The future of money
By Scott Sumner
Commenter Ted asked me the following question:
What will money look like in 100 years? In 1,000 years? In 10,000 years?
I’m no more able to answer that question that a citizen of the Holy Roman Empire (or a Mesolithic human) would be able to describe our current monetary system. So I’ll try to answer an easier (but still quite difficult) question:
What will money look like in 50 years? In 100 years? In 200 years?
My current views on monetary policy are quite unconventional. My belief that these views are true can be seen as an implied prediction that the policies will eventually be seen as conventional, and thus will be adopted.
In 50 years:
In 50 years, I expect something like NGDP targeting, level targeting. I expect the Fed will be willing to sell short unlimited NGDP futures contracts at a price implying 5% NGDP growth, and buy unlimited NGDP futures contracts at a price implying 3% NGDP growth. Interest rate targeting will no longer be needed, rather the New York Fed will be instructed to adjust its balance sheet (and/or interest on reserves) in a way that avoids having the Fed take a risky position on NGDP futures.
I see a 50-50 chance that paper currency will have been abolished.
In 100 years:
It is extremely likely that paper currency will have been abolished by 2119. The Fed will allow private citizens to have checking accounts at the Fed. This is because it’s unthinkable to have a monetary system where ordinary people cannot hold base money.
The Fed will use AI to determine the optimal target for monetary policy. This target will be similar to NGDP, but not identical. NGDP will be estimated on an hourly basis, as “big data” will provide the Fed with near real time access to aggregate nominal spending on goods and services, as well as nominal domestic income.
In 200 years:
Currency zones will no longer coincide with nation states. There are two possible models that could replace national money, the Eurozone and China. In the Eurozone, 19 countries share a single currency. In China, there are three currencies (four if you include Taiwan) in a single country. I don’t have strong views on which model will win out, but it seems highly unlikely that currencies will continue to coincide with national boundaries, that far out into the future. Instead, currency zones will typically cover areas that are either larger or smaller than nation states—perhaps both. What possible logic would there be for the current set-up, in a world likely to be radically different from today?
Surprisingly, I believe that wage/price stickiness will continue to be a problem in the year 2219.
I am not at all confident about any of these predictions, except for the eventual decline of paper currency.