Driverless Money

Bank of England, Bitcoin, driverless cars, NGDP targeting, monetary policy


Last week I happened to be contemplating a post having to do with driverless cars when, wouldn't you know it, I received word that the Bank of England had just started a new blog called Bank Underground, the first substantive post on which had to do with — you guessed it —  driverless cars.

As it turned out, I needn't have worried that Bank Underground had stolen my fire.  The post, you see, was written by some employees in the Bank of England's General Insurance Supervision Division, whose concern was that driverless cars might be bad news for the insurance industry.  The problem, as the Bank of England's experts see it, is that  cars like the ones that Google plans to introduce in 2020 are much better drivers than we humans happen to be — so much better, according to research cited in the post, that  "the entire basis of motor insurance, which mainly exists because people crash, could … be upended."  Driverless cars therefore threaten to "wipe out traditional motor insurance."

It is of course a great relief to know that the Bank of England's experts are keeping a sharp eye out for such threats to the insurance industry.  (I suppose they must be working as we speak on some plan for addressing the dire possibility — let us hope it never comes to this — that cancer and other diseases will eventually be eradicated.)  But my own interest in driverless cars is rather different.  So far as I'm concerned, the advent of such cars should have us all wondering, not about the future of the insurance industry, but about the future of…the Bank of England, or rather of it and all other central banks.  If driverless cars can upend "the entire basis of motor insurance," then surely,  I should think, an automatic or "driverless" monetary system ought to be capable of upending "the entire basis of monetary policy" as such policy is presently conducted.

And that, so far as I'm concerned, would be a jolly good thing.

Am I drifting into science fiction?  Let's put matters in perspective.  Although experiments involving driverless or "autonomous" cars  have been going on for decades, until as recently as one decade ago the suggestion that such cars would soon be, not only safe enough to replace conventional ones, but far safer, would have struck many people as fantastic.  Consider for a moment the vast array of contingencies such a vehicle must be capable of taking into account in order to avoid accidents and get passengers to some desired destination.  Besides having to determine correct routes, follow their many twists and turns, obey traffic signals, and parallel park, they have to be capable of evading all sorts of unpredictable hazards, including other errant vehicles, not to mention jaywalkers and such. The relevant variables are, in fact, innumerable.  Yet using a combination of devices tech wizards have managed to overcome almost every hurdle, and will soon have overcome the few that remain.

All of this would be impressive enough even if human beings were excellent drivers.  In fact they are often very poor drivers indeed, which means that driverless cars are capable, not only of being just as good, but of being far better — 90 percent better, to be precise, since that's the percentage of all car accidents attributable to human error.

Human beings are bad drivers for all sorts of reasons.  They have to perform other tasks that take their mind off the road; their vision is sometimes impaired; they misjudge their own driving capabilities or the workings of their machines; some are sometimes inclined to show off, while others are dangerously timid.  Occasionally, instead of relying on their wits, they drive "under the influence."

Central bankers, being human, suffer from similar human foibles.  They are distracted by the back-seat ululations of commercial bankers, exporters, finance ministers, and union leaders, among others.  Their vision is at the same time both cloudy and subject to myopia.  Finally, few if any are able to escape altogether the disorienting influence of politics.  The history of central banking is, by and large, a history of accidents, if not of tragic accidents, stemming from these and other sorts of human error.

It should not be so difficult, then, to imagine that a "driverless" monetary system might spare humanity such accidents, by guiding monetary policy more responsibly than human beings are capable of doing.  How complicated a challenge is this?  Is it really more complicated than that involved in, say, driving from San Francisco to New York?  Central bankers themselves like to think so, of course — just as most of us still like to believe that we are better drivers than any computer.  But let's be reasonable.  At bottom central bankers, in their monetary policy deliberations, have to make a decision concerning one thing, and one thing only: should they acquire or sell assets, and how many, or should they do neither?  Unlike a car, which has numerous controls — a steering wheel, signal lights, brakes, and an accelerator — a central bank has basically one, consisting of the instrument with which it adjusts the rate at which assets flow into or out of its balance sheet.  Pretty simple.

And the flow itself?  Here, to be sure, things get more complicated.  What "target" should the central bank have in mind in determining the flow?  Should it consist of a single variable, like the inflation rate, or of two or more variables, like inflation and unemployment?  But the apparent complexity is, IMHO, a result of confusion on monetary economists' part, rather than of any genuine trade-offs central bankers face.  As Scott Sumner has been indefatigably arguing for some years now (and as I myself have long maintained), sound monetary policy isn't a matter of having either a constant rate of inflation or any particular level of either employment or real output.  It's  a matter of securing a stable flow of spending, or Nominal GNP, while leaving it to the marketplace to determine how that flow breaks down into separate real output and inflation-rate components.  Scott would have NGDP grow at an annual rate of 4-5 percent; I would be more comfortable with a rate of 2-3 percent.  But this number is far less important to the achievement of macroeconomic stability than a commitment to keeping the rate — whatever it happens to be — stable and, therefore, predictable.

So: one goal, and one control.  That's much simpler than driving from San Francisco to New York. Heck, it's simpler than managing the twists and turns of San Franscisco's  Lombard Street.

And the technology?  In principle one could program a computer to manage the necessary asset purchases or sales.  That idea itself is an old one, Milton Friedman having contemplated it almost forty years ago, when computers were still relatively rare.  What Friedman could not have imagined then was a protocol like the one that controls the supply of bitcoins, which has the distinct advantage of being, not only automatic, but tamper-proof: once set going, no-one can easily alter it. The advantage of a bitcoin-style driverless monetary system is that it is, not only capable of steering itself, but incapable of being hijacked.

The bitcoin protocol itself allows the stock of bitcoins to grow at a predetermined and ever-diminishing rate, so that the stock of bitcoins will cease to grow as it approaches a limit of 21 million coins.  But all sorts of protocols may be possible, including ones that would adjust a currency's supply growth according to its velocity — that is, the rate at which the currency is being spent — so as to maintain a steady flow of spending, à la Sumner.   The growth rate could even be made to depend on market-based indicators of the likely future value of NGDP.

This isn't to say that there aren't any challenges yet to be overcome in designing a reliable "driverless money."  For one thing, the monetary system as a whole has to be functioning properly: just as a driverless car won't work if the steering linkage is broken, a driverless monetary system won't work if it's so badly tuned that banks end up just sitting on any fresh reserves that come their way.  My point is rather that there's no good reason for supposing that such challenges are any more insuperable than those against which the designers of driverless cars have prevailed.  If driverless car technology has managed to take on San Francisco's Lombard Street,  I see no reason why driverless money technology couldn't eventually tackle London's.

What's more, there is every reason to believe that driverless money would, if given a chance, prove to be far more beneficial to mankind than driverless cars ever will.  For although bad drivers cause plenty of accidents, none has yet managed to wreck an entire economy, as reckless central bankers have sometimes done.  If driverless monetary systems merely served to avoid the worst macroeconomic pileups, that alone would be reason enough to favor them.

But they can surely do much better than that.   Who knows: perhaps the day will come when, thanks to improvements in driverless monetary technology, central bankers will find themselves with nothing better to do than worry about the future of the hedge fund industry.


  1. You are right George that the benefits of driverless monetary systems vastly outweigh those of driverless cars.

    What you didn’t mention is that the title of that same blog article refers to being “asleep at the wheel” – which more than just a metaphor of their historical and current performance.

    Some things you just can’t make up!

    You look forward to the day when central bankers worry about things like hedge funds. I look forward to the day when they worry about central bank trivia – the insurance implications of driverless cars would have been a great example except that they appear to be doing that already.

    But what I really look forward to is the day when our central bankers are worried about getting another job.

    1. "What you didn’t mention is that the title of that same blog article
      refers to being “asleep at the wheel” – which more than just a metaphor
      of their historical and current performance."

      Very true; let it never be said that I lack a capacity for mercy.

  2. Great post, George. I am a huge fan of driverless cars and can't wait for that reality. I am of course a huge fan of NGDPLT as well. The similarity between my passions never dawned on me before!


    1. Thanks, Ken–I'm glad you appreciate the parallel. The case for driverless cars is indeed based largely on many of the same arguments that favor monetary rules over monetary discretion. The key difference is, as I've argued, that in the case of cars replacing discretion with superior rules represents a far _greater_ technological challenge!

      1. The parallel is self-evidently convincing and you are right that the tech challenge with driverless cars is greater (although we mustn't underestimate the automatic control issues involved with an automatic monetary policy; lets discuss that later).

        But what gets me just now is simply this: why on Earth is the UK central bank worried about the impact of driverless cars on the UK insurance industry? Yeah, so insurance companies go bankrupt and the rest of us rejoice at much lower insurance premia: goodness knows, they are high enough.

        Of course, one might argue that this becomes the Bank's concern because it falls under the PRA's remit but that hardly suffices. By this logic, they would have worried about every single technological advance since the Bank was set up in 1694, provided only that it had somehow made its way, however bizarrely and unconvincingly, to become its own concern: doubtless, they would then have tried to block it too. For example, 150 years ago, the downsizing of the candle industry would have been a concern too, had Parliament thought fit to make it so. Fortunately, they didn't.

        There are also more than one or two BIG issues out there – the risks to the Eurozone, the weakness of European banks, Ukraine, MidEast, China, etc etc. and yet the Bank of England's official position is that the risks to financial stability are low.

        But on further reflection, I take it all back: goodness knows how they would handle those.

        Memo to the Bank of England, great blog, please do focus on driverless cars, very important issue, etc.

        1. The Bank of England does monetary policy and some kind of regulatory oversight over the finance industry.

          The latter legitimately includes worrying about insurance companies.

          Whether the two functions should be discharged by the same institution in the first place is another discussion.

  3. ""It's a matter of securing a stable flow of spending, or Nominal GNP, while leaving it to the marketplace to determine how that flow breaks down into separate real output and inflation-rate components.""

    From the Graham, Fisher, Douglas, et al 1939 Program for Monetary Reform

    The following suggested monetary program is put forth not as a panacea or even as a full solution of the depression problem. It is intended to eliminate one recognized cause of great depressions, the lawless variability in our supply of circulating medium ..""

    How to do that … eliminate the cause for economic disruptions, however defined???
    Driverless ? Uh -Uh. Nope.

    Driverless = Lawlessness ….. when it comes to money.
    What we have today is either 'driverless' money, or an acceptance, through this endogenous 'Bankers Money School, of the driver being banker-greed.

    There seems agreement over time among conservative and progressive political-economists that stability in money supply growth is needed to achieve national GDP-potential without adding price inflation.

    There will-must always be a 'driver' to monetary expansion …… the question is whether it should be lawless-greed, or macro-economic (GDP) NEED. If its NEED, we solve for the instability inherent in endogenous money.
    For the Money System Common.


    1. Private provision of money will solve that. (And can be built on top of the driverless high powered money.)

      George Selgin has written a lot about this already.

      1. Thanks for clarifying the perceived private money outcomes.
        Please fill in the few details of the private money solution?

        This is the private money system hat we have now – it is the cause of the problems of excessive debt and socio-economic inequality in the national economy, among others. Bankers Money issuance is also the problem itself,
        being institutionally founded on the private bankers method of creating and issuing money via a debt contract between the issuing bank and any borrower.

        That specific money-issuance power is not necessary nor desirable to what is essentially a credit-debt transaction – again between a credit-issuing banking institution and someone in need of credit. That bank-borrower relationship would stay the same, as would all bank lending procedures.

        The private issuance of debt-based money is a problem that requires a systemic solution. – the issuance of non-debt based money.

        Under the public money solution, that money issuance' formerly provided by the loan contract terms comes instead via the spending of, by and for the government, on approved Budgeted expenses. All new money that is created thus enters general circulation.

        So, just like now, the Congress determines where the money in its national budget, and only its budget, is spent. So, no big deal there. No change on spending.

        And on the income side of the Budget, authorizations for ‘receiving‘
        the money-issuing seigniorage gain are based in the powers of the law as administered by the monetary authority. See, as in Kucinich –

        All new money will be issued by the government, for the public’s purpose, as authorized by the Congress, like the Constitution says.

        So, that’s the public money side on why we need to call for a national monetary commission where a proper inquiry into the failures of this monetary system can be made and where all options for a new
        money system most appropriate can be considered.

        I am sure that Dr. Selgin’s writings on this topic are not quite aligned to the public money option, and just as sure that they will be very well made in contrast, always. I trust he might enjoy the opportunity to do so enough that he might support the national monetary commission call.


        For the Money System Common

        1. Sorry, that was quite the misunderstanding. Most countries, including the US, have government issued notes and coins. (But privately supplied checkable bank deposits albeit heavily regulated.)

          By privately provisioned money, I meant the kind of notes that Canada and Scotland etc had during their free banking episodes. George Selgin wrote a lot about those. Very interesting.

          I don't care much about American shenanigans, apart from an academic curiosity, so can't comment on your suggestions for their Congress. But you seem to have confidence that adding more government will makes things better.

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  5. George,

    Just out of curiosity, why a 2/3% NGDP growth target and not the productivity norm that you've been advocating for a while?
    Harder to implement?

    Other (admittedly very hypothetical) option: a cryptocurrency that automatically alters its supply depending on money demand, mimicking a free banking system.


    1. They are the same. 2-3% is a rough estimate of the trend rate of total factor input growth. If spending grows at that rate, prices will decline at the TFP growth rate.

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