Electronic Money Free Banking and Some Implications for Central Banking

Abstract

This paper discusses electronic money, its relation to free banking and some implications for central banking. It begins by introducing its conceptual framework for modern central banking, in terms of which it then rehearses the free banking argument. It then reviews the development of e-money in terms of both electronic payment methods and electronic issue, with special attention paid to the latter. The discussion includes both mainstream developments, such as Mondex, and 'alternative' schemes such as LETS. From here the paper proceeds by way of a consideration of the synergy between electronic issue of money and free banking precepts, to a consideration of some implications for the future of central banking generally. It offers an 'contestable' model of central banking, which endeavours to show the effects that e-money may be expected to have (and, indeed, may already be having) as regards monetary policy, financial supervision and seignorage. It concludes that even in its current stage of development, the emergence of e-money not only reflects and supports key free banking concepts, but may be nudging modern central banking towards free banking practice.