Link to May 2, 2016 Reuters article “SNB could seek to prevent banks hoarding cash if franc soars: Roubini group.”Thanks to Makoto Shimizu for pointing me to this article.

Yesterday, Reuters reported

The Swiss National Bank might seek authority to stop commercial banks converting reserves into cash if its current policy arsenal failed to prevent a major appreciation of the franc, economist Nouriel Roubini’s research group said [in a] report published by the group on Monday after a meeting with SNB officials …

One option would be to prevent banks from switching reserves into cash. That would require a new law, but the Roubini Global Economics report said SNB officials “were confident that the legislation could be changed …to give the bank this authority”.

I find this intriguing because the heart of my proposal to eliminate the zero lower bound is to generate a negative paper currency interest rate when necessary by having the exchange rate giving the value of paper currency relative to electronic money that applies at the cash window of the central bank gradually depreciate over time. So any change in the ability of private banks to exchange reserves for paper currency or paper currency for reserves at the cash window of the central bank is of great importance as a precedent. 

The most natural reading of the Reuters description is that banks would no longer be able to convert electronic reserves into paper currency. That is equivalent to making the “ask” price for paper currency at the cash window of the central bank prohibitively high. In all likelihood, forcing private entities to get paper Swiss francs (with a face interest rate of zero) from each other rather than the central bank would make the market value of paper Swiss francs in a negative rate environment rise above par. 

On problem with a policy that makes the value of paper currency go above par is that anticipation of this policy could lead to the very hoarding of paper currency that the actual institution of the policy is meant to inhibit. By contrast, my proposal of having the value of paper currency start at par and then gradually depreciate below par (both bid and ask prices for paper currency gradually going down) works fine, without any such side effects, even if fully anticipated. It is also less disruptive than making paper currency scarce. 

One thing I have not emphasized enough about my proposal is that it can be seen as flooding the market with paper currency more and more over time, and thereby making the rate of return on paper currency lower. Thus, it is the opposite of a policy of trying to make paper currency scarce. My recommended policy would make paper currency abundant, but give it a low rate of return because of its gradually increasing abundance. There is a sense in which this is like a helicopter drop of paper currency to those who hold electronic money without any helicopter drop of electronic money. So as long as electronic money provides the unit of account, this helicopter drop creates the good “inflation”–inflation relative to paper currency–without creating any of the  bad inflation–inflation relative to the unit of account, which in this case is the electronic Swiss franc. This careful targeting of having higher “inflation” where needed to eliminate the danger of people pulling money out of banks and shifting into paper currency without all the disruption of true inflation (relative to the unit of account) is a great virtue of going off the paper standard.  

I have some hopes that Reuters, and perhaps the Roubini group, have misunderstood what the Swiss National Bank intends–and that they, in fact, intend to move in the direction of what I have proposed. Indeed, I have a genuine hope that the staff at the Swiss National Bank has studied carefully the things I have written about eliminating the zero lower bound that are collected in “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.” And I am hoping to arrange a second visit (my first was on July 15, 2014) to the Swiss National Bank sometime in Fall 2016 to discuss different approaches to eliminating the zero lower bound.