[Dave Birch] Over on Kashklash, I wrote about noted economist Willem Buiter's view of cash. Which is, broadly, that it's a bad thing. In fact, he says:
Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank... Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]
I agree with him that we could move to e-payments without a problem, because of technological advances made in the last couple of decades, and I'll come back to this point later on as it is my focus here. But I can't help but focus on what Willem says about the note stock. Not only is cash an iniquitous regressive stealth tax that discriminates against the poor, it is also supports illegal activity on a huge scale.
The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies. There is no economic justification for $50 and $100 bank notes, let alone for the €200 and €500 bank notes issued by the ECB. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]
The euro example is particularly noteworthy. Two-thirds of the euros in "circulation" (they are not actually circulating, of course, they are stuffed under mattresses in Eastern Europe) are in the form of these 100, 200 and 500 euro notes that I am pretty sure I have never seen. ATMs only give you 20 and 50 euro notes and I would imagine that many retailers would be reluctant to accept 200 and 500 euro notes at all. Both the euro and the dollar are widely used outside of their currency zone, delivering enormous income to the issuers. The sums involved.
The Fed makes money on a spread. Its main source of funds comes from issuing cash, since currency in circulation is, in effect, an interest-free loan by the public to the central bank. The interest it earns on its loans and securities is almost pure profit, or “seigniorage,” most of which it remits to the Treasury. Last year the central bank reported a whopping $43 billion in operating income.
[From The Fed makes money for taxpayers | The hedge fund of Foggy Bottom | The Economist]
In essence, then, Willem is pointing out that most cash serves only to provide a convenient store of value of criminals, tax evaders, sex workers and corrupt politicians. Yet the revenue it delivers to central banks (and from there on to governments) is substantial, which is presumably why the European Central Bank is happy to see a third of all the euros in circulation in the form of 500 euro notes. Williem is saying that central banks are pimps. And he's not the only one pointing out that we seem to be moving into a rather odd situation where governments themselves are deliberately making life easier for criminals at the expense of the law-abiding.
Physical money is disappearing and we are moving towards a cashless society where hard cash only exists to avoid taxes or to buy illegal services and goods.
[From chris woebken I selected projects]
Just my opinion, of course, but something is wrong with this picture.
Personally, I think it might make more sense to simply switch off cash the way we are switching off analogue TV. Then, if the market decides that it what low-value currency in circulation, the market can provide it (I'm reading George Selgin's book The Button Makers which describes just how this happened in industrial age Britain) or, just as some governments subsidise digital TV boxes, so they could subsidise the issuing of pre-paid cards. Replacing cash in this way isn't a problem. Getting people to accept the idea might be though:
My good friend and colleague Charles Goodhart responded to an earlier proposal of mine that currency (negotiable bearer bonds with legal tender status) be abolished that this proposal was “appallingly illiberal”. I concur with him that anonymity/invisibility of the citizen vis-a-vis the state is often desirable... (I am waiting for the US or UK government to contract Google to link all personal health information to all tax information, information on cross-border travel, social security information, census information, police records, credit records, and information on personal phone calls, internet use and internet shopping habits).
[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]
After reading through his excellent article, I felt that Willem underestimates the ability of technology deliver both the infrastructure needed to get rid of cash and the requisite compromise between anonymity and "absonymity". To see why, note the key barriers pulled from the piece above (we are not going to look at the seigniorage revenue lost to government as a barrier). To make something "cash like" then you have to be able to use it pretty much everywhere (you need a high POS density) and you need to be able to make small transactions in private, without being tracked, traced and monitored. I would argue that there are two technologies, tried and tested, that get us over those barriers..
The first is the mobile phone. We are already seeing the launch of mobile phones that can replace payment cards (there are 40 million of them in Japan already). But the strategic impact of mobile phones in the payment space is yet to come. Yes, mobile phones can be payment cards and that's great. But mobile phones can be also be payment terminals. Or to put it another way, you can use a chip and PIN card to pay, but you can use a mobile phone to both pay and get paid. Since we live in a country where, essentially, everyone has a mobile phone this means that it is absolutely feasible to eliminate cash altogether. In this coming world, if I want to pay you a pound, I will do it by text message or mobile Internet and you will know immediately that you have the cash.
The second objection is that losing the anonymity of cash would change the relationship between citizen and state (and bank) in an undesirable way. I used to think that this was true, but now I'm not so sure.
Thinking about anonymity again, my experience back in the day was that, for different reasons, neither the consumers, nor the banks, nor the retailers, nor anyone else actually valued anonymity at all. So if you put it in a tick-box, some people will tick it, but that's because they haven't really thought about it. Once they had though about it, their interest in anonymity plummeted.
[From Digital Money Forum: Nymity vs. anonymity]
However, as noted, advances in cryptography mean that the apparent paradox of security and privacy is easily resolved. We can use cryptographic blinding, virtual identities and so on to achieve the desired goals: it seems a paradox, but we can make secure e-payment systems that are mathematically incapable of revealing the identity of the user, systems that will mathematically disclose ownership in the event of misuse and a variety of other options. Digital money can do things that notes and coins can't.
Perhaps the most important use of money - It saves time.
Author W. Somerset Maugham (1943).
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