The war on cash is just getting started

You ain’t seen nothing yet.

That’s the real significance of the Bank of Japan’s decision to take interest rates negative on Friday.

And if you don’t believe me, you need only look at how rapidly the propaganda war on cash is picking up…

You don’t know what you got till it’s gone

Merryn and I discussed the Bank of Japan’s move on Friday in this week’s MoneyWeek podcast, and I went over the details of the move in Friday’s Money Morning.

But the key thing to take away is this: central banks aren’t close to being out of ammo. They haven’t even begun.

The “zero lower bound” is the idea that once interest rates hit 0%, there’s basically nothing that central banks can do to “stimulate” the economy. If they move interest rates to below 0%, and the banks pass this on in the form of negative rates, then people will just start taking money out of banks and stashing it under the mattress.

But as reality has already demonstrated, talk of a “zero lower bound” is – like many things in academic economic models – a comforting fiction.

For a start, “free” banking is by no means universal. We’re used to getting paid interest on current accounts in credit in this country, but there are plenty of countries where you’ll be charged for holding money in the bank (I remember being quite shocked by this when I lived in Australia for a short time many years ago). People still use the service rather than the mattress.

So interest rates can probably go quite a bit more negative than we might assume before the mattress salesmen are having to barricade themselves in their shops.

But what about when they do go negative enough to get us all racing to the bank, and demanding our money in cash (something that’d make Mary Poppins look like a docudrama)? Well, central banks are already laying the ground for that.

A piece on the Bloomberg website yesterday makes the point nicely. It’s a very positive piece on digital currencies, called Bring on the cashless future.

Cash is “dirty, dangerous, unwieldy and expensive”, apparently, hence the rise of cryptocurrencies such as bitcoin. And now governments from China to the UK are getting interested.

“Digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint.” Let’s leave aside the arguments about the stability or otherwise of a government mint. Digital cash could also help to stop money laundering, tax evasion, terrorist financing, and corruption in general. What’s not to like?

But – and here’s where we get to the meat of the argument – “the most far-reaching effect might be on monetary policy”.

Spend it or lose it

You see, if you make cash digital, then the central bank has complete control over it.

If you stick your money under a mattress, it can’t be reached by a negative interest rate. (Although it wouldn’t surprise me to see a tax on safe and mattress ownership). But if all cash is digital, you can’t avoid it.

So how do you make the transfer? Well, suggests Bloomberg, helpfully, a central bank would charge a fee for accepting paper currency. This would create “an exchange rate between electronic and paper money – and by raising the fee, it would cause paper money to depreciate against the electronic standard.

“This would eliminate the incentive to hold cash rather than digital money, allowing the central bank to push the interest rate below zero and thereby boost consumption and investment.”

Ta-dah! Problem solved.

Obviously there are some minor issues. “Security will be an abiding concern… and you don’t have to be paranoid to worry about Big Brother tracking your financial life.”

That’s putting it lightly. The reality is that a government-controlled digital currency is extremely problematic for all sorts of reasons.

Let’s take tax – a topical issue – for a moment. I think it’s unfair that Google and its fellow multinationals can gain a competitive advantage over local, smaller businesses because of their ability to game the global tax system.

Everyone should have to play by the same rules, and if that means Google “should” be paying more, then the system needs to change somehow to reflect that.

But I’m uncomfortable with the idea of a tax system being run like an “honour” system, where there’s a morally right and a morally wrong amount to pay, regardless of what the underlying legalities proscribe. That opens the door to arbitrary confiscatory decisions being made by governments who feel they have virtue on their side.

The idea of forcing people to pay what they “should” rather than constructing a tax system that actually works might appeal to certain types of government. And it becomes a lot easier to enforce when you have wealth largely stored in an entirely digital, traceable currency that can be stopped or confiscated at source by the government.

In short, if the prospect of ID cards under Gordon Brown’s government concerned you a few years ago, then this should worry you at least as much.

The war on cash is just getting started

Don’t get me wrong. I can see potential benefits here too. If we adapt government-backed cryptocurrencies, then it might become easier to create an environment in which competing private currencies can thrive too.

As long as we had almost friction-free digital currency exchange mechanisms on our phones, then we could use different currencies to fulfill different roles. One “hard” digital currency for our savings. One government-mandated one for paying your taxes. Loyalty currencies (voucher schemes basically) for certain shops.

It raises interesting questions about the nature of sovereignty and borders if your citizens stop using the government-backed currency for the majority of their transactions.

For example, how would the euro cope in a world with convenient competing digital currencies? The drachma could exist again without Greece ever leaving the eurozone.

I don’t think that governments want to open that particular Pandora’s box. So it’d be interesting – but most likely also rather disturbing – to see what sorts of rules they’d create to tackle the issue of currency competition.

All of this potential upheaval – turning the way we think the system works on its head – just to allow central bankers to “do more stimulus”. Are we really that desperate?

If this bothers you as much as it bothers me, then this’ll interest you – my colleague Tim Price has written an entire book on this subject, entitled The War on Cash, and it’s only becoming ever more relevant by the day. If you haven’t read it yet, you should pick it up here.

  • THX-1177

    The pros of digital cash outweigh the cons for me.

    The tax argument is a non argument. No country is ever going to implement a morality based tax system, businesses would not accept that, and I dare say many people won’t accept it either. After all, whose morals? The international tax system is not flawed on moral grounds, it’s just flawed because it has so many stupid loopholes and countries would rather compete against each other, instead of cooperate planet wide and collect taxes on sales where sales are made, instead of simply taxing profits. The fix is so damn simple, but requires all countries to cooperate. The UK especially needs to stop saying one thing while carrying on behaving badly in overseas territories.

    Banks should have complete control over cash. Nor should it be possible for anyone to stuff piles of cash under their mattress. If interest can be earned from a bank, then people should store their cash in the bank, or invest it in something. If not, they should pay to park it safely with a bank. A part of the “negative interest” should go toward an insurance against the bank failing so deposit protection limit can be increased.

    Citizen ID cards did not bother me one bit. The tax man knowing how and where I spend my cash does not bother me either. I don’t use cash for any illegal activity. I have no qualms about the tax man or anyone else knowing about my legal vices. If it’s legal spending, I just don’t care. Of course, I also really don’t care when other people try to apply their morals on me. :)

  • Ellen

    It all just illustrates how corrupt the monetary system has become by allowing the tail wag the dog and giving central banks control over our entire economy while the banks they oversee periodically have to pay fines (to who?) for their illegal activities.

    The continuing war on cash is a disincentive not only to save, but to work.

  • Seyers

    I have been inundated with e-mails to buy Tim’s book and am keen to acquire a copy but why do I need to make a Direct Debit? To be true to his subject he should accept ‘used notes in a plain envelope’!

  • Cameron Holder

    While I’m not thrilled about the cashless concept I think we are oversimplifying things a bit. There are plenty of things that act as pseudo cash and are more convenient than stuffing money under a mattress. Gold comes to mind as the obvious one. Wouldn’t everyone just buy gold?