2013 Writing Contest: Future World: How Would You Like to Pay For That?

First Place Essay

The Net Effect of Electronic Money

Brian Li, Upper Arlington High School, Columbus, OH, Teacher, Scott Shinaberry

It was eerie at the time of its conception, but now it is slowly becoming a reality. Portrayed in the movie Minority Report, the idea of personalized electronic information is rapidly growing in the United States. In today's day and age of highly mobile forms of communication, the United States has slowly incorporated more and more forms of electronic money in its markets. It first began with the use of electronic bank systems, and today, people can access these accounts directly from their phones and from sites such as PayPal to pay for items in their everyday lives. In fact, in 2010, only 54% of U.S. consumers claimed they preferred using cash, and up to 61 million U.S. citizens paid their taxes electronically (Consumer Payment Trends in the U.S.). The United States is rapidly integrating new forms of digitalized currency in our economy, and in the future, it may even become central to its way of business. Though electronic money may seem beneficial, overall, it will not significantly affect the economy.

Electronic money can be immensely beneficial to the U.S. economy. A paper from the Intemational Journal of Central Banking estimated that the average cost of an electronic transaction is half to a third of that of a paper transaction (Bolt, Humphrey, and Uittenbogaard 89). Considering that transaction costs account  for 1 - 2 % of a country's GDP, switching to electronic forms of currency will decrease input costs in all sectors of business, (89). This in turn will greatly increase aggregate supply of the economy overall, bringing down prices further and driving up output. In addition, electronic money will create more transparency in both government agencies and central banks by publicizing transactions (90). The largest benefit, though, is simply the decrease in implicit costs through mobility and convenience. Though this value is hard to measure, convenience "is an operative core value that runs deeper than most (American) values" (Fanell). It resonates with our fundamental idea of capitalism, and helps our economy remain productive. Electronic money not only benefits the economy monetarily, but also fundamentally.

While electronic money may be great in theory, there are many negative consequences that come with implementation. One major consideration is the rise of electronic theft. As currency becomes more digitalized, hackers will increase in numbers and will have a larger incentive to steal. In 2010, the amount of money businesses lost due to electronic theft grew to $1.7 million per billion dollars of sales from $ 1.4 million in only one year, a rise of almost 20% (Whitney). At this rate, the rise of electronic money will tremendously raise the demand for electronic theft and with it, the demand for password protection programs. As cited from Microsoft, "advantages of strong password rules (though), which "shields (fusers) from the direct costs of attacks, (will) burden them with far greater indirect costs in the form of effort" (Herley 2). The input costs of these programs will then decrease supply, bringing prices back up and output back down. Even with these programs, though, electronic theft can never truly be eliminated, only reduced. From WIRED magazine, they claim that "the age of the password is over," because hackers will target the databases that hold passwords instead of individuals themselves (Honan 183). This then means passwords, even to banking accounts, will become impossible to completely protect. So, not only will the costs from these protection programs raise input costs, but also the physical amount of money stolen from each corporation will as well.

Both of these factors will greatly decrease supply, maybe even more so than switching to electronic money in the first place. Overall, the benefits of electronic money may not be as good as they are generally believed to be. Although electronic money is a very good idea, it will not change much in the real world. Any increase in demand of electronic money will only bring approximately the same amount of theft and costs through protection programs until they reach equilibrium. There is a good reason 54% of Americans still prefer to use cash: because it is safe from electronic theft, and because it can still rival electronic money in terms of convenience.

Though in the future we may increase our use of digitalized money, it will not significantly impact our economy unless we can permanently deal with the consequences. America should look to alternative ways of decreasing transactions costs without complete dependence on digital information.