Sunday, September 04, 2016
Now is not the time to get rid of cash
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The other day I was queuing up at the bank, waiting while the woman in front of me handed over a large bundle of cash to pay her gas, electricity and phone bills. As we waited patiently she explained to the cashier she did not have a bank account, preferring to do everything in cash.

If some economists have their way she will not be able to do this much longer. The Bank of England is about to release the new, long lasting plastic (polymer) £5 note but some economists say physical cash is a relic of a bygone age, which should be consigned to the incinerator of history.

You may recall Andy Haldane, the Bank’s own chief economist, who has been saying one or two controversial things in these pages over the summer, floated this idea in a speech a year ago. Willem Buiter, chief economist at Citi, the global bank, and a Bank alumnus, has also done so.

Now Kenneth (Ken) Rogoff, former chief economist at the International Monetary Fund (IMF), a longstanding abolitionist, has devoted an entire book to scrapping cash. The Curse of Cash, from Princeton University Press, is published this week.

Rogoff is always worth listening to. His work with Carmen Reinhart on previous financial crises – eight centuries of them – was invaluable in informing the path out of the 2007-9 crisis. His related work on government debt and the safe limits on it, while it did not go unchallenged, was influential.

Surely all this is very different from the case for abolishing cash? After all, though we do not use notes and coins as much as we used to, they still account for almost half of all payments in Britain. Cash may not be quite the king it was but it has not yet been dethroned.

Rogoff, however, makes a persuasive case. “There is little question that case plays a starring role in a broad range of criminal activities, including drug trafficking, racketeering, extortion, corruption of public officials, human trafficking and, of course, money laundering,” he writes.

It is also central to illegal immigration, and the exploitation of both legal and illegal immigrants. Cash allows unscrupulous employers to bring in illegals and to pay them, and other workers, on a cash-in-hand basis, often well below the minimum wage.

Those two arguments have been around a long time. Rogoff’s third is particularly topical, which is why there is a renewed interest in the abolition of cash. While some central banks have moved to marginally negative interest rates to boost their economies – the European Central Bank and Bank of Japan most notably – they are constrained from moving more aggressively into negative territory by cash. Who would hold Treasury bills or other financial instruments with a negative interest rate of, say, 3% or 5% - losing money by doing so – when the interest rate on cash cannot fall below zero?

As he puts it: “The main obstacle to introducing negative interest rates on a larger scale is legacy paper currency, particularly the large-denomination notes that would be at the epicentre of any full-scale run from Treasury bills into cash.”

At this point some will be shaking their heads in disbelief. Zero or near-zero interest rates are bad enough. Surely seriously negative rates – paying the banks to hold your deposits - would be a disaster? His response, which will persuade some but not all, is that it is better to have a short burst of negative rates to lift economies onto stronger growth paths than a decade stuck at zero.

Governments, of course, make money from printing and coining cash, so-called seigniorage. It is not to be sneezed at, averaging around 0.4% of gross domestic product (GDP) in America and about half that in Britain. Even this is small beer, however, compared with the potential benefits of clamping down on illegal activities and aggressive tax avoidance.

What about the practicalities? Technology has moved on. I still take innocent pleasure in making a contactless payment with a debit card, only partly tempered by the fear that somebody else could be doing so just as well if they got hold of it. The technology exists for many, probably most, cash payments to be made electronic.

How about the unbanked? According to the Financial Inclusion Commission, 1.5m adults in Britain do not have a bank account and about half of people with a basic bank account choose to manage their money in cash. Rogoff says governments should take the lead in getting everybody into a bank account and a debit card. Indeed, there are sound public policy reasons for doing so. Financial exclusion often goes hand in hand with economic and social exclusion.

So is it case proven? Not quite. Negative interest rates still make me very uneasy and, as we have seen in recent years, emergency monetary policy moves have a habit of becoming permanent. If the existence of cash acts as a constraint on central banks cutting interest rates well below zero that is no bad thing.

This may also be a very bad time to advocate the abolition of cash. While cash’s role in payments is in decline, demand for notes and coin is accelerating. It rose sharply during the worst of the crisis and is rising again now. The 12-month growth rate of notes and coin, 8.2% in July, was the strongest since August 2009. Some of that is because people still do not trust the banks, especially when zero rates give them little incentive to keep money in them. Telling people they have to throw their lot in with the banks at this time would risk a popular uprising.

Where Rogoff is on very solid ground is when he says the process of weaning us further off cash should begin with the abolition of high-denomination notes. These are used disproportionately in illegal activities and money laundering and serve no useful social purpose. Already the European Central Bank has said it will not supply any more 500-euro notes and the Bank has hinted that the switch to polymer could be an opportunity to phase out the £50 note. Cash is not going to disappear, but we can do more to prevent its misuse.

Finally, before leaving money, I shall throw an intriguing thought your way. There appears to have been a post-referendum acceleration in the growth of the money supply, more broadly defined than just cash.

One measure, which brings together all the different ways of calculating the money supply, known in the jargon as Divisia money, accelerated in July to 10.2%, its fastest growth rate since current records began in 1999. Costas Milas, an economist at Liverpool University, who spotted it, points out that strong growth in this measure is normally associated with robust rises in GDP, and it should get a further boost from the Bank’s relaunching of quantitative easing. Interesting.