Electronic Money: A Challenge to the Sovereign State?

• Author: Helleiner, Eric

Information technologies (IT) have been applied more extensively to the financial sector than to any other sector of the world economy. They first began to be used in a widespread manner during the 1970s and 1980s in order to increase the efficiency of processing, storing and transmitting money at the wholesale level by large financial institutions. More recently, they have also come to play a vital role in retail financial transactions. The profound influence of the application of IT to finance is apparent in the United States, for example, where payments in electronic form were estimated at U.S. $417 trillion in 1991, as compared with only U.S. $70 trillion for paper and check payments, and a mere U.S. $1.7 trillion for payments in currency and coin.(1) Money, it appears, has come to be primarily an electronic blip on a computer screen or in a database.

The new "electronic"(2) forms of money pose important challenges to state power and control. One such challenge derives from the unprecedented mobility of money in its new electronic form. Indeed, the IT revolution is usually seen as a key cause of the dramatic globalization of financial markets in recent years, a development that has raised new questions about states' ability to regulate the movement of money. In the last few years, information technologies have also begun to be used to create entirely new forms of money, sometimes referred to as stored value devices. The importance of these new forms of money stems not just from the further mobility they may give to money, but also from the potential challenge they pose to state control over domestic monetary policy.

These challenges to state power and control in the financial sector have led some analysts to suggest that the IT revolution is causing a profound transformation in the nature of the world order. A dramatic relocation of power and authority is seen to be taking place in global politics, involving the decline of the sovereign state.(3) This vision is compelling, but in this article I argue that it overstates the significance of electronic money. I highlight a number of ways that states can respond, and have already responded, to these challenges in the contemporary age. Indeed, I suggest that if states adapt effectively to the new technological world--a task that may be easier for wealthier, more powerful states--information technologies may even enhance their power in ways that have been neglected in much of the existing literature. To develop these arguments, I have organized the article in two sections: the first explores the impact of the IT revolution on the ability of sovereign states to control global financial flows, and the second examines the implications of the new forms of stored value devices for states' ability to control not only financial movements but also domestic monetary policy

THE IT REVOLUTION AND STATE CONTROL OF GLOBAL FINANCIAL FLOWS

Those who see the IT revolution in finance as undermining state power usually suggest that the principal significance of this revolution has been the unprecedented global mobility of capital. The costs and difficulties of moving money around the world have been dramatically reduced, as electronic money can now be moved through telecommunications channels and processed quickly and efficiently by computers. Governments are said to find electronic money impossible to control, partly due to its new "quicksilver" nature.(4) The digital blips of information that carry money movements along telecommunications channels are also seen as difficult for regulators to distinguish from those that relate to other kinds of information flows. Regulation is said to be further hindered because financial activity increasingly takes place in a kind of cyberspace that recognizes no borders. In Walter Wriston's words:

The new world financial market is not a geographical location to be found on a map but, rather, more than two hundred thousand electronic monitors in trading rooms all over the world that are linked together. With the new technology no one is in control.(5) Even if governments believed they could control money movements, other authors suggest that they are inhibited from doing so by a powerful competitive deregulation dynamic that the new mobility of electronic money has unleashed.(6)

These arguments are important but should be questioned. To begin, it is important not to overstate the degree to which modern states have ever been able to regulate international movements of money. Money is after all one of the most fungible and mobile of products, and it held these characteristics well before the arrival of electronic money and the current age of financial globalization. Throughout the age of mercantilism, for example, most sovereign states in Europe sought to control the international movement of precious metals, but these initiatives were never very successful. Even at the high point of state controls on the cross-border movement of money during the 1930s and early postwar years, controls were rarely fully effective, notwithstanding the introduction of tough deterrents, which included the death penalty in some instances. The Bretton Woods negotiators, who endorsed the use of capital controls, were fully aware of these difficulties and encouraged both sending and receiving countries to cooperate closely in enforcing each other's capital controls.(7) In other words, they recognized that a government's sovereignty over financial movements was relatively limited and that it could be realized more completely only if complemented by other governments. If states have never been fully effective in their efforts to control money movements, an inability to control them today does not seem to be a very useful indicator of a significant change in the nature of world politics.(8)

Still, it is interesting to ask whether the IT revolution makes it even more difficult for states to control money movements. One of the difficulties in investigating the issue is that there are few examples of powerful states making extensive efforts to control cross-border financial movements in the current age. The IT revolution has, after all, coincided with a period when the most powerful states have liberalized their external capital controls almost completely.

For those convinced of the declining power of the state, the fact that these two developments have taken place at the same time is no coincidence. From this perspective, the recent liberalization trend has simply reflected states' recognition that they can no longer control financial movements in the age of IT. Technological developments, not states, are seen to be driving the current global financial order. As Wriston puts it:

Unlike all prior arrangements, this new system [of international finance] was not built by politicians, economists, central bankers, or finance ministers. No high-level international conference produced a master plan. The new system was built by technology.(9) To support this argument, Wriston cites the history of the eurocurrency markets:

No one designed them, no one authorized them, and no one controls them. They were fathered by interest-rate controls, raised by technology, and today they are refugees, if you will, from national attempts to allocate credit and capital for reasons that have nothing to do with finance and economics.(10) Other authors acknowledge that states have played a more active role in fostering financial globalization through liberalization decisions, but they also see these decisions as linked to the IT revolution. In a sophisticated analysis, Phil Cerny suggests that states have been increasingly compelled to liberalize because of competitive deregulation pressures unleashed by the new mobility of capital in this era of the "Third Industrial Revolution." Only by delegating power to a supranational authority, he argues, will it be possible for states to overcome these pressures and regulate global financial markets in a substantial way.(11)

Wriston's case that states have played little role in fostering the globalization of finance is not persuasive to me. The euromarket, for example, has relied on the support of states from its origins in the late 1950s. It never existed in some kind of cyberspace, but rather in specific geographical places--initially London and then increasingly many other locations--where state regulations on foreign currency financial activity have been kept deliberately lax in order to encourage the market's growth. The support of states was also important because every participant in the euromarket is a citizen of a sovereign state and potentially subject to that state's regulations. Wriston correctly observes that in the early years of the euromarket, the dominant participants were U.S. banks seeking to escape U.S. financial controls. But he neglects to mention that the flight of these banks to the "offshore" London market was actively supported by the U.S. Government, which made no effort to regulate their activities there and, indeed, even encouraged their activities with some regulatory decisions.(12)

The decisions of states to liberalize capital controls over the last two decades also cannot be fully explained as the inevitable product of competitive deregulation pressures or an inability to make controls effective. To be sure, these have played an often important role in some liberalization decisions. But so too did other factors that were unrelated to the IT revolution, such as specific British and U.S. interests in financial globalization, important ideological trends and various domestic interests.(13) Moreover, where competitive deregulation pressures were significant, they did not necessarily force states to change their regulatory policies in the same liberal direction. In many cases, liberalization decisions were viewed as more of a strategic choice in the face of a changing international environment rather than a decision...