This week I listened to Joseph Stiglitz's LSE lecture on the euro, and he mentioned digital currencies. This got me thinking about the possibilities for switching to a digital currency, and what that would mean for monetary, and fiscal policy and, more broadly, our economic system as a whole.

First, digital currency would remove all the burdens of physical capital. The government would no longer need to pay for the materials to print money or mint coins. That is no small amount. It already costs more to make a penny than the penny is worth. The US used over 10 million pounds of cotton to print money in 2009. It would also remove the need to inspect, retire and replace money. For businesses, it would mean that you no longer have to move cash from your store to the bank -- you wouldn’t even have to worry about having enough change or whether your employee gave the wrong change. For individuals, it would mean you could get paid easier and that you would never lose money or have the burden of change.

Digital currency would greatly increase the power of states to make more accurate policies. For instance, in the next large-scale downturn, it would enable you to easily use helicopter money, being able to send money to each citizen in an area for a local downturn or in the country for a recession. You could also incentivize spending by giving “cash back" on purchases. Similar to modern credit cards, you could pay citizens a percentage of their spending in order to help a stagnant economy. This would be fundamentally different from policies like interest rates which don’t incentivize spending; they only de-incentivize saving. You could also prevent capital flight by having controls on the amount that can be exchanged at any given time or by implementing something similar to the stock market's safety system. In the event that the amount leaving the country exceeds a certain value then the foreign exchange would stop for the day, or you could implement a system where you progressively exchange smaller and smaller percentages of the capital. For example, imagine that you have two parties who want to exchange $100 in their respective currencies. On a normal day they would be able to exchange their money, but under some conditions, they would be only able to exchange 85 or maybe just 10 of their dollars.

Another thing states could do with digital currencies is use smart contracts with banks. This could either be to create digital depositor's insurance, a contract that kicks into effect if a bank's capital hits zero, or a bank could just exist as a series of smart contracts with time deposits. It would also be possible that banks in their current form disappear, gone with the need to hold physical capital. Physical banks would be replaced by banks that you use not because of their branch locations, but because they employ the best full-time cyber security experts. The Federal Reserve could also use quantitative easing or money creation to pay the systems that process the block chain or other systems that process all of the transactions in the US economy.

The existence of a block chain would change our society. It would make illicit activity much more difficult. You could easily see the movement of money between persons or the history of those transactions. This means it could easily be entered into evidence in a court case. Just imagine what that would do to illicit drug sales, money laundering, prostitution or any other criminal activity. It also would make counterfeiting more difficult, because you are no longer trying to duplicate a physical item to fool the average person. You would have to trick a computer network continually updated by experts.Gangs would disappear quickly if it was no longer profitable to be an illicit entrepreneur.

Digital currency would make the job of tax agencies easier. The block chain would show all of the money that a person had made in a year and could be taxed incrementally, or could be on a gradient, based on how much you had made in a fiscal year. It would also make tax avoidance more difficult, because you would know all the times they have been paid, or paid their employees. It would also be able to see all the money a company had paid foreign firms. It would then know what percent of a company’s profits had been made in the US. You also could easily see transfers to document capital gains.

With all these benefits, what is stopping us from implementing a system like this? There would only be two problems with transitioning to a system like this, both of them caused by the size of the US economy. One trying to implement a computer system or series of computers that could handle the volume of transactions on a given day, and the arduous task of converting all of our physical capital to digital capital. Then you would also need to invest in a digital infrastructure to support all of this. So, is it a good idea? I think so. Is it feasible as the US economy stands? Not quite yet.