The Bank of England’s chief economist, Andrew Haldane, has suggested the abolishment of paper currency would be a “radical and durable” way of generating negative rates in order to boost inflation and stave off a new recession.
In a speech entitled ‘How low can you go?’, Haldane floats the idea of setting negative rates, saying that “the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside”.
Therefore, “there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.”
Traditionally, legislators have refrained from cutting rates below zero because such moves lead to a return on savings dropping into the negative, leading to people taking out money from the bank and ‘hoarding’ it in cash instead.
This in turn would slow, rather than lead to a boost in the economy.
‘Abolishing paper currency’
Haldane suggests that a ‘radical’ way of tackling this constraint would be the abolishment of paper currency. He says that “as well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source”.
Alternatively, he suggests “finding a technological means either of levying a negative interest rate on currency, or of breaking the constraint physical currency imposes on setting such a rate”.
This includes a proposal of setting up an exchange rate between paper currency and electronic money.
“Having paper currency steadily depreciate relative to digital money effectively generates a negative interest rate on currency, provided electronic money is accepted by the public as the unit of account rather than currency.”
He also suggests the maintenance “of a government-backed currency, but have it issued in an electronic rather than paper form”.
Bitcoin
Haldane asks whether such technological alternatives are possible, and he comes to the conclusion that they are because of the changes that Bitcoin has brought about.
“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential. On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. Bitcoin’s “blockchain” technology appears to offer an imaginative solution to that distributed trust problem.”
However, he does point out the various obstacles to this proposal such as whether an adaptation of this technology could support a central-bank issued digital currency, or whether the public would accept it in the first place.
“These questions do not have easy answers. That is why work on central bank–issued digital currencies forms a core part of the Bank’s current research agenda (Bank of England (2015)). Although the hurdles to implementation are high, so too is the potential prize if the ZLB constraint could be slackened. Perhaps central bank money is ripe for its own great technological leap forward, prompted by the pressing demands of the ZLB,” he concludes.
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