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For release at 12 Noon
Eastern Daylight Time
Thursday, October 6, 1966

Tomorrow's Money as Seen Today

Remarks of George W. Mitchell
Member, Board of Governors of the Federal Reserve System
at the
Annual Stockholders Meeting
of the
Federal Reserve Bank of Boston
Boston, Massachusetts
October 6, 1966

Tomorrow's Money as Seen Today
To introduce the subject of "Tomorrow's Money as Seen
Today" it is appropriate to first say something about today's
money as seen yesterday.

The textbook writers who trained my

generation always referred to the dual role of money as a "medium
of exchange" and a "storehouse of value."

The kind of money, in

their view, that best met the latter function was a precious metal,
usually gold or something readily convertible into that metal.
Their indoctrination emphasized the problems of making money stable
in value.

We are still very much occupied with that problem though

our reliance for stability is shifting from precious metals to men
and institutions.
Money as a transaction medium was given much less attention
perhaps because the writers of the time felt David Ricardo had
adequately covered the subject in the Bullion Report 100 years earlier.
He noted that "....the effective currency of a country depends upon
the quickness of circulation, and the number of exchanges performed
in a given time as well as upon its numerical amounts; and all the
circumstances, which have a tendency to quicken or to retard the
rate of circulation, render the same amount of currency more or
less adequate to the wants of trade...., above all, the same amount
of currency will be more or less adequate, in proportion to the
skill which the great money lenders possess in managing and
economizing the use of the circulation medium. "


Alfred Marshall commented, after quoting these words:

"This terse statement carries far."

And indeed it does— not only

in the sense that Marshall had in mind but in the sense that I can
use these same words 160 years later as a text for discussing
tomorrow's money.
Ricardo's message is quite simple and one of which every
banker will become increasingly aware, i.e., the more efficiently
money is used as a transactor (medium of exchange) the less the
amount of money needed to function any given flow of transactions for
an individual, a corporation, a government, or the economy as a

The fact that bankers are aware, or are becoming aware,

of Ricardo's generalization, however, has not always led them to
consider the consequences for their institutions and profession
of a vast acceleration in the efficiency of money use such as we
are just beginning to experience.
You, as bankers, have first-hand evidence of increased
deposit activity in your own institutions, I am sure.

It is most

evident in those accounts managed by corporate treasurers who have
learned the lessons of cash management well--and often even directly
from the "great money lenders" Ricardo referred to.

Money is also

used more intensively in small budget accounts where minimum or
average balance requirements are relaxed and transactions paid for
on a fee basis.


The over-all statistics of money stock and money use
reveal the same economizing trend»

Today, turnover of private

demand deposits in New York City metropolitan area is about
110 times per year* double the levels prevailing in a period of
high economic activity a decade ago.

In six other large financial

centers current turnover rates are a little less than one-half the
New York rate (52) and up 80 per cent.

In 200-odd other reporting

metropolitan areas turnover is roughly one-third of the New York
rate (34) and up 50 per cent over the mid-fifties.
The very high levels of turnover in New York (twice weekly)
and other major centers (weekly) are a reflection of the large
volume of financial transactions.

But the increases in rates of

turnover in all centers are a manifestation of closer money manage­
ment by banks1 customers, including increasing readiness to invest
idle balances in interest-earning instruments.

Thus, even before

automation has had a significant effect on efficiency in the use
of money other factors have been working in the same direction.
In banking we have now passed the threshold in use of
one of the most dramatic innovations of our time--the computer.
The technology of EDP, moreover, is breeding new generations of
equipment at an accelerating rate.

It is being spurred on by the

tremendous range of applications in science, industry, military
and civilian government--in fact in virtually every phase of
present-day life.

Banks cannot escape the consequences of this

technological revolution— to ignore the changes EDP entails for
banking can only result in an "accelerated atrophy" of the banks
and bankers who choose that course.

To accept and exploit the

technology may involve expense, hard work, and harder decisions,
but it will be at least as rewarding as survival.
I am hard put to it for a description, a technical analysis
to invoke in a persuasive way the powerful and spreading effect of
automation or cybernetics.

The first digital computer was completed

20 years ago— there are tens of thousands in use today.

In the

interim, speculations and pronouncements on the computer's role
in our economy have barely outpaced achievements in hardware
innovations and applications.

Perhaps I can use John Barth's

skill with words to suggest to you by indirection the computer's
true potential.
"All WESCAC does is say 'One goat plus one goat is two

Now, it does this in fancy ways, and quick as a flash;

but what it comes down to is millions of little pulses, like the
gates between the buck-pens: and all a gate can be is open or shut.
The only questions it can answer are the kind we can reduce to a
lot of little 'yeses' and 'nos', and it answers in the same language.
"This elementary capacity WESCAC shared with its crudest ancestors,
though it had been refined enormously over the years. ...thus too
it became possible for the beast to educate itself beyond any human
scope, conceive and execute its own projects, and display what could
only be called resourcefulness, ingenuity, and cunning. ... Yet...
there were respects in which the callowest new freshman was still

-5ifcs better: mighty WESCAC was not able to enjoy, for example, as
I enjoyed frisking through the furze; nor could it contemplate or

It could excogitate, extrapolate, generalize, and infer,

after its fashion; it could compose an arithmetical music and a
sort of accidental literature (not often interesting); it could
assess half a hundred variables and make the most sophisticated

But it could not act on hunch or brilliant impulse;

it had no intuitions or exaltations; it could request, but not yearn;
indicate, but not insinuate or exhort; command, but not care.

It had

no sense of style or grasp of the ineffable: its correlations were
exact, but its metaphors wretched; it could play chess, but not

The fantastically complex algebra of Max's Cyclology it

could manage in minutes, but it never made a joke in its life.9
These words will, I hope, do two things: first, convince
you that computers now in use, such as WESCAC, are more than equal
to the task of money settlement and accounting and, second, reassure
you that this particular generation of computers, at least, will not
engulf your role and self esteem as bankers for there are still
several banking functions left to perform that even a computer
cannot do better than you.

-6How will the computer change money and its use?


will motivate users and suppliers of money to adopt computer

Since money has changed little during the generations

while modern industrial economies have altered nearly every facet
of our way of living, is not its demonstrated adaptability persuasive
that the old money technology will continue?
These are the questions confronting every commercial
banker who is not looking toward an early retirement.
they be answered?

How should

Let me give you the basis on which 1 would reach

a judgment.
1 start with a background shot.

Money settlement, or the

transfer of purchasing power from one individual to another, has
had a sluggishly evolving technology of its own.

It began with

the movement of treasure--bullion or gold and silver coin--from
one safekeeping spot to another with all the hazards of theft or
loss and high cost of transport and security arrangements.


bullion and gold and silver coins were displaced as money by tokens
made of cheap metal or paper.

Similar security problems remained

but the paper currency, because of its denominational flexibility,
added great convenience for the settlement of larger and larger

Meanwhile, a still more efficient money instrument,

the demand deposit check, came into being; it has now become our
major money device and accounts for over 90 per cent, by volume,
of money settlements.

What likely will be the


of tomorrow's


Coins will remain, but mainly for carfare, sales taxes
and penny ante transactions.

Even today they make up only 10 per

cent of the total of coin and currency in use which, in turn, is
only slightly more than 20 per cent of the total money supply.
Currency use will decline sharply and the denominations likely to
have a substantial circulation will be limited to $ls, $5s, and

The larger denominations will be preferred only because of

non-traceability of currency transactions.

Today, the aggregate

of $1 and $5 denominations is about equal to that of coins; the
$10 denomination total is not quite as large as coins, $ls and
$5s combined.

Bank deposits will continue to dominate the money pool
perhaps even more than today: but exactly what extent will depend
upon how skillful bankers are in supplanting the "sovereign's"
money with their money and how resourceful they are in maintaining
their deposit totals in the face of a space age acceleration in
deposit account activity.
Thus tomorrow's money will be very much like today's
in many respects; coins for vending machines, small denominations
of currency for large tips, and bank deposits for the real business
of the economy.

The point of difference will be the way in which

demand deposits are used-~a change made possible by computer

-8The idea that money settlement— paying and being paid—
requires an actual or implied purchaser-seller or debtor-creditor
confrontation probably accounts for the fact that we have not long
ago used a far simpler system of settling our accounts.


transfers go through the banking system ultimately why not start
the process by having depositors directly tell their bank what to do.
Consider some magnitudes: there are about 14,000 banks but 140 do
well over 50 per cent of the business.

But there are 70 million

of us who have accounts in the banking system and we send each
other 60 million checks each day.

The processes and processing

required to complete those transactions are expensive, time consuming
and are geared to a completely obsolete technology--hand sorting and
manual posting of paper evidence of payment.
Tomorrow's money will have an entirely different flow
pattern and it will be centered on 200-500 computer centers
scattered throughout the nation.

A modified giro system will be

used, in which the payor will initiate the settlement process,
but will do so by communicating, not with the payee, but with
his bank— notifying it directly whom to pay, how much, and when.
Most of this information will be received at the bank in machine
language; if not, it will be converted to that form, and the
bank's computer will process the bookkeeping entries internally
for amounts drawn on it.

If one computer handles the accounts

for several banks the ojrt^PiHlg&sls still almost entirely an
internal one.




If pay^e^t iS t<> ^

account in another bank, the



information will be automatically routed into that bank's equipment.
Bank positions will also be adjusted frequently throughout the day by
debits and credits to member bank accounts with the Federal Reserve

The computers will transmit printed-out confirmatiorB to

the payor and advices to the payee at appropriate intervals.


print-outs could be transmitted by mail or telephone wire, at the
option of the customer.

In the case of larger customers, the

bank's computer will communicate directly with customer's equipment.
In this system there is no check sorting and re-sorting,
no shipment of checks from bank-to-bank or bank-to-eustomer, no

storage requirements for checks, no kited checks, no endorsement,
no N.S.F. checks, no float, and a minimum of manual processing.

The money of tomorrow I have been describing has a
variety of implications for all of us.

For banks' customers, one

of the most significant is that it will enable everyone to manage
his account as closely as he likes and the bank allows.

Since he

will have absolute control over the debits with no nonsense about
mail float it is likely he will also negotiate fixed timing
arrangements for credits from his employer, customers, and debtors.
And, of course, he can always dial the computer for the latest
information on the status of his account.

The ensuing advantage

for him, in addition to the computer's convenient documentation
of his transactions, is, of course, the opportunity to minimize
his idle cash.

Thus, he can have a higher proportion of his resources

invested with intermediaries--bank or nonbank--or in market instruments.


And these will still give him, under ordinary circumstances, such
liquidity as he needs for contingencies or seasonal fluctuations
in his expenditures.

This package of banking flexibility would

clearly be of practical significance to a large number of depositors.
There are advantages for banks, too»

The giro computerized

relationship between the bank and its demand depositors is not
dependent on the convenient proximity of banking offices and should
enable banks to widen their service areas, at least partially
breaking the bondage of an original location.

Probably more

important for bank earnings is the fact that the computer is not
only faster and more economical than the present system of money
settlement, but that it can simultaneously offer a wide variety of
tie-in accounting and financial services for a bank's customers,
thus giving it the opportunity to become the community's accounts
keeper--and with profit.
On the other hand, the system will entail at least one
major difficulty for banks when they face the potential of a sub­
stantial attrition in demand deposit balances as computers
accelerate money velocity.

If banks generally decide to use

activity fees to cover the cost of the money services they offer,
it is almost certain that a vastly smaller money supply than is
now required will be more than ample.
Banks could, however, bolster sagging demand deposit
aggregates by using compensating balance requirements to cover


the cost of account activity.

And if an additional compensating

balance were used as a sort of commitment fee for a personal or
business line of credit, the attrition on demand deposit balances
would be even less.

Another possibility is to use the great

flexibility of the computer to create a new relationship between
demand and several strata of time accounts in a given bank, making
replenishments in demand accounts and overflows into time accounts
matters of contractual relationship individually programmed for
each customer— thus, though a bank might be losing demand balances
it would be gaining time funds.
So far, it sounds as though everyone who accepts the new
technology will gain.

This is very nearly true.

A possible exception

is the Federal Government, whose coin and currency outstanding is, in
effect, an interest-free loan of about $4Q-odd billion from the public.
Though it costs something to maintain the coin and currency in working
condition this expense far from fully offsets the interest saving on
$40 billions.

But, tomorrow's money will have coins and some currency,

too, and it will be a larger economy, so the amount gradually dis­
placed is not likely to be much noticed.

Of course, it will only

happen as fast as the public is persuaded to turn to the cash/charge
card and the budget checking account as substitutes for pocketbook

The rate, if not the manner, at which bank credit cards are

coming into use recently suggests the trend toward substitution
will shortly be under way.


A few people are interested in the implications of
tomorrow’ money for tomorrowfs money managers.

How will they

deal with a monetary cyclotron built from a network of computers
programmed to achieve the maximum efficiency for everyone8s money?
Could the system be programmed so that for a given day's work no
one had more or less in his account, taking into account inflows,
than needed to cover outflows?
infinity and money supply zero.

If so, velocity would approach
However, in any foreseeable system

we would have a few billions of coin and currency and probably of
demand deposits.

What seems more to the point for the money

manager is that no one will be holding money as a storehouse of
value, a liquidity hoard or anything other than a medium of exchange.
Thus, the separation of the liquidity and transaction functions of
money may well force money managers to turn themselves into liquidity
managers, or into near-money managers, so to speak, and entail the
development of an entirely new set of tools for using the financial
system to influence economy's growth and stability.

The very least

that will happen to us as money managers will be some enforced
rethinking of money supply theories in a computerized economy.