Governments Can and Should Beat Bitcoin at Its Own Game

What's to come?
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

On Feb. 11, Future Tense—a partnership of Slate, the New America Foundation, and Arizona State University—will host an event on cryptocurrencies at the New America office in Washington, D.C. For more information and to watch the webcast, visit the New America website.

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.

Advertisement

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?

Yesterday’s paper currency is not only a barrier to speedy recovery from deep recessions—it is also a barrier to ending inflation. Many people don’t realize inflation in advanced economies such as the United States, the eurozone, and the United Kingdom is the result of conscious decisions of the Fed, the European Central Bank, and the Bank of England (with the Bank of Japan now trying to follow suit) to tolerate 2 percent inflation, in order to give monetary policy more room to maneuver. Here is the reasoning: Both households and businesses focus on interest rates in comparison with inflation when making spending decisions, so that higher inflation makes interest rates effectively lower. As economists say it, for a fixed nominal interest rate, higher inflation lowers the real interest rate. For example, if someone is paying 3 percent interest on a loan but inflation is 2 percent, then 2 percent is just making up for inflation, and only the remaining 1 percent actually gives the lender extra real value in terms of what the principal plus interest is worth. 

The key takeaway message for monetary policy is that because people look at how interest rates compare with inflation, an interest rate of zero that is 2 percent below inflation is much more stimulative than an interest rate of zero when inflation is also zero. (That is why the United States got more oomph from its zero interest rates than Japan, which had an inflation rate of zero or less.) 

TODAY IN SLATE

Foreigners

The World’s Politest Protesters

The Occupy Central demonstrators are courteous. That’s actually what makes them so dangerous.

The Religious Right Is Not Happy With Republicans  

The XX Factor
Oct. 1 2014 4:58 PM The Religious Right Is Not Happy With Republicans  

The Feds Have Declared War on Encryption—and the New Privacy Measures From Apple and Google

The One Fact About Ebola That Should Calm You

It spreads slowly.

These “Dark” Lego Masterpieces Are Delightful and Evocative

Crime

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.

Politics

Talking White

Black people’s disdain for “proper English” and academic achievement is a myth.

Activists Are Trying to Save an Iranian Woman Sentenced to Death for Killing Her Alleged Rapist

Piper Kerman on Why She Dressed Like a Hitchcock Heroine for Her Prison Sentencing

  News & Politics
Politics
Oct. 1 2014 7:26 PM Talking White Black people’s disdain for “proper English” and academic achievement is a myth.
  Business
Moneybox
Oct. 1 2014 2:16 PM Wall Street Tackles Chat Services, Shies Away From Diversity Issues 
  Life
Outward
Oct. 1 2014 6:02 PM Facebook Relaxes Its “Real Name” Policy; Drag Queens Celebrate
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
  Arts
Brow Beat
Oct. 1 2014 9:39 PM Tom Cruise Dies Over and Over Again in This Edge of Tomorrow Supercut
  Technology
Future Tense
Oct. 1 2014 6:59 PM EU’s Next Digital Commissioner Thinks Keeping Nude Celeb Photos in the Cloud Is “Stupid”
  Health & Science
Science
Oct. 1 2014 4:03 PM Does the Earth Really Have a “Hum”? Yes, but probably not the one you’re thinking.
  Sports
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?