Ed Conway in the Times endorses Ken Rogoff's suggestion (pdf) that we should abolish cash. This seems to me completely infeasible, in at least three different ways:
- It is a grossly illiberal measure - the banning of capitalist acts between consenting adults, to use Robert Nozick's expression. I can't see voters tolerating this, especially as the move would be a means (pdf) of imposing a tax upon bank deposits: negative interest rates are analogous to a tax.
- Some 700,000 people don't have bank accounts. Many more use cash as a means of controlling how much they spend. For these, a cash ban would be a massive inconvenience.
- It wouldn't work. As John Cochrane says, people could get round the ban (and avoid the inconvenience of negative rates) by various measures such as buying gift cards or prepaying taxes and utility bills.
Despite all the talk of the growth of virtual currencies and digital payments, cash remains popular: notes and coins in circulation have been growing steadily for years, suggesting that the public has a use for them.
Banning cash, therefore, strikes me as one of the most impractical ideas I've heard - and seeing as I was a teenage Trot, that's a big claim.
Now, when intelligent men have silly ideas, ideology is often to blame. And it's not hard to see the ideology in this case. The main argument for banning cash (other than to inconvenience tax-dodgers, which is no stronger an argument now than it has been for years) is to facilitate sharply negative interest rates. But if you want to stimulate the economy - which might be a more pressing requirement come the next downturn rather than now - there's an obvious alternative: looser fiscal policy.
The only reason to suggest something as outlandish as banning cash is that you believe this alternative to be impossible.
Now, I don't believe this for a moment. In our world of negative real interest rates and a shortage of safe assets a bond-financed fiscal expansion is possible. And if it isn't, a money-financed one - a helicopter drop if you like - would be. Surely, either of these are more politically feasible than a ban on cash. To believe otherwise - given the difficulties of the latter - is, I suspect, to have an ideological animus against fiscal policy.
But let's say I'm wrong. Let's suppose that there are circumstances in which we are at the ZLB and in which fiscal policy is ruled out and in which we then face some sort of shock so bad as to require sharply negative interest rates and a ban on cash. (I leave the reader to judge how easy it is to imagine such a world.) Would such a world really vindicate the worldview of those who prefer monetary to fiscal expansion? Or would it instead be better evidence for the Marxian claim that capitalist economies are dangerously unstable?
I suppose I would make an even stronger claim for the class bias inherent in eliminating cash. I suspect that the ratio of cash to total transactions declines steeply with income. As a result, eliminating cash would work a very real hardship on lower-income families/individuals.
At my place of employment (a U.S. university), salary disbursements went from actual checks to direct deposit in about 1995. At that time, virtually all the faculty and the professional staff had bank accounts, whereas about half the clerical and maintenance staff did not. Almost all of them opened accounts at the university's credit union, which I think is more socially beneficial than using large commercial banks. (In fact, because of the costs incurred by using check-cashing services, it probably was cheaper for everyone to have bank accounts...but, that's substituting someone else's preferences for theirs.)
Posted by: Donald A. Coffin | March 24, 2015 at 03:38 PM
Chris:
It pains me that you haven't linked to any of my posts since I write (obsessively) on this subject ;)
No matter, I'll make up for it in my response:
1. You point to a John Cochrane post that holds no water.
http://jpkoning.blogspot.ca/2015/01/cracks-in-zero-lower-bound.html
2. Cash use is beginning to decline in parts of the world as digital payments take hold: Sweden, Norway, and Denmark.
http://jpkoning.blogspot.ca/2015/02/sweden-and-peak-cash.html
3. You say that banning cash amounts to banning capitalist acts between consenting adults. However, banks in a hypothetical free banking system would NOT consent to issuing 0% notes when the return on loans has fallen to some negative level, and would call their note issues in for cancellation. No institution is required to issue liabilities it doesn't want to.
http://jpkoning.blogspot.ca/2013/06/does-zero-lower-bound-exist-thanks-to.html
4. Why do you draw such a stark line between fiscal vs monetary solutions? Surely the best way to approach the problem is to provide a list of ways for the powers-that-be to stimulate an economy, and let them choose which approach: fiscal, monetary, rain dances, whatever.
That being said, I don't support a cash ban. But there are ways to play around with cash to allow for further declines in rates.
http://jpkoning.blogspot.ca/2015/02/a-lazy-central-bankers-guide-to.html
Posted by: JP Koning | March 24, 2015 at 03:55 PM
Positive interest rates are a tax, since currency yields 0%.
A way to repeal the tax, while allowing positive or negative rates, would be to pay interest on currency. Miles Kimball has figured out how (unfortunately not referenced in that Ken Rogoff paper).
Posted by: Max | March 24, 2015 at 05:10 PM
I’m baffled as to why anyone listens to Kenneth Rogoff. He’s done more to give academic credibility to austerity than anyone else in the World. Members of Congress have regularly waved his articles in the air while arguing for less stimulus over the last five years.
His understanding of deficits, national debts etc is right down there with the likes of George Osborne, David Cameron and the others who believe in “macromedia” B.S.
Posted by: Ralph Musgrave | March 24, 2015 at 05:17 PM
In London, the final cash bus fare before cash bus fares were abolished due to lack of use was £2.35. The astute among you will note that a minimum of four coins are required to make up £2.35, and that most tendered inexact amounts will yield more than one different coin in change. It was therefore a profoundly inconvenient sum to set as a fare.
The sceptical among us - yes, there may be one or two - would argue that it was chosen precisely to discourage the use of cash on buses to make withdrawing the cash option easier.
Posted by: Christie Malry | March 24, 2015 at 05:52 PM
Eliminating cash would surely require consensus across the globe? You couldn't be the only non cash kid on the block could you?
And if they can get international consensus on that they would have no excuse for bank reform.
Posted by: An Alien Visitor | March 24, 2015 at 05:57 PM
I can confirm JPs input about Sweden. I work there regularly, and haven't used cash for anything for years, and my (admittedly middle class) Swedish colleagues would say the same. Can't comment about non-middle-class Sweden, though.
Posted by: gastro george | March 24, 2015 at 07:45 PM
no money? use cigarettes:
http://wayback.archive.org/web/20080717062228/http://www.albany.edu/~mirer/eco110/pow.html
Posted by: n j | March 25, 2015 at 07:26 AM
In the course of a day I leave £20 cash for my cleaner, she later gives £10 to her babysitter and £10 to a hire-car driver. So far, the money's still all in Yorkshire.
But if we all do this using IPhone pay-by-bonk, Apple have, within twelve hours, transferred 0.6p * of my original £20 from Yorkshire to California. If the hire car is UBER, then even more goes west.
No government revenue service is remotely as efficient at micro-taxation. Or at taxing other governments' citizens when they are not even in the territory. Even better, Apple is arranging to 'tax' payments made to, and by, the US government **
* http://www.theregister.co.uk/Print/2014/09/13/apple_to_get_15_cents_for_every_100_dollar_payment_on_its_pay_service_says_ft/
** https://gigaom.com/2015/02/13/why-it-matters-that-the-federal-government-will-accept-apple-pay/
Posted by: Jabez | March 25, 2015 at 08:07 AM
You missed the biggest argument - the possibility of interference from the heavens (e.g. magnetic field switch)
http://www.livescience.com/18426-earth-magnetic-poles-flip.html .
Posted by: reason | March 25, 2015 at 10:25 AM
Does the tooth fairy leave electronic credits in Sweden? How do people give their children pocket money? How do you tip a busker, or add to the collection bottle in your local pub when there is no physical cash? I'm genuinely curious as there is surely a bedrock of necessary physical cash transactions, mainly among the least powerful or most excluded in society. And the point about big tech firms micro-skimming from worldwide electronic payment methods is surely not to be dismissed.
Posted by: DJK | March 25, 2015 at 12:55 PM
It would allow big brother to police the gray and underground economies. Gov't can catch, tax, punish people who pay the cleaning lady or buy illegal drugs off the books.
Posted by: TK Texas | March 25, 2015 at 08:03 PM
"... people who pay the cleaning lady or buy illegal drugs off the books."
In the UK this is now done via betting machines:
They can then collect a printed ticket showing they have gambled that day – meaning that if stopped by police, they can answer questions about why an apparently unemployed young man carries hundreds of pounds in rolled-up cash.
http://www.theguardian.com/uk-news/2013/nov/08/gambling-machines-drug-money-laundering-bookies
Posted by: Jabez | March 25, 2015 at 08:25 PM