Where the smart money is going Victor Keegan from: The Guardian 01-03-1999 Page 17 BY HIS own choice, Gordon Brown has undermined the impact of his own department. Next week's Budget will be all about fiscal prudence and micro-economic management. The power to influence the economy in the short to medium term has been devolved to the Bank of England, which has sovereignty over interest changes. The Bank, having ill-advisedly raised interest rates early last year, has of late been falling over itself to reduce them to head off a recession that would almost certainly have happened had it not seen the error of its ways. Its speedy recantation has probably averted the danger of the economy sliding into an unnecessary recession (and for the third time in three decades). But it may yet be a close call. Meanwhile, it should keep cutting interest rates until we get nearer European levels. Although fiscal policy is out of fashion as a short-term economic manipulator, it could make a big comeback in the years ahead as a consequence of the digital revolutio Sooner or later most, of us will succumb to digital cash. Experiments are already happening all over the world. It is a case of which system will impose a global standard. What happens? Instead of having a credit card which links to our bank account via a telephone line in a shop, we will carry a different kind of "smart" card. It will be one ,with a brain of its own in the a microchip into which cash (suitably coded and reduced to the 1s and 0s of computer code) is loaded, as happens already in a less sophisticated way with telephone cards. The difference and it is crucial - is that the cash is carried around inside your card. Just think of the opportunities this will present to chancellors of the future. For the first time they will be able to target Budget disbursements by region, by behaviour and by applying time limits. This is because digital cash will be capable of being programmed so that its value depends on the context in which it is used. SUPPOSE we have joined Europe's single currency area, so all decisions about interest rates are taken by Europe's central bank. If Newcastle is suffering unac-ceptably high unemployment as a of result of interest rates being too high (in order, say, to slow the Germany economy) then the Chancellor could reduce taxes only in the postal areas around Newcastle. Or he could give extra money to deprived groups anywhere as long as they spent it in New- castle. Such a system would be bliss for Japan at the moment because, try as it may, its gov-ernment cannot persuade Japanese consumers to spend either their own money or tax reductions given by the gov-ernment. -But digital money can be encoded for specific purposes. Japanese people could be given tax cuts to buy consumer durables (or partic-ular goods hardest hit by the recession), as long as they bought them within a speci-fied period. After three months the digital cash would cease to have any value. This is not science fiction. As reported in last week's Guardian Online, an experiment with smart cards in East Yorkshire enables parents to load them with digitised money to pay for school dinners. This not only prevents students spending dinner money on something else but also reduces bullying, because there is no money to be taken. Such cards can also be used to earn points for activities ranging from healthy eating to picking up litter Another experiment, in Royston, Hertfordshire, uses smart cards to collect fares for bus journeys. They are encoded with the postal codes from the start and end of the journey. Neil Gershenfeld (in his new book When Things Start to Think, Hodder, £17.99) calls it the end of the atom standard for money as it goes on to the "bit" standard, enabling spending to be merged with the monitoring of it. When money is in the "bits" of computer code it will come packaged with algorithms for tracking its worth. HE TALKS of money which increases in value with the distance from the centre (to encourage regional policy). Or money whose purchasing power would depend on how many dollars it was earned with and then how many dollars it is being spent with. He argues that, just as a grocer who earns a dollar from selling a carton of milk cannot invest the proceeds on the currency markets (because the transaction is too small), so the zillions "earned" from currency transactions could lose purchasing power when used to buy milk. More enticing from the Chancellor's point of view is the possibility of digital taxation. The fear that the Internet will become a global tax-free zone (depriving governments of money to support their welfare states) need not become reality. Handled properly, the advance of digital money could provide the opportunity to reduce tax evasion. "Durmb" money can still pay taxes if suitably encrypted. But from a macro-economic point of view the biggest prize from digital money may be resuscitation of fiscal policy as a regulator of the economy. Of course, before being effective on a big scale almost everyone, rich and poor, would need to have smart cards. Considering the potential convenience (including not needing to carry cash even for small transactions) it may not be as hard to sell as some people imagine. But if it also offers an insurance policy against the rigidities of a single currency (assuming that Britain joins) then it might come to be regarded as a necessity rather than a luxury And Budgets would not be so dull and worthy.
