Typography

Ken Rogoff has famously called for a ban on high denomination banknotes in order to help combat tax evasion and hurt criminals. But rather than banning notes, why not implement a market-based approach such as a tax? Among other advantages, a tax leaves people with flexibility to determine the cheapest way to reduce their usage of the targeted commodity. This is how society is choosing to reduce green house gas emissions. So why not go the tax route for banknotes too? My recent post for the Sound Money Project on pricing financial anonymity delves into this idea. The anonymity provided by banknotes is both a "good" and a "bad". People have a legitimate demand for financial alone time ; a safe zone where neither their friends, family, government, nor any other third-party can watch what they are buying or selling. These days, cash is pretty much the only way to get this alone time. But cash's lack of a paper trail can be abused when it used to evade taxes. The r...

Freigeld , or stamp scrip, is designed to pay negative interest, but it can be re-purposed to pay positive interest. Remember when global interest rates were plunging to zero and all everyone wanted to talk about was how to set a negative interest rate on cash? Now that interest rates around the world are rising again, here's that same idea in reverse: what about finally paying positive interest rates on cash? I'm going to explore three ways of doing this. As for why we'd want to pay interest on cash, I'll leave that question till the end. ------- The first way to pay interest on cash is to use stamping. Each Friday, the owner of a bill—say a $50 note—can bring it in to a bank to be officially stamped. The stamp represents an interest payment due to the owner. When the owner is ready to collect his interest, he deposits the note at the bank. For example, say that 52 weeks have passed and 52 stamps are present on the $50 note. If the interest rate on cash is 5%, then th...

David Beckworth argues that the U.S. Federal Reserve should stop running a floor system and adopt a corridor system , say like the one that the Bank of Canada currently runs. In this post I'll argue that the Bank of Canada (and other central banks) should drop their corridors in favour of a floor—not the sort of messy floor that the Fed operates mind you, but a nice clean floor. Floors and corridors are two different ways that a central banker can provide central banking services. Central banking is confusing, so to illustrate the two systems and how I get to my preference for a floor, let's start way back at the beginning. Banks have historically banded together to form associations, or clearinghouses, a convenient place for bankers to make payments among each other over the course of the business day. To facilitate these payments, clearinghouses have often issued short-term deposits to their members. A deposit provides clearinghouse services. Keeping a small buffer stock o...

 We are more than thirty days into Narendra Modi's demonetization campaign, and while many of the commentators I follow say that it is admirable of Modi to try to reduce the role of  black money (wealth held by tax-evaders and criminals) and increase digital money adoption, most say that demonetization is not the way to go about it. In short, the idea behind Modi's demonetization is to require everyone who owns old 1000 and 500 rupee notes to bring them to a bank before year-end for conversion into new banknotes or to be deposited into an account. By forcing Indians to re-familiarize themselves with dormant accounts, or open new ones, the architects of the plan hope that India's reliance on cash as a medium of exchange will be reduced. Any amounts above the ceiling require proper documentation. Those who own large amounts of cash for undocumented reasons, either because they are evading taxes or engaging in criminal behaviour, will therefore be unable to make the switch, t...

Last week I asked whether the Federal Reserve could get rid of the $100 bill. This week let's discuss whether it should get rid of the $100. I don't think so. The U.S. provides the world with a universal backup monetary system. Removing the $100 would reduce the effectiveness of this backup. Earlier this week the New York Times took up the knell for eliminating high value bank notes, echoing Larry Summers' earlier call to kill the $100 in order to reduce crime which in turn was a follow up on this piece from Peter Sands. More specifically, Summers says that "removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place." As an aside, I just want to point out that Summers' moratorium is an odd remedy since it doesn't move society any closer to his better place,  a world with less crime. A moratorium simply means that the stock of $100 bills is fixed while their price is free to f...

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign. What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold  whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers : reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%. But as Nick Rowe writes , negative rate tiers—which can be thought of as maximum allowed reserves—are si...

The 1995 British two pound "Dove" coin The Bank of England's chief economist Andrew Haldane recently called for central banks to think more imaginatively about how to deal with the technological constraint imposed by the zero lower bound on interest rates. Haldane says that the lower bound isn't a passing problem. Rather, there is a growing probability that when policy makers need three percentage points of headroom to cushion the effects of a typical recession, that headroom just won't be there. Haldane pans higher inflation targets and further quantitative easing as ways to slacken the bound, preferring to focus on negative interest rates on paper currency, a topic which gets discussed often on this blog. He mentions the classic Silvio Gesell stamp tax (which I discussed here ), an all out ban on cash as advocated by Ken Rogoff, and Miles Kimball's crawling peg (see here ). According to Haldane, the problem with Gesell's tax, Rogoff's ban ( pdf ), a...