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?
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.
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.