Mr. Greenspan looks at some important issues arising from new information
and communications technologies Remarks by the Chairman of the Board of Governors of
the US Federal Reserve System, Mr. Alan Greenspan, at the Conference on Privacy in the
Information Age held in Salt Lake City on 7/3/97.
It is a pleasure to be with you this afternoon as you discuss some of the most
fundamental issues raised by our new information and communications technologies.
The topic Senator Bennett has asked us all to address is privacy in the information
age. The central dilemma in these discussions almost always involves fundamental choices about
how to strike prudent balances among the needs of individuals for privacy in their financial and
commercial transactions, as well as their personal communications; the needs of commerce to
bring us new products and new means to communicate; and the needs of the authorities to
provide for the effective administration of government and to ensure the public safety. These are
not easy choices. I think we all need to have a healthy respect for all sides of the debate. Even
further, we need to be aware that the balances we strike in one era may need to be reexamined as
technology and circumstances change.
The dictionary defines privacy as the state of being free from unsanctioned
intrusion. This concept, to which Americans feel a very deep-seated attachment, is reflected in
the Fourth Amendment to the Constitution, which assures "The right of the people to be secure
in their persons, houses, papers, and effects, against unreasonable searches and seizures...." For
the government to intrude on one's privacy is in a very fundamental sense a deprivation of
freedom. It is one of those deeply sensed issues that transcends people's constitutional or legal
views and delves into the realm of one's sense of person.
This is why the perceived threat to privacy from burgeoning technological
advance, coupled with an increasing sense of inefficacy in the face of sophisticated new
technologies, has created such a stir. The fears of invasion of privacy, as a consequence of
inexorable forces seemingly out of the control of the average American, has risen to a major
public policy issue.
A half century ago a number of writers expressed concern at a perceived ever
widening intrusion of government into the lives of individuals. They feared the ultimate
collectivization of our society where individualism would be significantly diminished or
expunged, and the emergence of "Big Brother" would come to define and dominate our lives.
1984, the year, as well as the book made famous by George Orwell in 1949, have come and
gone. The outreach of government, if anything, has receded, especially with respect to the issues
of personal liberty, and its concomitant, personal privacy.
I suspect that the fear of "Big Technology" when it arrives will travel the less
threatening route of "Big Brother" before it.
In preparation for addressing that issue, I believe it would be useful to examine
some of the interesting dimensions of the concept of privacy and its application to how human
society arranges itself. Indeed, when it comes to the issue of privacy, humans are distinctly
ambivalent. Greta Garbo made an institution of wanting to be alone. Yet, at the same time,
human beings have always sought and presumably needed the presence of others in organizing
their societies, even before we economists came on the scene to inform them about the benefits
of the division of labor.
But the various paradigms by which we have chosen to organize ourselves were
closely tied to how we viewed the relative value of individualism and its precondition, the
implicit need for privacy. In recent generations, the major competing forms of government, of
course, have been (1) a system based on individual rights with the role of the state largely
directed at protecting those rights (the United States being the most prominent example of that
form of government) and (2) the now defunct Soviet Union, and its eastern European satellites,
which were the model of communist collectivization. In the latter, the individual was
theoretically subject to the will of the collective but, in reality, subjugated by an elite autocratic
hierarchy.
In the Soviet system, rights inhered in the collective, which immediately
dismisses by definition any right to privacy. State intrusiveness in the form of the KGB or the
Stasi eviscerated any wall of personal separation that citizens may have sought.
But, in the end, that form of government did not, probably could not, succeed.
The human need for personal expression, property, and privacy, doubtless were significant in
undermining those collectivist states. Indeed, since the end of World War II, we have had as
close as one can come to a controlled experiment in the comparative effectiveness of alternate
forms of government organization. I refer to the extraordinary divergence in post-war recovery
patterns observed between West and East Germany. Both were rooted in the same historic
culture and institutions, differing virtually only in the form of political and economic
organization, which were adopted by those societies at war's end. Almost a half-century later,
when the Berlin Wall was torn down, the results of this remarkable experiment vividly and
unqualifiedly attested to the superiority of the West German free market system based on
individual rights, a system where people lived with minimum fear of the state's intrusion into
their daily lives. In East Germany, in contrast, to assure that society was appropriately
collectivized, it was necessary to probe into the private lives of all individuals and suppress
individual freedoms. Human beings had to be molded by force to achieve the East German
leaders' distorted view of societal organization. Privacy was scarcely the goal or purpose of the
East German state. Indeed, intrusiveness into the lives of all of the citizens was perceived to be
an essential ingredient in its organization.
The political and economic results of the post-war competition between East and
West generally have been unequivocal. The free market capitalism of West Germany has been
judged superior in all relevant respects, with very few dissenting from that conclusion. The
human need for privacy surely was a major factor in that outcome.
To be sure, our newer information technologies can scarcely be perceived as the
type of threat to privacy as that of the Soviet state. Nonetheless, the same pressing need for
privacy, which helped upend the Soviet Union, can be expected to address and overcome
concerns that our newer technologies will intrude on our cherished need for privacy.
Communism fell because its practice eliminated personal incentives to work and to acquire
property, except in a very limited sense. The existence of such incentives requires the broad
freedoms we enjoy to pursue our myriad personal goals. It was the deprivation of these
incentives and the suppressing of competition among individuals, the hallmark of a growing
economy, which brought Communism down.
Since privacy is such an evident value in our society, where technology threatens
that value, entrepreneurs can be counted on to seek means to defend it. The major resources they
have devoted to encryption in the development of new communication systems attest to the
economic value they place on privacy in communications. Moreover the pressures to enact legal
prohibitions on the dissemination of personal records will also create incentives to produce
technologies that protect them. Indeed, the most effective means to counter technology's erosion
of privacy is technology itself.
The marketplace is burgeoning with new devices to this end. These devices, of
course, include the many advances for encrypting and filtering information. We may even see
the deployment of technologies that permit individuals to make choices calibrating their degree
of privacy in conducting individual transactions.
With some irony, even some of the ability of the government to pursue protection
of individual rights is being impaired by effective encryption. This leads to the important
question of how to balance the legitimate expectations of individuals for privacy with the needs
of government for information to effectively administer the laws and provide for the public
safety. The most delicate care is needed in this regard to prevent unnecessary intrusion when
specific government decisions are implemented and to avoid the risk of a gradual, long-term
erosion of privacy.
Beyond these issues are immediate questions about privacy in the delivery of
professional, commercial, and financial services over open computer networks as well as
personal communications through devices such as e-mail. For example, there are typically strong
assumptions about privacy surrounding medical, legal, and financial communications and
records. These assumptions are designed to safeguard the autonomy of the individual and to
facilitate a society where special expertise can be developed and called upon, when necessary, to
promote the individual's welfare. It would be a strange outcome, indeed, if traditional notions of
privacy applied only at the physical office of the doctor, lawyer, or banker, but not when modern
computer technologies were employed to make professional services available at lower cost and
with greater convenience.
It may be that some services and communications channels will be used
regardless of what privacy guarantees are provided. Providing medical advice by computer
network to rural areas with no resident doctors may be one example. More common services,
however, such as certain cellular telephone technologies and the use of e-mail over the Internet,
are subject to less privacy than some other modes of communication, although extensive efforts
are currently being directed to address that. The growing use of credit cards without security
measures to pay for goods and services over open networks is another example.
Clearly, as these examples demonstrate, privacy concerns may be outweighed, if
only for the moment, by other factors such as cost and convenience. However, given choices in
the marketplace that include price, quality and differing degrees of privacy, I have little doubt
that privacy would be valued and sought after.
In the financial sphere, the payment systems of the United States present a
paradox. Our systems, and banking arrangements, for handling high-value dollar payments are
all electronic and have been for many years. Banking records, including those for loans and
deposits, have been computerized since the 1960s. Securities markets also now rely on highly
automated records and systems, born out of necessity following the paperwork crisis of the
1970s.
Thus, it might seem strange that in transactions initiated by consumers, paper
-currency and checks -- remains the payment system of choice. Debit and ATM cards, along with
automated clearing house payments, account for a very small percentage of transactions. Even
the use of popular credit cards has only recently begun to challenge paper's dominance. While
there are many other factors involved in this anomaly, the value of privacy of transaction has
clearly been a significant determinant.
Paper currency is, of course, the ultimate protector of anonymity, for making
ordinary payments at the retail level. It is, thus, a measure of how valued is privacy in our
system that inroads into the use of currency have been slow, and halting, in the face of
technologies one would assume would have quickly buried the presumed inefficiency of paper
transactions.
To be sure, checks leave a paper trail which can compromise privacy, but it is a
less efficient and accessible trail than when available newer technologies are used. Clearly, then,
the value of privacy of transactions that currency -- and to a somewhat lesser extent, checks
-provide is a measure of the economic cost individuals are willing to expend when far superior
efficiencies are at hand.
Nonetheless, the marketplace is currently investing large sums to develop new
means to automate payments as well as other retail banking and financial transactions. Projects
for creating stored value cards and Internet-based payment systems, for example, are being
discussed around the world. Again, as in the 1970s, articles are being written and conferences
are being held to pronounce the end of paper. They may again prove premature.
It is clear, however, that security and privacy will be very important if confidence
is to be established in these new systems. Indeed, in many, privacy of communication is a
necessary requirement. Many projects are evolving daily to meet the business requirements of
potential operators and the potential service needs of businesses and consumers.
There is a significant need for flexibility in allowing these technologies to adapt
and grow in response to pressures in the marketplace. There is also a need to avoid building
formal or burdensome regulatory systems on the shifting sands of project proposals. If we wish
to foster innovation, we must be careful not to impose rules that inhibit it. I am especially
concerned that we not attempt to impede unduly our newest innovation, electronic money, or
more generally, our increasingly broad electronic payments system. To develop new forms of
payment, the private sector will need the flexibility to experiment, without broad interference by
the government.
Our most intriguing challenge is whether new technologies can provide improved
financial services and, at the same time, provide greater privacy and related benefits. Flexibility
by industry, consumers, and government may help make such overall advances possible.
Finally, I want to emphasize that the information age is not something to be
feared, but may well be a vast opportunity. Personal computers, an array of software, and new
communications channels have placed powerful and creative technologies directly into the hands
of individuals. The current enthusiasm of society for science and technology, particularly among
young people, holds great promise for the future. If history is any guide, it is from this
enthusiasm that the future will be born.