The True Gold Standard (Second Edition)
When hearing or reading excited discussions of ``the new payment technologies'' and ``digital money'' it is well to maintain some historical perspective. What exactly is new, and what difference will it make? Is the coming change in the payments system revolutionary, or better understood as evolutionary? Will changes in the way money is paid from one party to another bring about changes in the character of money itself?
Monetary Evolution, Not Revolution
Digital money--spendable balances represented solely by digits on a bank's balance sheet--is not new. Banking historians have found that merchants in Genoa, Italy, were making payments by transferring bank account balances back in 1200 AD. It doesn't really matter whether the digits on the bank's balance sheet are displayed in ink or in pixels.
What has been changing over the centuries is the usual method of authorizing the transfer of balances from one account to another. In 1200, when Alice wanted to pay Bob by deposit transfer, one or both of them would have to meet in person with a banker to authorize the transfer orally. Paper checks--authorization by written order--came along later, first appearing in the 1300s and becoming common in the 1600s. Remote, paperless, and instantaneously executed authorization of funds transfer, in the form of ``wiring'' money from one account to another, has been around at the wholesale level since the mid-1900s, following the introduction of the electric telegraph. Wire transfer today accounts for the vast majority--more than six-sevenths--of the dollar volume of payments in the United States. (Cash is the most common method by number of transactions per day, but the estimated average value of a cash transaction is tiny, $10, compared to that of a wire transfer, $4 million.) What is called electronic funds transfer or EFT, wherein an individual accesses the payment system by means of a debit card reader or a personal computer, basically brings the wiring of money down to the level of the retail transaction.
What makes EFT significant is that it considerably lowers the cost of wiring money. The most obvious result to be expected is a reduction in the frequency of check-writing. Debit cards are now proliferating widely, bill-paying by personal computer is finally catching on, and deposit transfer via the Internet appears to be coming soon. People who today receive glossy catalogs, order merchandise by telephone, and pay by reading a credit card number to an operator, may in a few years find it more convenient to shop on-line by personal computer, and pay on-line by clicking an on-screen ``buy'' button to authorize a deposit transfer to the seller's account. (On-line payment by credit card is already available at many commercial Web sites today.) But these are evolutionary rather than revolutionary changes, and superficial rather than profound. What happens behind the scenes--deposit transfer--remains the same.