Tuesday, September 19th, 2017 MST

Should Government Abolish its Paper Money?

by Joe Cobb

Harvard professor Kenneth Rogoff wrote in the Financial Times, May 29, that “Paper money is unfit for a world of high crime and low inflation.”  He proposed to get rid of paper money.  Government paper money. 

What would people do to make payments? 

Most people in the U.S. have Visa or Mastercard or AmEx or other payment cards.  Most payments already are digital, so why should the government subsidize the printing of a “private payments” vehicle, like a paper Federal Reserve Note?  It does cost real economic resources to count and wrap and deliver the paper to the banks, and the stores.  They just ship it back again the next day.  Why should the government subsidize this process by giving away free Federal Reserve Notes to the public?  Visa, Mastercard, and AmEx are not subsidized.

An innovative product could be issuing AmEx or Visa Travelers Cheques in fixed dollar or euro amounts and allow them to be circulated without endorsement.  That would be a form of private paper currency that could make up the niche market for that kind of commerce.

But Control of the Economy is Really What Is Planned

Prof. Rogoff was not suggesting getting rid of paper currency for the purpose of financial innovation or privatizing a formerly government activity.  He was suggesting that getting rid of paper currency – and BANNING it – was the plan.  What the Harvard professor is advocating is an extreme form of the Keynesian model of macroeconomic planning.  But it is not so extreme, since the European Central Bank also recently announced a policy of Negative Interest Rates.

The Keynesian model, which is standard among all the British Neo-Classical schools, is common for Monetarists, Supply Siders, etc.  All of these economists agree that when the Federal Reserve, or the European Central Bank, sets an interest rate, it will affect the performance of the economy and the financial markets.

But when, like today, interest rates on government bonds are very low, it is not very useful to try to CUT interest rates.  That tool of the Keynesian planner’s magic kit is not available.  Prof. Rogoff believes that in order to keep using the Keynesian interest rate manipulation to push the economy, it must become a Negative Interest Rate.

Anyone lending money knows what this means.  You lend money today and get back LESS when it is fully repaid.  That is a Negative Interest Rate.  Only in the Keynesian economic model can this make any sense.  Yet, the first immediate problem is that nobody would lend money.  Everybody would just buy cash and hold it.

Prof. Rogoff suggests that abolishing cash would solve the problem.  Just like abolishing drugs solved that problem. 

Even if the Keynesian planner’s dream came true, and private cash and all Federal Reserve Notes were abolished, there would be many private stores-of-value serving the same old purposes.  Maybe the new ones, like gold coins and bars, would be more heavy, but they could still be fully electronic.  It just depends on the laws of bailment and exchange.

We are still watching to learn what happens with the experiment by the European Central Bank.  It would seem the policy of imposing Negative Interest Rates would only be effective when the central bank imposed it on the required reserves of the member banks.  It would just confiscate a portion of their excess reserves, or total reserves if appropriate.  But could any of the member banks pass this policy along to their customers? 

Not if the customers had a Zero interest rate alternative, like gold, silver, platinum coins and bars.

 

Joe Cobb was staff economist to Ron Paul in the 98th Congress.  He drafted the legislation, introduced by Ron Paul, to create the American Eagle gold bullion coinage.  This became Public Law 99-185 on December 17, 1985.  Joe Cobb is an advocate of replacing government currency with private alternatives and abolishing the Federal Reserve System.

3 Responses to “Should Government Abolish its Paper Money?”

  1. darrell

    Collecting precious metals instead of fiat currency is a great idea (I love silver myself, outperforms gold hands down.) But when the whole charade comes crashing down on our heads, what will you exchange long-term for currency. In reality, most people will be slow to trust metals and still cling to the hope that the paper money will eventually regain its intrinsic value, therefore making it difficult to exchange for services.

    • Joe Cobb

      It is true that people are not going to change habits, but if there really is some Disaster, then what might people want to use for payments, for money in daily life? I had once believed something small like the old silver dime would be great, but it all depends on “the Disaster.” How serious, how total?
      .
      Without any “Disaster,” it is becoming more and more possible for individuals to make transactions, often with their phones, transferring assets. Asset transfer is the essence of a barter system with liquid assets in play. Electronics already do this for millions in east Africa on their cell phones.

  2. Darryl Johnson

    For thousands of years, silver has been used as a form of currency. Silver was the preferred unit of exchange in nearly every early culture worldwide. Today’s paper money derives its purchasing power only through confidence in a nation’s ability to maintain a “prudent fiscal policy.” In turbulent times, such as those we are experiencing in the world today, diversifying your savings/investment strategy by adding silver may be a smart move.

    Indeed, many experts suggest that 10% to 15% of portfolio assets be in precious metals. As an investor myself, I know you need to spread your investments out in many forms from stock and bond, real estate and–of course–silver and gold.

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