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Virtual Money, Privacy, and the Internet
October 20, 1999
Peter A. Thiel, Richard W. Rahn


Introductory Remarks by David Theroux

Good evening ladies and gentlemen. Welcome to our latest Independent Policy Forum. My name is David Theroux and I’m the president of The Independent Institute. We’re delighted that you could join with us this evening. I think we have quite an interesting and provocative program and very timely, for those of you who follow high technology media and public policy. Those of you who are not familiar with the Independent Institute, hopefully you all got an Institute packet. There is background information about our programs, The Independent Review, including membership and subscription opportunities. I want to point out the new “g You: Systematic Federal Surveillance of Ordinary Americans.” And anyone interested in privacy, I strongly recommend that you take a look at that.

The Institute itself is a scholarly public policy research institute. We produce many books in addition to the journal including other studies and conference and media programs. Our interest is not to mimic or get involved in political intrigues or political battles. Our interest is to try and get to the heart of public policy disputes and the actual effects of government on these problems. In the packet, you’ll also find a sheet on tonight’s program. It also lists two of our upcoming policy forums, the next of which will be on November 17th and that program is on “The Civil War: Liberty and American Leviathan.” The two speakers are the historian Henry Mayer, who is the National Book Award finalist for his book, All on Fire, on William Lord Garrison and the abolition of slavery. And the other speaker is the historian and economist, Jeffrey Rogers Hummel, whose book, Emancipating Slaves, Enslaving Free Men. has gotten many people’s attention. We’ll also be holding an event on January 19th with the historian Robert Conquest, “Freedom, Terror, and Falsehoods.” We’ve had Bob speak in the past, about five or six years ago. Bob has a new book out, called Reflections on a Ravaged Century. For those of you not familiar with Dr. Conquest, he is the author of a number of landmark books, including The Great Terror, Harvest of Sorrow, Stalin, and other books, especially on the Soviet Union.

Tonight’s program is one that we’re very pleased to be hosting. We’re pleased that we have two excellent speakers on this topic. For those of you who are not familiar with this book, we highly recommend that you get a copy. It’s a book that we think is not just important, but perhaps even revolutionary in the whole field of commerce, money, finance, and privacy. Our first speaker tonight is an economist who has been involved in a whole range of fields. He’s the author of The End of Money. The End of Money I should mention, is published by our friends at the Discovery Institute in Seattle, who have been very helpful with us on many occasions, including helping us arrange for Richard this evening. Almost daily, there seems to be some sort of event pertaining to the issues that we’re going to be discussing this evening, especially in the world of public policy. Many of you may remember the recent proposal and the fight to stop a program called, “Know your Customer,” which was a series of regulations that would have dramatically changed people’s financial situation as far as the government’s involvement, at least monitoring-wise. But it seems like there’s almost a daily proposal or we hear of reports or discussions of proposals for the government to monitor financial records. To wiretap. To monitor e-mail. To censor the Internet. To tax Web site transactions. And so forth. Indeed, the prospects of a world in which private transactions are uncontrollable by government, is something that many politicians and bureaucrats are not too pleased about.

I’ll first introduce Dr. Richard Rahn, and he’ll be followed by a second speaker, Peter Thiel, and afterwards we’ll have questions from you, the audience, for both speakers. Richard Rahn is president and chief executive officer of Novecon, Ltd., and Senior Fellow at the Discovery Institute. Dr. Rahn formerly served as vice president and chief economist at the U.S. Chamber of Commerce, and Editor-in-Chief of the Journal of Economic Growth. He received his Ph.D. in business economics from Columbia University, and he served as the U.S. Co-Chairman of the Bulgarian Economic Growth and Transition Project. He’s also been executive director of the American Council for Capital Formation in Washington. He’s also been a Washington economic consultant for the New York Mercantile Exchange, Professor of Management and head of the Graduate Department of Management at Polytech University. He’s been National Executive Director of the Ripon Society, and a member of faculties at numerous universities, including Florida State, Rutgers, George Washington, and George Mason University. Richard is someone who has been a leading light in a whole number of cutting edge economic areas, but I’ll let him discuss one tonight. So I’m very pleased to introduce Dr. Richard Rahn.

Richard Rahn
President, Novecon Corporation

Well David, thank you very much for having me here. I’ve been very impressed with the work of the Independent Institute and particularly, their new journal here, The Independent Review. I thought the one-eye cover of the fall 1999 issue was in honor of me, but [laughter] as David mentioned, I live in Virginia, but I work in downtown Washington, and I recently became aware that I spent much of my working life within six blocks of the White House. It’s been the longest six blocks in the last eight years than it had been previously or last seven years, I guess it’s been now. Washington is that place where our former esteemed mayor once said, “The crime rate in Washington wouldn’t be bad at all if it wasn’t for all the murders.” Today I appear to talk about the future world and specifically, the future of money. My interest in the topic goes back many years and the great Nobel prize-winning economist, Hayek, who had talked about the de-nationalization of money, of currency. This seemed somewhat futuristic and a number of us had sort of played with the notions for many years—Hayek. We had played around with his concepts to see if we could make it a reality. And it looked very difficult, but suddenly the world changed. Technology changed, and we had development of the Internet, low-cost computing power, sort of the end of bandwidth. By that I mean, low-cost international telecommunication. In fact, with the Internet, it’s getting to be almost free. The rise of public key encryption. All these things came together, and so what Hayek had talked about, suddenly was possible.

When I was working in Eastern Europe, in Bulgaria, Hungary, Estonia, and particularly Russia and the former Soviet Union, we were trying to see how we could create new payment systems. In these countries, there were no checking systems. There were no clearing systems, as those of you who know all about banking at all. Nobody had checking accounts. Everything was done in cash. It was a very primitive economy in many ways.

So we had thought, well, maybe we’ll just skip checks altogether and go right to electronic commerce, and that caused me to start investigating what was the state-of-the-art for things like Smart Cards, and other types of digital transfers, and then I found that virtually nothing was being written upon this in the standard economic literature. The journal of the American Economics Association and others were not talking about this, but in places like Wired magazine, they were. And the people who were doing that understood what the technologies could do, but they didn’t understand much about international monetary mechanics, so I tried to bring them together all in this book, along with looking at the various public policy issues involved.

Now this stuff that we all carry around here with us, here’s a dollar bill. This one is an old one. Got Robert Rubin’s name on it so it can’t be that old, but anyway, it’s wrinkled and it’s dirty. You know, they carry a lot of germs and they find that like 60% of them have traces of cocaine on them. So if they ever want to bust you, they just pick up your money and say, “Ah-hah, there’s a trace of cocaine” because virtually all money has it. But this is a rather primitive way of doing things, and it’s even worse with coins. We all carry around some of these coins and you never have the right set of coins and these things for the vending machines or the parking meters or the other things when you need them. Of course, in the digital age, all that can disappear because we can go to Smart Cards, which is nothing more than a credit card with a chip in it, and you can actually put the money in a card called a “cash purse.”

But the really radical change that’s taking place is real time settlements. The reason you have this stuff is, this is a non-earning asset, and even with low levels of inflation, you lose one or two percent of the value each year and most of us carry around some quantity of this stuff. And the reason we do it, what’s the value of that piece of paper? Not much. But it’s because there’s a time period between getting rid of one productive asset and acquiring another productive asset or a good or service we want. But in the digital age, this time period can collapse to a fraction of a second. And suddenly the need for money as we normally thought of it, begins to disappear. Now you still need a numeraire in which to make transactions, where you have to have the dollar or bureau or something that we define relative values in. But the existence of money as we traditionally think of it, that is going to disappear. And it’s going to disappear fairly rapidly. The technologies are now there, and I expect many of you here are involved in various aspects of technologies. Which will have an impact on that.

But just think about it here, in the next few years, over the Internet, from your home computer or from your telephone, you will be able to take money and transfer it around the world, virtually at the speed of light. Not only that, there will be advances in public key encryption. You can easily encrypt it, just with a couple of keystrokes on your computer and no government or anybody else will know what you’ve done, and with a new public key encryption, it’s almost impossible for the NSA to break.

Forced to be in Washington, I had access to a lot of high-ranking CIA and NSA people and others who sort of panicked about this development, because in the old days, if somebody wanted to tap your phone, it wasn’t done as it was done in the movies. They didn’t have to have somebody break in your office to tap your phone. It was all done down at the telephone company. People don’t realize that. You got a court order and the telephone company was all set up, and on the old analog systems, they simply just listened in and they knew what was going on. Telephone companies switched over to digital systems, and suddenly it became a whole lot more difficult, but the phone companies would give the FBI or the NSA or CIA or whoever wanted to listen in, their codes to their digital systems so they could listen in.

But assume, let’s say that David here, wants to send a private message to Peter. Well, with public key encryption, this is easily done. You just download these programs, you can get them off the Internet or buy them from any software store, and you can transmit messages and the courts fortunately have ruled that encryption is protected under the first amendment. It’s freedom of speech. So you can use whatever level you want and for all intents and purposes, two of you could have messages that NSA, and nobody else, clearly the FBI, cannot break. The Clinton Administration and Janet Reno’s Department of Justice, came up with a proposal a couple of months ago—they said, “Well this is just terrible. We can’t let this happen. Let people have private conversations.” So they had a proposal to allow the FBI to break into your home and put devices on your computers to read the key strokes you were making, because it no longer did them any good to actually get the message, but if they could get in to see what David was actually was typing on his computer before he encrypted it, and what Peter was decrypting, then they could know what was going on. Well, fortunately, we still have enough people in the Congress who said this was outrageous and not going anyplace, and the administration seems to have backed off of it. But this is the continuing struggle between financial privacy and these new technologies. Because these new technologies will be very liberating.

Now, in a digital world, there’s not much reason for the Federal Reserve to produce money any more. This says a Federal Reserve note. This is part of the U.S. debt. When you hear about how much debt we have, this stuff you carry around in your pocket is part of the debt. And just as an aside, I’m sort of interested in all these folks talking about paying off the federal debt. Well, if we paid off the debt, what would we use for our money, but I don’t think you have to worry about that. But we won’t have a need for Federal Reserve notes, and most of the money will be supplied by private institutions. Now it doesn’t have to be supplied by banks. And I think the banks are facing a very difficult future. Because in the digital age, there’s no reason Macdonald’s or Microsoft or Boeing or any other well known company, can’t go ahead and start supplying money. Before we had the Federal Reserve System in 1914, and I know Burke [a friend from the audience] remembers this, but then we had most of the money in the U.S. privately issued, and by individual banks. Now, the federal government defined the dollar in terms of gold or silver they had a variety of things over time. The government defined what the value of the currency was. But most of the money was actually issued by banks, and well known banks like Citibank or Bank of America or so forth, their money would trade at par, and a lesser known bank, they might have a discount on it. But the same thing is likely to happen in a digital age.

I’m not sure how all this will start off, but if you had something that said a McDonald’s dollar, well, most people figure McDonald’s is probably a pretty strong corporation. You’re surely familiar with the name, and you probably would be willing to accept them. Much like the frequent flier miles that airlines now have. And they’re starting to be used for, not just airline purchases, but for other products to be used. They’re beginning to expand out, and what I think you will see is companies, maybe like McDonald’s, I know Burger King’s already done one experiment, with a frequent purchase program where they give you a smart card and you can get—it’s Whoppers at Burger King, right? You get five, I’m trying to remember which fast food franchise has which, but you can get like five Whoppers for the price of four, if you have a smart card and you can buy smart cards for other people, but there’ll be a tendency to allow these to be used for other purchases. So we evolve in a number of different ways. In Europe, it’s much more evolved than it is here, and in many countries. In places like Finland, you can use smart cards in parking meters, but just think of something like a vending machine. Vending machines have these electro-mechanical devices in them for putting dollar bills in, and like a wrinkled old dollar bill like this, it probably would be rejected. These things break down. Drug addicts and thieves break into them. And they’re expensive to maintain. They’re expensive to produce, but if you go into the digital world and you just stick a card in, or you just flash your card by it because some of them have the red light—infrared, and that just takes out the 75 cents or a dollar or whatever it is for the item you want out of the vending machine. The vending machine has digits in it. There’s no incentive for anybody to break in. These little card reader-writers are a fraction of the cost of the electromechanical devices we now use. Thinking of parking meters, where you don’t have to run out every few minutes and put new quarters in the thing. It’s timed. And that’s as I said, already done in Finland and a number of other places. So we have this radical new world which is well on its way, and it’s going to be a much better world.

Now, when I talk about this, and I say that we won’t move totally to digital money unless we have the same degree of anonymity as we have with this, and people want to make a number of anonymous purchases, both for good and not so good reasons. But you don’t want to have a trail for everything you produce, or everything you buy. At least most people don’t. And people have lots of reasons for not wanting to have a total electronic trail of everything they buy, and so I think it’s very important we maintain the anonymity. You’ve got to have the privacy. You don’t want to have total Big Brother-ism. Now, there are a bunch of people in Washington, the Justice Department, the FBI, and other places say “Oh no, this is terrible. We want to know what everybody earns. We want to see every cent that goes into them and every cent that goes out.” I think our founding fathers would be appalled at this concept, but these are the kinds of battles that are going on. And they’ve resisted the movement towards anonymous digital money systems. I got sort of fed up with listening to their arguments of how we can’t have anonymity, and they usually say because it increases tax evasion and money laundering and drug dealing. So I looked up the data. Last year, 932 individuals were convicted of money laundering in the U.S. Nine-hundred and thirty-two. Our population is 270 million. We had 18,000 murders. Now how many of those people were killed because somebody was trying to take somebody this stuff [holding up a dollar bill]. We had several million robberies, and several tens of millions of thefts. Most of it was trying to get this stuff [again, holding the dollar bill]. If you go to a digital world, you greatly reduce the opportunities for crime. The convenience stores. The all-night convenience stores. The gas stations. Banks. And so forth, which are prone to having people come in with guns to hold them up. If there’s no money there, what are you going to steal? You can steal somebody’s smart card, but you can have any degree of security you want on a smart card. You can have them so if somebody steals it, they can use it, or you can put in a PIN code or a thumbprint or a voice print or facial profiles. There’s all kinds of things you can do with them. Whatever level of security you want. So I think that the argument about crime is bogus. It is basically a battle over Big Brothers in Washington wanting to monitor every bit of your behavior.

This history of looking into people’s bank accounts is quite new. Traditionally, and Jim Burke remembers this, that gentlemen did not want to—that gentlemen didn’t read other gentlemen’s mail, and they didn’t look into their bank accounts. That was considered privacy. And actually, from the time of the Magna Carta and our Anglo-Saxon tradition, we had this concept of privacy. And governments had not had the authority, generally, to look into people’s bank accounts. That changed in 1933. Hitler’s Germany was the first country to put down a law to deny financial privacy, and as a decree made by Hitler in 1933, called for the protection of the state and individual, for your protection. Doesn’t this sound sort of familiar? And so, this gave the German government the right to look at everybody’s bank account. And this is the thing that caused a lot of Germans, particularly German Jews, to move that money out of Germany to Switzerland, to other places, to try to hide it from the authorities. Because it was setting up procedure.

You might have been reading these stories about the Bank of New York and this Russian money laundering story. I’m willing to bet that virtually nobody will get convicted of money laundering, because I’ve read through a lot of this. This is basically flight capital. I’ve been to Russia 31 times in the last nine years. I know the country fairly well. I’ve been all over it. I’ve been an economic advisor there. The Russian government has stolen the savings of the people at least three times over the last dozen years. They’ve stolen it by inflation, and when you have hyper-inflation, I mean, that’s the government doing nothing more than stealing the money. So you’ve had some poor Russian woman, who has saved up for many years, put her money in a state savings account, and that has been her little nest egg. And three times in the last dozen years, it’s been totally wiped out. So any sensible Russian, of course, is going to put their money in dollars. Most Russian’s hold currency. In fact, 70% of the U.S. currency is outside the country. They want to, and they want to get their dollars, not only in Russia, but they worry about it being seized there, but of course, they want to get them out. That is sensible. If you were faced with the same kind of economic situation in Russia, you would also want to get your money out. Now I don’t think the people want to get the money out of the criminals. I look at the government as being the criminal. And we get this all backwards. Because the government has been engaged in theft. And inflation is theft. We can spend a lot of time on this, but I think probably most of you are well aware of that phenomenon. I’m not going to talk much about the technology because Peter’s been more deeply involved than I have, so I’ll concentrate on some of the public policy aspects.

One of the big battles as I’ve already mentioned, is the battle over encrypting. There have been these attempts to try to deny encryption, or keep low levels, and if you have a small or low enough level of encryption, then of course, the FBI or the NSA or others can get into it. And again, we’ve been lucky that the courts have ruled in our favor domestically. It’s a First Amendment guarantee.

So then the government fell back to trying to control the exports of encryption. Well, my laptop PC, I’ve got an encryption program in it. Now, if I took that out and took it overseas—now they actually say I can have it in my laptop for my own personal use when travelling, but if I sold it to somebody, then I could be in trouble. Of course, these same encryption programs, you get them for free over the Internet. And encryption is something, because it’s mathematical algorithms, so how do you control it? I first became aware of the stupidity of the government’s position, and I think it was back in about ‘94, that we were trying to set up electronic payment systems in Russia, and moving to smart cards and so forth. And I was working with a Russian smart card company, it was providing software for the reader-writers and things, and they wanted the up-to-date stuff on encryption. There was a guy named Bruce Schneider that probably many of you know, who has got the sort of basic bible of encryption. So I said I’ll bring his book over. It was a big seller here in the U.S. On the back cover of his book, he’s got two discs that have the algorithms which are written out in the text. In the back of the book you have the algorithms, but he also had them on discs, so you could just drop them in your computer.

Well, when we were ordering the books, Bruce had called up and talked to one of my associates, and he said to her, “If you’re going to take these out of the country, you’ve got to take the disc out because those are considered munitions.” Same algorithms were actually in the book. You just had to scan it and put it back in the computer, but since it was written, that’s Freedom of Speech and protected by the First Amendment. But the discs are considered munitions. And the more I got into this, and looked at the whole stupidity of the system, and so the government is trying to control something you can’t control. Now the software companies who provide encryption programs, they’ve been at a big disadvantage because they’ve had to set up offshore operations to market this. And so, much of the encryption programs had moved over to Japan, Switzerland and Belgium and Finland, and other places which don’t have any restrictions on it. And finally the administration seems to be getting to back off on it.

But it’s much like so many things in Washington, the people are brain dead. It’s much like Prohibition. Prohibition clearly couldn’t work because there was a demand for alcoholic beverages. I know that shocks you. But there was a demand for alcoholic beverages, and people knew how to make wine, they knew how to make beer. Bathtub gin. I’m not sure I know how to make bathtub gin, but I’m a Virginian and we’re slow to learn these things, but anyway, all this was out and of course, it was ludicrous that if there’s a demand, the supply isn’t going to be there. And there’s a demand for high-level encryption and people are going to get it, and it’s easy because the basic fundamentals of how you do public key encryption now are known. And if any of you are interested, there are plenty of books out there on it. I’ve got some of them referenced in my book, there’s a whole loony policy in Washington.

The other big battle of course, is over bank secrecy. We have something called the Bank Secrecy Act passed in 1970, but in typical Washington fashion, the Bank Secrecy Act was actually anti-bank secrecy act, because it forces your banker to spy upon you. It prohibits banks from giving bank secrecy, even though it’s called the Bank Secrecy Act. And originally, they had a limit of $10,000 in cash transaction, and there were these currency transaction reports the banks had to file and that was in 1970, would be what, $40,000 today, but they kept lowering the level and they made it five and down to three and then David talked about the “Know your Customer” regs which is going to bring it down to zero. When I was doing the book, I went around and talked to a number of bank compliance officers for big banks. And they were talking about the huge cost of having to train all their personnel to look for suspicious activities. If David, let’s say he normally takes a hundred dollars of cash out a week, spending cash out of the checking account. Suddenly, one week David goes in and takes out $300. Ah-hah. A suspicious activity. A report goes to Washington, and if banks don’t do that, they’re fined. It’s a huge burden. So I started looking at the cost of this for the whole banking system. Well, it ran into hundreds of billions of dollars, and then, I looked at the number of convictions. Now, I calculated that your convictions seemed to cost more than a hundred million dollars when you look per conviction, if you looked up total public and private sector cost. And everybody was screaming about Ken Starr spending $44 million dollars and he got 17 convictions. Well, FCEN, the Financial Crimes Enforcement Network, is out there and I think their numbers are like a hundred million dollar per conviction. And I’ve debated some of their people and they’ve never come back with figures to prove me wrong. So I suspect my numbers are too low. The other is taxation. And taxation, this is a fascinating problem. I assume that there’s probably a libertarian weenie in this office.

David Theroux

Where’d you get that idea?

Richard Rahn

Well, friends of David. OK. David gave me one minute here. Let’s see if I can do it all in one minute. OK.

This book. Now think about it. And let’s assume I had written it in London rather than in Virginia, and that I had had a British publisher, but I have had a printer in Toronto, Canada, a wholesaler in Memphis, Tennessee, that when I sold it through, a Seattle, Washington company with warehouses in Reno, Nevada, if a Virginia resident had been on vacation in Florida, and with their portable computer, had ordered from Amazon using a credit card, A Visa card on a Bermudan bank—now please tell me, who would have the right to tax the transaction and how would you enforce it? And you’ve got all these states talking about Internet taxation. There’s a moratorium right now. It’s lunacy.

Last spring, the state of California, there was a group there that formed a task force to come up with how they would tax it. Then they brought a few of us fellows from the big accounting firms who were tax accountants and a few tax lawyers and a couple of economists like myself, who commented on this, and it took us about an hour-and-a-half to take these people apart. Not because we were so much smarter, but the problems of Internet taxation are overwhelming and you would have to have a massive violation of civil liberties of monitoring of everything.

And the final word, since he’s cutting me off here, is that think about the electronic age. If there’s an electronic hole anyplace in the world, if any country, anyplace in the world, decide not to go along with these controls, everything flows through it. And what this is going to force, I think, is a downsizing on government, which is good, but we’ve got a huge battle in front of us, because the totalitarian forces which reside in Washington—they don’t even realize they’re totalitarian forces—that’s part of the shame of it all. They come up with these things and they don’t realize they’re Hitler Juniors. They think they’re doing it to help us. But there’s going to be a big effort over the next few years, that we have to win the battle. We’ve pretty well won the battle on encryption. It’s not over yet, but we’ve pretty well won that. The Bank Secrecy, we’ve got a lot of work to do there, and the tax battles are the two big ones, and I hope you will all join in the fight. And David, again, thank you. And tell everybody to buy this book.

David Theroux

Thank you very much, Richard. Our next speaker is, as you know, Peter Thiel. Peter is the chairman and chief executive officer of PayPal, Inc. Peter’s also been a research fellow here at the Independent Institute. He’s the past president of Thiel Capital International. He’s also worked as a derivatives trader at Credit Suisse Financial Products. He’s been a securities lawyer for Sullivan and Cromwell. He’s been a speech writer for William Bennett. A law clerk for Judge Larry Edmonton in the U.S. Court of Appeals. Peter graduated Phi Beta Kappa from Stanford University and he received his law degree from Stanford Law School. He’s a co-author with David Sachs of an Institute book, The Diversity Myth: Multiculturalism and Political Intolerance on Campus. It’s a book on the issue of privacy and civil liberties in higher education. And his articles have appeared in the Wall Street Journal, Washington Times, San Francisco Chronicle and many other places, and for those of you who are interested, he’s also rated a national master in the U.S. Chess Federation. I’m very pleased to introduce Peter Thiel.

Peter Thiel
Chairman and CEO, PayPal, Inc.

Well David, thank you very much for that long introduction. I don’t know if I gave you permission to go through my whole resume, but I guess you’re not the government so that’s OK. One, I want to thank the Independent Institute for putting this event on and giving us an opportunity to step back a little bit and think about some of the bigger kinds of questions that we deal with. We often have these focuses on the immediate kind of questions. If you look at the headlines in the news on a given day, people will not be spending a lot of time talking about digital money and you’ll always have sort of the urgent things displacing the truly important things. And I think this is one of the things that’s quite big, quite important, and there are a lot of interesting questions it raises about the nature of money, about the nature of capitalism, politics, and the world, and so I want to step back a little bit today and look at some of these questions and talk a little bit about some of the technology that will be used to implement some of the changes we’re talking about, and try to keep these things fairly brief and let you guys and gentlemen and women, ask some questions at the end of the presentation.

Money is one of those things, it’s something you see everyday, but the more you reflect about it, the more mysterious it becomes. Your typical dollar bill, as Richard pointed out, has no intrinsic value, and yet it is something that people value extremely highly, and so there’s sort of this weird kind of subterfuge that goes on when people think about money. It something that has value, it’s valued by everybody. You can use it to buy things in an economy, and yet it’s something that has no intrinsic value. And the kinds of context where one can really see this sort of stuff break down, are cases where money is sort of in a twilight zone, where it’s breaking down. There have been of course, countless episodes in the 20th century, in the emerging world, where governments have gone out of control and have just started printing money like crazy, and the institution has started to collapse, and the link between money and value has really eroded. The classic examples are ones like Argentina in the late 1980s where you had hyperinflation. They had to raise prices in stores three times a day, the government was printing that much money. And so the upshot was that when people got their paychecks, they had to physically run to their bank accounts and physically run to a grocery store to make their purchases and try to pass the money on to someone else. It was like this game of musical chairs. And the chairs were taken away pretty fast, so you had to keep running really, really fast. The government of Idi Amin in the 1970s ran out of money and so they asked the Treasury Secretary. The Treasury Secretary came to the dictator in Uganda and said, “We have no money left; you spent it all.” And he said, “Well just print more.” And again, these are sort of extreme examples and yet they’re not totally inappropriate in any other context. I think perhaps the worst hyperinflation in the 20th century took place not in the Weimar Republic in Germany, not in Hungary in between wars or in any Latin American country. It took place in Yugoslavia or Serbia in particular, in the 1990s, where, in the course of the last ten years, they’ve inflated the currency by 23 orders of magnitude. Which means that one dinar in 1989 can buy about as much as 10 to 23 dinars would today. Periodically, they just lopped off a few zeros and then it would re-inflate, and they’d lop off a few more zeroes.

Richard talked about the government basically stealing everything in Russia three times in the last 12 years. Well, if you think that every time one order of magnitude, it’s like 90% theft. It’s pretty much that they’ve stolen everything in the country 23 full times. I mean, the remarkable thing is that they’ve gotten away with it. They’ve been able to sort of blame everybody else except for the government. For ten years, they’ve been quite effective in generating a series of scapegoats to divert people’s attentions. I think sort of another example is Mobutu in Zaire. In the late 1990s they periodically flew in these jumbo jets from France, where they had the printing presses. Nothing worked in Zaire anymore, not even the printing presses. So they had to fly in the jumbo jets with the physical currency, and by the time the government was coming to an end, they’d gone up to a million Zaire note, I don’t remember exactly what the currency was called, and basically, people in Kinshasa in the capital were no longer accepting it as legal tender. They were accepting hundred thousand notes, but a million -- this just seemed like too much. And so they actually had to bring in some more jets and fly up to some local provincial capitals where people were a little bit more behind the times and were still willing to accept these million denomination notes. Now these are sort of the extreme examples.

When we talk even about countries like the U.S., Western Europe and so on, there has been a significant erosion of monetary value. And the single currency in the world that has been the most robust currency in the last half century, is the Deutsche mark in Germany. And even so, one deutsche mark today has only about 20% of the purchasing power of one from 50 years ago, around 1950. So it will only buy you as much as 20 pfennigs would have in 1950. With respect to U.S. dollars, it’s about 10 cents on the dollar and it’s been inflated by about a factor of 10. With respect to British pound sterling, you’re down to about a factor of 20 and so on down the line. So it’s the sort of stuff that happens on geological time. It’s something people don’t generally notice, and yet, the musical chairs are slowly pulled away. And the fundamental problem when we think about, comes back to this initial paradox I started with, which is that money has intrinsically not very much value, and the nexus—the place we have value in a capitalist society is in intellectual labor, in real property, in the relationships that exist between people as they work together, in corporations, and as individuals and the kinds of trading relationships you have. To the extent money is closely linked to that, it has real value. To the extent the link gets broken more and more, it has less and less value. And one of the questions is, and it’s sort of a fundamental, philosophical question is, who gets to control that link between the medium of exchange and the goods that are exchanged. And to the extent it’s controlled by governments, you can have governments where it erodes in small ways like in Germany or the United States, or in very big ways like in Zaire or Serbia in the 1990s. And to the extent it’s controlled by individuals, it’s like you can have a currency which is linked to real value and therefore it does not erode at all.

What I want to sketch out is sort of the optimistic, futuristic scenario in terms of how we might be able to move from the world today of massive government and massive fiat money, into a world in the early to mid-21st century where this will no longer be the case at all and where it will be very, very different. I think the basic paradigm for thinking about this is as a reverse Gresham’s Law. Gresham’s Law is the law in economics that says that good money gets displaced by bad money over time. It comes from the Middle Ages, when the sovereign was able to coin gold coins and then every now and then, he’d collect some in taxes, and melted them down and coined coins with less gold content in them, and had more coins to spend. And then people in the rest of the economy, would gradually take the ones with the high gold content out and so gradually the currency got worse and worse and worse.

A reverse Gresham’s Law would work something like the following. It will be something where you have a choice between different currencies and the choice is not left to the sovereign, but to the individual. And in the sense the individual becomes sovereign is able to make choices regarding which currency they want to take. And when the individual makes these choices, they will choose better currencies rather than weaker currencies. And, there’s sort of a two-step process that I think this will go through. The first step is one in which we will go from really bad currencies like, let’s say, the Serbian dinar or the Russian ruble, to currencies where the link is not quite as troubled, like let’s say the U.S. dollar, and then the second step is where we will get rid of currency in the fiat conventional sense altogether, and it will be replaced by some kind of asset classes on real assets. And I want to sort of suggest to you that this process is already quite a bit further along than people think on both scores. The first one. Going from rubles to dollars or from Zambian quatars to dollars or Brazilian reals to dollars. The fact of the matter is that in many ways, given the global telecommunications network, given the interconnected world we live in, it is increasingly possible for people to substitute their currency for others. Richard mentioned the statistic that 70% of the U.S. physical currency is now held outside of the country. One of the remarkable numbers is in the case of Russia. It’s estimated something like $40 billion in physical cash is held in Russia. Only about $180 billion is held in the United States. The Russian economy is about 1/10th the size of the U.S. economy so that in effect, a greater percent of the Russian GDP today is held in physical U.S. dollars, than of the U.S. GDP.

And the same thing is true in a lot of these other emerging market countries. In China, the number is something like $30 billion U.S. dollars. India, it’s $20 billion. Argentina, Mexico, 10 to 15. And what’s basically happened in these countries is you have periodic currency crises in which the currencies collapse, and you have banking systems that are controlled by very corrupt political elites, and every few years, the banks collapse. In Russia, they actually managed to do both at the same time last summer, where not only did the currency become worthless, but for good measure, there was none left. So you went to a bank and there was no currency left either. They managed to pull the do both. Normally you only have to do one or the other, but just for good measures, they reduced both the currency and the quantity to zero at the same time. So you have people holding physical dollars. And this dollarization trend is a very, very powerful trend.

In Russia, and in a lot of these countries, it’s now basically legal for people to have dollars and in other countries. It’s still very illegal, but it’s basically just being done by everybody. There are of course, massive problems with holding dollars. The big ones are, again, some of the ones Richard identified, in terms of theft. It’s dirty. It’s not very fungible and so on down the line, and one of the questions is how do you move from these physical dollars to electronic dollars? I think the basic technology is going to take place on the Internet. I think a specific platform in the emerging world is going to be on a cell phone platform. If you look at the numbers, there are about 360 million—about 150 million online, desktop-based accounts today. That number projects to grow about 300 to 350 million in the next five years. However, with respect to cell phones, Internet-enabled cell phones are just getting rolled out right now. They already have some significant penetration in Japan, in Finland, in Sweden. They’re getting rolled out in Western Europe, and the U.S. next year. The numbers are projected to grow from about 10 million Internet-enabled cell phones today to about 1 billion in five years. In five years from now, everybody who is a member of the middle class in the emerging world, and in the developed world, will have an Internet-enabled cell phone. And this sort of a cell—in China, the number is projected to go to something like 300 million cell phones, most of which will be Internet-enabled. These people will have access to their bank accounts, and it will be very easy for them to move money into an account in a safe jurisdiction where the banks are not politically controlled, and they will basically be able to completely dollarize the economy. There will be no need to have any rubles or dinars and it will be non-traceable, no matter how illegal the Chinese Communist government says it is to hold U.S. dollars, you will have a password on your cell phone, and the only way to stop this process would be literally to shut down the telecommunications network. And that’s the kind of choice governments like China, India and some of these other countries are going to face. They will either have to shut down the telecommunications network and make it illegal for you to own a cell phone, or, they will have to basically give up the kind of monetary sovereignty they’ve had and the enormous power that they’ve been able to wield as a result of this kind of sovereignty over the last many, many years. So I think this process is already full-fledged. The dollarization worldwide is going to be accelerated enormously by the technology.

The second theme is a little bit more speculative. And that is, that getting rid of money altogether: going from digital dollars to any kind of government-backed currency, to purely private currencies. And what about private currency or private money? I think fundamentally what it means is that there is no medium of exchange. You exchange value for value, rather than exchanging value for something the government says has value. And whenever you have this intermediate step of the government saying something has value, that’s where you have the subterfuge, the sort of bourgeois domain come in, the game of musical chairs, where every now and then a chair gets pulled out and it turns out that you’re the one holding a dollar bill that’s all of a sudden become worth a little bit less.

The kind of exchange of value for value—the classic model would have been some sort of a barter model. That obviously has enormous transaction costs associated with it. These transaction costs go down in a digital age. And the kind of model that I think is the most likely to take place is one where you have other kinds of financial instruments that are very, very liquid. The one I would cite in the U.S. would be something like an index on the S&P 500, or some sort of generalized stock market index, where instead of having currency as being the place we have value, it is in real property, real companies, things that actually have real value, and so on that you might have conducted business by trading not dollars, but trading little slivers of the S&P 500, or of particularly large stocks like Microsoft or something like that. My guess is that it might be the whole stock market as a whole. And that as you trade these things, that becomes in effect, a de facto currency. Now, this is still pretty farfetched, but it is not quite as farfetched as you might think, and just as we’ve had people in Russia replace rubles with dollars, we have had people in the U.S. replace dollars with equity.

Over the last 20 years, one of the very big, sort of financial debates that takes place is whether the U.S. equity market is wildly over-valued, or whether it’s at a fair value or under-valued or anything like that. And one of the things people often talk about in making judgments about whether the equity market is over-valued, is something called the risk premium on stocks. What is the expected return on equity over government bonds? And for much of the 20th century, the risk premium has been enormous. It’s been something like 7-8 percent in the 1930s, 1940s, and even a decade ago, it was still 4-5 percent. You expected to earn 4 or 5 percent more on equity than on bonds, and that’s why they were priced. Today, the risk premium on equity has gotten down to about 2%, and so people are saying they’re not much more risky than government bonds. Now, if we really carry this digital argument to its conclusion, there will come a day at which the risk premium might be zero. If you actually look at the volatility in price, it’s about the same. There is a strong theoretical reason for suggesting the risk premium should be zero and maybe it should even be negative. Maybe at the end of the day, companies like Microsoft and McDonald’s and Intel and the whole conglomeration of companies has more intrinsic value than any given government, even the U.S. government, so if you believe that that’s the sort of trend that’s going to take place, we are already starting to see this kind of displacement, and again, it’s always a question of whether you want to impute this particular explanation to it, but I think it is one interpretation of what’s been happening with the equity markets that they’re basically starting to function as currency. Of course, this is the way people talk about stocks all the time, it’s driven by liquidity. It’s driven by people putting money into stocks. All of these things, because that’s where people perceive the true value to really reside.

There are some questions in terms of what can go wrong with the scenario. I agree with Richard on an awful lot of things. One place where I will disagree and not a big fundamental disagreement, but it’s a disagreement on emphasis, is I don’t think the big fights on this are going to be fought in Washington, D.C. I think that actually it’s for all the reasons Richard cited. The people in D.C. are completely backwards. They don’t understand any of the technology, and even to the extent they can, it can’t be stopped. You cannot stop things on the level of Washington, D.C. in terms of shutting down these encryption protocols, things like that. I think that government actors who are intelligent and who understand what’s happening, have realized on some implicit level, that the only way they’re going to stop this kind of digital revolution is to hang together. Either they must hang together, lest they all hang separately, for exactly the same reason, that otherwise, you’ll have money going to offshore jurisdictions where there’s low taxes, privacy rights, things like that that are in force. The classic example I cite in this regard, and I think there’s a very powerful push in this, is that the whole formation of the Euro trading zone in Europe was in the last year. Perhaps the single biggest push for it was this realization that jurisdictional competition was inexorably pushing things in the direction of free markets. There are 15 governments in western Europe, I believe that 14 of them are effectively run by social democratic governments. It is the most left wing configuration in the history of western Europe in terms of the politicians who run it. They’re not interested in a common currency because it helps business, or it facilitates trade, even though those are the kinds of reasons that initially were used to push it, and they were part of what drove it. They’re interested in it because they see it as the first step towards political union and they see political union as a pre-condition for preserving the welfare state and the massive governmental apparatus as it today exists in western Europe.

The euphemism that a lot of the politicians like to use in western Europe is something called “tax normalization” and what that means is that there should be no unfair tax competition which arises whenever one jurisdiction chooses to use lower taxes than another jurisdiction, and in a context of western Europe, where the jurisdictions are relatively small and it’s possible for people to move to lower jurisdictions such as the UK or Ireland, which are relatively lower than France and Germany and Italy, you want to harmonize these taxes and basically prevent this, and of course, western Europe itself is not a logical stopping point. It’s sort of the one thing that’s gone wrong with their plans, that the globalization has gone even faster than their political consolidations. They’ve been able to consolidate these jurisdictions in Europe into a single large jurisdiction, but at the same time, there are all these offshore jurisdictions that have popped and so on, so you have people like Lafontaine, the former finance minister in Germany who is the current finance minister in France and a lot of these countries urging that transactions in offshore jurisdictions be shut down. That basically it be made illegal to have offshore tax savings. And again, if you just sort of think about how in the world can this happen or what does this mean? Well, what it means is that politically you have to create a de facto global government. You have to basically turn the whole planet into a prison to prevent anyone from escaping. And there are some difficult questions whether it’s possible. My sense is that I’m optimistic in a sense that I don’t think it’s going to happen, but I think it is going to be a real fight. And it’s not going to happen under the auspices of the United Nations or anything like that. It probably will happen through various multinational bureaucratic agencies. It will happen through collaboration between the U.S., Western Europe, Japan and various governments, to basically make it illegal to put money into offshore jurisdictions. They will figure out ways to put very large pressure on these small countries. And there is a question of how islands in the Caribbean will be able to hold up, if you have the U.S. government or western Europe basically send a fleet of ships down to try to shut them down.

Now, there are questions about whether this is going to happen or not, but that is clearly what they are thinking. That is what intelligent socialists realize they need to do today to preserve the government as it is currently constituted. The stupid example of this, and it’s sort of a counter example, would be something like the government of Malaysia, which one year ago decided they wanted to basically prevent currency trading, and the government of Malaysia said, from now on, the Malaysian ringgit has value only inside of Malaysia. Outside of Malaysia, it’s worth zero. Inside of Malaysia, it’s worth 3.8 ringgits to the U.S. dollar. Outside, you have to have an infinite number of ringgits to buy a dollar. You can buy ringgits with dollars, but you can’t buy dollars with ringgits. And those were the basic rules they set up. And under those rules, they were able to basically create this artificial preserve within Malaysia. Now that’s not going to work five, ten years from now. With the global telecommunications revolution, the Internet access that we’re talking about based on cell phones, that kind of a solution will no longer work. I think it is an open question where the kind of push being made by people in Brussels for tax normalization across the world, whether or not that might work. So, I have one minute to go here. I think I actually may just leave it at that. I think that it is a very exciting future. I think that there are incredible technological forces pushing us in the direction of digital currency of a world of limited government, limited tax authority and ability. I think there are some very powerful countervailing forces and we really should not under-estimate. I think the sort of tension that has existed between technology and politics is in some ways likely to perhaps become even more exacerbated in early 21st century.

Thank you very much.

David Theroux

Thank you very much Peter. So we have an opportunity for questions, and Alex is the man with the microphone it looks like. So if you could speak into the microphone, because we’re recording all this. Do you want me to pick them, or do you guys want to pick the questions. Why don’t we start with—Burke, where do you want to start?

Burke Knapp (audience member): Richard Rahn asked me if I could remember the creation of the Federal Reserve in 1914, and I want to tell you I was born in January 1913 and I was always regarded as a very precocious kid. (laughter). Aside from that, may I ask a question, Richard. What he said about the transactions on the Internet made me feel very despairing about the income tax, the future of the income tax. I just think we may have to bury it. But then I think, well of course, then we resort to a sales tax as a substitute, and then I begin to think about that and my question to him has to do with the issue of the sales tax on the Internet. Especially on merchandise transactions. How do you see those?

Richard Rahn

A number of us in Washington have been sort of speculating on this. I’m on the board of the Institute for Research into the Economics of Taxation, and there were sort of serious ex-Treasury types who have more of a libertarian orientation but who are libertarians, but not anarchists, and trying to figure out how we have a tax system in the future. Property taxation is easy to see. They have a building sitting here and still be sitting here in the Digital Age and we can tax that. Merchandise, if it’s large physical objects, you’re probably still going to be able to do, but you look at the problem states have already had with catalog sales. And if a company has a location, I guess, someplace like Oregon where they don’t have sales tax, I believe I’m correct in that, and they ship merchandise to states who do have the sales tax, because of the Interstate Commerce Clause of the Constitution, they’re not obligated to collect the tax, and so you have a lot of these catalog retailers located in places like this, which gets into the point of the digital hole that both Peter and I talked about. It’s going to be very, very difficult. I think that—even in the income tax, for all of us whose product can be sent over the Internet, for those of us who write or even compose music. I mean, think about it. Ten years ago, who would have thought that the local music store would be in danger of going out of business because you could deliver music over the Internet for a fraction of the cost, and the Internet music store can be located anyplace in the world. Now how are you going to tax that? And that’s why I say, is the good news, it forces a downsize in government because the tax base will be eroded. The question that the two of us have raised, are we going to do this in a sensible and legal way, or are we going to do it like Prohibition and make everybody tax violators because it will be easy to escape, and I’m arguing that we need to have some enlightenment with the Congress and state legislatures and others and realize the new technologies have diminished their ability to tax and not make all their citizens criminals.

Audience Member

I have a background query for Doctor Rahn and then a topic question for you both. Dr. Rahn, according to your book on this, you testified before Congress on economic issues more than 75 times. How many times did the Congress take your advice?

Richard Rahn

At times, we won. In 1978, our first big victory. At that point, I was before American Council for Capital Formation, and we reduced the capital gains tax from 49% to 28%. A quick aside there. I was up arguing against some of the leading Keynesians of that time. In 1978, when we talked about doing this big cut, I argued that it would likely increase tax revenues by a billion dollars. The folks on the other side, the Keynesian economists, argued that it would likely reduce taxes by $2 billion. I turned out to be wrong. The first year tax revenues went up by over $2 1/2 billion, but at least the direction of my sign was correct. Now we have made a lot of progress, and I just want to add, those of you who know, Mudville’s Bob Mundell, won the Nobel Prize this past week, and for those of us who are supply-siders, and our whole sort of libertarian group, Bob was instrumental in our original group in making the tax arguments. People forget when Ronald Reagan took office, the maximum marginal tax rate was 70%, and as late as 1978 as mentioned, we had a 49% capital gains tax rate. And, the left will never admit it, but we are winning over time. The battle goes on. You never really win. You’ve just got to keep up the battle. But the tide clearly is going in our direction, and part of it is because of the things that Peter mentioned, of the international competitors. Most of you, or many of you, are not old enough to remember what the rhetoric was like 30 years ago. Burke remembers. But he remembers both before it got bad, after it got bad, and how it got better.

Audience Member

In the cause of fair play, I’m going to ask another question of Peter. A lot of financial strategists right now are recommending minimization approaches. Diverse investments, stocks, bonds, cash, coal for inflation, deflation, recession, whatever. Does your vision of a monetary future affect this sort of strategy? If so, how? If not, why not?

Peter Thiel

Well, I think that if you believe that there is going to be an end of money at some point in the future, and again, it may be a very long time horizon. It may not affect your investing on a quarter time horizon. But it is likely that the kinds of sectors that we come to invest are equity-based investments, and government bonds are likely to do very poorly. In the developed world, US, western Europe, Japan, one of the really big problems governments face is a massive demographic crisis in the sense that there are all these unfunded pension plans. It’s worst in Japan. The affected debt is something like over 250% of GDP in Japan, if you include the government debt, plus all the government affiliated agencies plus the unfunded pensions. Europe’s on the order of a 150%. U.S. is actually not quite that bad, but if this debt is going to be paid off to increase the taxes, that’s how they were going to be basically paying off these pension funds. If you believe that the ability to tax is going to go down because of digital money, there’s going to be an enormous problem in paying this off. The way they will probably curb it is either it will be defaults on bonds, or they will have inflation. So there are basically two ways the government can take care of it, if there is no ability to tax and if the obligations are too large. And under that sort of scenario, it will be much better to have assets in things that are real. It doesn’t necessarily have to be the latest hype real thing, like the Internet economy, but it can be real equities, real estate, those kind of things make a lot more sense and there’s probably a way to put together a portfolio that is deflation and inflation-adjusted under a lot of different scenarios, combining a variety of assets.

I think the important thing is you can have valuable value really in where you reside, rather than in digital money. One other point I just wanted to just sort of make and it’s my advice by Richard’s comment on sort of the ways you would tax policies and change. In response to both more enlightenment and the market pressures, it seems to me that the most remarkable statistic in this regard that I always cite is that between 1986 and today and it’s a mixed drawing in the sense that in 1986, the marginal income rates in the U.S. were 28%. Today they’re 39.6%. The marginal rates on capital were 28%, today they are 20%. Today we have the widest differential between taxes on capital and income in the history of the United States. Part of the reason for this, I would suggest to you, is that capital is the thing that moves most easily in a global economy. Labor, can’t move that easily. It’s harder to move from country to country. It’s much easier to move assets and investments from country to country, and so we have already seen de facto—an enormous shift of taxation onto capital—sorry, onto labor and away from capital, as a result of this global monetary pressure. And it’s again, if you think back seven years when Clinton came into office, this would have been the very last thing they would have imagined that they would be doing would be presiding over this massive shift in the tax burden of away from corporations and investors and onto the people who are blue collar workers, but that’s practically what they have done.

David Theroux

One other question that might be related to what Peter was just saying, is the issue of whether these kinds of pressures can force governments around the world to liquidate their own assets, because of these countries are going to be basically –

Audience Member

I think both of you mentioned two of the major factors in shaping the world economy in the future, one being the Internet and the other being digital money, but I think that you’ve ignored a major other factor and that is the—let’s say, as Mao said, that all law is dispensed from the end of a gun, and I think that Peter mentioned the fact that many world governments are looking to create a prison sort of mentality so that no one can escape from the taxation burden that’s being imposed by providing no escape routes as far as economics, and I think the thing that we both ignored is that society should not only shape by those sorts of forces and religion and things of that nature, but they were also shaped by the economic return of violence, and that is the amount of return that one gets depending upon the instruments one uses forms somewhat of a feedback to social organizations when economics dictate that a person for a relatively small amount of money, can have a weapon in their possession that provides an effective deterrent against the state, then states tend to be small because the economic return is not good. Whereas when economic returns are very good, for larger and larger weapon systems, like cannons and of course, nuclear weapons, then everyone wants to possess those because those have the most influence or best political return. And I think that we may be we moving into a—and people have talked about this—a situation where the cost of weapons of mass destruction will drop dramatically and that will act as a counter balance to the globalization effort towards creating larger societies because people will have it within their possession, crazies no doubt, but people would have it within their power to counter-balance the forces that countries have created through large weapons systems.

David Theroux

So do you want them to comment on that, is that your question?

Audience Member

Well, I’m just wondering if you agree with that or is that something that –

Peter Thiel

Well, I suppose if you want to frame this question sort of a very stark, Ayn Rand-type terms, there are basically two ways people can make a living. They can earn money or they can steal it, and sort of one of the questions would be, what is the marginal or what’s more practical, are you going to compensate—is it easier to steal money or is it easier to earn money? And I agree with the point that to the extent that the marginal returns on violence are reduced, you have a less violent world. I’m not sure that it comes about by having cooperation of weapons of mass destruction and everyone being able to have a nuclear bomb in their backyard. I think the way it might come about though, is through the kind of encryption technology that Richard and I described, where basically the cost of the government of great men, becomes more and more expensive and basically one way of thinking about it is that under the current system of monetary sovereignties, you have a printing press—you have one printing press in each country. And you need a certain amount of force, political power, whatever you want to call it, to control that one printing press. But if basically that process becomes decentralized, where every single person gets to choose what currency they have, you’d have to control not just the single printing press but the entire telecommunications grid. And that’s a much more difficult thing to do. And so the costs—even for the same return on violence, the investment’s much greater, and so I think that can tilt things quite a bit. I agree with your point fundamentally.

Richard Rahn

It’s interesting to note that countries are going towards choice in currency. El Salvador is the first country I know who has now just moved, saying you can use any currency you want in El Salvador, and there’s a big debate now whether Argentina will fully dollarize, because they have a currency board and the dollar is a one-to-one ratio with the Argentine peso, but the peso’s in denominative bonds, they sell it at a basically discount, dollar denominative bonds, and the debate is whether the loss of seignorage would be greater or less than getting rid of this discount, and I think most people who have looked at it, say dollarization would be far better because you can do it at a discount, because of costs to society.

Audience Member

There are many sources of money, like you mentioned McDonald’s dollar and think about the Fortune 500, all of them issuing dollars or maybe even 10 percent of them issuing dollars, what would be the—that brings up an exchange ratio problem, which a computer can handle, but what would be the matter with using gold as your standard?

Richard Rahn

There’s nothing wrong with using gold. In fact, there’s a company out of Melbourne, Florida, that has a fund called D-Gold, Digital Gold, and what you do is you buy gold which they keep in bouillon—it’s a hundred percent reserved, and they give you digital gold which could be used for various purchases and moving stuff around. There are a lot of experiments like this taking place. I mean, when you think about the companies doing it, for years, people took American Express Traveler’s Cheques, which were a form of a private currency, and people knew American Express well enough and had faith that they could be redeemed at cost. As long as people believe that McDonald’s and General Motors and whoever else will be pretty much interchangeable. If it comes from a company you’ve never heard of, you will probably refuse to accept it or maybe require a discount on it. But then you also get into the question of what kind of reserve, what your gold statement will be like, and it will be interesting to see how the market sorts this out on what the reserve policy would be. In my book, I point out that I think we will go to mutual fund banking, which is very close to the kind of model that Peter describes, where you have real wealth, real accepted corporate stock represent a real earning asset, that becomes a monetary base.

Audience Member

Yeah, this is kind of going back to the gentleman’s comment about the social fabric. When you’ve got a certain percentage of the world that’s basically educated and then will certainly drive to this type of technology, when the masses of the people certainly will be somewhat left behind. Just sort of comment on what you see and how the governments are going to hold the social fabric together for all of those people that realistically are going to be left behind out of this wave of technology as we go into the future?

Richard Rahn

I don’t believe people are going to be left behind. People are far better off if you take a look at what’s happened—I mean we talk about the Clinton years, we’ve had to “talk about the disparity in income growth,” but at the same time, the bottom has been rising sharply, and I think in the U.S., we have a lot less social tension now than we’ve had in a good long while. Obviously since near the end of World War II, because the bottom has been rising. When you have a full employment economy, which had been brought about by the technology not government. I know I live in Fairfax County, Virginia, and the official unemployment rate is 1.2%, which means that if you can stand up and breathe, you’ve got a job. And this is spreading into places where they’ve got the problems, but where you have the government interferences with the labor laws, it’s like in Europe. So I think governments are going to take a look at the successful models, because this is getting out now. The word is getting out what works, and the Hong Kong-U.S.-New Zealand-Switzerland type model, clearly is far superior to the socialist model. And I think increasingly, you may have left wing rhetoric, but you see even in Europe, there’s a lot of left wing rhetoric, but a lot of the policies are moving grudgingly in the right direction.

Peter Thiel

If I can say one thing, about that if I could actually. I think that things are going to get better across the board. I think that if we talk about sort of income distribution and how that’s going to change in the 21st century, sort of what it takes to be one of the questions about this, my view is that fundamentally what’s going to happen is income distribution will get much wider within countries and much smaller between countries, so that—the real injustice today is not that some people in the US are being paid ten times as much as other people in the U.S. It is that say, a software developer in India is being paid 5% as much as the exact same person in the U.S. That strikes me as sort of the far greater injustice of the two, and I think that sort of injustice is going to really start to disappear in the 21st century, and basically the people globally who are at the bottom of the heap are poor people in emerging market countries. And that is the group of people I think that will, as a whole, benefit the most because they’ve suffered the most from despotic governments.

Richard Rahn

Another aspect of that is even in the U.S., where the question is whether there’ll be some sort of a wide access to these kinds of technologies and products and so forth, I think that the answer is that the cost is being so radically reduced to have access to these kinds of choices, it means that people will not, as Peter is saying, have to be subject to a monopoly system. They actually will have the opportunity to choose the kind of systems they want to participate in.

Peter Thiel

Just one quick point. Just a very simple one. The cost of a message over the Internet is a fraction of the cost a stamp. And that benefits everybody. And now, they’re almost giving pieces away and soon they’ll be closing plants. And so, real communication costs is plunging for everybody, and it helps the people at the bottom much more so than people could always be.

Audience Member

Thank you. The potential benefits of the globalization that exchange are pretty clear to me. But I guess I’m curious, is if you guys think it’s all positive or do you perceive any potential difficulties of liberalization the monetary exchange may create for say, entrepreneurs and private companies seeking to gain access or expand penetration in global markets and developing markets. I mean, for the entrepreneur in a developing country, may they be shut out or supported by such a liberalization of the change?

Richard Rahn

If you have the globalization of the financial markets, entrepreneurs now have access almost to global capital. I mean, there’s all these services going up on the Internet, and so you can bid for mortgages now, and as we have, knowing what the price is globally, people often paid way too much for capital or goods in the past because they were locational or monopolies because they didn’t have information. And now, if you’re a Japanese housewife and you become quickly aware that in the US you actually pay one-third of the cost for rice, they’re going to put pressures on their own governments for any products, and I see this happening in a place like Finland, which I know a bit about. There they had very high tariffs on automobiles, and I noticed they’re just going to, because they’re so wired in, or actually wireless in their case, that they’re going to direct auto sales from manufacturers, and it’s going to make a huge pressure to reduce those tariffs on those auto places, because everybody will know the best price in the world, and if you’re in a particular country, and you say, “Why in the world do I have to pay four or five times as much as somebody else in a different country,” that’s a huge pressure on their governments to change policies.

Audience Member

I’m sorry, if I could just respond, might that drown out the small time guy and just kind of let the MNCs roll in and take all the business?

Peter Thiel

Let’s see. I suppose the question is, in a deep, politicized world where there’s less political power in national governments, the question is really, who benefits? Is it large corporate entities or is it small entrepreneurs? Let’s frame the question that way. My view is that it’s fundamentally the small entrepreneur, because in our current regime, if you are a multinational corporation, you can afford to buy lobbyists. You can get all sorts of benefits from the government. When the U.S. Chamber of Commerce sends a trade delegation to China, they have planes full of executives from the Fortune 500 companies. They don’t have a bunch of people doing Internet start-ups in Silicon Valley. But they fly all over the world. And so the current way in which politics distorts the market tends to be benefiting large corporations and to the disadvantage to the smaller companies. I think that basically the trend that we had seen over the last 20 years, is that the countries that have liberalized economies, the ratio of people working for big companies to small companies, has actually gone way down. The best illustration of this is comparing US, Western Europe. Since the early 1970s, the Fortune 500 companies in the U.S. have created no new jobs. There are fewer people working for Fortune 500 companies today than there were 30 years ago, and in Western Europe all the jobs would be created in small entrepreneurial type contexts. In Western Europe, which has not de-regulated the economy, that’s basically not taking place. The big companies haven’t created a lot more jobs. The government is employing more people and the unemployment rate has gone up. That’s basically what’s happened in Western Europe, and so I think fundamentally politics tends to benefit powerful corporate entities and because of the diminution of politics, so we tend to help entrepreneurs. The cost of rent-seeking is rising. We’ve seen a lot of these Fortune 500 executives complain because they’re getting less and less for those dollars.

David Theroux

There’s a school of economics called Public Choice, which studies the kinds of questions you’re asking, and basically what they show is that politics is used as the way to concentrate benefits and reduce costs and the result is that regulations almost inevitably are used or captured. Either advocated and/or captured by interest groups that can use it to advance their goals through essentially non-market means, and that’s it’s where concentration actually is created. We have time for one more question, I think.

Audience Member

I guess I better make this good. (laughter). For those of us who are awaiting the 21st century with 401(k)s, and many of us making more money than we absolutely need to live on, in other words with money to do things with and ability to search the Internet and so forth, where should we be looking? I took a little tour on the Internet today in anticipation of this talk, and on those subjects that we covered tonight, there are dozens and dozens of Web sites out there catering to that. Are there any really juicy ones that have the most reliable or information, or the best lodes to mine for individuals?

David Theroux

That would be

Richard Rahn

No, it’s very interesting because I’m seeing all these companies that work their way in there, I think. We mentioned D-Gold and I keep running into these companies all the time, and it suggests the very beginning stages of this revolution and it’s not obvious yet whose going to be the future Microsoft’s of this area.

David Theroux

I want to thank our speakers for their work and for their wonderful presentations. Thank you for joining with us, again, there are copies of The End of Money upstairs, and Richard will be delighted to autograph copies if you haven’t done so already. And again, we hope that you will join with us next time. Thank you for coming. Good night.


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