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.

  • Disqustinator

    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. 🙂

    • Milos Radojevic

      Well, you don’t care, but I am. Because what I am doing here is illegal in some countries and tomorrow it might be in mine too. Do you know what I am doing? Buying beer! So yes, for me it is important for sake of freedom to not leave cash in some banks I don’t trust. At least to have an option! Tomorrow you’ll need to put all your cash in your bank account, and suddenly country have problems, and country decide to take 90% of your hardly earned money, because they CAN. Does it bother you? And it almost happened in Greece. Then you would think twice about it. Maybe your bank tomorrow will not allow you to exchange money to other currency, because govt ordered it. Can you do something? No. You don’t understand that basic principle of any govt. is that YOU are the one that is gonna pay for their inability to operate with country and if THEY decide that something is legal, it will become legal. And opposite. Not about moral, or you.

      • Disqustinator

        You’ve just made my point for me then. If buying beer is illegal where you are, then you should obey the law while the law exists. Change the laws by working with your elected representatives.

        No it honestly does not bother me that a government can dip into the bank accounts of people. Why not? Because there are processes and laws in place to prevent that kind of abuse. If your country does not have such laws and protections, then again, change it, work with your elected representatives.

        I like centralized controls with legal protections, so I’m probably not the person for you to convince otherwise.

        By the way, not having cash does not prevent you from being able to illegally acquire beer. You can simply trade a service or other item of value for the beer.

        Physical money is just bits of metal and pieces of paper. A government can remove the value from physical money just as easily with digital money. It makes no difference.

        • Milos Radojevic

          I didn’t make any point to you. By giving country such power (to completely have control over your finances), you country is in higher risk in becoming dictatorship if one party wins most of the parlament. By the way in my country they will probaly never ban beer, but in some countries they did. And you are comparing exchange of goods or services with beer like 500yrs ago with cash transactions?!

          Laws, laws, laws. Don’t be silly. Governments break laws, I can find you dozen examples where laws are broken because government had power (even in Western world), and they have your MONEY, with alot of money they have military, with military they have POWER. While in bad days of unrest, I will be using gold or bitcoin or foreign cash (whatever is best) to survive, your money will stay in bank, locked in local currency without ability to withdraw, and possibly inflate to the point that it doesn’t have any value. So tell me who is in better situation now?

          And also have you heard for word bankruptcy? That happens when someone plays with someone’s others money (like your one that is in bank), and business that they invested doesn’t go well (if govt. have power, they would be able to obtain loan from bank without insurance) and get their companies into bankruptcy intentionally, bank loses money and you loose money. Money is gone. It seems that you need to learn what happens with your money when your money is in your bank. It doesn’t just “stay” there.

          • Disqustinator

            Any country, today, can become a dictatorship if the population chooses to vote in a certain way. Digital cash or not has nothing to do with it. Also, you seem to automatically equate digital cash with governments. Private banks are not the government, at least not in developed democratic economies.

            You’re missing the point about physical money. It’s just a token to represent an exchange of value. So yes, if you needed to, you could transfer that value to other things, gold, livestock, personal services, etc.

            Governments may attempt to break laws, that’s not the point. The point is having the laws in the first place so that when governments try to break laws they can be held to account. The point of laws is not to prevent, but to hold to account for actions that society agrees are unacceptable. So, no, I’m not concerned about governments breaking laws. If they break a law, then that means there is a law to begin with, which means there is a process to challenge the government’s law breaking. Perhaps in your country you need better laws and a better government, and that’s something for your country’s population to do.

            You can be bankrupt with physical money too. If your bank fails you only get back the amount the banking regulations protect. It’s not practical to keep hundreds of thousands of personal savings in a piggy bank at home – for one thing, you’re not earning interest – and for another, you’d need a really big piggy bank.

            I work in banking and financial technology. I rarely use physical cash, maybe only a few times a year. I never carry physical cash. If a shop or a service provider doesn’t accept digital payment, I go elsewhere. I recently switched my window cleaner to one that accepts PayPal payments because the previous one insisted on cash so he could fiddle his income tax.

            • Milos Radojevic

              Private banks follow the rules of country and govt. Digital currency if stored in banks of your country is same as you gave your cash to your govt. to keep it safe, while same govt that you didn’t choose might take over on your funds when they have access. Difference between cash and e currency is accessibility, while e currency can be blocked/penalised/frozen immediately cash needs physical force. Also cash can be exchanged to other type of currency on black market or being spent for something valuable as gold for example. While buying something like that is very hard with e currency in case of unrest.

              Unfortunately I felt it on my skin, as sanctions were imposed to my country and who had cash were fast enough to exchange it for something and recover most of value while people that had money in bank accounts lost everything (hyperinflation) and they were unable to withdraw money. Every country have rule that in case of danger can use/block your funds and everything they need to keep country running.

              Far from that I say that cash is perfect, but e currency is not perfect as well. So instead to be against some money vaults, I am up for using all of them at the same time as different types of capital storage, as you never know which will fail to protect you. But excluding cash and keeping all capital in banks is worst idea that someone can do.

              • Disqustinator

                I disagree. I also don’t share your concerns about governments taking people’s money. That’s a government problem for countries with poor governance systems. It’s not a money problem. If you don’t trust your government, change it or make better laws.

                Then again, I am of the view that in some circumstances governments should be allowed to take people’s money. If a country has been sanctioned then presumably it is to punish that country.

                I hope digital cash will take over in the near future. Physical money facilitates much crime and tax evasion.

                • Milos Radojevic

                  Okay. I disagree on your view too about govt and strongly disagree about sanctions and think that is not best place for this kind of discussion as it is too long, we can go into hours why I think like this with you and opposite.

                  • Disqustinator

                    You can disagree all you want but the trend is towards digital cash. Consumers prefer every day convenience. The rapid adoption of mobile payments will help speed up the process.

                    You can diagree about sanctions, but they happen for a reason.

  • 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?