What is the Future for the Money and how it will Affect Monetary Policy

Money and the payment system have evolved over time. The earliest forms of money were commodities, such as cattle and grain, that came to be used as means of payment and stores of value, two properties that effectively define money. Over time, precious metals, specifically silver and gold, became dominant forms of payment. From the 1870s to World War I and, in some cases, into the Great Depression, many nations backed their currencies with gold. Later, fiat money--currency and coin issued by the government but not backed by any commodity--became the dominant form of money, along with deposits issued by banks. What has driven this evolution of money, and what is the future of money? This is the first set of questions that motivate this lecture. Money also provides a metric for the measurement of prices. That is, once you have defined the unit of exchange, you can measure the price of any other item in terms of that unit. Money is also obviously related to monetary policy. Another theme of the lecture is the relationship between the nature of money, the scope for changes in the overall level of prices, and constraints on or opportunities for discretionary monetary policy.

The next step in the evolution of the nature and transfer of money appears to be the spread of electronic forms of money and payment. In the United States, deposit money issued by private banks grew rapidly in the late nineteenth and the twentieth centuries. From a historical perspective, a now well-established form of electronic money is the bank deposit stored on the computers of the banking industry. Ironically, the most widely used method by the general public for transferring this electronic type of money is still the paper check, although large-value transactions between banks and between some businesses are electronic.

In the early-to-mid-1990s, a new generation of technology created the possibility of storing monetary value on a silicon chip embedded in a plastic card or in a personal computer. With these developments, the focus of payments development shifted to electronic money--e-money--using card-based and computer-based products (often referred to as stored-value cards and network money, respectively) that consumers might use as a general means of payment in both the physical and the virtual worlds. What is driving the evolution toward electronic payments and perhaps toward new forms of electronic money? How rapidly is the innovation catching on, and what will the payment system look like in the future? How would the spread of e-money affect financial stability and the conduct and effectiveness of monetary policy? This is a third set of questions that motivate my lecture.

In the past, money was often privately produced, though today note and coin production has generally become a government monopoly. The development of e-money has generated a fascinating debate about the possibility of reintroducing privately issued currency in the United States. What would be the implications for the payment system and for the central bank of the reintroduction of what is in effect private currency? Could the development of private money and private clearing balances make the Fed obsolete? If so, what becomes of monetary policy, and how would the price level be determined? These are the final themes that motivate my lecture.
Home page.