As a network, a payment system is likely to exhibit network externalities and perhaps some public good characteristics. Such properties may be more pronounced in an electronic payment system, because of its greater reliance on communication infrastructures with high fixed and low variable costs, for instance. This paper presents the basic economics of network externalities and reviews some basic principles regarding public goods. It then asks what these phenomena imply about the role of the Federal Reserve in emerging payment systems. The general conclusion is that there is reason to be skeptical that network externalities and public goods will be significant sources of market failure in electronic payment systems. These phenomena, by themselves, give rise to no particular, essential central bank role in these markets.

The Federal Reserve Act erected a unique structure of government decisionmaking, independent with elaborate rules balancing internal power. Historical evidence suggests that this outcome was a response to public conflict over inflation's redistributive powers. This paper documents and formalizes this argument: in the face of conflict over redistributive inflation, policy by majority can lead to policy that is worse, even fo the majority, than obvious alternatives. The bargaining solution of an independent board with properly balanced interests leads to a better outcome. Technically, this paper extends earlier work in making policy preferences endogenous and in extending the notion of equilibirum policy to such a world. Substantively, this work provides a simple grounding of policy preferences-largely missing heretofore-linking game theoretic models of policy to historical evidence about the formation of an independent monetary authority.

Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.