Electronic money and banking: what should government's role be?

• Author: Castle, Michael N.

"Congress and the executive branch must work together to monitor privacy issues, the security of electronic transfers, consistent standards, and public acceptance."

One of the duties of the House Monetary Policy Subcommittee is the oversight and authorization responsibility for the currency and coins produced by the Bureau of Engraving and Printing and the Mint. Along with the Federal Reserve System, these bureaus intimately are connected with and affected by the development of electronic money.

Money is a valuable franchise for the Treasury and the Fed. Billions of dollars are added to government accounts each year as a consequence of the seignorage booked from the difference between the production cost of paper and base metal monetary tokens and its value in the market. This ample cushion, sometimes even referred to as "profit" from operations, provides an effective independence from the authorization and appropriations process. This, in turn, places a heavier burden on Congress to assure that the stewardship of the public's money continues above reproach.

The point of this little digression is to underscore that the Fed and the Treasury have inherent conflicts of interest with the development of electronic money. Theoretically, they stand to lose $20,000,000,000 or so in annual earnings and a substantial measure of independence if electronic money were to supplant physical notes and coins completely. Thus, there is a certain irony in the fact that the Subcommittee was encouraged to look at the concept of stored value by the Director of the Mint in 1994.

At that time, we were trying to evaluate the arguments over whether we should replace the dollar bill with a dollar coin. It seemed to me that, while the dollar coin is a viable issue, by concentrating only on coins versus paper money, we could be refighting the last war.

It became apparent that Congress and the government should be studying what the future of money is in a larger sense. As a consumer, thought about how my own banking habits have changed since the advent of the automatic teller machine. The ATM greatly has reduced the need even to enter a bank to meet most daily banking chores. The initial discussion of stored value cards and other forms of electronic currency stimulated our interest in where this entire field was headed.

The goal of our work in the House Banking Committee has been to try to get ahead of the curve on the electronic banking issue, rather than have Congress react--and probably overreact--when a problem occurs on something it may have neglected. Our future of money hearings have introduced us to the entrepreneurs of this field and the various systems they are promoting. We received previews of how banking may be affected as personal, portable ATM equivalents are reduced to a plastic card with an embedded microprocessor. Law enforcement and...