WIRING FOR DOLLARS: The Electronic Money Revolution

Thursday, October 21, 1999

Guests predict that, in the near future, most people will no longer use cash, but rather conduct all financial transactions electronically. These transactions will be instantaneous, secure, and invisible and will remake the entire global economy. What will happen when governments can no longer control or tax the flow of capital? According to our guests, nothing less than a revolution.

Recorded on Thursday, October 21, 1999

Peter Robinson: Welcome to Uncommon Knowledge. I'm Peter Robinson. Our show today, High Technology and Money. We being with a brief history of money starting when there was none. In those days of course people had to engage in barter. A bag of rice for some firewood, some firewood for a sheaf of wheat. The problem was of course a bag of rice was hard to carry in your pocket and you should just try putting wheat into a wallet.

Money revolution #1 - currency. The Sumarians, the Babylonians, the Romans, all the ancient empires figured out that if they established a standard unit of currency, a store of value, they would revolutionize commerce. And if this fundamental idea that persists through our own day, even if nowadays most of us carry more value in the form of paper than in the form of coins. Benjamin Franklin, I just love that boy's face.

Money revolution #2 - digital money. These days many of us carry even more value in the form of plastic than in the form of paper or coin. But although credit cards free us from the need to carry cash, they tie us to something else -- the banking system. Every time I engage in a transaction using a credit card, a bank gets into it one way or another.

Money revolution #3 - electronic money, E-money. It will soon be possible for me to have a store of value on a little computer like this one. And if you have a little computer of your own, then when I want to buy a house or a car or a sweater from you, all I'll need to do is press a button on my computer to send the e-money to your computer. No coins, no paper currency and no bankers.

Now as this begins to happen our two guests contend the world will be changed. With us, Peter Thiel, the CEO of Confinity, a company that is working to make electronic money a reality and Richard Rahn, an economist and the author of a book entitled "The End of Money."

Walter Ristin, former chairman of Citicorp, banker, he knows a thing or two about money, has written a book called "The Twilight of Sovereignty." He argues that the high-tech revolution in finance will mean the end of the nation's state as we know it. Does electronic money, E-money, pose a threat to the sovereignty of the United States? Richard?

Richard W. Rahn: Yes, and to every other government.

Peter Robinson: And you're happy about that?

Richard W. Rahn: Yes. Because it powers people. It liberates people.

Peter Robinson: Peter.

Peter A. Thiel: Yes it does. Although mostly to emerging world governments as a first step. US Government probably the least threatened, but they're all threatened to greater-lesser degrees.

Peter Robinson: Let's establish a beat--right off the bat there. The two of you are talking about a revolution then.

Richard W. Rahn: That's right.

Peter A. Thiel: Well it's happening right now, whether people realize it or not.

Peter Robinson: My sinuses are now clear. We're ready to go. That's--I was expecting somewhat more measured responses to that question. All right. How does E-money work?

Richard W. Rahn: It's not more than electronic representation of paper currency and coin. You know credit cards and debit cards, electronic transfers are already doing it. Smart cards and the direct transfer from computer to computer, like Peter is doing. That is coming next.

Peter Robinson: And what is it that your company does exactly?

Peter A. Thiel: Well, we're developing a means to making payments on small devices, such as the palm pilot a personal data assistant, cell phones, the Internet enabled cell phones which are going to be rolled out in the next few months--

Peter Robinson: Instead of reaching for my wallet and pulling out a dollar when I have to make a payment, I can pick up a device like that--

Peter A. Thiel: --and make a payment using infra-red beaming, like your garage opener, or you can pick up your Internet-enabled cell phone and make a payment to Brazil.

Peter Robinson: And this is a secure transaction?

Peter A. Thiel: It is a far more secure than cash or credit cards.

Peter Robinson: Secure to the extent that a hacker can't steal my money from that device?

Peter A. Thiel: It involves something called strong encryption and it basically means that it's virtually unbreakable.

Peter Robinson: Secure to the extent that I can engage in transactions that are invisible to the government of the United States?

Peter A. Thiel: Just about. We have a system that's transparent to our own company, but basically you could set it up so it would be completely anonymous.

Peter Robinson: So people can now begin engaging in transactions that are completely invisible to other parties, including governments.

Richard W. Rahn: What is happening--you'll soon be able to move money basically around the world at the speed of light. Computer to computer. All encrypted so no government can read any of this.

Peter Robinson: Okay. Let me challenge you a little bit on this point. Steven Levy Newsweek magazine's technology columnist, I quote him …"…within ten years there will be a major successful counterfeiting of electronic money…" he speculates that it will happen in one of two ways. That in fact the encryption, although very powerful, is not quite impossible to crack. Somebody sooner or later will crack it. Or, in one of these pieces of software that's being rolled out, your company, someone else's, there will be a flaw that doesn't get detected until too late. You just don't buy it.

Richard W. Rahn: No. What happens is right now you've got counterfeiting of all kinds of paper currency. When they came out with our new $100 bills with the thread in them, it was claimed that the Iranians were starting to counterfeit that within about six weeks. When you have electronic currency--

Peter Robinson: --right--

Richard W. Rahn: --yes, occasionally there will be little incidence, but again, Peter and other people will make their system more robust. But this is a constant cat and mouse game.

Peter Robinson: You're suggesting that we give up our currency, our traditional currency, to throw ourselves into this sort of technological arms race in which the good guys try to stay one technological leap ahead of the bad guys. But it's just leap--leap--leap--

Richard W. Rahn: It's much easier to counterfeit these things than do the electronic counterfeiting. So it's going to be far rarer and far more difficult to do than counterfeiting we have now, and we're going to have far less counterfeiting. This is much more secure.

Peter Robinson: Much more secure. You're both--that's your position. All right. You both agree it poses a threat to the sovereignty even of the United States, but you said it poses a threat to the sovereignty of Third World countries first, so--

Richard W. Rahn: You shouldn't use the word threat.

Peter Robinson: Threat? No.

Richard W. Rahn: No. Because we're interested in individual liberty. It increases the sovereignty of the individual and reduces--

Peter Robinson: --the corollary of which--

Richard W. Rahn: --reduces the power of the State in the ability of the State to engage in tyranny and theft through inflation.

Peter Robinson: Peter Thiel mentioned Third World countries. Wouldn't E-money damage their fragile economies? Let's take a country more or less at random, let's say Uruguay. It's like a lot of Latin American countries. It's very sharply divided into the haves and the have nots. What I put to you is, the haves, the well educated people, sophisticated in financial transactions will pick up devices like yours, begin engaging in transactions to avoid taxation, avoid the regulatory overhang of Uruguay. And the government will see its tax revenue shrinking, its ability to control the money supply undermined and who will that--that will hurt the have nots. What you're going to do is de-stabilize Third World governments. In Uruguay it's going to hurt the poor.

Peter A. Thiel: I don't think that's the most likely impact of this at all. I think the likely impact is that it will liberalize free trade around the world. It will enable the poor to get payments from not just Uruguay, it'll enable them to make money selling things in the United States and all over the world. The biggest wealth inequities in the world are between countries. They're not within countries. And it's comparing how well does someone do--let's say a software developer in India. They make about five percent as much money as a software developer in the United States. That's why I think we have some real inequities and this kind of global electronic revolution is going to probably collapse those tremendously.

Peter Robinson: Richard.

Richard W. Rahn: Already the wealthy in the upper classes in these countries protect themselves. They have Swiss bank accounts. They already operate in dollars and--

Peter Robinson: In Uruguays of the Third World.

Richard W. Rahn: --yeah in the Third World. And so it's the poor who are the ones who are suffering. This enables, the electronic revolution enables many more people, the middle classes in this country and eventually many of the poor because these devices become very inexpensive to protect themselves against flirtatious governments.

Peter Robinson: Now around here in Silicon Valley what you'll hear over and over again is that technology is neutral. The technology doesn't mean or do anything in an of itself, it's what people do with it. If this really is not an ideology free technology. This is a libertarian technology. Both of you are demonstrating, you're showing a little inkling, you're showing some enthusiasm here for actually overthrowing governments. Undermining particular Third World--

Richard W. Rahn: Peter, you're not overthrowing governments.

Peter Robinson: No?

Richard W. Rahn: You're reducing the ability of governments to engage in bad monetary and fiscal behavior. You're forcing governments to be more responsible. Because then people will find it easier to opt out. If a government starts to inflate--

Peter Robinson: How does the government of Uruguay become more responsible once people start using these devices?

Richard W. Rahn: Because people can flee out of the currency almost instantaneously when they have these devices. They can move into any currency they want.

Peter Robinson: So either the government of Uruguay holds the Uruguan peso stable or people simply stop using it.

Richard W. Rahn: That's right.

Peter Robinson: Let's get back to E-money in the United States and explore a few issues beginning with crime. We in the United States have a regime of all kinds of disclosure laws that apply to financial institutions. The Bank Secrecy Act of 1970, the Money-Laundering Control Act of 1986 and on and on and on; which mean that the FBI, other law enforcement agencies, if there is evidence of money laundering, drug trafficking, terrorists getting money from the United States. They can go in, trace the transactions and go after the bad guys. That is a good thing, is it not?

Peter A. Thiel: It is a good thing although that is not the way they normally do it. Normally we catch bad guys doing bad things. You don't catch them spending the money they made doing those bad things.

Richard W. Rahn: Most of this is totally ineffective. You've got these laws as you just pointed out. A huge body of regulation which is immensely costly to the banking system. Last year, there were only 932 convictions for money laundering in the United States. But if you go to digital money, just think of the huge reduction you'll have in crime. Most crimes are people trying to steal this. If you go to digital, electronic money, there's not going to be the opportunities to go in and grab things of the cash flow. The convenience stores, the banks, the gas stations, all the other places where robbers come in and hold them up, and there's millions of these occur in this country each year. There were 18,000 murders last year in the US. A good share of those were caused by people trying to steal this. Yes, it's true that some money launderers can take advantage of it. But any smart money launderer already knows how to get around these regulations.

Peter Robinson: Let's press down a little bit on this question of taxation. Let me list to you the taxes that I pay and you tell me under a regime of E-money, which taxes the government will still be collecting. Income tax.

Richard W. Rahn: Limited amounts.

Peter Robinson: How?

Peter A. Thiel: It'll depend on your job. If you have a job that's geographically bounded where a large employer--

Peter Robinson: I work for General Motors and they withhold something from my paycheck just the way they do right now--

Peter A. Thiel: The government will still be able to go after General Motors and therefore they'll still be able to collect those kinds of--

Richard W. Rahn: They will have payroll taxes for jobs that cannot usually move to some other locale. For people who are working for governments or big corporations, universities and so forth, clearly it's going to be easy. For those people who can move any place in the world or are self-employed, who I'd say intellectual workers, software writers, architects, lawyers and so forth, it'll be easier for them to evade.

Peter Robinson: So what's going to happen? Your regime of E-commerce is going to stratify society and the really smart swift people who get to disguise all of their transactions in their income so that the government can't even find it. And the poor drones like me--

Peter A. Thiel: Well it's a political--

Peter Robinson: I mean isn't that--go ahead, go ahead.

Peter A. Thiel: The political choice is whether you want to increase the burden on other people. On the blue collar workers. I don’t think that's a political choice the government should make. I think the political choice should be to just cut taxes across the board. Now I will note that one of the great ironies of the Clinton Administration is that they have in fact done exactly that. If you look at 1986, marginal tax rates in the US, 28% on capital, 28% on income. Today it's 20% on capital, that's gone down. On income it's gone up to 39.6%. What they have effectively done is shift the tax burden from capital on to labor. It's the last thing in the world they would have thought of--

Peter Robinson: --and if people had been using E-money, they wouldn't have been able to do that? How does your argument apply here?

Peter A. Thiel: If we would downsize the government, they wouldn't have had to do that. But it's a political choice. They decide to maintain the welfare state at all costs, even at the expense of going after blue collar workers.

Richard W. Rahn: Things like Social Security and MediCare, they can be privatized and people will not have the incentive to go ahead and escape that kind of taxation, that's a major part of the tax burden right now.

Peter Robinson: I am telling you that you argue from a little device that lies flat on the table like that to the overthrow of the largest social program in American history in the blinking of an eye. I mean, this is lightening speed revolution, it's not electronic money, it's speed revolution.

Richard W. Rahn: It's not us who are sort of deliberately doing this. The technology is coming along. There's thousands of people around the United States who are already working on aspects of this. It's just happening. Technology evolves. When the automobile first came up, states and localities in some places wanted to damn that. It doesn’t work that way. You can't put it back in the box. So you've got to face the realities of the new technologies and you have to design your tax and other social systems to face the technological reality that is there.

Peter Robinson: It is going to happen whether we like it or not. It happens that the two of you like it very, very much.

Peter A. Thiel: I think unbalance is a good thing, yes.

Peter Robinson: But that's a separate point. No matter what.

Richard W. Rahn: The one thing I'm arguing for and I did this book, The End of Money and the Struggle for Financial Privacy. My argument is because this is happening that members of Congress, the State Legislature and others, have to understand the reality and begin to redesign the systems to make them compatible with the digital age. Because if they get into denial they'll force everybody to become criminals and people will just go ahead and evade it. Now that's not a desirable society. We want a civil society and we can design tax and other structures to fit the digital reality without destroying civil society.

Peter Robinson: Next issue--how is E-money going to effect the financial markets? The government is able to tax my capital gains because we have the Securities and Exchange Commission, the Stock Exchange, all of these file copious records with all kinds of regulatory authorities including the IRS and so I just get a statement telling me effectively how much I owe the government. Now we'll be able to exercise this huge capital markets on Wall Street, regulation free--

Peter A. Thiel: No, that's not the way it works. The way it works Peter is you have people can choose what country to invest their capital in. And they will choose to invest it in countries where the capital tax regimes are the most favorable. Capitals globally mobile. That's why we no longer--if we had capital tax gains rate at 40% or 50% in this country, sure that can be enforced. But it would be devastating to our markets.

Peter Robinson: If I understand you correctly, what's likely to happen is that Wall Street will sense that it's losing ground to what? Hong Kong? Singapore? London? It's hard to imagine that the Europeans would de-regulate before we would, isn't it?

Richard W. Rahn: Oh we've had people in Australia and New Zealand, there's lots of areas around the world, Chile. You know they catch on to what is a market opportunity and they begin to reduce their tax rates or capital begins to flow there, then you have competition between countries. One reason the US has done so well over the last 20 years since the Reagan administration is because our tax is particularly on labor and capital, have been substantially lower than that in Europe, and other places in the world. That is forcing other countries to reduce the size of their governments and governments compete like corporations do.

Peter A. Thiel: The opposite version of this is something that is euphemistically called tax normalization. The European--socialist governments in Europe have realized they need to hang together or they will hang separately because the kind of regulatory arbitrage Richard just described. And so they basically created the European Union--the common currency, one of the main reasons behind it is to push for a political integration and have the same high tax rates across the board. Not have unfairly low taxes and this is what they call tax normalization, is raising the taxes the same level everywhere. The Socialists position of this is basically that because the economy is global, government has to become global and have to turn the entire planet effectively into a prison and prevent people from escape. That's the alternative.

Peter Robinson: And it won't work.

Peter A. Thiel: I hope not.

Richard W. Rahn: No. We have to resist it.

Peter A. Thiel: I certainly hope not. I think if you're a Socialist it will no longer work on the level of a nation state, that's the part that definitely will no longer work.

Richard W. Rahn: People can opt out in any digital hole, anyplace in the world, everything can flow through. So you've got to really get almost every government in the world to agree in order for the governments to maintain that kind of controls and high tech regime--

Peter Robinson: So what you're saying is you're saying capital gains and five years from now if the people of Uruguay, the government of Uruguay is looking for a way to make up its lost revenue, it may actually institute a regime of half a percent capital gains taxes. And the markets will shift to Montevideo and I'll be able to invest by my computer--

Peter A. Thiel: There are about thirty countries in the world today where there are effectively no taxes on capital.

Richard W. Rahn: Most countries don't have really capital gains taxes. We have some of the highest in the world and that's one reason we were forced constantly reducing. In 1978, the capital gains tax was 49% in this country. So we've steadily gone down. That's one reason the markets have taken off. We have had much greater wealth creation by reducing these taxes. It's been a good thing.

Peter Robinson: Let's move on to the Federal Reserve. Will E-money take away the Feds ability to regulate the economy?

What will Alan Greenspan do? You gentlemen are proposing a money supply that can't be measured let alone regulated.

Richard W. Rahn: Well the function really are, I think, of central banks in the future.

Peter Robinson: Tell us the function of central banks now, just to establish that.

Richard W. Rahn: Well they have to define the value of the currency and hopefully control the growth of the money supply in order that we don't have inflation or deflation.

Peter Robinson: So it's Alan Greenspan as Chairman of the Fed, it's his job to keep the dollar worth a dollar--

Richard W. Rahn: That's right.

Peter Robinson: --as best he can.

Richard W. Rahn: But there's another way to do it.

Peter Robinson: And what's that?

Richard W. Rahn: And that would be a modern version of the gold standard. And I think what would evolve to is that the central banks will come up with a commodity basket. We'll have gold and petroleum and other traded commodities throughout the world. A sense of commodity prices, and they'll have an index, sort of like the Dow Jones index. And they'll define the dollar in terms of an added stock of these commodities. And then the private market will go ahead and actually produce the dollars. There will be a defined measure for the dollar, but our wealth will be kept in productive assets. This thing here is not productive. Americans carry lots of money in a wallet, and each year it goes down by one, two, three percent. We're going to be at the end of carrying around non-productive assets. In the digital age, you could make a settlement--if Peter and I want to do a transaction, I could have my stocks security account, debited and he is credited instantaneously if we're going to make a sale between each other.

Peter Robinson: Let me quote George Will, your fellow conservator. I quote, this is his observation on our knowledge about how to run the economy, …"between 1890 and 1945 the business cycle was convulsive and destructive. Twice the economy contracted 10%, twice it contracted almost 15%, yet since the second world war, there has been a single contraction of a mere 3% and today we find ourselves in the 17 year expansion, we have in short learned a thing or two." That is to say, using fiscal policy, taxation and spending; and monetary policy, the Federal Reserve through a long century of hard lessons, the government of the United States has actually learned very substantially how to keep the economy stable and growing. And now you two want to see its tools of fiscal policy and monetary policy yanked away.

Peter A. Thiel: The real question with respect to Will is whether this improvement is caused in the global--whether the more stable global economy with few ups and down cycles--

Peter Robinson: He's talking about the United States.

Peter A. Thiel: --in US is caused by the government. Or whether it's caused by technology. And the technological interpretation of this is that we have a far more stable economy because people know what to do with inventories. We have just in time factories. We don't produce too much or too little. All these things are measured much more precisely.

Peter Robinson: Nothing to do with welfare state.

Peter A. Thiel: Absolutely not.

Peter Robinson: Taxation--fiscal policy--

Peter A. Thiel: Fundamentally, you've got Food, Economic, disequilibria--

Peter Robinson: Alan Greenspan isn't a better Fed chairman than Alan Burns was when he—Arthur Burns rather-

Peter A. Thiel: Well Arthur Burns was perhaps the worst one in US history, but Greenspan is not God. Peter, he's not God.

Peter Robinson: Well now that's an even more revolutionary statement.

Peter A. Thiel: I realize that may be a heretical thing to say but he really isn't.

Peter Robinson: Last item--as tax revenues decline as a result of E-money, how small will the Federal Government become?

Today Federal tax revenues run in a little more than a fifth of gross domestic product. In 15 years from now, as your technology takes off, what will Federal tax revenues be running? Richard?

Richard W. Rahn: Well, the studies have been showing what the optimum size of central governments and it appears to be between 10-15% of GDP.

Peter Robinson: How do you possibly study something like that? What we have is a democracy, voters vote on what they want and--

Richard W. Rahn: You look at both time series studies where governments were at various times in terms of their public sector's percentage of GDP and what the growth rates were and you look at longitude at some of these governments around the world where they are. And there's a lot of empirical of this. Now we know there's a large amount of waste to government spending. Everybody understands that to the extent you can force that out, you'll have a rise in real incomes, rise in employment and people are better off rather than worse off.

Peter Robinson: You buy that?

Peter A. Thiel: To answer your question directly I think about a fifty percent cut in spending by the Federal government. And maybe the time horizons a little longer, maybe 20-25-30 years.

Peter Robinson: Twenty to twenty-five years, all right. This is big stuff you're talking about here.

Richard W. Rahn: When we talk about cuts, we're not talking about a cut in nominal spending today. We're talking about a slowing down of a growth of increase in government spending at the same time the private sector is growing more rapidly and so government has a smaller pie.

Peter Robinson: So this one won't feel like a revolution.

Richard W. Rahn: No. You're not going to have massive numbers of government workers laid off and all that kind of thing, that's not going to happen.

Peter Robinson: And overall then your view is the economy will become more efficient, the government will become more efficient, we'll all be better off. You really believe that?

Richard W. Rahn: Yeah, well Peter, you hit the key thing, and that is information. Because in information economy when everybody knows most anything they want to know, then they don't make as many mistakes. Like the unintended inventory build ups, they cause a big recycle--

Peter A. Thiel: And corollary to that is that there's less role for government. Because one of the functions of the government in say, the mid-20th century, the ideal type world was incredible lack of information and if you had a few government bureaucrats who had more information, you could argue that there was more for the government to do. In an economy where everybody has access to the information why should a few people in DC make decisions over twenty percent of the GDP?

Richard W. Rahn: And that's also true for the corporate sector. You'll notice that big corporations have a smaller segment of the total private sector pie, because they no longer have the information monopoly they used to have. And it's one reason we've had this entrepreneurial revolution in the last twenty years. Is that small companies now have the same access to information that only big companies or big government used to have.

Peter Robinson: Which government should be most worried about this?

Richard W. Rahn: Which government?

Peter Robinson: Let me put it to you this way. It seems to me that the European Union, the very moment that they finally begin to be clinching all this thing together, your technology--

Peter A. Thiel: Their timing is completely off--if they finally figure out how to basically create fortress Europe, at that point the economy had become global.

Richard W. Rahn: Those governments were the big--those countries with biggest government sector, like France, they'll have the hardest transition problems and those countries that have relatively smaller government sectors such as us, such as Switzerland, New Zealand, they'll have an easier time with the transition.

Peter Robinson: Richard Rahn, Peter Thiel:, thank you very much. As you heard, our guests envision virtually no downside to the E-money revolution except for governments. But sports fans, I can think of one--how's a ref ever going to decide who gets the first kick off, no heads, no tails. Thing doesn't even flip right. I'm Peter Robinson, thanks for joining us.

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