In the long history of how things get paid for, is electronic money the next step? If the issue is how money is transferred, that question is settled--it is happening now. But if it is the creation and acceptability of new forms of money, the jury is out.
Like so many other tools of civilization, money has evolved tremendously over the centuries. While change was glacially slow at first, the pace of evolution has recently been accelerating, and there is no reason at all to think that will stop. But what new forms might money assume? Will electronics take over, and if so, how soon will it do so?
Money has three functions in society, and how well electronics serves these functions will determine its future. First, money is a unit of account, or a way to measure and record value: a pig is worth X dollars. Second, it is a way to store value conveniently for future use; possession of a pig is replaced by possession of a bank account recorded in, and retrievable in, money. Finally, it is a medium of exchange; instead of having first to find a pig to trade for cloth, money buys cloth or a pig.
For money to fulfill these three functions, it must satisfy certain requirements. It should be easily and broadly recognizable and hard to fake (counterfeit), its value should be reasonably stable (a major matter, indeed!), and it should be durable and not deteriorate (electronic pulses are potentially wonderful). Finally and crucially, it should be convenient and inexpensive to use (vital for its acceptance in daily commerce).
The history of money illustrates these points. It began, of course, with barter. In a primitive society a pig might be traded for a bolt of cloth. The obvious limitations of this kind of exchange led to the use of proxies for value. In societies near oceans, sea shells served; in other places, special stones; and later on, pieces of metal, often gold or silver, did duty and came to be shaped into coins. The development of printing spurred the use of paper notes. From this came checks, with which payments could easily be made over a distance, a major breakthrough. When the telegraph was invented, the technology for making remote payments developed further, as transfers became virtually instantaneous. Then a natural extension was the use of modern electronics and computers.
Today, money is transferred in a wide variety of ways. Most of the value moves nearly invisibly to consumers and businesses through what may be termed wholesale payment systems, such as the Federal Reserve's Fedwire, and these systems are almost entirely electronic already. But most of the products under development are designed to serve the vast "retail" channels, which encompass the infinity of smaller transactions occurring daily throughout the economy.
How will electronics fit into this matrix of functions and requirements? The products being developed today fall into two groups, and it is important to distinguish between them because only one of them is a new form of money. Those referred to as electronic banking do not represent a new kind of money, but rather offer a new way to access a number of traditional bank services with traditional money. Such activities as bill paying and shifting funds among accounts over a telephone or computer connection belong here, and development is well along in this field. The many emerging types of stored-value cards and other media, however, do create a new money, as they represent an alternative to government-issued or -guaranteed instruments.
In stored-value systems, the liability of the issuer is recorded directly on the card, and a corresponding deposit account is not necessarily maintained for the individual card holder. Innovations of this type are coming along a bit more slowly. To be sure, some systems may involve both stored value and a deposit balance transfer capability, thus integrating the two types of products.
Predictions of an electronics-based cashless society have been around since the 1960s and, at least to date, it has not emerged. Consumers and businesses have proven quite conservative in their money management, relying heavily on tried and true methods even after more advanced techniques have become available. To one degree or another, this conservatism will likely be the case in the future as well. That said, why should the course of events be different now?
The characteristics of e-money and the speed of its advent will depend in large measure upon whether it serves the historic functions of money better than do its existing forms--whether electronic cash does better as a unit of account, a store of value, and a medium of exchange. How acceptable the new products are will be determined by the market and the classic economic factors of basic supply and demand characteristics. Suppliers will have to deliver a product that consumers want to use at a price that they are willing to pay, and that merchants see as a desirable additional way to conduct business.