Tuesday, December 30, 2014

Cancel currency?




Zero bound

Many economists would like the Federal Reserve to be able to set a negative interest rate target, as a way to further "stimulus." 

The conventional answer is that this is impossible because of currency. As long as you--and more importantly, banks -- can hold cash, which pays a zero interest rate, the Fed can't impose a negative interest rate on bonds.  In reality, holding cash is expensive, even for banks, so we can and do see slightly negative interest rates on occasion. But more than -0.5% or so would be hard to sustain. 

This has led to a number of creative proposals, which Ken summarizes
Willem Buiter.. has discussed ... devices for paying negative interest rates on currency...  stamp taxes... (currency would remain valid only if it were regularly stamped to reflect tax payment). ... Mankiw (2009) points out that the central bank could effectively tax currency by holding lotteries based on serial numbers, and making the “winners” worthless. 
Ken goes on to the ultimate version of this idea: get rid of cash all together and move entirely to electronic transactions.  

Let's leave aside the (dubious, in my view) claim that negative nominal interest rates are the vital cure for our ailing economies, and just focus on the question whether eliminating currency will allow it. 


Here are the ones I can think of: 
  • Prepay rent or mortgage payments. 
Comments section: how many more can you think of?

Now in each case, you might say this can be changed. The IRS could refuse pre-payments for taxes, or charge a negative interest rate or a penalty for pre-payment. Businesses now charge penalties for late payment, so institutionally they could charge penalties for early payment.

But our legal and financial system deeply enshrines the right to pay early. Imagine the string of court cases in which consumers demand their right to pay rent, gas bills, etc.  vs. landlords who won't let them.

Politically, imagine the  outrage at an attempt by the Federal Government and Federal Reserve to enforce negative interest rates -- to "take away people's money'' -- at a magnitude that matters -- 5% say, not 5 bp --  and to eliminate people's right to hold cash to enforce that confiscation. You might as well propose to take away their guns, gold bars, and stocks of canned food.

So, bottom line, we cannot have strongly negative nominal rates without a legal revolution essentially negative-indexing the entire economy and payment system, and upending centuries of law giving you the right to pay bills at face value.

The zero bound is not just cash.

"Illegal" transactions, regulations, and tax evasion

Paper currency facilitates making transactions anonymous, helping conceal activities from the government in a way that might [!] help agents avoid laws, regulations and taxes. This is a big difference from most forms of electronic money that, in principle, can be traced by the government
Indeed. The central characteristic of currency is anonymity of its possession and of the transactions it facilitates. Though transactions aren't that closely monitored now, the computer revolution is making it more and more possible. And Ken is explicitly proposing even more: that the IRS and regulatory agencies will actively use their ability to monitor electronic transactions to enforce "laws, regulations and taxes."

Though anonymity facilitates evasion of "good" taxes and necessary regulations, the ability to transact anonymously is an important safety valve that protects our economy and many others around the world from a welter of "bad" taxes, laws, and overly intrusive regulations.  How much of each we have now, and how desirable strict enforcement is depends on where you sit. I imagine opinions differ at Harvard vs. Cato or Mercatus.

Regulations may be more important than taxes. Big companies and wealthy people who pay most of the taxes in the US don't have to cheat; they just hire good lawyers and lobbyists. Monitoring transactions is an excellent way to enforce compliance with all sorts of regulations. And we plausibly have more bad regulations than (even) bad taxes.

In the U.S., eliminating cash would heavily impact the poor. The U.S. has 11 million undocumented immigrants, most working and transacting in cash. It is likely that many readers of this post have violated the extensive Federal and State labor laws or immigration laws, in their hiring of household help, and able to do so by transacting in cash. Sub-minimum wage jobs would disappear without currency, as would many jobs available to ex-convicts and others facing legal restrictions on their employment. What little entrepreneurship and activity exists in many poor parts of inner cities survives on cash, by being able to evade not just taxes but onerous local regulations, occupational licensing restrictions, zoning restrictions, labor laws, and so forth. Are you buying lights windows or toilets that violate zoning energy or water laws? Not any more, you're not.

A lot of "tax evasion" using currency consists of quite poor people evading the astronomical marginal tax rates implicit in social programs. People on social security disability, and medicaid, say, who would lose lots of benefits if they reported income, pick up a lot of spare money working for cash. Do we really want them to obey all the rules strictly -- not work at all? Should the watch TV all day long?

I wrote about the pernicious consequences of e-verify here. The world in which the Federal Government must pre-approve every employment strikes me as a nightmare. The world in which the Federal Government is monitoring every transaction between people to enforce who it thinks you can and can't hire is a worse nightmare.

In other parts of the world, small businesses and labor markets only function at all by avoiding laws, taxes, or regulations. Estimates for Europe put the "shadow economy" at least 20% of GDP, and a larger fraction of employment especially for young people. Values in the rest of the world are likely larger. It's not obvious that eliminating cash and cash transactions in Europe would raise tax revenue, rather than simply lowering actual GDP and employment by 20% or more.

There is about $1.3 trillion currency outstanding, more than $3,000 per US citizen. 3/4 of it is $100 bills. Most is held abroad. You get the picture of who holds dollars and why. US policy makers my think all our taxes, rules and regulations are benificent, but we don't think that of the rest of the world. Do we really want to get rid of this safety valve for Russia, Argentina, Venezuela, Cuba, the Middle East, and so forth?

If the U.S. were willing to allow anonymous electronic transactions, then we could get rid of cash. But we already have lost a great deal of the ability to transact anonymously, and the current technological and policy trend is entirely in the other direction.  One used to be able to take more than $10,000 out of banks at will; now such a withdrawal must be reported. Smaller cash transactions are voluntarily reported by banks under fear of "know your customer" and anti-terrorism regulation. Remember the glorious ending of the Shawshank Redemption, where the hero takes huge piles of cash out of a bunch of banks and heads to the Mexican border? Forget it.  And it's already being used politically: Justice is using know-your-customer rules deny legal but unfavored industries such as marijuana dispensaries and payday lenders access to banking.

Treasury abolished bearer (anonymous) bonds in 1983, with the switch to electronic book-entry holdings. Anonymous Swiss bank accounts are a thing of the past. The SEC, IRS, and CFTC are none too happy about bitcoin.


More deeply, a world in which the Federal Government can observe every single transaction made by every single person and corporation, and thereby reconstruct the size and composition of every person's wealth, strikes me as an Orwellian nightmare. Among the rights to privacy, the ability to make an anonymous transaction, already severely hampered, cannot disappear totally.

Imagine the repercussions for political liberty if the Federal Government has a record of every single transaction. If a candidate for political office once bought a racy magazine, that record is in government files. And one Lois Lerner or Edward Snowden away from a twitter feed. If a prominent political voice, or even an annoying economics blogger, had a purchase somewhere in his or her history they did not want made public, or that violated some nitwit law or regulation, they could quickly be silenced. Imagine what J. Edgar Hoover could have done to the civil rights and anti-war movements with the ability to see every transaction in the country.

Ken acknowledges this point:
A different type of argument against eliminating currency relates to civil liberties. In a world where society’s mores and customs evolve, it is important to tolerate experimentation at the fringes. This is potentially a very important argument, though the problem might be mitigated if controls are placed on the government’s use of information (as is done say with tax information), and the problem might also be ameliorated if small bills continue to circulate 
"Experimentation at the fringes" means anyone who bought booze in prohibition, or pot in the last 50 years, or sought public office. Campaign finance law is already a political cesspool. Imagine what it will look like when a rogue prosecutor can see every transaction. I'm not sure that's a fringe.

"Controls are placed." Absolutely we need controls, and we need them now even with currency. Let's add some subjects and active verbs here: Congress should pass clear stringent laws, with strong judicial oversight and equally strong penalties, on the limits of the government's collection and use of data on financial ownership and transactions.

Substitutes and a chilling ending:
Last but not least, if any country attempts to unilaterally reduce the use of its currency, there is a risk that another country’s currency would be used within domestic borders. Even if that risk is not great for a country like the United States, there is still the loss of revenue from foreign users of currency (many of whom may be engaged in underground or illegal activities within their own borders, even if not within US borders). Thus, any attempt to eliminate large-denomination currency would ideally be taken up in a treaty that included at the very least the major global currencies
Venezuela and Argentina get along on dollars. Don't be so sure the risk is not great for the US. Bitcoin, though very imperfect in a lot of dimensions, shows the strong demand for anonymous transactions and wealth holding. We could learn to use Euros pretty fast.

A global treaty banning currency and anonymous transactions...I can see the pitchforks now.

To be clear, this is a good essay, and Ken brings up all the important points. My disagreement here is just judgement on the importance of some considerations -- "good" tax and regulatory evasion, "good" anonymity, the importance of anonymity for political freedom -- relative to others -- seignorage (trivial in my view, important in Ken's) for example.


  1. You would need to outlaw barter as well. Trade using gold coins (or bars) too. And trade in promises to pay gold coins upon demand.

    1. Good point! And better, the "sharing economy" apps could soon make widespread barter much cheaper. They could even invent app-specific credits to account for three-way barter...

    2. When ideas like this were discussed in Israel, which is passing laws prohibiting large transactions in cash, I thought of many ways to avoid these prohibitions by barter. One example is based on the custom of having accounts at the local grocery. When my plumber is not able to take cash, I would just pay his grocery bill. If the tax authority starts checking who is paying whose bills, I assume I would have to get from my plumber a shopping list. I assume the tax authorities could start monitoring my grocery bills, but that seems a little insane.

    3. No, gold won't allow a zero riskless nominal return. The moment negative rates are put into place the price of gold will spike to level at which it would be expected to decline at a rate equal to the negative interest rate. You're still penalized.

      I'm also underwhelmed by your claim that our legal and financial system deeply enshrines the right to pay early. It also enshrines the right for contracts to require people to pay penalties for early payment. Take for instance prepayment penalties on mortgages or auto loans. A 'legal revolution' as you refer to it isn't required... the laws already exist.

    4. I knew you would comment! right up your alley

    5. JP,

      Yes there can be prepayment penalties attached to contracts, but in the case of a mortgage loans, the lender must make you aware of those penalties prior to approval of the loan. Hence, the right to pay early is preserved, but you may at your choice forfeit that right. Don't like the prepayment penalty, find another lender.

    6. You can prepay your electric bill or medical insurance, but that means you just run a positive balance. You don't actually buffer up a supply of kilowatts or coverage-months. If the price changes, you pay the new price as the payment becomes due. (I've prepaid now and then when I travel for more than a few weeks and worry about missing due dates.)

      Another approach as with gift cards would be to use pre-orders as one guy did with video games at "The First National Bank of Gamestop" http://imgur.com/FHnO7QJ

    7. Friends, it's so much easier than this: In Germany 1945-48 the focal point for parallel currencies became cigarettes and brandy, as the nominal currency prices of all transactions were fixed according to Nazi law, enforced by the Western Allies, no less, in the face of a vast and growing monetary overhang. For us, gold and silver make most sense, but as these might be illegal, something else would emerge, pretty much right away. And no, this is not efficient, except compared to the alternatives. :-)

  2. Link to the paper is broken. Here is a good one: http://www.nber.org/papers/w20126

  3. Best thing that could ever happen to BitCoin.

    The minute the political hot potato of the negative impact on illegal immigrants comes out the whole idea will be DOA.

    1. I'll give most any odds somebody will always find a way to identify the people behind BitCoin transactions. BitCoin has already suffered several thefts and a quick search shows at least one claim to be able to identify users today.

    2. This is just vague speculation without substance. If not literally bitcoin then another cryptocurrency.

    3. All cryptocurrencies suffer the same vulnerability - they are pseudonymous networks with a public record of who is connected to whom (via transactions).

      Researchers of social networks have already proved that they can use this information to determine the real-world identity behind pseudonyms on a network (no need to examine the actual content of transactions or messages - connections alone are sufficient to completely break pseudonymity.)

    4. All cryptocurrencies do not suffer from this vulnerability, some are designed specifically with true strong anonymity in mind such as DarkCoin, StealthCoin, XCurrency, ZCash. Although they're not popular, they show that the tech is there and works, it's just a matter of time and demand before one of these becomes popular.

  4. I didn't think that 1984 was supposed to be used to plan how to run society.

  5. Thank you for the excellent post. In general terms, it's just the mother of all portfolio shifts that sends V toward infinity and M toward 0, with no change PY. Financial and non-financial businesses would have a huge financial incentive to accommodate the demand for cashless transactions, prepayments, zero interest on paying credit card balances within 30 days, etc., and would find all sorts of innovative ways to do this that we can't even imagine right now.

  6. As a first step toward eliminating cash Prof Rogoff and all other advocates of a cashless society should set an example and voluntarily publish every monetary transaction they make publicly on the Internet. Hackers have shown they can steal credit card numbers and Hollywood emails with ease, The obvious next step is for individual financial records or other embarrassing transactions.

    I also wonder whether a cashless society is getting support from banks. They stand to receive a financial windfall taking a fee from every transaction. A "low cost" electronic transaction is still more expensive than zero cost cash transactions. From things I've read about electronic welfare and food stamp payments, banks are making a nice amount of money from fees for all but one or two token "zero cost" ways to get the money.

    I can't see the NBER paper (need to drive 20 miles to a University), but paying the neighbor's kid to shovel the driveway or having a garage sale seems like it would become a real mess. I think this is recognized by the suggestion that small bills might continue to circulate. This latter suggestion ignores the fact that we've done this before -- large bills no longer circulate and we've been restricted to "small" bills -- $100 or less. If only bills up to $20 are allowed to circulate, criminals and foreign governments will just stockpile $20 bills (and all $20 bills will have traces of drugs as is currently reported about $100 bills).

  7. If I pay my rent early in Chicago, by law my Landlord must deposit the funds in an interest bearing savings account and provide me with the name and address of the bank. Same goes with my savings deposit. Is there a reason why that interest rate would not also be negative?

  8. I bet credit cards would start issuing their own currency. They already offer cash back on purchases, and essentially are running their own currencies with an alternative price system under our noses. I imagine it would just be in the form a rechargeable gift card though...so you already have it covered.

  9. It is my understanding that crypto-currencies, like Bitcoin, contain a transaction log embedded in the computer code that make it possible to trace the complete transaction history. Done to prevent fraud and counterfeiting, it does not allow anonymous transactions like currency.

    On a more general point; why do economists continually devise ways of giving government more power to correct "wedges" when the evidence clearly indicates the folly of such schemes? Do government bureaucrats (even those enlightened ones with ECON degrees) really have the ability to measure and implement the "correct" policy?

  10. There are things I don't buy, because I don't want to give someone my credit card data.

  11. Gift cards, bill prepayments, supplier prepayments, pre-funding benefits don't really work in your example - they're really a loan to the suppliers, and so there's credit risk. Subway cards, gas prepayment is a loan to the municipal authority - again credit risk.

    It's only really Federal institutions that this works for - and definitionally the government controls these. The government could institute a 10% prepayment premium for paying bills more than 30 days in advance. If the demand for discounted bills and bonds becomes high enough, presumably if the Fed auctions them, they could sell and then trade at a negative yield. Similarly the Fed (and anyone else) could repo at a negative yield.

  12. It helps to look a bit at the accounting to understand what will be the result of negative interest rates on reserve deposits. In the end they have the exact same effect as a tax on bank capital. Put it that way: Would they still be seen as a way to improve economic growth? Wasn't the lack of (sufficient) bank capital one of the reasons for the financial crisis?

    1. Odie,

      Spot On!!!!

      It has probably occurred to you that Mr. Rogoff is not really describing a "negative interest rate" in the borrower / lender sense of the term.

      A negative interest rate in my mind implies a reversal of the flow of money - negative interest payments flow from lender to borrower.

      Instead, Rogoff / Mankiw describe a means to reduce the amount of currency (Federal Reserve "lotteries"), while the amount of debt remains the same?

      This is cockamamy to say the least.

      A tax assessed by the central bank is not much different than the central bank lending money at a positive interest rate - interest payments flow from borrower (private bank) to lender (central bank). How is this a "negative" interest rate?

  13. Cochrane is exactly on point: how many of us want the government to be able to track every transaction we make? Rogoff's idea is a very foolish one. Fortunately it will not be implemented.

  14. John,

    Why does every solution put forth by Ivy league economists (Rogoff, Krugman, Mankiw) involve adding some measure of risk to currency whether that be inflation, negative interest rates, or whatever?

    Should a government sell risk bearing assets that are distinct from currency? Really that is the question. No one (not even the government) can make you buy them (hence your liberty is not infringed upon) but they are sold for two purposes:
    1. To finance government deficits
    2. To provide the public a risk bearing means of investing for the future

    "Ken would like to get rid of paper currency in favor of all electronic transactions."

    In a perfect (no fraud, corruption, theft) world that might make sense. One nice thing about paper / coin currencies is that they are cumbersome. Counterfeiting has a cost / benefit ratio that rises as more counterfeit bills / coins are created. It's easy to prove that a bill / coin is counterfeit no matter how many hands it passes through. Prove that a electronic dollar sitting in your bank account was legally obtained by the person that gave it to you.

    If you want to go electronic currency without the counterfeiting problem, then you need to go with electrical currency. The base unit of money is the kilo-watt hour (or Joule). All transactions are settled by transmitting energy across the electrical grid.

    Gosh that sounds like a modern day "gold" standard - doesn't it? Except, you don't have territorial problems with deposits of Joules being abundant in some areas of the world and non-abundant in other areas. Likewise, governments must produce goods of real value (or tax private enterprise of those goods) to be able to spend.

    1. Deposits of joules, as such, aren't lying around in nasty parts of the world. The materials we use to distill (not exactly) produce energy often are.

      Who knows, though---maybe this would be the incentive needed to get cracking on solar power!

    2. Energy storage and transmission are inefficient so it costs energy to store it or transmit it. The overhead is proportional to the amount being stored or sent. The more you store or send, the higher the cost. In that sense it's like gold - you pay to store it or move it.

      However, anyone can "mine" energy just by putting up as solar panel. Money should be indestructible but energy is consumed. Energy is not very portable in large amounts.

      I can wire transfer $1 or $10,000 for the same flat rate.

      Handing someone a $1 bill or 100 x $100 bills costs close to zero.

    3. JB,

      "Energy is not very portable in large amounts."

      Actually, the efficiency of electrical transmission increases with the amount of energy being transmitted. The reason is that the voltage (on alternating current systems) is increased to lower the wire resistance (heat) losses that occur during transmission.

      Yes the absolute amount of energy loss rises with the amount being transmitted, but the percentage loss actually falls (efficiency rises).

      "Money should be indestructible but energy is consumed. Energy is not very portable in large amounts."

      NO, this whole argument revolves around whether currency should be a medium of exchange or a store of value - hence Rogoff's suggestion that the federal reserve hold a regular lottery that "destroys" currency from time to time.

      If the objective is to make the medium of exchange a bad store of value, then energy makes perfect sense.

    4. All,


      Pascal, Gauss, Schrodinger, Einstein, Kelvin, Euler, Faraday, Copernicus, Volta, Galileo, and others have all appeared on regional currencies (usually associated with the nationality of the scientist). Noticeably absent is Isaac Newton and James Prescott Joule.

      The logic behind putting scientists on currency (primarily a European thing) was to disassociate monetary policy from politics.

      Imagine a "real bills doctrine" where a 100 Joule note actually represents 100 Joules of energy.

    5. The new Fort Knox?


    6. Isaac Newton appeared on British 1 pound notes from 1978 to 1984. I can't find any currency featuring Joule though there is a "joulecoin" crypto-currency (ala bitcoin), www.joulecoin.org. No indication of energy backing though.

    7. Why was Newton taken off the 1 pound note and who was he replaced by?

    8. The pound note was discontinued in 1982, replaced by a pound coin in 1983, so nobody replaced Newton. There was no portrait on the back of the pound note prior to 1978. The monarch's portrait (Elizabeth II) is on the front of all British currency.

      Britain (and Canada) solved the problem of pound (dollar) coin acceptance by eliminating the note when the coin was issued. The smallest bill these countries issue today is 5 pounds / 5 dollars.

      Search for the "Standard Catalog of World Paper Money". There is some sort of online access, though I don't know how much is available free. I have PDFs of the print books (which are soldonline or can be found on eBay), so I did searches for "newton" and "joule".

  15. The negative interest rate behaviours that you list (with the possible exception of the IRS one) are all behaviours which are exactly the objective of super-loose monetary policy. What are you suggesting would be the negative impact of these pre-payments?

    The businesses and people who receive the early payments would then do the same. Cash becomes a "live grenade" which nobody wishes to hold for longer than absolutely necessary, as it should be.

    1. Liquidity's a normal good, as they say. You want the cost of holding cash (nominal interest rates) to be as low as possible, just as you want the cost of any other service to be low (the Friedman rule).

      Having to organize your life around minimizing your cash balances has a non-trivial cost in time and effort. Ask any adult who's experienced a hyperinflation. One nice thing about near-ZLB interest rates is that shoe-leather costs are as low as they're ever likely to be.

    2. Richard Havell is correct. The workarounds professor Cochrane suggests are features - not bugs - of the policy professor Rogoff recommends. When the economy is operating below capacity, we need increased spending to take up the slack. Lower interest rates make spending now more attractive than saving for later.

      While it is true that savings = investment, this doesn't mean that investment in a depressed economy is a good way to increase spending. The most likely way increased savings will result in increased investment is through increased inventories. This unplanned investment will be corrected as soon as investors realize their mistake - with greater unemployment and reduced output in the next time period. This leads to lower income and lower savings to match the reduction in investment in period 2.

      Getting people to spend now is the whole point of lower interest rates.

    3. "Lower interest rates make spending now more attractive than saving for later."

      They also make lending now less attractive than lending later. They also make debt reduction now less costly than debt reduction later.

      "Getting people to spend now is the whole point of lower interest rates."

      Getting people to borrow now is the whole point of lower interest rates. Except that for every borrower at an interest rate, there must be a lender at that same interest rate. Your argument might make sense if the central bank was the only bank in town.

  16. An absurdity of negative interest rates is that negative output, i.e. wealth destroying output is then possible. Here is a simple (if silly) example. I borrow money at minus 3%. I buy 100 houses and knock down one of them just for fun. Then I sell the remainder a year later. Ignoring the costs of selling etc, and assuming the I sell the houses for the same price as I bought them, I make a profit!

    1. Sort of like having the federal government paying farmers to burn their crops?

    2. Or the building of bombs, guns, tanks, aircraft, etc...usually we are taxing other nations' wealth, but we could start attacking ourselves

  17. Silvio Gesell, the father of this train of thought, actually considered pre-payment for goods a benefit of his freigeld system, where currency holdings were to be heavily taxed in hope of driving nominal interest rates to zero. In his Natural Economic Order he imagines a shopkeeper's description of changes in his business after the imposition of freigeld:

    "Customers were formerly loath to part with their money, because the money did not compel them to pass it on; because they received interest; because they had money in the savings bank; because it was more convenient to have money in the house than goods; and finally because nobody was ever sure when he would receive the money owing to him...

    "The new money constantly reminds men of their duties as debtors, and they are eager to pay, as they are paid, promptly. Money is now compelled to circulate, so its circulation is steady and uninterrupted. It can no longer be arrested by rumours. Regular circulation produces a regular turnover of goods, and as everyone, to avoid loss, is anxious to pay at once for what he has bought, the influx of money into my till has also become regular. We shopkeepers are able to rely on this regular influx of money and are therefore no longer forced to keep a reserve of money; quite apart from the fact that reserves of money are now impossible, since they depreciate. Instead of hoarding money, people now lay in stores; they prefer possession of goods to possession of cash, just as, for the same reason, they prefer paying cash to buying on credit. Instead of minute quantities, the public now buys large amounts of goods in their original packing; instead of a gallon, a barrel; instead of a yard, a roll; instead of a pound, a sack...

    "Payment in advance is all that is needed to satisfy craftsmen and to provide them with the money necessary for carrying on their business."

    The inconvenience to the consumer is only considered as a kind of joke. Apparently the only way the shopkeeper can persuade some customers to either buy something or leave his shop is to remind them that the tax on their money holdings is due the next day.

  18. Yeah, I think it a lot more practical to run moderate inflation in the 2-3% range and keep cash legal. We may wish to move from taxing income to taxing final sales only, and pollution, or something to that effect.

    But a cashless-deflationary federal police state sounds like,,,a nation many would migrate away from. Is this really something economists want?

    1. "We may wish to move from taxing income to taxing final sales only..."

      Why would we want to do that?

    2. Never tax productive behavior---income and FICA taxes are terrible!

  19. Isnt the gift cards/prepayment argument based on a partial equilibrium intuition? If interest rates were negative, gift card denominations and/or terms of use would be modified accordingly.

    1. Or businesses would stop issuing gift cards if the money backing them is subject to a negative interest rate.

  20. Good points and negative nominal interest rates would no be at all necessary if the Fed would have announced that it would continue with larger amounts of QE until NGDP were back on its pre-2008 trend. It would also help if governments (particularly state and local governments) could have taken advantage of low borrowing rates to finance infrastructure projects and avoid tax shortfall layoffs.

  21. Jose Romeu RobazziJanuary 1, 2015 at 12:36 PM

    This proposal scares me that it is even being made, just like the "more inflation is good" proposal. They are actually the same proposal, let's control what people use as currency, so that a group of people in a council of experts can determine "the optimal" policy, in effect causing wealth transfers between economic groups as they see fit.

    1. Jose,

      Take a look at if from the fiscal prospective - what good should a government accept as acceptable payment for taxes? Should it be the same good that is used as a medium of exchange for goods and services?

      Ken's point was that an all electronic payments system makes tax evasion harder. Cochrane's point was that in the U.S., eliminating cash would heavily impact the poor.

      And so should the U. S. totally eliminate taxes on all cash transactions and raise them on electronic transactions?

  22. Cashless transactions collapse at the first strong wind. In the aftermath of a hurricane, tornado, etc., that rips out the electricity and, more importantly, the data lines, cash is king as it is absolute.

    Remember after Katrina and Sandy, plus many other disasters, the government is slow and abusive in the delivery of food and other necessities. But local vendors can open on a cash basis quite quickly and the Walmart supply trucks are on the road quite quickly.

    1. I don't know, data can be transmitted wirelessly and there are portable generators. Could each of the large banks maintain a fleet of a couple mobile ATMs with satellite communications for that purpose?

      I understand the point that in the immediate aftermath of a storm, people with cash on hand will have an advantage. But doesn't that assume that the cash wasn't in the house when it was leveled by a tornado, flood, etc.

      With an electronic account, you gain access with a name, social security number, and a password which can be memorized.

  23. Having not read all the comments, I must say that someone is likely already to have raised this point.

    Eliminating currency, in whatever form, is likely to have distributional consequences that should, I think, be taken into account. People with (persistently) lower incomes are less likely to have checking accounts (for one, local, take: http://www.armstrong.edu/initiatives/community_indicators/cind_economic_indicator_2; an FDIC survey is here: https://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf). These families rely on cash for many transactions that, for the rest of us, are handled in other ways. So any push in this direction *must* consider this sort of consequence.

  24. I see that Cochrane has made this point...for me, however, it would be somewhat more important than it appears in his discussion.

  25. John,


    But the central bank can pay a premium for bonds that already exist through open market operations. The question becomes, can the central bank pay more for a bond than its principle value and interest payments are worth? I would think not, but I don't have anything to support that presumption.

    Can the central bank pay $200 for a government bond whose principle and interest payments are only worth $100?

  26. Miles Kimball, author of the blog “Confessions of a Supply-Side Liberal” has been pushing this idea since at least 2012. Examples of his posts are:
    ◾How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation
    ◾How the Electronic Deutsche Mark Can Save Europe
    ◾Could the UK be the First Country to Adopt Electronic Money?
    ◾Electronic Money: The Powerpoint File
    ◾America’s Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks

  27. A paper trail of every expenditure will increase the divorce rate.

    I have one friend getting a (nasty) divorce because of Facebook.

  28. Miles Kimball has explained that it's simple to pay interest on currency (positive or negative). The method is a shifting pegged exchange rate between currency and electronic money. He also explains the legal changes required. The things you mention are non-issues as far as I know. The big change is that currency would not be legal tender; that is, a $100 bill would not necessarily cancel a $100 debt. It would be hard to do this at the spur of the moment, but if planned long in advance, there wouldn't be any problem.

    Now if the Fed just stopped issuing new currency, then the exchange rate between currency and electronic money would float, and there would be no need to abolish legal tender. But a floating exchange rate is a lot more painful than a pegged exchange rate. Hard to say how this might affect the cash economy.

  29. Cash is still a popular product - especially the offering produced by the US. If the Americans take theirs off the market, or tax it, then it is indeed as you say: "We could learn to use Euros pretty fast."

  30. Here in Europe we have already had several drills in exchanging the bank notes to new ones. When we enter to THE BIG BAIL-IN, also those bank notes owned by individuals and politically selected corporations will be exchanged to "New Euro" notes. (Two old notes buy one new.) – The note exchange has a long history here.

  31. Info, maybe superfluous: France has just made trade in cash for amounts over 2.000 euro illegal. I'm not French and no legal scholar, but the text smells like like criminalizing everything transacted without bank-intermediation;


    1. Can you post a link to a news story or other documentation? I didn't find it easily on google. Sources in French ok.

    2. Old news but:

      Old news,


      On a more local note (and again old news):



    3. They discussed it for a while though, here is an old article:


    4. The old limit was 3000 euro, applicable only to payment for services. The change reduced this to 300 euros for payment at a "guichet" or treasur ywindow of different service providers. At stores the limit is still 3000.

      There is no limit on person to person exchanges (buying a car or an apartment for example).



  33. It is a great blog post by professor Cochrane again. I would add another big obstacle which he does not mention. To implement pure electronic money the central bank would have to choose between one of two hard options:

    A) Create electronic current accounts for every citizen, which would be like "nationalizing" a big part of commercial banking. Banks would dislike this and it would force central banks to go into the small customer attendance business.

    B) Force commercial banks to create electronic current accounts for everyone. Banks would dislike creating these accounts for people that have only small cash balances.

    In principle, central banks could choose B and then make a lottery assigning poor citizens to different banks. But it would be an unpopular task. Banks would dislike these poor customers that bring no profits and would try to provide the worst possible service to them. Regulators would then have to enforce minimum standards for these "poor people" bank accounts.

    In principle these obstacles can be solved, but by no means easy in political terms. There are lots of "free checking account" programs all over the world to grant banking access to poor people. In each and every country banks protest over these negative-profit customers.


