Miles Kimball has promoted his system of defining the dollar in terms of electronic money and allowing hand-to-hand currency to float during deep recessions.
He argues that this would allow nominal interest rates to fall below zero when necessary. Interestingly, he also argues that this possibilities makes it possible to create truly "honest money" with a zero inflation rate rather than the planned 2% inflation common among central banks today.
In my view, banks already issue "electronic money" and there is no need to have the Federal Reserve provide start providing it directly to the public.
The Fed already provides "electronic" base money to the banks, and that is enough. Let reserve deposits at the Fed "define the dollar" though ordinary bank deposits would be redeemable in that base money and so reinforce that definition for other firms and households.
And what about currency? Rather than try to have the Fed manipulate an exchange rate between government currency and deposits, simply get rid of the government currency and let private banks issue the currency. Normally, that currency would be redeemable in reserve balances at the Fed and the privately-issued "electronic" deposits created by banks.
If there is a "national economic emergency," and extremely low interest rates make it attractive for households and firms to hoard currency and profitable for banks to issue less currency, then the banks will stop issuing it and there will be a currency shortage.
Meanwhile, market interest rates on various securities, including "electronic money" could adjust to clear markets and keep spending on output growing at a slow steady rate. The most likely consequence would be that interest rates would never actually fall so low, and there would never be a shortage of currency. The second most likely scenario would be that any such currency shortage would be very short lived. Disruptive, but not much of a problem.
But finally, if market clearing interest rates on deposts are presistently so negative that a shortage of currency persists, then let the private sector come up with solutions. Perhaps ordinary retailers would issue dated script--more like coupons than what we now think of as currency for these small, face-to-face transactions.
Suppose tax evaders and black marketeers start using private gold coins for their transactions and to store their wealth. So? The price of gold would change with its supply and demand, just as today. Let it.
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Why do you think the price of gold can adjust but the price of paper can't?
ReplyDeleteBill,
ReplyDeleteCompletely agree with this, except one thing: "The Fed already provides "electronic" base money to the banks, and that is enough." why is that "enough"? What if the Fed could provide public checking accounts at zero cost? Would it be *wrong* to do so? Why should regular citizens not be allowed to receive the same government benefits as clearing banks?
Well, I spent 20 years as a Wall Street reporter.
ReplyDeleteWall Streeters may be the smartest people there are, aside from physical scientists. But also the cunningist. And the metric is money. Not morals, ethics, true capital formation etc.
Not sure I want Wall Streeters printing money. Or Charles Keating types. Financial institutions attract fraudsters the way kindergartens attract child molesters.
I fear the public would lose faith in "all bankers" and disintermediation would result. Deflation. Sustained deflation.
In Japan, the results of even mild long-term deflation have been very ugly.
You know, real per capita incomes in the 1960s rose by more than 30 percent in the USA. I'll take that.
Benjamin:
ReplyDeleteDisintermediation into what?
How would it be inflationary?
If people have little confidence in bank issued currency, then they would be even less likely to use it as a store of wealth.
The notion that they would lose confidence in banks, withdraw currency from banks and start to hoard bank issued currency, and cause deflation, is a contradition.
If people choose to hold interest bearing government debt, because they don't want to hold bank issued currency, then at worst the result is a negative yield on government debt. That will deter hoarding government debt and won't cause deflation.
If people don't trust bank issued currency and that makes them distrust other banks, and they instead by stocks, how is that deflationary? Why is more equity investment a bad thing?
The worst consequence would be if people hoarded gold. The result of that would be higher gold prices, which would deter gold holding, would not be deflationary, but to the degree people chose to hold more of their wealth in that form rather than stocks, bonds, and yes, bank deposits including currency, then the capital stock would be lower and real output per capita would be lower.
But the price of gold, either real or nominal would not be especially stable and so this really wouldn't be some kind of "low risk" investment.
By the way, it was the foolhardy effort to target the unemployment rate starting in the sixties that lead to the high inflation and poor economic performance of the seventies.
Bill-
ReplyDeleteLike your columns as you know.
1. I did not say inflationary. I said deflationary.
2, If there were sporadic scares about currency, I think it would taint all currency. Maybe in this day and sage, that only means people use credits cards. Still, not something to look forward to.
3. Yes, with free banking, and some bak frauds and currency busts, we might get a population that wants to be paid in gold or diamonds etc. Even currency backed by gold could be defrauded, and would be, no doubt. Bankers would steal the gold etc. Like the salad oil in the tanks scam.
I concede your point about the 1960s, though, in a way, it is my point. Even with moderate inflation in the 1960s, we had very good real income growth. So inflation is not that bad.
Whether the 1960s inflation carried over into the 1970s, or the 1970s inflation was sustained by Burns is another argument. Structurally, the economy was different then.