Hail Fischer Black!

Twitter engineer Alex Payne made news today by announcing that he is leaving Twitter to co-found a bank, called banksimple. The new bank is supposedly focusing on simplicity and transparency: there are no fees, you can deposit checks by uploading a picture of them, the website is nice and clear, etc. That’s great and all, but I got really excited when I looked into the bank a little more. One of the things they claim on their About page is “No overdraft fees.” Further down the page it says, “We will launch later this year with a simple card with in built checking, savings, rewards and a line of credit.”

If I am interpreting their claims correctly, it seems that every checking account will be linked with a line of credit, and there are no fees for switching between a positive and a negative balance. This is a large step toward making Fischer Black’s famous article, Banking and Interest Rates in a World Without Money, a reality. Black imagines that everyone has a single account at a bank. At the end of each month, if your average balance was positive, they pay you interest. If your average balance was negative, they charge you interest.

The interesting aspect of this world is that if most payments are made by check or electronic transfer, there is no reasonable definition for the quantity of money. Gross deposits are not the quantity of money, because this makes an arbitrary distinction between positive and negative balances. The net value of bank accounts is not the quantity of money, since they will equal (by an accounting identity) the capital of the banking sector. That’s not too useful. If there is no quantity of money, then a lot of what we know about macroeconomics breaks down. There is no quantity theory of money, and there is no liquidity preference theory. “Monetary policy” is powerless. This goes to show how much of monetary macroeconomics is completely dependent on particular institutions and legal restrictions.

I would like to live in a world with the simple kind of Fischer Black-style banking, so I hope that banksimple takes off and works the way I expect it to. Even if it doesn’t, I think that the next few decades are ripe for changes in how we think about money; Black’s influence is likely to grow. If you haven’t yet read Business Cycles and Equilibrium (which contains a reprint of Banking and Interest Rates in a World Without Money), do it soon.