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Abolish cash? The State needs to relearn its proper role as servant, in this and other respects

November 26, 2015

chris gilesChris Giles, who leads the reporting of economics on FT.com, won the Royal Statistical Society’s prize for excellence in journalism in 2008.

It was good to read his article on the recent call to get rid of the money in our wallets:

‘An unfortunate echo of Maoist China’: abolish cash and you invite tyranny

Giles points out that central banks have never been so powerful, able to:

  • set the cost of borrowing,
  • put limits on bank lending

and poke their noses into every corner of the financial system.

 

 

 

b of e header

 

He reports that Andy Haldane, the Bank of England’s chief economist, wants to abolish the cash in your wallet and replace it with a digital wallet on which negative interest rates can be charged – ultimate control?

andy haldaneIn a speech to the Northern Ireland chamber of commerce, he said it would help the bank to manage inflation by enabling it to bypass the current constraint against lowering rates below zero.

Haldane argues that as an emerging market disaster is following the Anglo-Saxon and eurozone crises of 2008 and 2011, he wants to be able to stimulate spending in Britain but cannot easily do so because interest rates are constrained not to fall below 0%. He thinks that if the BoE set a negative interest rate — in effect charging savers to hold their money in the hope they would spend instead — people would switch to cash, stick it under the bed and thereby get around the efforts to encourage more consumption.

However, at the UWE’s launch of their Masters programme in Currency Supply Chain Management, the Bank’s chief cashier, Victoria Cleland said that when asked ‘is cash about to die?’ The short answer is ‘no’. Cash is still a key player in the payments landscape . . . At any one time during 2014, we estimate that around 20% to 30% of total UK cash was in what we refer to as the ‘transactional cycle’ – cash held by banks, consumers, and retailers for the purposes of facilitating everyday transactions. The remainder of UK cash is accounted for by hoarding and demand from overseas and the shadow economy.”

In 2009 Andrew Bailey, then Executive Director for Banking Services and Chief Cashier, Bank of England presented this graph showing the trend.

banknotes in circulation

The FT reports that Andrew Sentance, a former member of the Monetary Policy Committee at the BoE, took to Twitter to call for more debate. “Sorry to say but Andy Haldane’s spouting rubbish here. Shame he’s not on Twitter so we can engage with him directly.”

Giles’ verdict: the proposal is illiberal and prioritises a skewed view of theory over public acceptability:

“Haldane would ban the use of paper currency and coinage that has been used for centuries in pursuit of a theoretical contingency. Some 48% of all transactions in the UK use cash, making it by far the most popular payment method. No wonder wiser heads at the BoE, such as Victoria Cleland, the chief cashier, say cash is here to stay”.

He continues: “Some argue there would be beneficial side effects from abolishing notes and coins through the regularisation of illegal activities. Really? What is the more likely response of a drug dealer and client who mutually want to conduct a trade: ‘Let me sell you the dope on a traceable payment system’; or ‘Let’s use euros instead’?”

Giles adds:professors Stephen Cecchetti and Kermit Schoenholtz observe that it is better if the government creates trusted, anonymous notes and coins rather than some private agent”.

In 2014 Cecchetti & Schoenhotz explained that the anonymity of paper currency can liberate people, freeing them from their governments: “In tyrannical societies, the government could use its intimate knowledge of people’s payments as a method for malevolent control . . . Cash is a vehicle for freedom . . . from homicidal dictators as well as from tax collectors. Ultimately, if someone is going to issue cash to protect these freedoms, it might as well be the government that collects the seigniorage rather than a private agent”.

Reader’s comment: “Agree with all this. As soon as the Bank would try to do this all our savings would leave the country and we would switch to using US dollar bills or gold coins. So hopefully not very practical this side of a global dictatorship. The State really needs to relearn its proper role and place.

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