Is E-Money Our Future?

Richard Dale Fitzgerald II offers some intriguing suggestions in his recent piece, “Encryption, Finance, Freedom, and You.” The idea of doing an end-run around governments and their fiat currencies is certainly appealing. The vision offered is one of the free economy shedding the state like an old skin, obviating the need for any direct action within the framework of existing political systems.

However, as appealing as the vision is, it doesn’t do for us to minimize the difficulties to be encountered on the way. It is only through a rigorous examination of e-money and its meaning to us as acting humans that we can discern whether it can achieve the ends we seek.

One difficulty to be addressed is the proliferation of media of exchange. One of the great advantages of the international gold standard was that everything else was priced in terms of this single commodity. This greatly simplified trade. Even today, in the era of fiat currencies, the dollar and to a lesser extent the yen and the euro serve as international standards by which all prices can be compared. A proliferation of e-currencies, backed by various fiat currencies, commodities, and other assets, greatly complicates this picture, and moves us toward a state of barter.

Recognizing this, Fitzgerald contends: “Although barter is a relatively inefficient means of trade today, the ability of the Internet to put everyone in instant contact with everyone else means that barter exchanges could quickly become a significant portion of our economy.”

However, one of the great disadvantages of barter is that everything must be priced in terms of everything else. This is, to say the least, a bit confusing. A certain portion of these difficulties can be programmed away. But our valuations are not constant, even over very brief time spans. Nor do they simply vary regularly, following some deterministic function. Therefore, they cannot be fully embodied in any algorithmic system. Any valuation must come down to a choice by acting man, so our system of exchange must be comprehensible to humans. When I go to decide whether I want a new car, it is relatively easy for me to evaluate how many dollars I’m willing to spend, as both my labor and (almost) everything else I might buy instead are also priced in terms of dollars. But how many cattle futures or Microsoft stock options is the new car worth? The idea that every consumer will have to be equipped with sophisticated arbitrage tools and be constantly evaluating such choices is a daunting one.

Mr. Fitzgerald says, “The limits [on e-money] are only on our imagination,” but surely our inability to hold the price of everything in terms of everything else in our heads is an additional limit. After all, socialist planners have always been able to imagine that they could still calculate under socialism – despite the fact that there has never been a possibility that they could actually do so.

E-Gold and its ilk could, theoretically, re-establish gold as the internationally accepted medium of exchange. The difficulty that strikes me here is that current governments have a strong interest in maintaining the importance of their fiat currencies. Should E-Gold or a similar arrangement actually offer serious competition to fiat currencies, governments would be strongly motivated to destabilize this competitive currency by whipsawing the gold market through massive buying and selling.

Governments are, of course, a constant threat to any independently evolved money. Their resources, while finite, are still vast. A key underpinning of their power is their monopoly over the issuance of money within their jurisdictions. This is not something they will surrender lightly, and we can expect that they will be willing to devote significant resources to crushing their competition, through means fair and foul. Well, no, actually just through means foul, which will, of course, be presented to the public as being eminently fair.

Fitzgerald raises intriguing possibilities, and is to be commended for doing so. Any scheme that holds out a serious hope for loosening the state’s grip on our lives is well worth examining. But it is early days yet for e-money, and our exploration of the notion has just begun.

July 14, 2000

Gene Callahan is a programmer and writer.  He is a regular contributor to