In class, Professor Kimball has discussed his strong support for the discontinuation of paper money, and for it to be switched to be electronic. He has written countless blog posts about it. One of which is about the zero lower bound, or ZLB. Along with that, he contributed an article to Slate that made connections to bitcoin. Professor Kimball’s main claim about eliminating the ZLB is that negative interest rates are crucial to the economy’s recovery. Negative interest rates will cause increases in investments. The main function of eliminating the ZLB is to decrease the incentive to save, therefore stimulating consumption. Consumption is important for combatting the recession, and a huge increase in consumption would help raise output.
It seems that this idea has been catching on. An article in the Wall Street Journal, discussed the elimination of paper currency as well. However, this was more from a legal standpoint. According to the article, crime has been declining very quickly since the 1990’s. The article mentions that a possible reason why is that people have been using cash less and less. Cash is very anonymous, which means that it is integral to illegal transactions.
To this day, I have been having trouble completely agreeing with Professor Kimball’s stance on the elimination of paper currency. I agree that the ZLB is created by paper currency. I also believe that this idea could work in theory. When interest rates decrease, consumption and investment go up. This is because the interest rate is the opportunity cost of spending money, as opposed to saving it. A lower interest rate means that by spending, the individual is giving up less than he would if the interest rate was higher. The biggest problem for me is that creditors will disappear. Positive interest rates make creditors want to lend money because the borrower will pay back more money in the future. Nobody would want to lend money at a negative interest rate. Why would somebody want to lend money when he or she knows that the borrower will pay back less money in the future?
I do agree with every legal standpoint in this discussion. Electronic money is very easy to trace. A bank, or the government can know when and where a transaction is made. The same cannot be said about paper currency. If paper money were to be eliminated, how would a drug dealer be able to sell his product? Would the buyer pay him with Square? The answer is “no” because the government would be able to see it.