President's Message: The Cashless Society and the Federal Reserve

Thomas C. Melzer

The story in the June 23 USA Today was startling: An East Coast furniture chain would no longer accept cash from its customers. The chain adopted the no-cash policy after two of its employees were wounded during a holdup. As it turns out, the new policy was not as risky a business proposition as it sounded. Less than 3 percent of the chain's business was transacted with cash. Thus, a rush of firms scrambling to follow its lead is unlikely for the moment.

What is likely is that new forms of payment will continue to make inroads. Already, smart and debit cards are eating into the territory of cash, credit cards and checks. "Home banking" services now enable customers to pay bills and purchase goods electronically, using a telephone or personal computer. Several banks are even planning to offer a full array of banking services on the Internet.

And then there's E-cash. As a recent cover story in Business Week accurately described it, "a raft of companies are developing their own forms of electronic money...[which] moves...largely outside the established network of banks, checks, and paper currency overseen by the Federal Reserve." What does the Fed think about all this?

In theory, we think it's great. In pushing for electronic over paper forms of payment, the Federal Reserve has advocated moving in this direction for years. What's different today is the accelerated pace of financial innovation, based primarily on new technology and the emergence of new players. Will such innovation lead to greater efficiency? Will our payments system remain safe? Will it be broadly accessible? If so, the U.S. economy will benefit. If not, it could threaten economic expansion and stability.

It's pretty clear to me what one of the Federal Reserve's key roles in all of this should be. The Fed has a mandate from Congress to oversee the integrity and efficiency of the U.S. payments system. As the system increasingly reflects new technologies, the Fed must actively encourage interested parties to balance efficiency with reliability and safety. This will require the cooperation of both banks and nonbanks, as well as the public and private sectors. It will require, in some cases, that all parties set aside short-term competitive issues and focus on the future, with the public interest foremost in mind.

Ultimately, the extent of our cooperative efforts today may well influence how competitive the United States will remain in the global marketplace of the future. I'm confident that the Fed is willing and able to do its part in providing the necessary leadership.


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