The War on Cash Is Even Worse than It Seems
source: mises.org
by Kevin Dowd
The Adam Smith Institute have recently published my report “Killing the Cash Cow: Why Andy Haldane is Wrong on Demonetisation” on Andy Haldane’s proposal (“How low can you go?”) to abolish cash. [Disclosure: Andy and I are old friends and I criticize him reluctantly.] I think Andy has made some marvelous contributions to the economic policy debate since the onset of the Global Financial Crisis, but this isn’t one of them. Going further, I believe that those who advocate or who are even willing to entertain the abolition of cash are onto a seriously bad idea.
In this posting, I would like to outline my critique of Haldane’s proposal and put it into the context of the broader War on Cash (WoC).
Andy made his proposal at a speech in Portadown in Northern Ireland on September 18th 2015. I confess that I was horrified when I read it and wrote up a first draft shortly afterwards. For various reasons, I was unable to work on it again until this year and hence the delay in publication. In the interim period, there were further major developments of which two in particular stand out. The first was the publication of Ken Rogoff’s book “The Curse of Cash” in August 2016, and the second was the Indian WoC, the policy unexpectedly announced by Prime Minister Narendra Modi in November last year by which the highest denomination notes – the 500 and 1,000 rupee notes, making up 86% of the note supply – were to be almost immediately withdrawn from circulation. I touched on these in the revised version of my report, but chose not to dwell on them at any length because my report was already overly long and the Indian experiment is ongoing.
The first point to note is that the WoC is not just about technocratic issues related to payments technologies: cashless payments systems are already both commonplace and spreading. On the cash vs. digital issue, sometimes cash is better (e.g., for small anonymous transactions) and sometimes digital (e.g., where the parties concerned have the technology and anonymity is not an issue). Instead, the core issue in the WoC is whether people should be compelled not to use cash, and this issue is of profound importance. In a nutshell, my argument is that the abolition of cash threatens to cause widespread economic damage – as an example, just look at what has been happening in India – and to have a devastating impact on many of the most vulnerable in our society. It also threatens to destroy what is left of our privacy and of our financial freedom: we wouldn’t be able to buy a stick of gum without the government knowing about it and giving its approval.
Haldane’s support for the abolition of cash did not receive the generally positive response that normally welcomes his policy statements. My straw poll of the blog comments about it in the Financial Times immediately afterwards suggests that some 75-80 percent of readers were opposed to it, some strongly. “It’s almost fascist in its undertones. A totalitarian move to track and control all spending,” wrote one blogger. “Lives in intellectual bubble. Would endanger our democratic freedom for financial experimentation,” wrote another. His critics included Andrew Sentance, a former member of the Bank of England Monetary Policy Committee: “Sorry to say but Andy Haldane’s spouting rubbish here,” Sentance said on Twitter.
The core of his argument goes as follows. His primary concern is the central bank’s room for manoeuvre: its scope to reduce interest rates if it felt it needed to. This room for manoeuvre depends on three factors. The first two are the real interest rate and the inflation target, and the inflation rate and the real rate together determine the nominal rate. The third is the Zero Lower Bound (ZLB), the lowest interest rate that the central bank can achieve without triggering a widespread move from deposits into cash, and in practice this ‘ZLB’ will be a wedge below 0.
The problem he addresses is that long-term declines in real rates – due to factors that are beyond the control of the Bank of England – have reduced this room for manoeuvre, and he is looking for means to widen it again. Among the options he considers is to abolish cash in the event that the central bank should want to implement a Negative Interest Rate Policy (NIRP). With no cash, there is no longer a ZLB to prevent the central bank going into negative rate territory.
To be fair, he does not actually say that he wants negative rates or that he wants to abolish cash. Instead, he gives a technocratic perspective in which he regards these as options that should be considered along with more conventional options such as, e.g., raising the inflation target. But to me, what is alarming is that he is willing even to put these options on the table as if NIRP and banning cash were merely technical exercises that did not entail a raft of major economic, social and other problems. It is those problems on which I focus in my report.
