The future of money

                          Andrew Odlyzko

                       AT&T Labs - Research
                       amo@research.att.com


The amount of money has been growing even as our society has become
increasingly networked and computerized, and we can expect this trend
to continue.  Money has historically been a store of value and a
medium of exchange, and those roles will need to be filled.

The growth in quantity and importance of money will be accompanied by
continuing difficulties in defining what it is.  In spite of centuries
of studies, there are many measures of money supply, such as M1, M2,
and M3, and a continuing debate on their significance.  The problem is
that the form and role of money is affected by social as well as
economic and political factors, and people change their behavior,
sometimes suddenly.  Money has had many forms, from beaver pelts to
the stone disks of Yap. Even among modern industrialized countries,
there are great variations.  For example, checks are widely used in
the U.S., and virtually absent in Japan.  Many choices societies make
are arbitrary, as in the use of Kent cigarettes (but not Marlboros or
Gauloises) as the currency for the black market in Romania in the
1980s.  Our economy has seen some recent creations of money-like
instruments such as airline frequent flyer credits.  Although
worldwide commerce argues for reducing the variety of financial
instruments, electronics also makes such instruments easier to create,
and so we are likely to have many types of money.

The future of money can be glimpsed today.  Money will be primarily
electronic, since it is already largely electronic; our checking and
savings account balances are just entries in banks' computers, and
cash is less than 10 percent of broad money supply.  The bulk of
financial transactions (when measured in dollars) are electronic, such
as the trillions of dollars in daily foreign exchange trades.  Thus
the main remaining questions are whether and how soon the numerous but
usually small transactions by individuals and businesses that are
conducted in cash and checks will become electronic.

Electronic transactions are less expensive and increasingly becoming
more convenient than those with cash or checks.  For large
institutions such as corporations and governments, this provides
strong inducements for eliminating paper, and we will see an
acceleration of the already rapid move towards business-to-business
electronic commerce.  However, the factors of cost and convenience are
not likely by themselves to induce individuals to switch quickly.
People are not faced with a choice between electronic money and the
huge stones of Yap that weigh tons.  Cash, checks, and credit cards
work well.  The advantages of electronic banking are not compelling
for individuals, and the inertia of ingrained habits is great.  As an
example, tens of millions of passbook savings accounts still exist,
although banks have been trying to eliminate them to reduce costs.
The only way to get people to change quickly is to either compel them
to do so, or offer them substantial inducements.  Compulsion occurs
when governments or corporations require Social Security or payroll
checks to be handled by electronic funds transfers.  Inducements to
change can come either as lower costs, or as greater convenience (as
in the rapid acceptance of electronic devices for paying for road and
tunnel tolls).  Therefore the speed with which cash and checks are
displaced in transactions by individuals will depend largely on the
actions by large institutions and how they are accepted by society, 
and are thus harder to predict.