The war on cash continues

Nick O'Connor

Ever heard of Andrew Haldane?

He’s the Bank of England’s chief economist. His word carries a lot of weight with the authorities. And last week he let the cat out of the bag: he’s coming for your cash!

Haldane gave a speech last week where he explained that central banks have a problem. He calls it the ‘zero lower bound’, or ZLB. In simple terms, the ZLB is the lowest point central banks can push interest rates to without people pulling their money out of the bank and stuffing it in their mattress.

Think of it as the point where people say: “enough”.

This is a problem for people like Haldane. He sees the ZLB as a constraint on policy – it stops the Bank of England pushing interest rates into strongly negative territory.

Presumably he thinks that would be a good idea. I mean it sounds like a great plan, doesn’t it? The bank can then incentivise (read: force) people to go out and spend their money instead of saving it for the future. All that spending helps the economy grow. The bank’s genius economists save the day!

Everyone’s a winner

Well, if believe that, you probably hate Capital and Conflict.

Anyway, back to Haldane. As I said, he sees the ZLB as an obstacle to his grand plans.

So what’s his solution?

Abolish cash, of course!

From Haldane’s speech (emphasis mine):

“A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency.

“This, too, has recently had its supporters (for example, Rogoff (2014)). As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

“A third option is to set an explicit exchange rate between paper currency and electronic (or bank) money. Having paper currency steadily depreciate relative to digital money effectively generates a negative interest rate on currency, provided electronic money is accepted by the public as the unit of account rather than currency.

“All of these options could, in principle, solve the ZLB problem. In practice, each of them faces a significant behavioural constraint. Government-backed currency is a social convention, certainly as the unit of account and to lesser extent as a medium of exchange. These social conventions are not easily shifted, whether by taxing, switching or abolishing them.

“One interesting solution, then, would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets.

“But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”

Note that he never uses the word cash

Instead it’s just ‘paper currency’. It might surprise you but this kind of idea does have its cheerleaders. And not just in central banking circles. Some people with real jobs think it’d be a good idea.

Take, for instance, the FT’s Martin Sandbu. In his ‘Free Lunch’ newsletter last week he had this to say (again emphasis mine):

“Top economists have called for restrictions on cash because it hampers monetary policy when interest rates are low: the unlimited ability to convert deposit money into cash is thought to mean that central banks cannot bring interest rates in the economy very far below zero. If they do, depositors will simply take cash out, and cash as currently constituted bears a zero interest rate. So what to do if the economy needs strongly negative rates?

“The obvious answer is to constrain the conversion between bank deposits and physical cash.”

What all this comes down to is the fact that the great and good of the financial world believe they know how to control and perfect the economy. Like doctors treating a sick patient, they know what the economy ‘needs’ to get better. And what the economy needs is negative interest rates.

We’ll leave the elitist undertones of all this to one side for now (“we’re economists and you’re not, so just listen to what we say and don’t question it”).

The broader point is that people taking their money out of the bank to avoid negative interest rates is a natural decision.

It’s an entirely logical response to the situation

It’s also the natural consequence of central banks’ actions.

But people like Haldane don’t want their actions to have consequences. They want to be free to do what they “know” is right.

Abolishing cash (or ‘paper currency’) is one way of doing exactly that.

We’ve been talking about this threat for a good couple of months here at Capital and Conflict. Tim, Dan, Bill and I have all written about it on numerous occasions.

I know some of you see us as paranoid conspiracy theorists as a result of that. At least, I’ve received plenty of emails more or less saying that.

If you’re one of those people – or you’re on the fence about Tim Price’s ideas about Financial Martial Law – I hope this is a wakeup call. If the BoE’s chief economist coming out and stating he’d like to abolish cash doesn’t help you see what’s happening, I don’t know what will.

The writing is on the wall:

The war on cash has started.

Nick O'Connor's Signature

Category: Central Banks

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