The transition to an electronic currency is coming sooner rather than later and will allow the Fed to use more policy tools and exercise greater flexibility.
The debate over dollar bill or dollar coin is over. Dollar coins are heavier and have a higher cost of manufacturing but have a significantly longer lifespan. For that reason many countries like Canada use dollar coins. Once upon a time it made sense for U.S. treasury to use dollar coins instead of the familiar dollar bill. However, this is no longer the case. According to the Wall Street Journal columnist Jo Craven Mcginty “Now, the lifespan of paper money has increased, the bulk of the potential savings has been forfeited and the U.S. Federal Reserve, which once supported the change, is against it.” Any potential gains from transitioning to a coin are lost. The longer lifespan of a dollar is reflective of the changes in technology and consumer preferences. The transition to an electronic currency is coming sooner rather than later and will allow the Fed to use more policy tools and exercise greater flexibility.
The opportunity cost of currency is very high. There are tons of electronic wallets and payment systems available. The movement away from cash is complex and it is not fully explained when one says American’s just plain do not like cash. There is an abundance of options to carrying money in your wallet. It seems like almost every day a new startup releases a new wallet or payment system. Applications and credit cards have been making carrying and empty wallet convenient for years and now applications take it a step further. For example taxis have credit card scanners or come from applications like Uber and if you owe your friend money just use Venmo. People like the convenience of quickly swiping a card or hitting a few buttons on their phone. It is an argument of tastes and preferences and cash is losing.
Governments stand to gain substantially from an electronic currency as well. Electronic money is easier to track allowing the government to better understand the velocity of money, spending patterns and the effectiveness of monetary policy. This increased knowledge and understanding will help guide monetary policy on multiple fronts.
The Fed does not use all the tools at their disposal for a few reasons. In the case of quantitative easing the implications of the policy are not fully understood but with negative interest rates the limiting factor is policy structure. Negative interest rates at this point in time have been largely theoretical, but have the possibility of substantial policy implications. Once the zero lower bound is removed Obama and Janet Yellen can fully utilize the powers of the Federal Reserve and negative interest rates. Applications and credit cards are not going away any time soon but cash could be.