Book Review: The End of Money and the Struggle for Financial Privacy by Richard Rahn

Financial Services & E-Commerce Newsletter - Volume 3, Issue 3, Fall 1999

November 1, 1999

John Pickering

Several years ago, before the White House had a Y2K czar and before CNN had run its first story on the millennium change, I received a solicitation letter about the "Year 2000 Computer Problem." The letter forecast gloom and doom and recommended I invest in gold, guns and generators and send in $99.95 for a Y2K newsletter that would (presumably) be published right up until 1/1/00. Then the entire world would shut down, and I would be safe in my basement with a hundred years' supply of Ensure and freeze-dried Chili Mac.

That letter looks a little hysterical now, in light of all the preparation that's occurred across all the major sectors of our economy. But the letter did have an unexpected optimistic millenial component to it that's worth considering. The author explained that, although Y2K would bring much misery and suffering as our economy ground to a halt, at least we'd get our freedom back. The theory was once the payment system broke down and all those government transfer payment checks stopped arriving, people would lose faith in the greenback and return to commodity-backed money of one sort or another. That, in turn, would eviscerate the leviathan state's iron grip on our lives and finances and turn us into a more populous version of a pre-New Deal America. And, the letter writer concluded, that would be something for which we could be thankful. A truly "millennial" vision.

Richard Rahn has a technology-induced millennial vision of his own. But The End of Money isn't about Y2K. In fact, curiously, this book, which is about the likely impact of state-of-the-art computer technology on society, doesn't even mention Y2K at all. But, like those who see the death of big government through Y2K, Rahn sees in the spread of digital encryption technology the collapse of the intrusive tax and financial regulatory system that governs our economy and our lives. Fortunately, in Rahn's millennium, no one loses his Social Security check. Instead of Y2K's want-of-a-nail technological failure, it is the success of computer technology that offers us hope for a brighter tomorrow. And the only suffering needed to usher in Rahn's digital millennium is the frustration of the IRS and other assorted regulator-types because of their inability to do anything about it.

How will this all come about? The key is to understand (or, for nontechnical types, simply to believe) that publicly available digital encryption technology is so strong and so difficult to decode using anything approaching cost-effective resources that it will soon be practically impossible for the government to know anything about many if not most of our financial transactions, particularly our investments and income, that we don't choose to reveal. "Enjoyment and liberation are coming," Rahn tells us, "because the digital revolution is about to cause the death of most taxes on capital. What governments cannot see they cannot tax and, as a result of the digital revolution, the government will only see financial capital which is voluntarily taxed." The mechanism is somewhat complex, but Rahn explains it fairly well. First, we will see the proliferation of commodity-backed, privately issued electronic money. We will be capable of transmitting this money electronically in encrypted, untraceable form. So, your paycheck is secretly transmitted to your electronic money account held in a country that protects financial privacy (Rahn's current favorite is Switzerland), and the IRS has no way of knowing how much you were paid (or, possibly, even that you were paid). Just as significantly, the IRS will never know if you have any capital gains on your electronic money.

Now, this may constitute tax evasion and be punishable under U.S. law, but Rahn makes a convincing case that once the odds of being caught approach zero, Americans will become much more willing to "opt out" of the tax system. (No, that's not what the Gramm-Leach-Bliley Act's "opt out" system is about.) The government's efforts to keep track of all these encrypted transactions will make Prohibition look like a fantastic success. In a memorable comparison, Rahn says that government efforts to tax capital in the digital age are ultimately as futile as totalitarian attempts to eliminate subversive ideas in a land of fax machines, printing presses, copiers and the Internet. He makes an appealing case for the moral justification of tax evasion in limited cases, although it would be more convincing if Jesus Christ had taught that one should "render to the supply siders" instead of to Caesar.

I'd certainly rather gain my freedom through digital encryption than through Y2K-induced economic collapse. But there is a dark side to emerging digital technologies. Rahn is honest about evaluating the dark side, and he recognizes that the digital libertarian utopia isn't at all certain to come about, at least not in any particular country. He's practical enough to understand that some governments will fight to the end to keep their monopoly control over currency and their ability to monitor financial transactions. In fact, The End of Money is a good read just for the discussion of abuse of power by governments regarding privacy. Remember those "secret" FBI files the Clinton administration perused? What about the ill-named Bank Secrecy Act, currency transaction reports, suspicious activity reports, know your customer rules, and asset forfeiture? Rahn covers them all, and more, and does a valuable service by exploring the startling extent of abuses in all these areas, especially asset forfeiture. Of course, if all these infringements on financial privacy led to a significant reduction in crime, one might argue that, on balance, things aren't so bad. But Rahn makes a convincing case that all these laws actually have a very low impact on crime. He assures us that sophisticated criminals can easily avoid detection, especially once they embrace electronic data encryption as they are sure to do. Then only the criminals will have financial privacy. He also emphasizes that our myriad collection of federal criminal laws assure that everyone is guilty of something, so selective enforcement against those out of political favor is fast becoming the order of the day. He's certainly right that this is a great challenge to the rule of law in a free society.

Most technology, including digital encryption, is of course morally inert. Thus, a single technology — the implantation of computer chips under the skin, for example — can be used for good or evil. On the positive side, Rahn thinks implants will eventually supplant smart cards. He sees this as a Good Thing, and one supposes that it would be — at least for those who tend to lose their wallets. But the downside of implantation technology is that an administrative, statist government would want to use it to monitor where all the citizens are, all the time. In "Malapense," a country Rahn hypothesizes several years down the wrong fork of the financial privacy debate, the government attempts to do just that.

When you're writing about privacy and the ways our government infringes on it, it's tough to avoid letting your argument get chewed up by the blades of black helicopters hovering over everything. (Incidentally, has anyone determined whether those black helicopters are Y2K-ready?) However, Rahn conducts himself admirably on this point. His portrait of Malapense might be a little overblown, but it's evenly balanced by the digital utopia of "Freelandia," a competing country that started at the same place as Malapense but followed the economic prescriptions of one Johann Kempenski (I'm not making this up, but Rahn sure is) into the blissful realms of strong financial privacy and a booming economy.

A final note about Richard Rahn — he's really quite a guy. He is President of Novecon Ltd., senior fellow of the Discovery Institute, adjunct fellow of the Hudson Institute, and adjunct scholar of the Cato Institute. He is a former Chief Economist of the U.S. Chamber of Commerce, consultant to the New York Mercantile Exchange, professor at Polytechnic University of New York, Florida State, Rutgers, George Washington and George Mason, consultant to the U.S. Air Force, member of the Mont Pelerin Society, Chairman of the Business Leadership Council, Reagan-appointed member of the Quadrennial Social Security Advisory Council, and economic advisor to President Bush during the 1988 campaign. He is exceedingly well published and he's been on more TV shows that William Ginsburg. Considering all this, it's surprising that his isn't more of a household name, at least among financial institutions attorneys. Then again, Rahn does seem to value his privacy.


* John Pickering is a regular contributor of book reviews to this newsletter. He is an associate with the law firm of Balch & Bingham in Birmingham, Alabama.