The monetary policy of last resort is to get rid of the old money and start a new one. "Currency reform".

I can just remember this policy being mooted in the 1970's. What happens if tightening monetary policy fails to break entrenched inflationary expectations and an ever-increasing inflationary spiral? It was the ace in the back pocket. Not to be played unless all else had failed.

Today's problems are the exact opposite of the inflationary 1970's. But the solution — the monetary policy of last resort — might be the same. If you can't loosen monetary policy to break entrenched disinflationary expectations, then maybe it's time to think about currency reform.

The 1970's problem was that people had too little belief in the value of the currency. Real goods looked good in comparison. Today's problem is that they have too much belief in the value of the currency. Real goods look bad in comparison.

It's easier to think about currency reform in the Eurozone. In fact, currency reform is probably coming, whether anyone wants it or not. Eurozone governments and banks that cannot pay their obligations in Euros may end up paying their obligations in a scrip that is not pegged to the Euro. A scrip issued by each national government that is worth whatever people think it is worth. And if people start using that scrip as a medium of exchange, and medium of account, it becomes a new money. Sure, Greek supermarkets might prefer payment in Euros, but if their customers can only pay in New Drachmas, then it's either accept New Drachmas or let the vegetables rot on the shelves. And the supermarkets' suppliers might prefer payment in Euros, but it's either accept New Drachmas or let the vegetables rot in the fields. And the workers picking the vegetables might prefer payment in Euros, but it's either accept New Drachmas or nothing.

In the Eurozone, if pessimists like me turn out to be right, currency reform will happen volens nolens. Though it would probably be better if governments recognised the inevitable, and adopted currency reform sooner rather than later.

It's harder to envisage currency reform in countries like the US or Japan.

What's the point of introducing a New Dollar or a New Yen? How can a change in names, a purely nominal change, make a difference? Well, money is a nominal variable. If purely nominal changes didn't make a difference, we wouldn't be needing to have this discussion about monetary policy, now would we?

When a company's brand starts to convey the wrong image, it may be hard to change the image. Sometimes it's better to scrap the old brand and start a new one.

But how exactly does a government scrap the old money? It's not as obvious as it sounds. How can it stop people measuring prices in "old" dollars, and using old dollars for their shopping? (It's easier in the case of hyperinflation, when the old money is already heading for extinction anyway).

First, the government starts doing its own shopping in New Dollars. The government is a big shopper. Just as we tend to use the same language as those around us are using, so we tend to use the same money as those around us are using.

Second, the government stops enforcing new contracts requiring payment in old dollars, and lets old contracts be paid in New Dollars.

Third, the government stops making change in old dollars. The reason a $20 bill is worth two $10 bills is that the central bank is willing to convert one into the other. And that mutual convertibility makes $20 bills and $10 bills fungible and easy to use as money.

Fourth, as a final resort, stop enforcing laws against counterfeiting old dollars.

It's entirely possible (as long as counterfeiting is not a big issue) that the old dollars could retain their value, and continue to be held. If so, they might even rise in value against the New Dollar. That's not a problem. People hold antique furniture, and old masters too, and they may rise in value too. But a rising demand to hold antique furniture or old masters does not cause a recession, unless people start using antique furniture and old masters as a medium of exchange (because then people stop buying other goods because they don't want to spend their stocks of antique furniture and old masters). Who cares if old dollars become a new gold — continuing as a store of value but defunct as a medium of exchange?

It's no good introducing a new beer with a new name if people think the new beer is going to taste the same as the old beer. So sure, announce a new monetary policy regime, like price level path targeting, or NGDP level path targeting, at the same time as you change the name of the currency. But the nominal nominal change matters, probably more than the real nominal change. You need a new focal point for people's expectations to coalesce around. So you had better give it a new name.

Just back from four days in another world at a friend's cottage. Read the news, got depressed, then wrote this.