Typography

Narayana Kocherlakota, formerly the head of the Federal Reserve Bank of Minneapolis and now a prolific economics blogger, penned a recent article on the abolition of cash. Kocherlakota makes the point that if you don't like government meddling in the proper functioning of free markets, then you shouldn't be a big fan of central bank-issued banknotes. For markets to clear, it may be occasionally necessary for nominal interest rates to fall well below zero. Cash sets a lower limit to interest rates, thus preventing this rebalancing from happening. I pretty much agree with Kocherlakota's framing of the point. In fact, it's an angle I've taken before, both here and in A Libertarian Case for Abolishing Cash . Yes, my libertarian and other free-marketer readers, you didn't misread that. There is a decent case for removing banknotes that is entirely consistent with libertarian principles. If you think usury laws are distortionary because they impose a ceiling on int...

The whippersnappers who work in the cryptocurrency domain are moving incredibly fast. As I've been saying for a while, assets like bitcoin (or stocks ) are unlikely to become popular as exchange media; they're just too damn volatile relative to incumbent fiat currencies. There's a new game in town though: stablecoin . These tokens are similar to bitcoin, but instead of bobbing wildly they have a fixed exchange rate to some other asset, say the U.S. dollar or gold. Now this is a promising idea. If a crypto-asset can perfectly mimic a U.S. dollar deposit's purchasing power and risk profile, and do so at less cost than a bank, then the monopoly that banks currently maintain in the realm of electronic payments is in trouble. Rather than owning a Bank of America deposit, consumers may prefer to hold an equivalent stablecoin that performs all the same functions while saving on storage and transaction fees. To compete, banks will either have to bribe customers with higher inte...

Last week Citi's Willem Buiter published a note on the three ways to get rid of the effective lower bound to nominal interest rates, one of which is to abolish cash. He goes on to say that politically, the abolition of currency would run into opposition from some of the legitimately cash-dependent poor and elderly, from those for whom the anonymity of cash is desired because they are engaged in illegal activities and from libertarians. The first constituency can be helped, the second can be ignored and the third one should take one for the team. I think that Buiter is wrong to characterize libertarians as necessarily opposed to the abolition of cash. Their take on cash is probably (or at least should be) a bit more nuanced. Since libertarians generally advocate government withdrawal from lines of business like health care or liquor retailing, an exit of central banks from the cash business should be a desirable outcome. What Buiter is advocating is a bit more extreme than just gov...

The Swedes really don't like cash. First, consider that Sweden is the only country in the world that I'm aware of where reliance on paper money is in decline. Second, no country's central bank has produced a nominal deposit rate as negative as Sweden's, for as long. Yet even at -0.85% per year, Swedish banks who own those deposits haven't fled into 0% cash, providing some indication of the degree to which they hold banknotes in disdain. ABBA won't accept paper As the chart below shows, cash outstanding continues to grow in almost every country except Sweden. Japan and Denmark are the only countries that come close to pacing the Swedes, although both nations continue to show incremental growth in demand for banknotes. Even Kenya, where m-pesa has taken hold, shows strong cash demand. Sweden reached "peak-cash" somewhere between 2007 and 2008. The reason for this change of heart is public preferences, not government diktat. The monetary authorities can ...

What is this gas station using as a medium of account? Visa/Mastercard dollars or Federal Reserve dollars? In this post I'll argue that in many cases, a nation's medium-of-account doesn't consist of base money issued by its central bank, but credit card money created by Visa and Mastercard. This may have some interesting implications for monetary policy. Whoever issues, creates, or manages a nation's medium-of- account determines the general level of prices, and this makes it a monetary superpower. But before I get to that, let's revisit the meaning of the word medium-of-account. I've written a number of posts on the idea of medium-of-account because it has always seemed to me like an important concept, although admittedly it's taken me a while to zero-in on a satisfactory understanding of the term. What I like about medium-of-account is that along with the ideas of unit-of-account and moneyness , it allows us to pretty much remove "money" from th...

Florentine florin Last year Scott Sumner introduced the econ blogosphere to what he likes to call the medium-of-account function of money, or MOA, defined as the sign in which an economy's sticker prices and debts are expressed. Here and here are recent posts of his on the subject. I think Scott's posts on this subject have added a lot of depth to the interblog monetary debates. However, I've never been a big fan of Scott's terminology. As I've pointed out before , what Scott calls MOA, most modern economists would call the unit-of-account function of money. Older economists like Jevons and Keynes[1] referred to the unit-of-account as the money-of-account, and modern economic historians also prefer money-of-account. Terminological differences aside, in today's post I want to focus on what I'll call from here on in the unit-of-account function of money. Scott's UOA posts often emphasize the idea of separating the unit-of-account function from the me...

Many moons ago Matt Yglesias wrote that the "zero lower bound is a pure artifact of the existence of physical cash."  In this post I'll argue that the zero-lower bound , or ZLB, is an artifact of our modern central bank-managed monetary system, and not the existence of cash. In a free banking system in which private banks issue banknotes, competitive forces would force bankers to rapidly find ways to pierce below the ZLB, rendering the bound little more than a fleeting technicality. What is the zero lower bound? When the economy's expected rate of return drops significantly below 0%, interest rates charged by banks should follow into negative territory. But if banks set sub-zero interest rates on deposits, everyone will quickly convert them into central bank-issued paper currency. After all, why hold -2% yielding deposits when you can own 0% yielding cash? The inability to set negative interest rates is the zero-lower bound problem. As I'll illustrate, the threa...

Nick Rowe , Scott Sumner , and most recently, David Glasner , all say that the US's current medium of account is the dollar. I disagree. I think that the current medium of account is CPI units. Here's why. First, there's been some sloppiness with definitions in the links above, so let's define the term. The medium of account is whatever defines the unit of account . I think this a pretty standard definition. That's Bill Woolsey's definition here . David echoes this definition in his comment here . Take an old-style central bank that holds 100% gold reserves in its vault. It chooses the word "dollar" to stand as the unit of account . The bank then goes on to define the dollar as equal to x grains of gold. Thus the medium of account is gold. Our central bank issues paper notes which are to be used as the medium of exchange . Shopkeepers post prices in terms of the unit of account , the dollar, and accept notes as payment. Some shopkeepers might eve...

Isaac Newton, Master of the Mint Miles Kimball's proposal for subordinating paper money to electronic money sounds to me a bit like abandoning bimetallism. Beginning in 1717, Isaac Newton, Master of the Royal Mint, put England on a bimetallic standard. Under bimetallism, the pound sterling was defined as a fixed quantity of silver or gold. In other words, where before England's medium of account was a certain quantity of silver, the new medium of account was a certain quantity of both metals. The unit of account through all of this remained pounds. As the market prices of gold and silver varied due to technological advances and new discoveries, the fixed silver-to-gold ratio meant that one or the other would be undervalued relative to its actual market price. As a result, the entire nation's stock of circulating coin would either flip to gold (if gold was overvalued by the mint) or silver (if silver was overvalued). After all, why bring your silver to the Royal Mint in L...

Bill Woolsey , Scott Sumner ( here and here ), and Nick Rowe and a debate that was fun to follow. It seems to me that they more or less end up on the same page. Here's my rough synopsis. The argument seems to have started as a semantic battle over the definition of the word money. Scott holds that money is the medium of account (MOA), Nick and Bill say it's the medium of exchange (MOE). I say ignore this part of the conflict. Pretend the word money doesn't exist. Money . The semantics detract from the main points of the debate which, to me at least, is about how price rigidity, MOA, and MOE interact to cause recessions. Scott's point centres around the following example. The MOA in Zimbabwe is gold. This means that the sticker prices of goods and services are set in gold ounces. But Zimbabweans pay for these things using a central bank issued Zim$. Shopkeepers keep a sign at the till showing the current exchange rate between an ounce of gold and Zim$ so people who hav...

Tyler Cowen and Scott Sumner discuss the idea of abolishing central bank-issued cash. The existence of cash can create problems for monetary policy. Say a central bank wants to reduce the rate it pays on central bank deposits to below zero. If it did so, everyone would immediately convert deposits into cash, since owning 0% yielding paper notes is better than owning an instrument that pays a penalty rate. There appears to be a zero-lower bound to the interest rate on deposits. Ban cash and you might remove that bound. Tyler points out that the alternative to an outright ban is to put a Silvio Gesell-style tax on cash that brings a bank note's yield to something below 0%. This way, no one will prefer cash to negative yielding deposits. But as he points out, this is slightly "goofy" since it requires serial numbers and scans on all paper notes. There is a simple alternative that doesn't require a ban, nor does it require that all cash carry sensors, serial numbers, or...