TRANSMISSIONS

Send comments to maxmore@primenet.com or to:

The Editor, Extropy, 13428 Maxella Avenue, #273, Marina Del Rey, CA 90292

Digital Checking

I want to address a few of the points made by Lawrence White in the article in Extropy #15 on digital cash.

I had one quibble with White’s description of currency and cash cards. He seemed to overlook the salient feature of electronic cash, that once withdrawn it gets “re-blinded” so that it is not recognizable to the bank. So this is fundamentally different from electronic checking, where the payor knows the identity of the payee. This is not very significant to what I mostly want to talk about, though.

Robin [Hanson] had asked about White’s challenge to the dogma that cryptography in general and digital cash in particular will lead to collapse of governments and the advent of a libertarian/anarchist state. This view has been advanced most forcefully by former [Extropians e-mail] list member Tim May, who refers to this scenario as “crypto-anarchy”.

Actually in reading White’s article I don’t find very much to challenge or address this view. After the technical discussion White argues that the new technologies will make it a lot easier for people to get overseas bank accounts. I had echoed this point in my earlier message, probably dimly remembering White’s argument.

White then asks two questions: will this hurt the Fed’s control of the money supply (of dollars), and will people switch to using some new currency in place of dollars. He thinks neither is likely.

Two things about these issues stand out: one is their US-centric nature, which is in contrast to the international net. Why ask about the Fed’s control of dollars and not the British government’s control of pounds, etc.? White seems fixed on a world in which people have well-defined currencies that they “should be” using, but my guess is that the boundaries between currency usefulness are likely to blur for more and more people. Secondly, even if White is right, it doesn’t really address the larger issue of crypto anarchy; people may stick with dollars, but if they can exchange them anonymously for

enough of their personal finances, they may be able to evade taxes and thus starve the government of its revenues. We went over this already, but White doesn’t touch on it at all. His issues are more narrowly focused.

As far as the money-supply issue, White says that the Fed can simply change the reserve requirements to keep control of money supply, as it does today. However he just finished arguing that more overseas bank accounts will exist, hence presumably there are a lot more “Caribbean dollars” outside the control of the Fed. The Fed still will wield a lot of leverage, but presumably the internationalization of dollars that he predicts will make it less powerful. The Eurodollar market which has become so significant in recent years may increase by orders of magnitude once every Uncle Joe has his own overseas bank account with which he communicates with perfect anonymity and secrecy.

As far as the other point, that people won’t stop using dollars (or yen in Japan, pounds in England, etc.) I think as I said above that internationalization will hammer at this assumption. If most of the things on the Net that I want to buy are in Japan it may be that I will want to get paid in yen rather than dollars. The net will allow more people to work farther from where they live, including overseas. The company I work for is considering farming work out to India. We can use email to send and receive the programs they will write for us. They don’t charge very much.

White’s argument seems hardly more than saying that people will do what they have always done. But the net will offer an opportunity for new financial instruments to get a competitive edge. It is like a new ecological niche, and it may be that the stodgy old currencies of the past won’t be the strongest to colonize.

Another thing I expect to happen is a reduction of transaction costs in switching currencies. With the market volume increasing there should be economies of scale, a more competitive situation. So it may not matter that much what currency you get paid in online, you can easily switch it to the local currency of whatever

you want to buy.

So, overall, I did not think White’s analysis was very useful. He focused on some narrow issues which might be of interest to the professional economist but did not seem to look at the bigger picture, or to consider the larger scale changes which the net may cause.

Hal Finney

hfinney@shell.portal.com

Reply by Larry White

Hal Finney is right that my article didn’t address the proposition that “cryptography in general and [encrypted payments] in particular will lead to the collapse of governments and the advent of a libertarian/anarchist state.” As he noted, my focus was narrower. Let me broaden it a bit here.

First, as to the fiscal implications: I agree with the mild proposition, cited by Robin Hanson, that encrypted digital checking will weaken governments (not necessarily to the point of collapse) by undermining their ability to levy some kinds of taxes. An increase in the convenience of using anonymous and untraceable ways of transacting will clearly make taxes on more kinds of transactions harder to collect. Casual income (e.g. from babysitting), received in cash, is in practice untaxable already today. The empirical question, about which we can only speculate, is how big a difference it will make when the anonymity and untraceability of cash payments becomes available for check-like payments.

I doubt that it will make a big difference to sales tax collection, because the option of cash payments already exists today in face-to-face retail transactions. (Mail-order transactions are already sales-tax-free, at least in the United States.) Retailers very seldom (at least in my own experience) offer a sales-tax-free price if one will pay in cash. Presumably they fear a sting operation by tax agents posing as customers, a fear that would remain even with a customer offering payment by encrypted deposit transfer. The same con-

7

EXTROPY #16 Q1 ‘96

siderations suggest that neither will there be a big difference to payroll taxes paid by regular employers.

Encrypted desktop funds transfer may well make a big difference to the taxability of gambling, by allowing gambling via the Internet (see the article in the October ‘95 issue of Wired). On-line competition from offshore lotteries and virtual casinos will undercut the taxability of local lotteries (today state-run monopoly lotteries tax their customers via lousy odds) and physical casinos.

I’m having trouble, though, thinking of many other transactions where nowadays the parties acquiesce to paying taxes only because it is too much of a hassle to make the deal in untraceable cash and they are afraid to evade taxes when paying by check or credit card payment. If I am overlooking some major sets of transactions for which this situation obtains, I hope someone will point them out.

Second, as to the monetary implications: Hal Finney wonders why I “ask about the Fed’s control of dollars and not the British government’s control of pounds, etc.” Theoretically, these are the same question. The dollar was just the example I chose.

My point about reserve requirements was that the Federal Reserve (to use the U. S. example again) could, if it wanted to, easily apply them to smart card currency balances. The total of such balances will appear on the balance sheets that banks report to the Fed each week. But reserve requirements on bank-issued currency are not needed to keep control of the quantity of money; neither are reserve requirements on bank deposits. Reserve requirements are just a tax.

By making it easier for domestic citizens to move deposits and currency balances to privacy-respecting offshore banks that don’t report to the Fed, I argued, desktop electronic funds transfer will make the reserve requirement tax, and other taxes on banks, easier to evade. The Fed will find it more difficult to impose taxes and regulations on banking, and in that sense its power will decline. But the Fed won’t find it harder to control the global aggregate of deposit and currency dollars, unless the proportions between onshore and offshore dollars becomes harder to predict. I don’t see any reason to think that this proportion will be any harder to predict than it is today, when offshore banking is already huge, and when about half of all Federal Reserve notes circulate outside the United States.

Finney’s point is certainly well-taken that desktop EFT may, by providing cheaper access to low-commission interbank exchange rates for switching between currencies, make ordinary money-holders more sensitive (as multinational firms already are) to the strength of their local currency. The more readily money-users will dump a weakening currency (with a rising inflation rate) in favor of a substitute strong (low-inflation) currency, the lower the rate of inflation a central bank will find worth having.

My argument for expecting people to persist using their national currencies was not that “people will do what they have always done,” but that there is a kind of lock-in to an established monetary standard. People will not substitute out of the local currency for a trivial difference in inflation, though we know from the “dollarization” experiences of high-inflation countries that the public will substitute when the inflation differential gets high enough. Cheaper access to foreign currency lowers the threshold differential (by how much is again an empirical question). Central banks will have to be more careful not to vastly exceed the inflation rates of their major trading partners.

Unfortunately, I still see no reason to expect the de novo establishment of stateless currencies. It is hard to imagine that any individual would find it his best option to switch to a new currency that none of his trading partners yet uses.

Larry White

lwhite@rigel.econ.uga.edu

Great Idea Seeks Champion

The World Wide Web lets you follow links forward easily, but following them backwards is much harder. Links which could be nearly as easily followed backwards as forwards were a central feature of early “hypertext” visions, such as Xanadu, with which I worked for a while.

We were big fans of criticism as central to the evolution of knowledge, and we hoped that such bi-directional links would, among other things, allow people to easily find criticism of pages. Imagine that people at the home page of the CIA or R.J.Reynolds, or at some high-profile Op-Ed article, could find responding critiques with just one button push! This might have profound implications for public and commercial debate.

Now I know there are various

“backlink” projects working on how to do this in a general/efficient way. But most of these projects leave the ability to follow a link backwards at the discretion of the page linked-to—exactly the wrong incentives for criticism. And in the meantime habits, conventions, and expectations are being formed by actual use of the web, and these now have little place for direct criticism.

Actually, we can get most of the benefit of easily-found criticism from just one small modification to one web browser. That is, to get this feature:

Given that I’m looking at a page (call it page1), I push just one button, and get a page which lists page2s which reference page1.

…you just need your browser to paste the URL of page1 into the query form of a web database, such as Open Text Index, that allows searches on cited URLs.

Of course having such a browser would just be the first step. Fans of criticism should then:

1. Create pages which effectively criticize other pages, and to submit them to this database.

2. Use this browser and its backlinks button, and spread the word about how handy it is.

If this feature gets a good reputation, other browsers and databases should jump on the bandwagon, and we might slowly induce a web culture of criticism, where websurfers get into the habit of looking for criticism when they have doubts about a page.

Yes, there is a lot more one can do with backlinks besides finding criticism. And for pages with many backlinks, we’d like better ways to help folks find the good criticisms. But let’s not try to work everything out before we get started—that was Xanadu’s mistake.

This idea needs a champion, someone who really values criticism, and who will take the time to make it real. I don’t have time to be this champion, and neither does Rob Jellinghaus, who also advocates it. Hence this plea, which can be found at:

http://www.hss.caltech.edu/~hanson/findcritics.html

Please mention this page to whomever you think might care.

Robin Hanson

hanson@hss.caltech.edu

EXTROPY #16 Q1 ‘96

8