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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Miles Kimball on How Electronic Currency Could Yield True Price Stability



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Miles Kimball has written a stimulating, and quite convincing, short article for Quartz arguing that governments should swap electronic currency for physical currency as the “unit of account,” i.e., as the “yardstick for prices and other economic values.” While paper currency could be retained for everyday transactions, its value would fluctuate relative to  the electronic currency that would serve as an anchor. The chief virtue of electronic currency, according to Kimball, is that it would give central banks a powerful tool for macroeconomic management:

What the opponents of primacy for electronic money fail to realize is that making electronic money the economic yardstick is the key to eliminating inflation and finally having honest money. The European Central Bank, the Fed, and even the Bank of Japan increasingly talk about an inflation rate like 2% as their long-run target. Why have a 2% long-run target for inflation rather than zero—no inflation at all? Most things are better with inflation at zero than at 2%. The most important benefit of zero inflation is that anything but zero inflation is inherently confusing and deceptive for anyone but the handful of true masters at mentally correcting for inflation. Eliminating inflation is first and foremost a victory for understanding, and a victory for truth. 

There are only two important things that economists talk about that are worse at zero inflation than at 2% inflation. One that has attracted some interest is that a little inflation makes it easier to cut the real buying power of workers who are performing badly. But by far the biggest reason major central banks set their long-run inflation targets at 2% is so that they have room to push interest rates at least 2% below the level of inflation. With electronic dollars or euros or yen as the units of account, there is no limit to how low short-term interest rates can go regardless of how low inflation is. So inflation at zero would be no barrier at all to effective monetary policy. It might be that we would still choose inflation a bit above zero to help make it easier to cut the real (inflation-adjusted) wage of poor performers at work, but I doubt it. So I predict that making electronic dollars the unit of account would pave the way for true price stability with long-run inflation at zero instead of 2%. The main benefit of making electronic currency the centerpiece of the price system would be that central banks would never again seem powerless in the face of a long slump. But even setting that gargantuan benefit aside, the benefits of true price stability alone would easily make up for any inconvenience from the abdication of paper currency in favor of the new rulers of the monetary realm: electronic dollars, euros and yen. [Emphasis added]

Kimball’s discussion is nuanced, and he acknowledges the psychological resonance of physical currency. To make the case for electronic currency as the unit of account in the larger political conversation, one would have to be prepared to allay concerns about privacy and the abuse of government power. Electronic currency could markedly reduce criminal activity, but of course it would do so by greatly expanding the state’s capacity for surveillance of economic transactions.

That said, “electronic currency = zero inflation” could prove an appealing pitch. 



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