As long as paper currency has an interest rate of zero, it is hard for other interest rates to go below zero, so the only way to get interest rates below inflation is to push inflation above zero. Take paper currency off its pedestal, and inflation is no longer necessary to provide this space for monetary policy, since interest rates can go down, instead of inflation having to go up. Then there is nothing standing in the way of ending inflation forever.
To make it possible to end recessions quickly and to end inflation forever, a government needs to take the following steps:
- 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.
- 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.
- 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.
- 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.
- 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.
But make no mistake: Giving electronic money the role that undeserving paper money now holds will only tame the business cycle and end inflation. Fostering long-run economic growth, dealing with inequality, and establishing peace on a war-torn planet will remain just as challenging as they are now. But every time one set of problems is solved, it allows us to focus our attention more clearly on the remaining problems. It is time to step up to that next level.