Central Bank attack on cash is an attack on Liberty: FT

September 23, 2015 6:21 pm

In cash we trust — abolish it and you invite tyranny

Chris Giles - Financial Times

Andy Haldane’s call to get rid of the money in our wallets has an unfortunate echo of Maoist China

©EPA

Central banks have never been so powerful, yet their ability to set the cost of borrowing, put limits on bank lending and poke their noses into every corner of the financial system is insufficient for some. Now the Bank of England’s chief economist wants to abolish the cash in your wallet and charge you for a digital equivalent.

Andy Haldane argues the world economy is entering a third leg of a long crisis: an emerging market disaster is following the Anglo-Saxon and eurozone crises of 2008 and 2011 respectively. In these circumstances he wants to be able to stimulate spending in Britain but says he cannot easily do so because interest rates are constrained not to fall below 0 per cent. He worries that if the BoE set a negative interest rate — in effect charging savers to hold their money in the hope they would spend instead — people would switch to cash, stick it under the bed and thereby get around the efforts to encourage more consumption.

Attach a gloomy assessment of the efficacy of quantitative easing and other means of stimulating spending, and his answer is to get rid of cash and replace it with a digital wallet on which negative interest rates can be charged.

The case might be logical, but that is not a sufficient condition for public policy. Mr Haldane thinks banning cash and switching to digital money would be a “great technological leap forward” but his words have more than an unfortunate rhetorical echo of Maoist China. It is illiberal and prioritises a skewed view of theory over public acceptability.

For the vast majority of the time when interest rates are positive, Mr Haldane’s plans are simply unnecessary. He would ban the use of paper currency and coinage that has been used for centuries in pursuit of a theoretical contingency. Some 48 per cent of all transactions in the UK use cash, defying regular predictions of its demise and making it by far the most popular payment method. No wonder wiser heads at the BoE, such as Victoria Cleland, the chief cashier, say cash is here to stay.

At times when interest rates would ideally fall below zero, the central bank still has more tools in its armoury than Mr Haldane cares to consider. Nordic countries have shown that significantly negative rates can be imposed on bank deposits without the feared shift towards people hoarding cash under mattresses, so there is already more room for conventional monetary policy to work. In addition, it is clear that in the event of a slump a broad-based tax cut financed by central bank purchases of the resulting public debt would provide the necessary stimulus.

Mr Haldane asserts that such action would send monetary credibility “down the most slippery of slopes”. This fear is far from well grounded; and, as Professor Simon Wren Lewis of Oxford observes, ruling out monetary financing of tax reductions for fear they might be popular is hardly a sensible position for an unelected central banker.

The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty

Some argue there would be beneficial side effects from abolishing notes and coins through the regularisation of illegal activities. Really? What is the more likely response of a drug dealer and client who mutually want to conduct a trade: “Let me sell you the dope on a traceable payment system”; or “Let’s use euros instead”? Cash would have to be abolished everywhere and the BoE does not have those powers, thankfully.

The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty, as professors Stephen Cecchetti and Kermit Schoenholtz observe. It is better if the government creates trusted, anonymous notes and coins rather than some private agent.

Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest. Cash is unlikely to die a natural death — and, until it does, long may it live.