No, let's not try to abolish cash


There's an idea being floated that we should abolish cash, move over entirely to electronic money, so as to be able to control boom and bust in the economy. There's three reasons (at least) why we think this is a bad idea:

In this futuristic world, all payments are made by contactless card, mobile phone apps or other electronic means, while notes and coins are abolished. Your current account will no longer be held with a bank, but with the government or the central bank. Banks still exist, and still lend money, but they get their funds from the central bank, not from depositors.

Having everyone’s account at a single, central institution allows the authorities to either encourage or discourage people to spend. To boost spending, the bank imposes a negative interest rate on the money in everyone’s account – in effect, a tax on saving.

Faced with seeing their money slowly confiscated, people are more likely to spend it on goods and services. When this change in behaviour takes place across the country, the economy gets a significant fillip.

The recipient of cash responds in the same way, and also spends. Money circulates more quickly – or, as economists say, the “velocity of money” increases.

What about the opposite situation – when the economy is overheating? The central bank or government will certainly drop any negative interest on credit balances, but it could go further and impose a tax on transactions.

So whenever you use the money in your account to buy something, you pay a small penalty. That makes people less inclined to spend and more inclined to save, so reducing economic activity.

The first and most obvious failing here is that of privacy, liberty even. Who really wants the government (whether the political one or the State or the central bank) having a record of each and every transaction in the economy? The nothing to hide, nothing to fear line isn't actually true we're sorry, but it isn't. That amount of information: that amount of control even. You can imagine the sort of horrors that would result. Seriously, how long before someone starts demanding that only 3 units of alcohol, 6 grammes of salt, a day and no more than one hamburger a week can be bought with that one, single, electronic account?

The second is that it is getting the point and purpose of the economy the wrong way around. We, us people, the citizenry, we're not here to make the economy hum along. Having an economy that hums along is nice of course but it is to serve us, not the other way around. Thus imposing radical change upon us for the sake of the economy is simply nonsensical. It is to have the logic of the matter completely arse over tip.

And the third is that it almost certainly wouldn't work to control the economy in the manner described. Because the usual cause of booms and busts is the authorities themselves getting those economic levers set to the wrong levels. We might argue this from Hayek's point, that no one can ever know enough to set them to the right positions, we might borrow from Mancur Olson and point out that the State is, in reality (at least the people controlling it are) a stationary bandit. Much more interested in maintaining control through re-election than they are in the long term of the economy. This is why we always have a relaxation of monetary and fiscal conditions in the run up to an election: that's just the way that it works.

In this reading the boom and the bust is caused by political control of those levers of the economy: strengthening that control really isn't going to solve that problem.

As usual around here our objections are a mixture of concerns over liberty, morality and plain flat out cynicism about the political process. You can apply your own weights to these things but we worry most about the first and third.