The cashless society?
Yesterday's edition of "The Economist" had an interesting article, which you can read online in full at
http://www.economist.com/news/finance-and-economics/21618886-abolishing-notes-and-coins-would-bring-huge-economic-benefits-leaving-dead
and which argues for the complete abolition of notes and coins as forms of money.
At first this idea will seem to be completely off-the-wall, but some of the ideas in it are actually very powerful.
Once apon a time currencies were supported by the value of the metal in the coins. The first paper money was backed by a promise to exchange it for precious metal. Even today, a five pound note contains in small writing the following commitment from the Bank of England
"I promise to pay the bearer on demand the sum of five pounds."
I read in one of my economics textbooks as a student that if you try to take them up on it you'll be issued with another five pound note. But it originally meant you would be issued with five pounds' weight of sterling silver. It is still just about within living memory that in the 20's Winston Churchill, as Chancellor of the Exchequer, put Britain on the "gold Standard" for the last time, linking our currency to precious metals.
These days most money consists of bank deposits, and accounts of one kind or another without physical form. This is not necessarily a problem if they are managed responsibly, though it certainly can be if they are not or if people lose confidence in financial institutions.
At the end of the day, currencies only work because people have confidence that they will be able to exchange them for something they value. I have heard this described as a "confidence trick" and it could equally be described as herd behaviour - any type of money has value because, and only because, people believe it has.
Throughout history the biggest threat to that confidence has been dishonesty or foolishness on behalf of those in power - debasing the coinage in the case of old currencies based on precious metal coins, failing to have sufficient assets to support the liabilities of the banks and of the government in more recent times.
From time to time someone proposes making the currency stronger by linking it to something tangible like gold or silver. Churchill was the last minister in the UK to actually attempt it.
When I was a student I had a fantasy of linking the currency to something more suitable to the modern economy - and I was in favour of using a fixed unit of energy, probably the Kilowatt Hour.
By the time I graduated and collected my degrees in economics, I understood that in the real world there are all sorts of issues with that, but if we ever had a fundamental collapse of confidence in the world's currencies, we would have to restore it either by goiong back to Gold, or do something like my KiloWatt Hour idea.
"The Economist" makes a remarkably strong argument that much of the strength of demand for cash, apart from the fact that it is sometimes convenient, is people who don't want governments to know what they are doing.
And do you know what? Where the people concerned are not fraudsters, bank robbers, thieves, paedophiles or drug-runners, I rather like the idea of them being able to use their own money in ways the government cannot track. The state is far too powerful already without knowing how we spend every penny we earn.
"The Economist" also weakened their argument in my eyes by suggesting that the abolition of cash would make it easier to allow interest rates to go negative.
No thank you - negative real interest rates have already done far too much damage. We need a culture which encourages and rewards sensible financial planning including steady saving for retirement, and anything which made negative nominal rates more practical is a thoroughly bad idea.
One interesting thing is this. Most honest people can go through their lives without ever seeing a high value banknote such as a five-hundred Euro note. I seem to recall that I have seen a few such notes once or twice, but have never used them myself. But they are very useful for criminals. They argue that
"There are €295 billion ($382 billion) of €500 notes in circulation. Yet most Europeans have never seen one: criminals hog them, as they are so useful for moving ill-gotten gains around. (€1m-worth of €500 bills weighs just 2.2kg.)"
They conclude the article by suggesting as a compromise that higher denomination notes, from about £500 or €500 upwards, should be phsed out, saying
"That would allow small transactions to be kept completely private, while making life much trickier for all but the pettiest of criminals."
At face value (sorry!) there does seem to be a strong case for that proposal.
http://www.economist.com/news/finance-and-economics/21618886-abolishing-notes-and-coins-would-bring-huge-economic-benefits-leaving-dead
and which argues for the complete abolition of notes and coins as forms of money.
At first this idea will seem to be completely off-the-wall, but some of the ideas in it are actually very powerful.
Once apon a time currencies were supported by the value of the metal in the coins. The first paper money was backed by a promise to exchange it for precious metal. Even today, a five pound note contains in small writing the following commitment from the Bank of England
"I promise to pay the bearer on demand the sum of five pounds."
I read in one of my economics textbooks as a student that if you try to take them up on it you'll be issued with another five pound note. But it originally meant you would be issued with five pounds' weight of sterling silver. It is still just about within living memory that in the 20's Winston Churchill, as Chancellor of the Exchequer, put Britain on the "gold Standard" for the last time, linking our currency to precious metals.
These days most money consists of bank deposits, and accounts of one kind or another without physical form. This is not necessarily a problem if they are managed responsibly, though it certainly can be if they are not or if people lose confidence in financial institutions.
At the end of the day, currencies only work because people have confidence that they will be able to exchange them for something they value. I have heard this described as a "confidence trick" and it could equally be described as herd behaviour - any type of money has value because, and only because, people believe it has.
Throughout history the biggest threat to that confidence has been dishonesty or foolishness on behalf of those in power - debasing the coinage in the case of old currencies based on precious metal coins, failing to have sufficient assets to support the liabilities of the banks and of the government in more recent times.
From time to time someone proposes making the currency stronger by linking it to something tangible like gold or silver. Churchill was the last minister in the UK to actually attempt it.
When I was a student I had a fantasy of linking the currency to something more suitable to the modern economy - and I was in favour of using a fixed unit of energy, probably the Kilowatt Hour.
By the time I graduated and collected my degrees in economics, I understood that in the real world there are all sorts of issues with that, but if we ever had a fundamental collapse of confidence in the world's currencies, we would have to restore it either by goiong back to Gold, or do something like my KiloWatt Hour idea.
"The Economist" makes a remarkably strong argument that much of the strength of demand for cash, apart from the fact that it is sometimes convenient, is people who don't want governments to know what they are doing.
And do you know what? Where the people concerned are not fraudsters, bank robbers, thieves, paedophiles or drug-runners, I rather like the idea of them being able to use their own money in ways the government cannot track. The state is far too powerful already without knowing how we spend every penny we earn.
"The Economist" also weakened their argument in my eyes by suggesting that the abolition of cash would make it easier to allow interest rates to go negative.
No thank you - negative real interest rates have already done far too much damage. We need a culture which encourages and rewards sensible financial planning including steady saving for retirement, and anything which made negative nominal rates more practical is a thoroughly bad idea.
One interesting thing is this. Most honest people can go through their lives without ever seeing a high value banknote such as a five-hundred Euro note. I seem to recall that I have seen a few such notes once or twice, but have never used them myself. But they are very useful for criminals. They argue that
"There are €295 billion ($382 billion) of €500 notes in circulation. Yet most Europeans have never seen one: criminals hog them, as they are so useful for moving ill-gotten gains around. (€1m-worth of €500 bills weighs just 2.2kg.)"
They conclude the article by suggesting as a compromise that higher denomination notes, from about £500 or €500 upwards, should be phsed out, saying
"That would allow small transactions to be kept completely private, while making life much trickier for all but the pettiest of criminals."
At face value (sorry!) there does seem to be a strong case for that proposal.
Comments
I presume by pointing out that it is funny you are not suggesting that it is a good idea.
Why not deposit £1000 in our high interest bank account here at jims bank, we take £50 from your balance each year (in 12 high interest monthly payments of £4.17)
at the end of just one year you could have £950 in your account thanks to our great high earning interest rate, wonderful to deal with inflation, and by the time you retire, if you keep your account open we may repossess your house.
I mean whats not to like about the idea.
Rather a lot, if you're a potential depositor.
Yes Chris, i agree 100% with you, negative interest rates are a completely stupid idea, and could never be used to support any idea.