The Effect of Internet Value Transfer Systems on Monetary Policy

The arisal of experimental systems to transfer value (digital cash) over the Internet is of interest to monetary policy circles. These systems claim to turn the International Financial System back to the days of free banking, with uncontrolled and rampant issue of currency by private banks. This paper argues that, in actuality, Internet cash issuance will not be a strong force, neither against the tools of monetary policy, or for its own mercantile purposes. Three models are used to develop an understanding of how digital cash systems will fit in the financial system. Fractional banking describes the effect of such cash on the money supply. The Baumol- Tobin model provides insights into how digital cash will function in terms of balances, and thus how it effects the rest of the financial system. Finally, a look at potential participancy reveals the scale of effect on monetary policy.