Helicopter money is widely discussed as a possible monetary policy instrument to counter an economic downturn resulting from the corona virus crisis. Here is a summary of chances and risks of this concept:
The term „helicopter money“ originally refers to the distribution of paper money by “helicopters”[1] in order to increase the purchasing power of the population and to produce a “repressive” effect in crisis situations of a credit money system. The term helicopter is a synonym for broad and random. The distribution is neither benefit-oriented nor do most proposals require anything in return for receiving money. However, a government may claim that it uses helicopter money “for the benefit” of all. This could be the case, if there are temporary disruptions in the creation of new credit money and negative multiplier processes threaten to result in a sustained dismantling of economic structures and harmful individual hardship. However, it is difficult to know in advance, whether simply providing purchasing power is sufficient to compensate for losses deriving from a deflationary spiral. It may well be that strengthening the supply side – for example, through tax refunds – could be more effective for maintaining supply structures. In such a structure the term “helicopter money” might be inappropriate.
It does not matter whether a government distributes helicopter money as paper money or credits citizens’ bank accounts. Both require an accounting transaction in the central bank balance sheet. Paper money is a liability of the central bank which, according to the rules of double-entry bookkeeping, must be offset by a counterpart on the asset side of the balance sheet. Similar effects would arise if citizens’ bank accounts are credited. It would be conceivable to book a very long-running non-interest-bearing claim against the state. In return, the state would receive paper money or credits in bank accounts, which could then be distributed. An absence of money due to economic disruptions would be compensated by such a central bank loan and the compensation would be spread over a very long period of time and could be diluted by longterm inflation. If helicopter money shall not to be visible as additional government debt, this would require major changes in the government finances. If a resulting national debt shall be visible, it would have to become clear to what extent an economic damage is effectively compensated through an efficient distribution of such helicopter money. If this stays in doubt and the intrinsic value of money is considered to be decreasing the incentive to provide goods and services for money is usually reduced.
The idea of simply printing paper money and distributing it directly without booking a counterclaim would make it necessary to decouple the cash concept from the credit money system and to set it up in a completely different way as is currently regulated by law. If helicopter money shall no longer be a claim against a central bank or against any other balance sheet, it is probably just paper, and there may be little willingness to provide goods and services for its receipt in the long run.
The population’s desire for more and more helicopter money would have to be countered by high hurdles and appropriate justifications. The principle of exchanging performance against counterperformance could be endangered. The risk that foreigners would not want to exchange their products for a diluted money would have to be taken into account. It is most likely that the competitiveness of a society which has money with a low intrinsic value will be harmed. However if a restoration of the sustainable intrinsic value of money is pursued and interest rates subsequently rise through market processes, these risks should decrease.
Negative interest rates are intended to enforce economic activity. But, they put pressure on banks’ equity. If, like in the case of a natural disaster, economic activity is not possible at all, negative interest rates, which in the first phase reduce the monetary base would accelerate deflation and thus be counterproductive. In very critical phases, helicopter money could have a much more stabilising effect.
[1] The author of the term helicopter money is Milton Friedman, The Optimal Money Supply and other essays, Verlag Moderne Industrie 1970
Leave a Comment