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Time to scrap cash?

20 May 2009 2 comments

Paul Penrose

Head of Research

Finextra

With the spectre of negative interest rates hoving into view, is it time to rethink the value of cash as a medium of exchange?

Failure to do so will lead inevitably to currency hoarding as savers turn their assets into cash to avoid the deflationary effects of a move to negative interest charges.

In his maverecon blog at the FT, Wiliam Buiter, a former member of the Bank of England's monetary policy committee, looks at the options available to hide-bound central banks, including abolition of currency, taxing currency by physically time-stamping it, or unbundling it from the unit of account.

He concludes: "Taxing currency may be awkward and intrusive, but abolishing currency is not just easy (just do it) but also has considerable advantages as a blow against criminality and terrorism. Unbundling currency and numéraire is something that can be done over the weekend. I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is that they love the seigniorage so much?"

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Comments: (2)

A Finextra member

20 May 2009

You bet they love the seigniorage income that much! Mind you, unless we also see the abolishion of sex, drugs and taxation, I imagine your average citizen would be against killing off physical banknotes too. Have you ever seen the results of tests to investigate banknote contamination by cocaine? To put it into context, last week police in Sydney made random stops of car drivers coming into the city to test them for drugs. 9% tested positive.

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A Finextra member

21 May 2009

Fundamentally cash is just a medium of exchange and people will start using shells or meteorites if gold is suddenly or mysteriously devalued (very possible) and cash is withdrawn (less likely). Plenty of diamonds available and although they can be manufactured, there is little seignorage in making them at current prices.

Possibly a more realistic goal might be to get a slightly better taxation handle on the electronic money possibilities. The issues of identity and taxation are likely to be more solvable and fruitful for cash strapped governments.

Without taking the incentive out of holding cash, it won't go away, and in many cases cash or cash related events are the incentive for people to work. It would be a vary dangerous move to undermine cash in order to encourage electronic money, at a time when trust is so badly shaken.

As the governments were far behind the real events with the financial crisis, they are likely to be far behind future sentiment events. There will be some level of 'sentimentality' about cash.

The only way cash will be supplanted is by a more convenient, safe and reliable alternative. It would be presumptuous to describe anything extant thus.

The taxation issue is an obvious case of backward thinking anyway - we should be taxed purely on consumption, not effort. Therin lays the solution to global warming, government's needs and perhaps economic and political stability.

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