I know, said Marvin, let’s abolish paper money!
It was Friday morning, quite early on in the two-day conference, when Carnegie Mellon University Professor Marvin Goodfriend was slogging through a paper entitled “The Case for Unencumbering Interest Rate Policy at the Zero Lower Bound”.
And then towards the end he would have jerked heads up from mobile phones with the words: “Abolish paper currency”.
Before we get to what he was talking about, it’s worth recording that the only thing markets were interested in about Jackson Hole was whether Fed chair Janet Yellen would give a hint about the next US rate hike — September, or December or both.
Of course she didn’t, and was never going to. And in a way, this difference between what markets were focusing on, and what those at Jackson Hole were actually talking about encapsulates the problem with modern economic policy.
Financial markets are utterly divorced from the real world and so are the druids, but at least they worry over it as surgeons clustering over a patient on the operating table who stubbornly refuses to get better. Central banks have tried to influence the real economy by inflating financial and property markets but so far it hasn’t worked — all they have succeeded in doing is getting the undivided attention of financial markets.
The title of this year’s conference was “Designing Resilient Monetary Policy Frameworks for the Future”, but reading the papers and the reports of those who were there, it’s clear that could have been cut down to two words: “Now What?”
Howard Schneider of Reuters suggests another two words in his Jackson Hole roundup — a plea to the central bankers’ colleagues in the rest of government: “Please Help”. He meant help with fiscal policy.
On Friday morning, Marvin Goodfriend was discussing the problem raised by Janet Yellen in her speech to open the conference, and which is obsessing all central bankers around the world: with interest rates at, below or near zero everywhere, how do we deal with another downturn?
One solution, discussed in several papers, is for fiscal policy to step up and for central banks to sit the next one out, shackled as they are by the “zero lower bound”.
But that idea is anathema to a self-respecting central banker at any time, let alone after three or four decades of being the centre of the economic universe, sagely pulling the levers that determine the fate of humankind.
Professor Goodfriend was actually the first economist, in 1999, to suggest that zero is not a lower bound, and that negative interest rates were an option, way ahead of his time.
In his Jackson Hole paper on Friday he went a step further: “The most straightforward way to unencumber interest rate policy completely at the zero bound is to abolish paper currency.”
That’s so people wouldn’t be able to take their money out of the bank to escape negative interest rates — that is, paying the bank to hold the money for them, as digital records — and instead to hoard it as paper cash. He didn’t say “under beds”, but that’s what he meant.
“In principle, abolishing paper currency would be effective, would not need new technology, and would not need institutional modifications.”
My local butcher is way ahead of him. Sam abolished paper currency three years ago because his butchers were always having to wash their hands after handling cash and before dealing with the meat. As Marvin Goodfried might have put it, this policy did not need “institutional modification” — Sam just put up a sign saying “no cash”, which was a bracing change from the many “Cash Only” signs one sees.
But extending Sam’s philosophy to the entire economy would present certain challenges, as Professor Goodfriend acknowledged.
“…the public would be deprived of the widely-used bundle of services that paper currency uniquely provides — a generally accepted paper medium of exchange providing transactions services especially for low-value transactions; a readily accessible, safe liability of the central bank; a store of value; a degree of privacy in financial management; and the option to hold money outside the banking system and to withdraw deposits at par as paper currency in times of financial stress.
“Hence, the public is likely to resist the abolition of paper currency until mobile access to bank deposits becomes cheaper and more easily available, ATM charges for access to paper currency become excessive, and/or electronic currency substitutes become widely available.”
Quite true Marvin. A cashless world is probably further away even than driverless roads.
In her speech, Janet Yellen talked about the central bankers’ “toolkit”, and devoted her speech to discussing how it has already been expanded and could be expanded some more.
She concluded: “Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively.”
It was, in short, a pep talk. “I know some of you are staring hollow-eyed at the floor, knowing that nothing you have done has worked wondering what to do next now that you have run out of things to do, but it’ll be OK! We’ll think of something.”
I know, said Marvin a short time later, let’s abolish paper money!
Alan Kohler is publisher of The Constant Investor
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There was a point during the conclave of central banking and economic druids at Jackson Hole, Wyoming, on Friday and Saturday when the dead end that economic policy in the world has now reached was laid bare.