely to the most popular global currencies, as is sometimes suggested (De Boissieu 1988). That would be so only if cross-border competition were restricted to international use alone: the dollar, euro, and yen along with a few lesser rivals (e.g., sterling and the Swiss franc) vying for shares of private investment portfolios or for use in trade invoicing. Deterritorialization, however, extends to foreign-domestic use as well, hence involving all currencies, to some degree, in direct competition with one another -- the weak as well as the strong, even those formally protected by exchange controls as well as those that are legally convertible. Money's oligopoly is truly global. The challenge of deterritorialization is faced by every government.

But that of course does not mean that the challenge is the same for every government. Quite the contrary, in fact. Universal does not mean uniform. In reality, the problems facing the favored few countries whose currencies actually do the competing across national borders - most notably, the reserve centers of the U.S., Euroland, and Japan - are in a class apart from the difficulties confronted by those many other states whose monetary spaces are being invaded. The challenge is clearly greater for economies like those in Latin America, the Middle East, or the former Soviet bloc, where currency substitution is by now a familiar and accepted fact of life. The implications of electronic money can thus be expected to be comparably differentiated. I will consider first the latter group of countries -- those with less competitive currencies - and then move on to the reserve centers.

Implications for the less competitive

What does electronic money add to the problems facing countries with less competitive currencies? E-money's main impact here, while not insignificant, will be more a change of degree than of kind. The effect will be to expand the population of currencies circulating within each country, further eroding an already increasingly tenuous connection between nominal demand and supply of national money. As more substitute currencies become available, variations of home-currency monetary aggregates will have even less influence on overall spending. Policy will become even more attenuated.

The key point is that for central banks in these countries, the challenge to monetary autonomy is difficult enough already even without electronic money. As compared with the halcyon era of territorial currency, when central banks could assume a reasonably tight connection between their own decisions and spending behavior, deterritorialization poses a tricky dilemma: how to guide overall expenditures when some part of the money supply available to residents is comprised of currencies other than the state's own monetary unit. The authorities can still use such instruments as open-market operations and discount-rate policy to guide bank lending in national money. But insofar as the public has access to other monies too, additional room for slippage or unpredictable lags is created in the transmission mechanism running from policy implementation to bank reserves to deposit creation.

Further refinements of policy are thus required to ensure that overall goals are met. Key questions include: How large is the supply of alternative currencies in circulation? How much spending can those alternative currencies support? And how easy is it for residents to switch back and forth between the national money and others in response to central-bank actions? (Technically, how great is the cross-elasticity of substitution between currencies?) In effect the supply of national money must now be treated as a residual, managed so as to complement expected developments in the non-national component of the total money stock in circulation. Once due account is taken of the availability of substitute currencies, parameters can be established for open-market operations and discount-rate policy that will, with luck, still exercise something like the desired influence on macroeconomic performance.

Though tricky, therefore, the dilemma is potentially manageable - but only so long as the residual represented by the supply of national money does not become too small. And there, of course, lies the rub. In reality, in an increasing number of countries, the local currency's share of monetary aggregates is already dwindling rapidly as a result of deterritorialization. This is clearly demonstrated by recent data from the IMF (Baliño et al. 1999: 2-3) reporting the percentage of "broad money" (M2) accounted for by foreign-currency deposits in a number of middle-income and developing economies around the world -- a rough measure of currency substitution. Even without the additional component of foreign banknotes in domestic circulation, which is by definition unknowable, the numbers are telling. In as many as a dozen and a half countries, from Azerbaijan to Uruguay, a third or more of the broad money stock is now comprised of currencies originating elsewhere. In three dozen others, the percentages are smaller but nonetheless significant and in most cases growing. In all these economies, the supply of national money is indeed fast becoming a residual too small to have much direct effect on aggregate expenditure.

In this context, electronic money will add quantitatively to a central bank's problems but not, in any meaningful sense, qualitatively. For these countries the real discontinuity has already arrived -- with deterritorialization, which broke the direct link between national money supply and nominal demand. Their monetary space has already been invaded; their central banks are already being forced to fight for market loyalty; their sovereign power, accordingly, has already begun to wane. The advent of electronic money will simply hasten the ebbing of the tide by contributing still more currencies to the competitive fray - some of which could turn out to have wider appeal than the government's own brand of money. The battle facing these central banks will not be new, just more intense.

Implications for reserve centers

What then of the reserve centers, whose currencies are doing the invading? Until now, these economies have enjoyed something of a free ride - all the benefits of competitive success abroad (14) without the corresponding disadvantages of a threat to monetary monopoly at home. For them there has not yet been any real discontinuity breaking the link between national money supply and nominal demand. For them, therefore, the advent of electronic money truly will be a reversal - a distinct change of kind, not just degree -- insofar as one or more e-monies begin to gain widespread acceptance. When that happens the reserve centers too, for the first time, will face genuine currency competition on their own turf.

Indeed, if anything, the challenge is likely to be felt by the reserve centers first, even before any impacts spread onward to countries with less competitive currencies. The reason is evident. It is the reserve centers that are most wired - the most plugged into the new realm of electronic commerce. Online access is far greater in the U.S., Europe, and Japan than elsewhere. Hence if electronic money is to gain widespread acceptance anywhere, it will most probably happen initially in these same areas. It is no accident that Flooz, Beenz, and most other experiments to date have all originated in the world's most advanced economies, which are both financially sophisticated and computer literate. It is precisely these economies that are likely to be the most receptive to innovative new means of payment that can be used and transferred electronically.

Once some of these experiments begin to bear fruit, a new day will indeed have dawned, just as Kobrin (1997) and Friedman (1999) assert. As in countries with less competitive currencies, which already face invasion of their monetary space, the population of monies will be expanded, breaking the link between the supply of national money and nominal demand. Now, for the first time, central banks in the reserve centers too - the Federal Reserve, European Central Bank, and Bank of Japan - will be faced with the tricky dilemma of guiding expenditures when a significant fraction of the available money stock is comprised of currencies other than the state-sanctioned monetary unit (the dollar, euro, or yen).

Again, however, it is important to note where the root of the challenge lies. Kobrin, for instance, is right to be worried about the potentially profound impact of electronic money on monetary management. But he is right for the wrong reason, insofar as he stresses the control aspect of monetary policy rather than its autonomy. The problem is not, as Kobrin suggests, that the advent of e-money will make it difficult for central bankers to control monetary aggregates. In the reserve centers, as in those countries that have already experienced currency deterritorialization, the central bank's capacity to manage the stock of money denominated in the nation's own unit will not be directly affected. Bank reserves can still be adjusted to guide the growth of local bank money. The challenge, rather, as Friedman correctly argues, will be to the autonomy of central-bank policy - the capacity to manage demand -- owing to the increasing availability of attractive alternatives to national money, both central-bank currency and bank money. (15) Alan Greenspan and his counterparts in Europe and Japan will now be compelled to refine policy too, just as less fortunate central bankers have already been forced to do; that is, to treat the supply of national money more as a residual, taking due account of the availability of substitute currencies in circulation. The problem, as elsewhere, lies in the relative size of the residual. Could the local money's share of the total monetary stock become too small to be effective in steering aggregate expenditure? The question has been posed most starkly by a central banker, the ECB's Otmar Issing (1999): In a world of electronic money, he asks, "would the familiar existing units of account, the euro, the US dollar, the pound sterling, etc., continue to mean anything?"

The empire strikes back?

Is the threat real? Helleiner (1998) and others, as indicated, contend that the challenge is unlikely to be serious. Three broad lines of argument are offered, none entirely persuasive.

First, the very possibility of new privately issued e-monies is discounted. Both Helleiner (1998) and Goodhart (2000), for example, argue that the scenario is unlikely because of the inherent advantages of incumbency already enjoyed by existing national currencies. In Goodhart's words, conventional money "has first-mover advantages; it is already there.... The demise of [conventional money] at the hands of [e-money] will not happen" (Goodhart 2000: 17, 19). But that skeptical view ignores the powerful forces gathering to overcome the conservative bias of the marketplace - the immense new opportunities created by the expanding world of electronic commerce; and, above all, the potent allure of seigniorage. As already acknowledged, there is little reason to expect new "rootless" monies to gain acceptance overnight. But there are good reasons, I have suggested, to assume that given enough time, the necessary trust can be created. The issue is not the "demise" of conventional money but rather the emergence of non-conventional rivals. Even Goodhart concedes that "over time it is possible that some brand (or brands) of [e-money] may become increasingly widely accepted [and] may indeed substitute for currency in a wider range of possible uses" (Goodhart 2000: 17-19).

Goodhart also stresses the difficulty, with today's technology, of providing complete anonymity for transactions in e-money. "How can the payer/payee be confident," he asks (Goodhart 2000: 8), "that the other counterparty will not be recording the transaction in a manner that will leave an audit trail that can subsequently be followed?" The question is not unreasonable. Clearly, the technology does not exist to make e-money as anonymous as paper currency - at least, not yet. The trickiness of the challenge of providing adequate assurance of privacy has also been acknowledged. But it is reasonable to note too that banknotes account for a decreasing share of overall transactions in most economies. The same threat to anonymity exists with electronic payments systems using conventional currency. E-money, in fact, is at no special disadvantage in this regard.

What then of the inherent advantages that central banks enjoy in providing a payments system? This point has been stressed by Freedman (2000), in effect harking back to Knapp's state theory of money. The fact that the central bank is a state institution, Freedman contends, backed by the full faith and credit of the national government, makes its own settlement mechanism virtually riskless as compared with that of any private money issuer. Hence "it is very unlikely that other mechanisms, including variants of electronic money, will supplant the current types of arrangements for the foreseeable future" (Freedman 2000: 2). Once again, however, this takes an unduly restrictive view of how trust in a money is constructed. Admittedly the backing of the state gives conventional currency an extra margin of competitiveness. But for reasons already indicated, even that advantage need not prove an insuperable barrier to the successful introduction of new forms of money.

A second line of argument points to the fact that central banks themselves have professed to be unconcerned about the challenge of electronic money. Helleiner (1998), for instance, cites a spate of official studies that have generally reached sanguine conclusions. Typical was a 1996 report by the Bank for International Settlements averring that as far as monetary policy is concerned, "it is highly unlikely that operating techniques will need to be adjusted significantly." (16) So if policymakers are not worried by the prospect, Helleiner asks, why should anyone else be? In fact, however, such commentaries tend to date back to the first generation of electronic money and address only early prepaid products like Mondex and Digicash. Central bankers have much less reason to be indifferent to more recent versions of electronic money, which offer the possibility of entirely new clearing mechanisms rather than merely another form of liquidity. One straw in the wind is Otmar Issing's pointed question, quoted above. Another can be found in the anxious words of Mervyn King, deputy governor of the Bank of England. King suggests that once new electronic currencies make it possible for transactors and investors to bypass state-sanctioned money, "central banks would lose their ability to implement monetary policy. The successors to Bill Gates [could] put the successors to Alan Greenspan out of business" (King 1999: 411). Remarks like these seem anything but unconcerned.

A third line of argument, taking the possibility of electronic money more seriously, acknowledges possible risks to monetary policy but nonetheless expresses confidence in the ability of central banks to sustain their traditional influence over nominal demand. The empire has the weapons to strike back, if need be. For Helleiner (1998), the political scientist, this means using the coercive power of the state. Central bankers, he suggests, are unlikely to remain wholly passive if their traditional prerogatives seem truly in jeopardy. More likely, they will seek to extend their regulatory authority to newly emergent e-monies, imposing on issuers the same reserve requirements as traditionally applied to commercial banks and managing the reserves of issuers via the traditional tools of monetary policy in roughly parallel fashion. As he puts it, "state authorities [could] impose a regulatory structure on stored value devices similar to that which they impose on other forms of money" (Helleiner 1998: 407). In extremis, they might even try to outlaw new e-monies altogether. But could they? One of the principal characteristics of cyberspace is its divorce from national territory. Producers of electronic currency could evade prohibition or control simply by shifting operations to another jurisdiction, just as banks have long since avoided taxation or various restrictions by booking transactions through offshore centers in the Caribbean or elsewhere. Attempts to extend the central bank's regulatory authority could, in practice, prove to be quite futile.

For others, such as the economists Freedman (2000), Goodhart (2000), and Woodford (2000), the power to strike back lies not in the central bank's regulatory authority but in its continuing ability to influence interest rates. In Freedman's words: "Even in the extremely unlikely case... that the development of network money permitted alternative settlement services to be offered that effectively competed with central bank services, central banks would very likely be able to continue to influence the policy rate" (Freedman 2000: 4). Central banks, it is said, could retain influence over interest rates simply by conducting open-market or discount-rate operations in electronic monies as well as in their own state-sanctioned currency. But how easy might that be for policymakers, requiring transactions in currencies that they themselves do not create? Central banks would have no choice but to build up a war chest of e-currencies in the same way that they now hold foreign-exchange reserves. But that is still not the same as their traditional power to create national money at will. Interest rates might be influenced, but imperfectly at best.

The threat, in short, is indeed real. The risk is not that the power of the sovereign state will disappear -- at least not in the sense of the state's ability to control the supply of its own money. Rather it is that as the population of monies grows the power of the state, as Issing and King imply, will simply become more and more irrelevant. The autonomy of monetary policy will, gradually, just fade away. That is -- or should be -- as much a worry for the reserve centers as it already is for others. Arguments to the contrary notwithstanding, the dawn appears to be anything but false.

IV. Conclusion

As indicated, my conclusions are more consistent with the spirit of the predictions of Kobrin and Friedman than with the sanguine view expressed by Helleiner and others. The anticipated era of electronic money, though an entirely natural development in the context of today's rapidly globalizing world economy, will indeed have a profound impact on the effectiveness of monetary policy - less so in countries with weaker currencies, where control of aggregate spending has already been compromised by the accelerating deterritorialization of national monies; definitely more so in the reserve centers, where domestic monetary monopolies will be seriously breached for the first time. The world will have circled back to a time when cross-border circulation of currencies was widespread and private monies were commonplace.

The irony of all this is hard to escape. For years, the followers of Friedrich Hayek have been calling for denationalization of money, to little avail. Governments have, quite understandably, been resistant to any voluntary surrender of authority. Yet what could not be achieved by intellectual persuasion now seems about to be produced instead by technological development and the rush of events. With the arrival of electronic money, money creation will become increasingly privatized. Hayek's vision of a world of unrestricted currency competition could, for better or for worse, soon become reality. (17)

There seems little doubt, therefore, that state dominance of money is seriously threatened. Like it or not, governments will have little choice but to look for new instruments of policy if they wish to continue to take responsibility for macroeconomic performance.

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Notes

1. An earlier version of this paper was presented at the annual meeting of the international Studies Association, Los Angeles, California, March 2000. Helpful comments were received from David Andrews, Eric Helleiner, and three anonymous reviewers for this journal. The research assistance of Jeffrey Chwieroth is also gratefully acknowledged.

2. For a rare early exception, see Berentsen 1998.

3. Explicitly, the papers by Freedman, Goodhart, and Woodford were framed as direct responses to Benjamin Friedman's article. It is not clear that any of the four, all economists, was even aware of the earlier contributions by Kobrin and Helleiner. Freedman is deputy governor of the Bank of Canada, while Friedman, Goodhart, and Woodford are academics at Harvard University, the London School of Economics, and Princeton University, respectively.

4. This paper elaborates on thoughts first expressed in Cohen 1999.

5. Useful introductions to the subject of electronic money include Furche and Wrightson 1996; Lynch and Lundquist 1996; E. Solomon 1997.

6. E. Solomon 1997 prefers the term "cybermoney."

7. The Bank for International Settlements (2000) provides a detailed survey of prepaid electronic money products. For further detail, see Singleton 1995; Furch and Wrightson 1996, ch. 5; Stewart 1997.

8. For more information on these fledgling units, see their respective web sites. For Flooz: www.flooz.com. For Beenz: www.beenz.com. For Cybergold: www.cybergold.com. For iPoints: www.ipoints.co.uk.

9. Most popular, according to The Economist (2000), is Beenz, with less than three-quarters of a million customers as of early 2000. Next comes Flooz, with some 450,000 users.

10. Today only one e-money, Cybergold, can actually be converted into conventional money. All others, for now, can only be used for the purchase of goods and services (i.e., they are commodity-convertible but not currency-convertible).

11. A similar argument is made by Weatherford 1997.

12. Kobrin (1998) has used the same allusion in a related context.

13. See e.g., Vaubel 1986; Selgin 1988; Glasner 1989; White 1989.

14. These benefits are discussed in Cohen 1998: ch. 6

15. The challenge was underestimated by early analysts, such as Furche and Wrightson 1996 or Berentsen 1998, who saw electronic money as an alternative to central-bank currency only, excluding reservable deposits.

16. BIS 1996: 7. For other citations, see Helleiner 1998: 29.

17. The parallels between Hayek's vision of denationalized money and the anticipated era of e-money have been noted inter alia by More 1995; Macintosh 1998; Helleiner 1999; Issing 1999; The Economist 1999.

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