Last month the chief economist of the Bank of England, Andrew Haldane openly suggested to completely abolish cash. This means that the most radical and quite frankly ludicrous forms of keynsian economics are now openly debated in the political establishment of this country. The government hates cash for a number of reasons.
Cash is the ultimate economic freedom. When I am paying cash, I can buy goods without documentation of the transaction. This anonymity is a problem for a government desperate for revenue. With cash transactions, the government relies to a large degree on the honesty of its taxpayers to tell them about these transactions. Because of this and many other reasons many people tend to like cash. It is still used by many, despite the fact that for some time the government has tried hard to make it inconvenient.
This war on cash includes things like the mandatory registration of large cash transactions. Also, the legal tender money does usually not offer big bills anymore. In the UK the biggest Pound note is £50. But even that is not very often used. Most of the time you are dealing with £20 notes. This is the highest note you can get out of an ATM. £20 notes are nice if you want to buy a round of beer, but they are very inconvenient for any larger transactions. Larger payments are therefore less and less made paying cash. For example, try to buy a new car paying cash in this country. Very difficult to do already.
But tax is not the only reason why the government does not like cash. The real reason why this debate is coming up in Britain is that the government has an economical problem. The Keynsians are trying to kick start the economy by printing money and they are increasingly irritated that it is not working as their models predicted. They have lowered the interest rates to 0.5%. This was supposed to encourage people to take on more debt and spend the borrowed money. But the problem with that is that a large number of people is already so deep indebted that even at these super low interest levels they are not able to borrow more. In other words, the society has reached peak debt. The only institutions that can still borrow on a larger scale are banks. They however used the money to some degree to repair their balance sheets. After that, they were not spending the money on consumer goods. Instead, they are using the money to speculate in asset markets, where they have blown up gigantic bubbles.
The economy is not really recovering as it should and that although the government has been trying to fix it for many years now. So what to do? They have tried 0% interest rates, they have tried QE, none has worked. They could admit defeat and come out and denounce keynsianism as a wrong model. In that case we could move towards a more free market model. But of course that is not going to happen. Instead they seem to conclude that the problem is that they have not pursuit keynsianism aggressively enough. But then, how can you do it even more aggressively? Which tools are left?
There are essentially two. They could go out and print money directly for the people instead of just for the banks. This could be implemented by ordinary people being able to borrow at no costs from the BOE directly. If that is not aggressive enough, they could deposit some money into every citizen’s bank account. This money would come directly from the BOE, in other words it would not be financed by taxes, but simply created out of thin air. Sure enough, that would cause a small and short boom as most people would start spending that money. But everyone with at least a little bit of rest rational thinking left will realize that this boom would come with a gigantic hangover in the form of inflation that would be difficult to stop. That is why this option is not really seriously considered, at least for the moment.
The other possibility is to lower interested rates even more. Since interest rates are essentially at zero, at this point that would mean negative interest rates. With negative interest rates, the money you have deposited in a bank shrinks more and more over time. On the other hand, if you borrow money at negative interest rates, you get paid to borrow. In other words, this is a punishment for savers and a reward for borrowers. And that is exactly why some people think this is a good idea. The hope is that this way, they can get some more people to borrow. More importantly however, they hope that they can get the last remaining selfishly stubborn savers to finally go out and spend their money.
But there is a problem for that plan to be executed. The problem is the existence of cash. As long as cash exists, savers will simply take their money out of the banks and store it somewhere else. That means with cash, people could get around the penalty. Even worse, if a lot of people take their money out of the banking system, you essentially have a bank run. That is what happened in places like Switzerland and Denmark, two countries that are already experimenting with negative interest rates. The interest rates are only very slightly negative, too little to bother the smaller savers. But richer depositors like hedge funds did at least try to take their money out of the banking system. They quickly discovered that this was not very welcomed by the banks.
This is happening at interest rates that are just a little bit below zero. In order to push interest rates significantly lower as our central planners are contemplating, cash needs to be abolished first. Then, so the political establishment thinks, the state will finally have total control over the economy and can force people to spend their money as the politicians want. In addition to that, Banks would finally be free to spend as much printed money as they like, without worrying about a bank run. If they really did implement this policy, we can imagine the disaster. We know what results total central planning produces. And we also know where printing money ultimately leads to.
But of course they are totally overestimating their powers. It is hard to stop freedom. If people are punished to hold their money in the UK banking system, they will soon start using banks elsewhere. After all, if there is no cash anymore, what difference does it make where your bank is located in the world. In order to prevent this type of bank run from happening, the next step will have to be capital controls. You would need a permission from the government to get your money out of the country. If the economy has survived all the government intervention up until that point, capital controls will really make things much worse, as it would limit the possibility of people to trade significantly.
It should be clear by now that threatening to abolish cash is nothing short of threatening economic martial law. It would be a really nasty policy. Ultimately however, it will backfire. Once people are loosing faith in the state currency, they will simply start using something else as cash. This could be gold, silver, Bitcoin or something else. The economy of Kenya for example is currently functioning on a de facto mobile phone minutes standards. The so called M-Pesa has won the trust of the people, after they started mistrusting the state issues Kenyan Shilling. Once trust goes, the government loses control over its currency and we would essential have free banking. At the end, markets cannot be stopped by governments.
Looking at it this way, maybe we should support the abolition of cash. But than, a lot of people will get badly hurt in this scenario. As a result we only might get freedom, but we might also get something completely different instead. After all the UK government is a lot more powerful than the Kenyan one. That is why I just signed this new petition to stop the debate about abolishing cash before it happens. Decide for yourself whether you want to sign.
Please click https://petition.parliament.uk/petitions/109727 to sign.