The case for retiring another ‘barbarous relic’ - Cash
August 23, 2015 7:03 pm
The case for retiring another ‘barbarous relic’
Could a world without cash make for a much-improved
economy?
The fact that people treat cash as the go-to safe asset
when banks are teetering is heavy with historical irony. Paper money was once
the symbol of monetary irresponsibility. But even as individuals have taken
recent crises as reasons to stock up on banknotes, authorities would do well to
consider the arguments for phasing out their use as another “barbarous relic”,
the moniker Keynes gave to gold.
Already, by far the largest amount of money exists and is
transacted in electronic form — as bank deposits and central bank reserves. But
even a little physical currency can cause a lot of distortion to the economic
system.
The existence of cash — a bearer instrument with a zero
interest rate — limits central banks’ ability to stimulate a depressed economy.
The worry is that people will change their deposits for cash if a central bank
moves rates into negative territory. The Swiss, Danish and Swedish central
banks have pushed rates lower than many thought possible; but most policymakers
still believe in an “effective” lower band not far below zero.
With a recovery under way in most rich countries this may
seem academic. The talk is now of when to raise rates. But the fear of the
lower band is still causing damage. The dominant argument for beginning the
tightening cycle is to have enough “ammunition” for a new stimulus when the
next downturn comes. Removing the lower band would leave central banks well
equipped to deal with a slowdown even from near-zero starting points.
The second feature of cash is that, unlike electronic
money, it cannot be tracked. That means cash favours anonymous and often
illicit activity; its abolition would make life easier for a government set on
squeezing the informal economy out of existence.
It is in this spirit that Kenneth Rogoff, the former
chief economist of the International Monetary Fund, has argued in these pages
for abolishing high-denomination banknotes such as the €100 and €500 notes.
Electronic money also permits innovations to reward
law-abiding businesses. Value added tax, for example, could be automatically
levied — and reimbursed — in real time on transactions between liable bank
accounts. Countries that struggle with tax collection could go a long way in
solving their problems by restricting the use of cash. Greece, in particular,
could make lemonade out of lemons, using the current capital controls to push
the country’s cash culture into new habits.
The technological and practical obstacles for not using
cash have largely disappeared. In Scandinavian countries, cards are regularly
used even for tiny transactions. Sweden reached “peak cash” almost a decade
ago: the amount of currency in circulation has shrunk by more than a quarter
since 2007, even though the population and economy are both larger.
The anonymity that cash uniquely affords is, however, an
argument for keeping it as well as for abolishing it. It is not only criminals
and money launderers who prefer cash. Especially in the post-Snowden era, many
ordinary citizens legitimately want the option of not leaving digital
footprints.
Fortunately some benefits of electronic money can be
reaped without banning all cash outright. Cash could remain accessible but at a
cost, so that its users pay for the privilege of anonymity — and remain
affected by monetary policy. Dated banknotes could see their value as legal
tender gradually fall over time; banks could be charged for swapping electronic
reserves for physical cash and vice versa. The benefits of cash are significant
— but they need not be offered for free.
Copyright The Financial Times Limited 2015.
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