Digital Cash; Money In The 21st Century

Digital Cash
by Brad Puffer

In the last few years scores of companies have been formed, sporting appropriately cyber-sounding names, all aiming to be a part of the future of money. Some use the internet to facilitate secure transactions through credit card sales. Others, through complex algorithms, convert your bank dollars to digital code - complete with your digital signature - which can be sent to online vendors. Still others are setting up independent systems of electronic money which use their own network of vendors and users.

[PDF] Digital Cash

What is digital money, and where is it taking us?
Digital cash acts much like real cash, except that it's not on paper. Money in your bank account is converted to a digital code, stored on a microchip, a pocket card, or on the hard drive of your computer, and can be used for anonymous transactions by any vendor who accepts it. Your special bank account code can be used over the internet to purchase a new CD, or can be presented in card form at the local supermarket for food. Everybody involved in the transaction, from the bank to the user to the vendor, all agree to recognize its worth, and thus create this new form of exchange.

The internet may be the natural environment in which digital cash will flourish. In fact, if the internet is to continue to grow, many experts argue that it must become commercial. But fears that credit card numbers and other personal information could be snatched away by a clever hacker make many users apprehensive about buying goods over the internet.

To bring consumers to the internet, many corporations have rushed into developing new technologies to create secure and efficient transactions over the World Wide Web. Many of the new technologies depend on systems, like credit card purchases, that are already familiar to users. By pre-registering your credit card numbers in a secure computer, users can send a special code over the internet to authorize use of your number. The card number itself never travels over the internet and you even receive an e-mail confirming your purchase. Another system uses a complex encryption method so that if someone did manage to steal your number, the number would be completely useless to them. These forms of electronic transactions are the first, and most familiar step, for commercializing the web and beginning the process of electronic monetary exchange.

But the use of digital cash, though convenient, may bring with it complex problems. Because digital money is anonymous, criminals could use untraceable digital money to evade taxes or launder money. Money could flow instantly between countries without being traced. Computer hackers could break into digital cash systems and instantly download the wealth of thousands of customers.

The potential problems go beyond those posed by anonymity. If your hard drive crashes, would you lose not only a hard drive and valuable information, but all of your digital cash as well? Could digital cash wreak havoc on traditional bank and government-controlled monetary systems? Would large private companies take power away from traditional banks by controlling and regulating large holdings of digital cash? And will digital cash be available to those who cannot afford personal computers?

Along with potential problems, digital cash brings with it clear advantages over traditional money. For the user, electronic money is precise, simple and convenient. For banks, it could mean the elimination of thousands of paper transactions and, in turn, the reduction in user fees. For corporations, it could mean the ability to circumvent banks entirely to create direct company to company transfers. Most experts believe that the use of the internet for electronic transactions and the use of digital cash will rapidly increase over the next ten to twenty years, but it won't replace the real cash you can crinkle in your hand any time soon.

The History of Money

In the Beginning: Barter
Barter is the exchange of resources or services for mutual advantage, and may date back to the beginning of humankind. Some would even argue that it's not purely a human activity; plants and animals have been bartering—in symbiotic relationships—for millions of years. In any case, barter among humans certainly pre-dates the use of money. Today individuals, organizations, and governments still use, and often prefer, barter as a form of exchange of goods and services.

9,000—6,000 BC: Cattle
Cattle, which include anything from cows, to sheep, to camels, are the first and oldest form of money. With the advent of agriculture came the use of grain and other vegetable or plant products as a standard form of barter in many cultures.

1,200 BC: Cowrie Shells
The first use of cowries, the shell of a mollusc that was widely available in the shallow waters of the Pacific and Indian Oceans, was in China. Historically, many societies have used cowries as money, and even as recently as the middle of this century, cowries have been used in some parts of Africa. The cowrie is the most widely and longest used currency in history.

1,000 BC: First Metal Money and Coins
Bronze and Copper cowrie imitations were manufactured by China at the end of the Stone Age and could be considered some of the earliest forms of metal coins. Metal tool money, such as knife and spade monies, was also first used in China. These early metal monies developed into primitive versions of round coins. Chinese coins were made out of base metals, often containing holes so they could be put together like a chain.

500 BC: Modern Coinage
Outside of China, the first coins developed out of lumps of silver. They soon took the familar round form of today, and were stamped with various gods and emperors to mark their authenticity. These early coins first appeared in Lydia, which is part of present-day Turkey, but the techniques were quickly copied and further refined by the Greek, Persian, Macedonian, and later the Roman empires. Unlike Chinese coins which depended on base metals, these new coins were made from precious metals such as silver, bronze, and gold, which had more inherent value.

118 BC: Leather Money
Leather money was used in China in the form of one-foot-square pieces of white deerskin with colorful borders. This could be considered the first documented type of banknote.

800 - 900 AD: The Nose
The phrase "To pay through the nose" comes from Danes in Ireland, who slit the noses of those who were remiss in paying the Danish poll tax.

806 AD: Paper Currency
The first paper banknotes appeared in China. In all, China experienced over 500 years of early paper money, spanning from the ninth through the fifteenth century. Over this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. Then beginning in 1455, the use of paper money in China disappeared for several hundred years. This was still many years before paper currency would reappear in Europe, and three centuries before it was considered common.

1500s: Potlach
"Potlach" comes from a Chinook Indian custom that existed in many North American Indian cultures. It is a ceremony where not only were gifts exchanged, but dances, feasts, and other public rituals were performed. In some instances potlach was a form of initiation into secret tribal societies. Because the exchange of gifts was so important in establishing a leader's social rank, potlach often spiralled out of control as the gifts became progressively more lavish and tribes put on larger and grander feasts and celebrations in an attempt to out-do each other.

1535: Wampum
The earliest known use of wampum, which are strings of beads made from clam shells, was by North American Indians in 1535. Most likely, this monetary medium existed well before this date. The Indian word "wampum" means white, which was the color of the beads.

1816: The Gold Standard
Gold was officially made the standard of value in England in 1816. At this time, guidelines were made to allow for a non-inflationary production of standard banknotes which represented a certain amount of gold. Banknotes had been used in England and Europe for several hundred years before this time, but their worth had never been tied directly to gold. In the United States, the Gold Standard Act was officialy enacted in 1900, which helped lead to the establishment of a central bank.

1930: End of the Gold Standard
The massive Depression of the 1930's, felt worldwide, marked the beginning of the end of the gold standard. In the United States, the gold standard was revised and the price of gold was devalued. This was the first step in ending the relationship altogether. The British and international gold standards soon ended as well, and the complexities of international monetary regulation began.

The Present:
Today, currency continues to change and develop, as evidenced by the new $100 US Ben Franklin bill.

The Future: Electronic Money
Digital cash in the form of bits and bytes will most likely become an important new currency of the future.

Update to Program

NOVA's "Secrets of Making Money" was originally broadcast in October, 1996. Since then a few key facts as reported in the program have changed. (See program transcript). Here is a brief update.

Introduced in 1996, the U.S. $100 bill, which was the focus of the program, is no longer the only new note of US currency. The Treasury Department introduced a new $50 note in 1997, a new $20 note in 1998, and new $5 and $10 notes in 2000.

Counterfeiting remains a serious problem, however. According to the Secret Service, counterfeiters put $47.5 million into circulation in 2001.

To counter the counterfeiters, particularly those using sophisticated computer techniques, the Treasury, along with the Federal Reserve Board, has announced plans for a further redesign of some notes: the $100, the $50, and the $20.

Circulation of this even newer design, called NexGen, could begin as early as 2003.

The NexGen notes will look much like their predecessors and include the same security features. But they will also sport subtle background colors. According to the Treasury, "While color is not in itself a security feature, the use of color provides the opportunity to add additional features that could assist in deterring counterfeiting."
— Ethan Herberman.

August, 2002
http://www.pbs.org/wgbh/nova/moolah/update.html

Digital Cash - A system that allows a person to pay for goods or services by transmitting a number from one computer to another. Like the serial numbers on real dollar bills, the digital cash numbers are unique. Each one is issued by a bank and represents a specified sum of real money. One of the key features of digital cash is that, like real cash, it is anonymous and reusable. That is, when a digital cash amount is sent from a buyer to a vendor, there is no way to obtain information about the buyer. This is one of the key differences between digital cash and credit card systems. Another key difference is that a digital cash certificate can be reused.

Digital cash transactions are expected to become commonplace by the year 2000. However, there a number of competing protocols, and it is unclear which ones will become dominant. Most digital cash systems start with a participating bank that issues cash numbers or other unique identifiers that carry a given value, such as five dollars. To obtain such a certificate, you must have an account at the bank; when you purchase digital cash certificates, the money is withdrawn from your account. You transfer the certificate to the vendor to pay for a product or service, and the vendor deposits the cash number in any participating bank or retransmits it to another vendor. For large purchases, the vendor can check the validity of a cash number by contacting the issuing bank.