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This is why cash should be illegal

Mike Bird   

This is why cash should be illegal
Finance3 min read

smashed cash machine broken atm

David Goehring, Flickr

No need for these any more.

Should the world go cashless? This subject, which probably would have sounded ludicrous even thirty years ago, is seriously being discussed - at least in the advanced economies of the world.

On a health level, cash is admittedly pretty disgusting - we've developed a system of exchange that requires the swapping of thin pieces of dirty cloth and grubby chunks of metal - gripped in hands, stuffed in sweaty pockets, and stuffed up peoples' noses. Not ideal.

But that's not really a good economic argument against cash.

Here's Ed Conway, economics editor at Sky News, writing about getting rid of cash in the Times.

The idea is not as outlandish as it might seem. Think about it: when was the last time you really needed cash? The majority of our day-to-day transactions now take place using credit cards, contactless payment and charge cards (such as Oyster cards). Internet banking means you can transfer money to someone in a few clicks. Nowadays you can even pay people via Twitter and Facebook.

Currency has proved useful but it has just about passed its sell-by date. If the world economy was run by Apple, it would have discontinued cash a long time ago.

Of course, that's an argument that cash is irrelevant, but not that is should actually be banned. For that, Conway leans on rockstar economist Ken Rogoff's recent paper "Costs and benefits to phasing out paper currency".

Here's Rogoff's conclusion:

Nevertheless, given the role of paper currency (especially large-denomination notes) in facilitating tax evasion and illegal activity, and given the persistent and perhaps recurring problem of the zero bound on nominal interest rates, it is appropriate to consider the costs and benefits to a more proactive strategy for phasing out the use of paper currency.

It's based on two big arguments:

  • Monetary policy would be easier. That's because at the moment, it's hard to reduce interest rates below zero - if the amount of money in your bank account is actually shrinking, why not turn it into cash and essentially hide it from banks' negative rates? The central bank might want to try and cut interest rates further to boost demand, and it can only do that if there in't any cash around.
  • Cash facilitates crime. According to Rogoff, today the "major uses" of cash "seem to be buried in the world underground and illegal economy." Cash is an easy way to pay for illegal activities without leaving a record (in government currencies, at least). Criminal behaviour would be much harder to hide if only electronic money existed.

There's more detail on the economic arguments for having an only e-money system over on economist Miles Kimball's excellent blog.

But there are arguments against the move too. Over on Stumbling and Mumbling, Chris Dillow makes that case:

  • There's a civil liberties argument. What business is it of the government to monitor every purchase made by private, consenting citizens? Is that a norm we want to make?
  • Lots of people still don't have bank accounts.
  • There'd still be a demand for something more like cash. Dillow suggests that people might use gift cards or something similar as a proxy - perhaps the move would be towards bitcoin or some similar crypto-currency.
  • Fiscal policy is better than negative rates. Forget negative rates, fiscal policy (simple government spending) is a better option if interest rates are at zero and the economy is still depressed. No need to go to all this trouble.

It might be sooner rather than later that we find out how well these arguments stack up in practice - cash use is dwindling in Sweden and the country has already discussed banning notes entirely.

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