Citi Chief Economist Willem Buiter is arguing that cash should be outlawed, so central banks will be able to reduce interest rates below zero in times of crisis, according to Bloomberg News.
While others have pointed out that cash is inefficient and its anonymity helps criminals, Buiter argued in a note on Thursday (April 9) that the real problem is that central banks can only reduce interest rates to zero. Below that, keeping money in a bank would actually cost depositors, encouraging them to spend it. For example, Buiter calculated that U.S. Federal Reserve rates should have been as low as -6 percent during the financial crisis to force spending that would have improved the economy.
However, because cash exists, depositors can convert deposits to cash and avoid that penalty. Buiter’s solution: Abolish currency entirely, tax it, or “remove the fixed exchange rate between zero-interest cash currency and central bank reserves/deposits denominated in a virtual currency.”
But Buiter does see problems with abolishing cash, and takes them on in turn.
Will people resist a major change like eliminating cash, which is still used in 85 percent of global consumer transactions? Yes, Buiter wrote, but in advanced economies and many emerging markets, electronic payments have made currency “redundant,” and its legitimate uses are mostly for smaller retail payments.
Is currency use still high among the poor and some older people, even in advanced economies? Yes, but keeping a limited amount of low-denomination cash in circulation — nothing bigger than $5 — might handle that problem. An alternative: “Provide the ‘great unbanked’ with automatic access to a bank account instead of retaining the limited use of currency. The benefits in terms of social and financial inclusion are likely to outweigh even non-trivial costs of account opening.”
Will central banks and governments lose seigniorage revenue (the difference between the currency’s face value and what it costs to print or mint)? Yes, but central banks can make profits on excess reserves currently held to back currency.
Will abolishing currency lead to lost privacy and risk excessive government intrusion? Yes, but that would be outweighed by how eliminating cash’s anonymity would hurt criminals. “The net benefit to society from giving up the anonymity of currency holdings is likely to be positive (including for tax compliance),” Buiter wrote.
Would switching exclusively to electronic payments create new security and operational risks? Yes, but cash is prone to counterfeiting, and “technological progress in IT (and notably payment systems) remains swift and should further reduce the incidence of outages and malfunctions over time.”
Economic and political considerations aside, Buiter’s proposal doesn’t take into account at least one other challenge in eliminating cash: Human brains react differently when their owners are spending cash than when they’re paying with non-cash means such as credit cards.