Re: E-cash and Interest

[luxana <pati@ipied.tu.ac.th>]

On Wed, 10 Jan 1996, Tim Philp wrote:

> With the E-cash systems that I have seen, you generate your own E-cash 
> and have it signed by a 'bank' At that moment, it becomes like cash in 
> your wallet and you loose interest that this money could be earning.

>From the standpoint of monetary economics, this is correct.  The (ecash)
bank has the right to use your deposits to give out loans.  When you
withdraw your money (and turn it into either cash or ecash) they (the
bank) no longer have the right to turn your deposits into loans. 
Withdrawn cash/ecash can not earn interest.

This is the problem of (e)cash: if you have it on hand you _must_ forgo
any interest earnings.  Theoretically, the optimum holding of (e)cash is a
function of interest rate (the greater the interest rate, the less cash on
hand), transaction cost of making withdrawals (the easier and more
convenient the withdrawals, the less cash on hand), and the "providence
value" of cash (the more you value instant gratification, the more cash on
hand). 

Thats why ATM machines have caused us to hold less cash.  We can now keep
money in the bank (letting it earn interest and letting the bank create
loans with it) and withdraw from ATM terminals only when we need it.

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eMAIL: pati@ipied.tu.ac.th      Boldness has genius, power and magic in it.
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