Toward a Cashless Society; E. Kolar

Third lesson: Banking is not a natural monopoly. Historical experience shows that there are some tendencies for larger banks to be more efficient, but not beyond a certain size. Nationally branched banks do tend to out compete smaller banks in many areas of the banking business, but not in all areas. Banks must be large enough to diversify their assets and liabilities adequately, but this does not require being large relative to the entire banking market. Recent develop ments in the financial technologies of loan syndication and securitization may have reduced the size at which a bank becomes large enough in this respect. In the absence of government regulations that currently favor the largest banks, particularly the pursuit of the "too big to fail" doctrine by the Federal Reserve and the Federal DeTOWARD A CASHLESS SOCIETY 377 posit Insurance Corporation, a stable and deregulated financial structure would result that would likely include both large and small banks. 0 1. Hans Sennholz, Money and Freedom (Spring Mills, Pa.: Libertarian Press, 1985); Kevin Dowd, Private Money: The Path to Monetary Stability (London: Institute of Economic Affairs, 1988); George A. Selgin, The Theory of Free Banking (Totowa, N.J.: Rowman and Littlefield, 1988); Kevin Dowd, The State and the Monetary System (New York: Philip Allan, 1989); David Glasner, Free Banking and Monetary Reform (Cambridge: Cambridge University Press, 1989);Lawrence H.

White, Competition and Currency (New York: New York University Press, 1989);Richard Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, Mass.: American Institute for Economic Research, 1990); Steven Horwitz, Monetary Evolution, Free Banking, and Economic Order (Boulder, Colo.: Westview Press, 1992). 2. This statistic, from a study by Andrew J. Economopou los, is cited by Kevin Dowd, "U. S. Banking in the 'Free Banking' Period," in Dowd, ed., The Experience of Free Banking (London: Routledge, 1992),p. 218. Pioneering modem work on the U. S. experience with' 'free banking" laws, which is the source for the information in the next paragraph of the text, has been done by Hugh Rockoff and by Arthur J. Rolnick and Warren E. Weber. TOWARDA CASHLESS SOCIETY by Elizabeth Kolar T he financial system of today's world is the product of centuries of innovation.

What began as a barter economy moved through various incarnations in response to the limitations inherent in the evolving sys terns. Changes will undoubtedly continue to occur in response to social and technologi cal progress. Contemporary discussion of likely changes has focused increasingly on the possibility of a cashless society. The The author is an operations analyst for Diebold, Inc., a banking equipment manufacturer. technology for such a society exists. How ever, the benefits of cashlessness are not yet perceived to outweigh the supposed disadvantages. This article will discuss the progress to ward cashlessness and its relevance to free banking. Free banking historically involved the issuance of bank notes that were re deemable for a "base" money such as gold or silver. Modern proponents of free bank ing such as Lawrence White have continued to think of it in these terms. White's col league at the University of Georgia, George 378 THE FREEMAN • OCTOBER 1993 Selgin, has, on the other hand, envisioned a regime under which the existing (U.S. dol lar) monetary base would be frozen, and banks could then issue notes that would be exchangeable for base dollars. Both writers apparently envision a society that will con tinue to use currency and coin as pervasive media of exchange.

A cashless society would mean, of course, the absence of currency and coin. Therefore, a cashless society could mean a barter society in which commodities were traded for commodities. However, barter would represent a major step backward. The cashless society envisioned and discussed herewith refers instead to the widespread application of computer technology in the financial system. Increasingly, funds are being transferred via an "Electronic Funds Transfer System" (EFTS). The EFTS As it became apparent that electronic banking was here to stay, Congress in 1974 established the National Commission on Electronic Fund Transfers. The commission studied the infant EFTS, and published its recommendations in 1977. The commission concluded that an EFTS developed in an "orderly" manner would be beneficial to consumers of financial services and sug gested that such a system operate outside the public sector. The commission went on to state that "a national EFTS could be supported by as few as 225,000 on-line terminals installed in general merchandise stores. "

As the commission completed its re search, the Federal Reserve established "Fed Wire." Fed Wire is a nationwide electronic communications network that links the 12 Federal Reserve District Banks, all member commercial banks, and the U.S. Treasury. It represents a considerable in vestment on the part of the Federal Reserve, and has been interpreted by the member banks as Federal Reserve endorsement of a nationwide EFTS. Transition to an EFTS involves overcom ing structural barriers such as high start-up costs as well as the establishment of co operation and communication among com peting banks and retailers. In a sense, by the creation of Fed Wire, the Federal Reserve has provided not only an endorsement of EFTS, but a subsidy as well. Large institu tions have capitalized on the Fed's invest ment, and smaller organizations must now subscribe to the changes in order to remain competitive.