(Tim Worstall) Ken Rogoff is an extremely fine economist. It’s also possible that Ken Rogoff is wrong this time: for he’s suggesting that it might be time to try and abolish cash from the economy. He’s got two major reasons for trying this and I’m vaguely sympathetic to one of them and vehemently against the second line of reasoning. But my really big point about this proposal is that it simply wouldn’t work.
For while we do often say that a government provides value to a fiat currency by insisting that tax is paid in it, this isn’t, really, what provides value to money. It might support it in some manner, but the true definition of money is whatever it is that people will accept as money. And if government stops providing people with something that can be used as physical money then they will simply turn to something else. It might be something worse, less convenient, riskier, but as sure as eggs is eggs there will be something or other used.
The thinking man’s Marxist, Chris Dillow, has a look at the idea here.
Now, when intelligent men have silly ideas, ideology is often to blame. And it’s not hard to see the ideology in this case. The main argument for banning cash (other than to inconvenience tax-dodgers, which is no stronger an argument now than it has been for years) is to facilitate sharply negative interest rates. But if you want to stimulate the economy – which might be a more pressing requirement come the next downturn rather than now – there’s an obvious alternative: looser fiscal policy.
The only reason to suggest something as outlandish as banning cash is that you believe this alternative to be impossible.
That’s rather stronger than my own views of the paper. That paper being here and the first reason to try to ban cash is:
Paper currency has two very distinct properties that should draw our attention.
First, it is precisely the existence of paper currency that makes it difficult for central
banks to take policy interest rates much below zero, a limitation that seems to have
become increasingly relevant during this century. As Blanchard et al. (2010) point out,
today’s environment of low and stable inflation rates has drastically pushed down the
general level of interest rates. The low overall level, combined with the zero bound,
means that central banks cannot cut interest rates nearly as much as they might like in
response to large deflationary shocks.
If all central bank liabilities were electronic, paying a negative interest on
reserves (basically charging a fee) would be trivial.
So, make all money electronic and we can have negative interest rates. Well, OK, I suppose I could vaguely support that. Although I don’t think we actually need to be able to do that, I think we’ve seen that we do have enough unconventional monetary policy tools without needing that. But, you know, whadda I know? Maybe the future will provide us with a situation where we need that tool. Or maybe Dillow is right and it really would be easier to turn to fiscal policy at that point?
However, the second point I am against:
We now turn to a second drawback to paper currency. Paper currency facilitates
making transactions anonymous, helping conceal activities from the government in a way
that might help agents avoid laws, regulations and taxes. This is a big difference from
most forms of electronic money that, in principle, can be traced by the government. (We
discuss the issue of substitute anonymous transactions vehicles such as Bitcoin, later on.)
The reason being that I see that anonymity leading to both tax dodging and trade in things that the government doesn’t want there to be trade in as positive aspects of money. On the tax dodging, that people can carry out economic transactions without being taxed (even at risk of punishment) imposes a limit on how heavily government can tax those that are declared. You don’t have to go the full Mancur Olson (government is simply the financial rapine of the citizenry, our only choice being which bandits and by how much, a position I only hold on really bad days) to believe that some sort of practical limitations on how much we may be taxed might be useful in restraining them.
There’s quite enough people pining for the days of 90% income tax rates without our actually giving anyone the power to really charge them. Similarly for trade in things the government bans. I think the government bans the trade in far too many things (I’ve been a consistent backer of legalising both drugs and the sex trade over the years for example: not that I participate in either, rather on the grounds that consenting adults get to do what consenting adults want to do, subject only to harm to the rights of others to do the same) and thus again, that anonymity of cash allows the trade of things that government does ban the trade of and that’s a good thing.
However, the real argument against this idea is that it just won’t work. Every society that has managed to invent the idea of money still has that concept. And money has taken some pretty strange forms in extremis. There’s a famous study of what was used for money in a WWII prison camp for example, another of tinned fish (tinned mackerel? Dried mackerel?) being used in contemporary American prisons. And there’s also the historical example of Yap, which used large stones. And even when one was lost overboard the family that had owned it were assumed to still own it and have that capital even though they couldn’t present it. My point being that when we don’t have cash money then we’ll just use some other unit of account in the place of that cash money. And that, of course, poses a very serious problem for this idea that purely electronic money will enable the Fed to control the economy better. For if we all go off and use dried mackerel as our money then in order to control the money supply the Fed has to become a manufacturer of dried mackerel. At which point we should probably decide that it’s easier to stay with that printing press in the basement.