I had an interesting email Q&A about electronic money with a questioner who liked the idea of publishing it here, but asked to remain anonymous. 

Questioner: I just read your article in Slate on electronic money and negative interest rates. One question I had is, if interest rates go negative, what’s to prevent someone from borrowing an infinite amount of money?

For example, if a bank is offering -1% interest on a loan, what’s to stop me from borrowing $1 million, immediately repaying $990,000, keeping $10,000 in profit, and then immediately taking out another $1 million loan and doing the same thing over and over again? Perhaps you could put limits on the amount of money a single person could borrow, but it seems the limits would need to be much higher for corporations, and anyone could start dozens of corporations. It seems ripe for abuse. What’s to prevent this from happening?

Miles: Just like savers have to wait to get the benefits of positive interest rates, borrowers have to wait to get the benefits of negative interest rates. I would have to wait until a year later to have the $1 million I borrowed shrink to $990,000. What is also important, no one will give me a negative interest rate long term. They will only give me a negative interest rate for a few quarters during a serious recession. So I can’t just wait and wait until the amount I owe shrinks to nothing. If I have to wait a year to get the -1% and I only get one year, then the maximum shrinkage I can get, total, is 1%.  

Questioner: Why are negative interest rates easier to implement with electronic money than paper money?

Miles: It is easy to make numbers shrink in an electronic account. Paper currency has a number written on the front of it in ink, so (unless a bill has so much electronics in it that it is effectively an electronic account), the meaning of that unchanging number on the front has to change over time. What I propose is a changing exchange rate between paper money and electronic money (=bank money). And it is advantageous to use the electronic money as way all the accounting is done (“unit of account”).

Questioner: The Fed can make paper money less valuable by printing money, quantitative easing, etc. Conversely, they can make money paper more valuable by reducing the money supply. Is your argument that these levers are less efficient than electronic money?

Miles: Yes. All of those depend on making all forms of money less valuable. My proposal makes paper money temporarily less valuable than other forms of money when we need it to be and as much as we need it to be, with high precision. (See “A Minimalist Implementation of Electronic Money” and “How to Set the Exchange Rate Between Paper Currency and Electronic Money.”)