Could killing cash save the global economy? If cash didn’t exist, there’d be nothing to stop economic policymakers bumping interest rates into negative territory, charging people for holding money in the bank. In today’s low-growth, low-demand world, perhaps that’s just the trick.
That’s the argument made by two influential economists in recent months. The first of these is Kenneth S. Rogoff, whose book The Curse of Cash has been doing the rounds of the financial press (his name may be familiar even to those who avoid discussions of monetary policy — he was one of two high-ranking economists behind the widely cited “Growth in a Time of Debt” study, whose computational errors were uncovered by three decidedly less influential economists in 2013). The second is Marvin Goodfriend, who this weekend made an aggressive argument for the use of negative interest rates at the Federal Reserve’s annual retreat at Jackson Hole. A corollary of his argument is the necessity of abolishing paper money. It’s an attraction that forms a central plank of Rogoff’s book as well.
Raising or lowering interest rates to stimulate or curb economic activity (“monetary policy”, in the jargon) is one of the most useful tools in economic policymakers’ arsenal. But it is also blunt and structurally imperfect. In periods of extended low growth, when nothing seems to get people to spend, if interest rates are below or near inflation, the options available to central banks rapidly diminish. Interest rates, after all, cannot go below zero. Or can they?
[Australia, mate, you’re doing interest rates all wrong]
Negative interest rates are not an entirely novel idea. The European Central Bank, Japan, Denmark, Sweden and Switzerland have, in recent months, been playing around with them; they charge commercial banks for their deposits with the central bank, rather than paying them interest for doing so, with the intention of encouraging the banks to lend money out for higher returns. The experience hasn’t always gone to plan, but it has defenders. “Negative rates work and are nothing extraordinary or immoral or absurd,” European Central Bank executive board member Benoit Coeure told The Wall Street Journal last week.
But as long as customers have cash, negative interest rates are only of limited use, as cash money cannot gain or lose its face value. Cash is a constant alternative to engaging in the interest-fuelled financial system.
Take away cash, and you take away this option. If money became entirely digital — a number in an account held in a small number of institutions licensed to hold such accounts — it couldn’t go anywhere. Couple it, as Rogoff suggests, with fees on large withdrawals, and the only way to avoid negative interest rates would be to spend, which is the what central banks aim for for when lowering interest rates.
The things that made today’s near-zero interest rates ineffective, Goodfriend said on the weekend, were unlikely to change. “Low long-term nominal interest rates today reflect underlying forces unlikely to dissipate any time soon … It is only a matter of time before another cyclical downturn calls for aggressive negative nominal interest rate policy actions.” In an extended period of low growth, a cashless society would not have to worry about the “lower bound” of interest rates, allowing policymakers to regain the effectiveness of monetary policy.
[Money, cash, whoa: Aussies won’t part with dollars and cents]
As for the technological change, Rogoff argues the time has come for governments to seriously consider a cashless society. He makes broader arguments too, reflective of the increasing frustration of many with cash. Cash has always been a risk for businesses — something they have to collect, guard and deposit (or have picked up). For law enforcement, cash is a nightmare. It enables criminal spending and money laundering, which would be a damn sight harder in a world where all transactions were tracked.
And the cashless society is a favourite topic of a wide range of both fintech startups and more established financial institutions, which are quickly developing ever more convenient, simple ways for people to pay for things without ever touching money. The idea has some political support in Australia — Liberal Alex Hawke has written that the shift to a cashless society will “lead to countless benefits for all Australians in convenience and security, and will save billions in transaction costs every year”.
It’s not that cash has no defenders. A cashless society is problematic for anyone who wants to preserve privacy. Those who’ve lived through natural disasters can also testify to the advantages of cash (good luck buying food, or anything really, if you can’t access the internet for a few days). Cash provides something digital currency does not — the ability to spend spontaneously with little concern of the consequences or the paper trail.
A $5 note dropped into a homeless person’s hand is a simpler transaction than an exchange of bank details. Children can be trusted with petty cash more easily than ATM cards. Among friends, it’s easier to split a bill with … well, bills. In its simplicity, cash can be exchanged between people as easily as it can be exchanged between people and businesses.
But is this enough in its favour? Maybe the citizens of Western democracies will rally against any attempts to abolish, or weed out, the cash they’re accustomed to. But in most recent instances in the Western world, the concerns of civil libertarians have, for the most part, not been effective in convincing citizens to turn from convenience. Powerful forces are increasingly advocating getting rid of cash. Some economists are joining them.
Excellent article and very important service to develop a meaningful discussion around cash and the role it plays in society. Aside from the monetary policy issues outlined in this article, there many other reasons why Australia should focus on a cashless society, not least of which is to remove a rich source of corruption in a number of industries. A start would be to remove the $20, $50 and $100 notes from circulation. This would make it a lot harder for individuals to carry their paper bags of corruption! I have been blogging on my year without cash at https://rhkirby.wordpress.com/
That’s a fascinating exercise Robert. Will check back to see how your trip to Europe goes.
Interesting blog Robert. You make the point that it cost you $2.50 to take cash out of an ATM. You seem to gloss over that every bill I pay with a credit card has a charge attached to it, yet concentrate on the $2.50 fee for a bank transaction, which you could easily avoid and/or you can withdraw $1000 rather than just $60 at a time. You rightly point out that it is more expensive for a business to handle my cash, yet fail to mention that they pass on a charge for paying in other than cash.
Droplet has been withdrawn which isn’t good omen for cashless.
You’re doing the fascists work for them. This is one of the arguments for a cashless but moneyed society. It is a stupid one because they can just launder their wealth in ways the poor can’t. Were you even paying attention to the Panama Papers? Up yours, dude.
And let’s face it, if you’ve done nothing wrong you’ve got no reason to have jitters about the all-powerful security state controlling your access to your money along with everything else, right?
Cashless society….pfah! The latest in a very long line of absurdities coming down the pipeline.
I use cash very infrequently. Well actually it’s perhaps twice a week at a local bakery which doesn’t take EFTPOS or credit cards. And it’s only a $15 transaction anyway.
I use a credit card whenever I can. On a recent trip to Switzeland I was able to pay for small purchases such as public transport and in shops easily with one. No bother with notes or coins.
But if cash is abolished and there’s a risk of negative interest rates I can see that some people would, instead of putting their savings under the bed, buy gold bullion.
Hmmm… Perhaps it’s time for me to buy gold?
Gold is risky. Better to buy US dollars. That is where European money flees in a depression.
My thought was everyone could just buy Bitcoin. But then I remembered its wildly fluctuating price and figured most people’s currencies were a far safer bet, negative interest rates or not https://www.coinbase.com/charts?locale=en
I think there are 2 issues here. One is currency (such as AUD, GBP, USD and Bitcoin) this can be traded. The other is cash which is a physical manifestation of currency. Technology is rapidly changing the way we use currencies and cash is becoming a very small part of the money supply – which is why you have to wonder why people carry large wads of $100 notes? Sinister reasons no doubt as it isn’t related to ease of payment.
And there are robberies from bitcoin banks
And black markets using Bitcoin.
What happens when the electricity is off or the internet down? Will all commerce cease?
Seems like a perfect target for terrorists to bring economies to their knees.
Would any tradie work in a cashless economy?
Brilliant !
Good one Myriam
A good article but cashless society would be the death of many things, not just cash. Anonymity in spending is still important to some of us. Flexibility is key too. The ravenous gouging of companies demanding you pay to use a credit card when paying bills, in spite of it being far cheaper for them to be paid via credit card than cash is just one example of the distortions possible in a cashless society. This could go so pear shaped, and the proselytisers are naive in thinking that there is only ‘blue sky’ in the idea with no down side. As citizens, the police state would become complete with a cashless society.
It’s a mindless solution to an extant problem, that being that monetary policy is now largely ineffective. I’ve got a better solution, how about effective government!
I’m already considering taking all my money out of the bank anyway. What do banks do exactly if they have no depositors, or is that a stupid question? Whose money do they lend out?
Very good points! Hence we need to have a healthy debate. I accept that cashless societies could lead to greater unwanted scrutiny, but I also object to corruption in all its forms as evidenced by deliberate manipulations of the AUSTRAC reporting limits, the use of cash in certain industries for money laundering or tax evasion, etc. The way merchants ignore the costs of using cash in setting surcharges for card transactions is also due to the fact that the large ones can get away with it, although the regulators are starting to clamp down. Better government is the answer as this will lead to greater protections of our rights, instead of knee-jerk legislation that overrides our privacy. Cash is NOT the answer – but part of the problem.
The death of cash to me spells one of the more significant signs of the death of humanity – you can’t consider this issue from a simplistic lens. Whilst I openly acknowledge the corrupting forces behind cash transactions, multinational companies still avoid tax regardless. To live in a cashless society is to live in a society where all your consumptive impulses can be traced and manipulated – a complete embrace of conspicuous consumption as both the means and the end.