Governments should ditch paper currency in favor of electronic.

Governments Can and Should Beat Bitcoin at Its Own Game

Governments Can and Should Beat Bitcoin at Its Own Game

The citizen’s guide to the future.
Feb. 3 2014 7:15 AM

The Paperless Economy

How governments can and should beat Bitcoin at its own game.

Prehistoric paper money.
Paper money should go the way of the dinosaurs.

Photo by Sharon Meredith/iStock/Thinkstock


From a technical point of view, Bitcoin is far ahead of governments in its beautiful implementation of electronic money.

But Bitcoin itself is not the future of money, because it is hard to believe that governments will willingly hand over control of the world’s monetary policy to the Bitcoin algorithm. Nor should they. Keeping the value of money constant over time is difficult and requires strong, capable institutions like central banks. But looking toward the future, it is the electronic dollar (and euro and yen and pound … ) whose value should be kept constant, not yesterday’s paper currency.


Many people are attracted to the gold standard because they think of gold as maintaining its value. But like Bitcoin, the value of gold relative to the goods and services we need to buy fluctuates in the markets every day. An economic yardstick of fixed value doesn’t come that easily. It has to be engineered—and the clearest path to engineering an economic yardstick of fixed value is electronic. 

The key advantage of electronic money over paper currency is this: Monetary systems based on paper currency allow for strongly positive interest rates, but not strongly negative rates; by contrast, it is easy to have interest rates on electronic money vary all the way from strongly positive to strongly negative. High interest rates make it expensive to spend now compared with waiting until later, while low interest rates encourage people to spend now. If interest rates can vary freely over a wide range, they are able to signal to households and businesses as loudly as necessary that the economy needs people to cut back on spending and save more when the economy is overheated, or cut back on saving and spend more when the economy is in a recession.

To zero in on the key problem, in our current monetary system we take for granted an interest rate of zero on paper currency. That interest rate of zero can falsely signal to households and firms that it is OK for them to hold back on spending—even at times when businesses desperately need the customers and people desperately need the jobs that extra spending would provide. Think of a one-year loan. With a positive interest rate, of, say, 2 percent, borrowers pay back their initial loan, plus 2 percent interest. With an interest rate of zero, borrowers pay back the loan with no additional costs. With a negative interest rate, of, say, minus 2 percent, borrowers pay back the loan, minus 2 percent. In effect they’re being paid for taking on a loan. Can you imagine anything that might better stimulate economic activity?





To make it possible to end recessions quickly and to end inflation forever, a government needs to take the following steps:

  1. Establish official government-sanctioned electronic money in a way that makes the use of electronic money as convenient and seamless as possible. This involves setting the stage for private innovation in electronic payment systems by giving full legal tender status to electronic money in all government-insured bank accounts and in other accounts that are officially certified as backed 100 percent by reserves held at the central bank.
  2. Dethrone paper currency from the exalted legal status it was given (very controversially) in the late 19th century, by giving anyone, at any time, the right to refuse payment in paper currency, unless a contract explicitly calls for payment in paper currency. Further demote paper currency by abolishing the guarantee that a paper dollar (or euro, or yen, or pound) will always be worth the same amount as an electronic dollar. But make sure that it is easy for people to convert paper currency into electronic form and vice versa.
  3. Search in the nooks and crannies of the legal code and government agency regulations and policies for places where it is assumed that interest rates are always zero or positive or where it is assumed that paper currency has a special status—and root those assumptions out. (For example, make it clear that people can’t show up with suitcases full of hundred-dollar bills to settle their taxes.) Encourage businesses to do the same with their business plans and their accounting.
  4. Give the central bank the authority to make interest rates negative, including making the interest rate on paper currency negative when necessary, by using the fact that a paper dollar is no longer guaranteed to be worth the same amount as an electronic dollar.
  5. Require the central bank to bring its inflation target down to zero over the course of 15 years and to forever afterward keep the value of a dollar in terms of goods and services within an unchanging narrow band. This should be revised only when necessary to take into account improved ways of measuring the value of a dollar (or euro or yen or pound).

It has become traditional for U.S. Treasury secretaries to periodically repeat the mantra that “a strong dollar is in our nation’s interest.” I would add one word to the mantra: “A strong electronic dollar is in our nation’s interest.” A strong electronic dollar is one that works smoothly in transactions, empowers monetary policy to bring a speedy end to recessions, and keeps its value over time with no concessions to inflation.

The path to a strong electronic dollar will require bureaucratic and political fortitude. But the economic principles involved are clear. The rewards at the end of that path—the taming of the business cycle and the end of inflation—insure that some nation will blaze that trail. (My bet is on the United Kingdom.) Then the rest of the advanced nations will follow.
