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Why would central banks want to kill off cash?

A quarter of Australians have had it with cash. At least according to electronic payments network PayPal. The network's research found not only did 25 per cent of respondents not shop at cash-only businesses, more than half noted cash-only organisations were hard to do business with.

Traditional payment technologies, including cash and cheques, are certainly ceding share to electronic alternatives – and have been for decades. By some official forecasts the Australian cheque will die off by 2018.

"I quite like this, hoarding cash as a kind of social activism."
Andrew Cornell, Managing Editor

But typically it has been providers and beneficiaries of new technology, like payment schemes and financial institutions, who have promoted the shift – although consumers don't shift unless new technology offers a clear advantage in convenience, price or security.

For example, PayPal's research also found 70 per cent of Australian consumers felt small businesses needed the latest payments technology to be competitive -that is, convenient for consumers.

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Photo credit: Arsineh Houspian

Now though the regulatory sector has entered the fray with the chief economist of the Bank of England arguing traditional cash was impeding the efficacy of monetary policy, the central banking tool for setting the price of money and targeting inflation.

Andrew Haldane, always an imaginative and rigorous regulator, raised the policy cost of cash in a speech last week analysing the challenge of zero interest rates or, more precisely, the fact interest rates can't be set below zero in a nominal sense, the so-called “zero lower bound” (ZLB) trap.

Haldane's concern is that while policy, government and economic, may demand lower and lower rates to counter deflation or a lack of economic vigour, once central bank rates hit zero there's nowhere else to go.

Of course, there are some extraordinary policy tools available and indeed some European central banks have effectively created negative interest rates by charging the banks which make deposits with it. So rather than receive a return for a deposit, the lender to the central bank pays a price – presumably because even a slight haircut is better than a riskier alternative.

Cash though, according to Haldane, is a problem. If a person or an organisation holds physical cash, there are very few policy alternatives for charging for it. (Although Haldane notes a few historic ideas, such as unilaterally cancelling some serial numbers invalidating the currency or a stamp tax on notes of which John Maynard Keynes approved.)

Haldane accepts negative rates on currency are a big challenge, for social and political as well as economic reasons.

“Government-backed currency is a social convention, certainly as the unit of account and to lesser extent as a medium of exchange,” he says. “These social conventions are not easily shifted, whether by taxing, switching or abolishing them. That is why, despite its seeming unattractiveness, currency demand has continued to rise faster than money GDP in a number of countries.”

An electronic state currency is one alternative: “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.”

Haldane wasn't actually proposing this as a policy objective although he made the point, with which I agree, that new technologies such as the blockchain protocol behind Bitcoin may well become mainstream.

Nevertheless, the argument fuelled a debate. Writing in the Financial Times, Chris Giles fumed central banks mandating electronic currency was a step towards tyranny, an “echo of Maoist China”.

“The case might be logical but that is not a sufficient condition for public policy,” Giles wrote. “It is illiberal and prioritises a skewed view of theory over public acceptability.”

Against Haldane's observation – a common and logical one – that cash fuels an illicit black economy (tax cheating, money laundering, criminal finance networks) – Giles counters “the anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty”.

I quite like this, hoarding cash as a kind of social activism.

Haldane readily concedes there is much of the thought experiment in what he says: “Central bank-issued digital currency raises big logistical and behavioural questions too. How practically would it work? What security and privacy risks would it raise? And how would public and privately-issued monies interact?”

But the more profound point is new technology is not only disrupting business and business models, it will inevitably have more of a role to play in the operations of the state.

There are already social security payment systems which utilise the greater controls available with electronic payments, for example welfare smart cards with blocks on using the payment function in certain stores.

Electronic debits and credits are deeply embedded in state transactions, whether in the normal course of government transactions, welfare or taxation. There is no reason why governments and central banks should not be technologically advanced.

“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential,” Haldane says.

“On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. Bitcoin's “blockchain” technology appears to offer an imaginative solution to that distributed trust problem. Whether a variant of this technology could support central bank-issued digital currency is very much an open question.”

The final challenge though remains the consumer. Just as early versions of what were once called stored-value chip cards, issued by Visa, MasterCard and Mondex, died because they didn't really do anything cash didn't and didn't do it faster, the public will really rebel if state-sanctioned electronic money is either too expensive or too inconvenient.

The FT's Giles finishes “Mr Haldane's proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest. Cash is unlikely to die a natural death — and, until it does, long may it live.”

Giles is right although surveys like that of PayPal tell us cash may enter its dotage – like cheques –earlier than we think. And hang around there a lot longer.

The Australian Payments Clearing Association launched a project in 2011 which many interpreted as clearing the plot for the internment of the cheque, given the disastrous vital signs evident. Strident voices ended that. As they had done in the UK where the government had to back down on a plan to kill off cheques by 2018.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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