How easily can we eliminate paper currency?

Ken Rogoff says we should do it, Miles Kimball has written extensively on the topic, Willem Buiter too.

But how to do it, assuming that we wanted to?  (Here is the piece by Miles which covers the transition most specifically.)  Let’s say you allow people to turn in their currency for tickets to heaven and the currency is then never replaced.  In the short run that will increase the demand for currency in precisely such a way that advocates of a currency-less economy worry about.

Alternatively, we could tax people caught holding paper currency, either explicitly or implicitly.  Imagine for instance random lotteries, based on serial numbers, which make some dollar bills suddenly worthless.  People then will try to spend their currency and velocity will increase.  But currency doesn’t go away.  The policymaker could try to drive up velocity so much so that currency had a value of zero.  This either drives up prices a lot, or alternatively currency acquires a price separate from demand deposits and other forms of inside money.  The former option seems undesirable, whereas the latter leads to a good outcome.  But note this: once currency has a separate price, you don’t need to get rid of it on any macroeconomic grounds.  Pricing currency is better and easier than getting rid of it.

Yet another scenario, as Kroszner and I had outlined a long time ago, is for currency to evolve out of existence, as it is slowly displaced by assets of higher return and greater convenience, such as electronic payment media.  This does not involve transition problems, but it takes a long time.  In recent times currency if anything has been a growing part of the U.S. money supply.

Rogoff suggests eliminating large-denomination notes as a way to start.  I don’t object to that suggestion but of course it doesn’t get rid of currency.  It even runs the danger that a truly small and squirrely asset — small notes of currency — starts ruling the roost, a’la Keynes’s chapter seventeen.

Once you have currency, it is hard to get rid of in an efficacious way.  It is harder yet if you think that currency “rules the roost” in some kind of disadvantageous manner.  Getting rid of currency is a discrete event of some kind, and thus it would bring discrete changes to…the roost.


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