The proposal to abolish cash has a certain superficial appeal, but—even before we get to the myriad practical problems—it could turn out to smuggle in a dangerous agenda of stealth privatisation. Kenneth Rogoff’s argument that we can simply abolish physical cash and switch to using electronic money, completely misses one crucial difference between the two—the institutions that create them.
“Electronic money”—that is, the numbers in your bank account, which change every time you spend on a debit card—are not fully equivalent to physical cash. They’re actually IOUs, or deposits created by banks when they issue loans. As the Bank of England recently confirmed: “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.”
If physical cash, in the form of notes and coins can be considered “public” money in the particular sense that it is created by a public institution, bank deposits can be thought of as “private” money, again in the specific sense of who creates them—namely, the banks. The Bank and the Royal Mint, which respectively create notes and coins, have clear rules of transparency and lines of accountability concerning the volume and distribution of the money created. In contrast, the deposits created by commercial banks do not have the same clear lines of accountability. The private sector can effectively, at least in the upswing of the business cycle, create as much as they want.
Worse, the money held in your account is, legally speaking, the property of the banks. The physical cash you hold is, as you’d expect, legally yours. If we moved to an “electronic money only” situation, as Rogoff is proposing, without creating a new “digital cash,” our nation’s whole process of currency creation would have been completely privatised.
Having a privatised currency may appeal to some, but the 2008 crisis is pretty clear evidence that the banks aren’t doing a very good job of creating money. Indeed, they have been seriously abusing their privilege. After 30 years of financial deregulation, banks create new money predominantly for the financial and property markets, bloating the financial sector, and puffing up housing bubbles. With the private sector still heaving under the mountain of debt, little has changed since the crash.
Rogoff also pleads that it is necessary to give cash the axe, because it will allow central bankers to shift to negative interest rates. But that implies that the barrier to monetary policy working is simply that central banks can’t cut interest rates enough. This misses important reasons about why low interest rates aren’t working. Negative rates are simply a continuation of the ultra-low rates of the last seven years. And they’ve failed to stimulate the economy—witness the slowest recovery in history—chiefly because people and businesses don’t want to take out more debt.
Low rates only work by encouraging more private sector borrowing. But with private debt still sky high, there wouldn’t be much room to pile on much more—even if it were wise. Suggesting that 0.25 per cent rates are not low enough is like assuming that if a mallet didn’t fix the software problem on your computer, then it is time to reach for a sledgehammer.
Rather than chase after negative rates and the abolition of cash, we should consider other options, such as “digital cash” and monetary financing. Unlike deposits made up by the banks, proper digital cash really could work as a replacement for physical money and a means of discharging the government’s duty to provide the public with a safe form of currency. The first feature of real digital cash is, of course, that it is created by the central bank. It could then be an electronic version of notes and coins. It would also generate income for the government, just as the issuing of physical money has always boosted the state’s coffers, through the process known as seigniorage. By allowing the banks to create all the electronic money we use today, the state is shooting itself in the foot; let us not make that problem worse.
The other big idea gaining traction is monetary financing. It is far more preferable to ever-lower interest rates, which no longer work. Central banks would create new money, and use this to fund government spending, which could in turn support employment, investment and incomes. This might sound dangerously radical, but it’s currently considered fine for banks to create money, irrespective of whether they use it to lend to businesses for productive investment or instead to support speculation in land or financial assets. In this context, the taboo on creating money to finance state spending on worthwhile things is hard to sustain.
Digital cash could work hand-in-hand with monetary financing in various ways. One idea would be for every citizen to have a digital cash account at the central bank, perhaps administered by a private bank. If monetary financing became part of the toolkit, the award of a cash transfer into digital cash accounts would be a remarkably straightforward way to inject money into the economy.
This human invention, this tool, we call “money” is changing fast. But we need to direct these changes towards a money system that works in the public interest and helps to build a more stable and fair economy. That will involve some much bigger thinking than simply getting rid of cash.
