Monetary Policies
Digital currency payment systems have raised macroeconomic questions and concerns regarding their impact on the money supply and governments' control over monetary policy. In the U.S., research has shown, however, that the Federal Reserve system's control of the money supply can be adjusted to reflect the change in the money demand, and as such government officials consider the effect of digital currency on the monetary system to be minimal (Blinder 1995). Nevertheless, proposed digital currency systems may affect the monetary system in two possible ways: they may influence the supply of money by changing the money multiplier, or they may change, in the long run, the velocity of money, affecting price levels and interest rates. The effect of digital currency on the money supply depends on how inside monies are created while its effect on the velocity of money is uncertain.
Money is exchanged with goods and services of equal value except when it is issued by the government, which gains from the difference between the cost of printing a dollar and the value of a dollar, known as the 'seigniorage.' Further revenue is derived from the fact that the dollar currency held by consumers amounts to interest-free lending to the government by the public-an privilege often abused by excessive printing. In 1994, most of the $20 billion generated by the Federal Reserve could be accounted for by the government's privilege to "print" money, according to Federal Vice-Chairman Alan Blinder. Thus, when private monies are issued, they take away some portion of the government's revenue related to seigniorage and other currency operations.
As long as a national government is the only currency issuer, its revenue related to seigniorage is the monopoly profit. If private firms are allowed to print money, the profit will be shared with these firms. The dollar is accepted by the public because of its confidence in the U.S. government. Likewise, the acceptance of private money will depend on the public's trust in the companies who issue the money. But this does not mean that these private companies will appropriate what previously were the government's revenues as profits. Whether the profit is kept by them or is distributed to consumers will depend on the competitiveness in the currency industry. If, for example, online banks compete by paying interest on digital currency deposits, the interest paid to depositors is the seigniorage now being appropriated by governments. The competition among issuers may well drive the private profit to a level where a significant portion of the monopoly profit currently enjoyed by governments is instead given to consumers in the form of convenience, service and quality.
Currently, money laundering and other criminal activities are the main concern with digital monies. This may be justified since a widespread use of digital currency is some years away except for some exotic (often presumably illegal) applications. However, micropayments, smart cards, and other digital forms of money that are more efficient and give more choices to consumers will become prevalent in the digital economy. The "hands-off" approach by governments purports to promote private initiatives and to avoid stifling innovations through bureaucratic constraints.
However, if legal frameworks and financial institutions are necessary in physical markets, the same is also paramount for the electronic markets to function properly.
|
