Would electronic money end recessions?
The latest advocate of abolishing paper money is writer Matthew Yglesias, who argues that a monetary system with only electronic money and payments would end recessions.
Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power for three reasons:
1) When people make cash payments, their purchases aren't tracked, giving them privacy from government surveillance
2) If payments are made in cash, it will enable them to make payments without paying taxes.
3) The existence of physical cash makes it impossible to lower nominal interest rates below zero because if they are below zero then people will withdraw their money from banks.
So, while paper money isn't as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments. The latest statist to advocate the abolition of paper money is leftist Salon-writer Matthew Yglesias.
What bothers Yglesias isn't however so much points 1) and 2), but 3). Yglesias entitles his article "How eliminating paper money could end recessions" and argues that if only interest rates could be lowered sufficiently below zero, people would want to stop holding money and buy more, ending any and all recessions according to Yglesias.
It is certainly true that if money loses value, people will be more inclined to make purchases rather than hold on to money. But that needn't increase production, it is more likely to simply raise prices. Indeed, by lowering the incentive for earning money it is more likely to lower production.
After all, what matters for the demand to hold money isn't just nominal interest rates on money but also expected inflation, or in other words what matters is real interest rates. And we've had societies where real interest rates have been extremely negative, impoverishing anyone who holds on to money for too long. The most extreme and (in)famous examples of this was Zimbabwe in 2009 and Germany in 1923. Last time I checked, Zimbabwe in 2009 and Germany in 1923 wasn't examples of booming economies "despite" the fact that real interest rates in those countries were close to -100% (the lowest possible level)
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.