How to end boom and bust: make cash illegal
How to end boom and bust: make cash illegal
Comment: Forcing everyone to spend only by electronic
means from an account held at a government-run bank would give the authorities
far better tools to deal with recessions and economic booms, writes Jim Leaviss
By Jim Leaviss
1:28PM BST 13 May 2015
This story is part of our "Money Lab" series,
in which respected figures from the world of finance put forward controversial
ideas for improving our personal finances or the economy. We will publish this
story in print in "Your Money" this weekend along with the best
comments from readers, so have your say below
A proposed new law in Denmark could be the first step
towards an economic revolution that sees physical currencies and normal bank
accounts abolished and gives governments futuristic new tools to fight the
cycle of “boom and bust”.
The Danish proposal sounds innocuous enough on the
surface – it would simply allow shops to refuse payments in cash and insist
that customers use contactless debit cards or some other means of electronic
payment.
Officially, the aim is to ease “administrative and
financial burdens”, such as the cost of hiring a security service to send cash
to the bank, and is part of a programme of reforms aimed at boosting growth –
there is evidence that high cash usage in an economy acts as a drag.
But the move could be a key moment in the advent of
“cashless societies”. And once all money exists only in bank accounts –
monitored, or even directly controlled by the government – the authorities will
be able to encourage us to spend more when the economy slows, or spend less
when it is overheating.
This may all sound far-fetched, but the idea has been
developed in some detail by a Norwegian academic, Trond Andresen*.
In this futuristic world, all payments are made by
contactless card, mobile phone apps or other electronic means, while notes and
coins are abolished. Your current account will no longer be held with a bank,
but with the government or the central bank. Banks still exist, and still lend
money, but they get their funds from the central bank, not from depositors.
Having everyone’s account at a single, central
institution allows the authorities to either encourage or discourage people to
spend. To boost spending, the bank imposes a negative interest rate on the
money in everyone’s account – in effect, a tax on saving.
Faced with seeing their money slowly confiscated, people
are more likely to spend it on goods and services. When this change in
behaviour takes place across the country, the economy gets a significant
fillip.
The recipient of cash responds in the same way, and also
spends. Money circulates more quickly – or, as economists say, the “velocity of
money” increases.
What about the opposite situation – when the economy is
overheating? The central bank or government will certainly drop any negative
interest on credit balances, but it could go further and impose a tax on
transactions.
So whenever you use the money in your account to buy
something, you pay a small penalty. That makes people less inclined to spend
and more inclined to save, so reducing economic activity.
Such an approach would be a far more effective way to
damp an overheated economy than today’s blunt tool of a rise in the central
bank’s official interest rate.
If this sounds rather fanciful, negative interest rates
already exist in Denmark, where the central bank charges depositors 0.75pc a
year, and in Switzerland.
At the moment it’s easy for individuals to avoid seeing
their money eroded this way – they can simply hold banknotes, stored either in
a safe or under the proverbial mattress.
But if notes and coins were abolished and the only way to
hold money was through a government-controlled bank, there would be no escape.
Apart from the control over the economy, there would be
many other advantages of a cashless society. Such a system is much cheaper to
run than one based on banknotes and coins. Forgery is impossible, as are
robberies.
Electronic money is an inclusive and convenient system,
giving poor and rural sectors of an economy – where cash machines and bank
branches may be few and far between and not all people have accounts – a tool
for easy participation in the economy.
Finally, the “black economy” will be hugely diminished,
and tax evasion made all but impossible.
Jim Leaviss is head of retail fixed interest at M&G
Investments.
*Improved macroeconomic control with electronic money and
modern monetary theory, by Trond Andresen of the Norwegian University of
Science & Technology
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