by Peter Schiff, Schiff Gold:
About a year ago, the IMF published a creepy paper offering governments suggestions on how to move toward a cashless society even in the face of strong public opposition. It hasn’t been in the news a whole lot lately, but the war on cash undoubtedly continues.
Governments and central bankers claim moving toward a cashless society will help prevent crime and will boost convenience for the average citizen. But the real motivation behind the war on cash is control over you. We got a first-hand look at what happens when governments restrict access to cash when India plunged into a cash crisis after the Indian government enacted a policy of demonetization in November 2016.
Andy Haldane serves as chief economist and the Executive Director of Monetary Analysis and Statistics at the Bank of England. He proposed the elimination of cash during a speech in the fall of 2015. Durham University professor of finance and economics Kevin Dowd has written a paper titled Killing the Cash Cow: Why Andy Haldane Is Wrong About Demonetization. Dowd wrote an article published by the Mises Wire outlining his arguments. It provides a fantastically detailed overview of the war on cash and why it threatens “widespread economic damage.”
Andy made his proposal at a speech in Portadown in Northern Ireland on September 18th 2015. I confess that I was horrified when I read it and wrote up a first draft shortly afterwards. For various reasons, I was unable to work on it again until this year and hence the delay in publication. In the interim period, there were further major developments of which two in particular stand out. The first was the publication of Ken Rogoff’s book “The Curse of Cash” in August 2016, and the second was the Indian WoC, the policy unexpectedly announced by Prime Minister Narendra Modi in November last year by which the highest denomination notes – the 500 and 1,000 rupee notes, making up 86% of the note supply – were to be almost immediately withdrawn from circulation. I touched on these in the revised version of my report, but chose not to dwell on them at any length because my report was already overly long and the Indian experiment is ongoing.
The first point to note is that the WoC is not just about technocratic issues related to payments technologies: cashless payments systems are already both commonplace and spreading. On the cash vs. digital issue, sometimes cash is better (e.g., for small anonymous transactions) and sometimes digital (e.g., where the parties concerned have the technology and anonymity is not an issue). Instead, the core issue in the WoC is whether people should be compelled not to use cash, and this issue is of profound importance. In a nutshell, my argument is that the abolition of cash threatens to cause widespread economic damage – as an example, just look at what has been happening in India – and to have a devastating impact on many of the most vulnerable in our society. It also threatens to destroy what is left of our privacy and of our financial freedom: we wouldn’t be able to buy a stick of gum without the government knowing about it and giving its approval.
Haldane’s support for the abolition of cash did not receive the generally positive response that normally welcomes his policy statements. My straw poll of the blog comments about it in the Financial Times immediately afterwards suggests that some 75-80 percent of readers were opposed to it, some strongly. “It’s almost fascist in its undertones. A totalitarian move to track and control all spending,” wrote one blogger. “Lives in an intellectual bubble. Would endanger our democratic freedom for financial experimentation,” wrote another. His critics included Andrew Sentance, a former member of the Bank of England Monetary Policy Committee: “Sorry to say but Andy Haldane’s spouting rubbish here,” Sentance said on Twitter.
The core of his argument goes as follows. His primary concern is the central bank’s room for maneuver: its scope to reduce interest rates if it felt it needed to. This room for maneuver depends on three factors. The first two are the real interest rate and the inflation target, and the inflation rate and the real rate together determine the nominal rate. The third is the Zero Lower Bound (ZLB), the lowest interest rate that the central bank can achieve without triggering a widespread move from deposits into cash, and in practice this ‘ZLB’ will be a wedge below 0.
The problem he addresses is that long-term declines in real rates – due to factors that are beyond the control of the Bank of England – have reduced this room for manoeuvre, and he is looking for means to widen it again. Among the options he considers is to abolish cash in the event that the central bank should want to implement a Negative Interest Rate Policy (NIRP). With no cash, there is no longer a ZLB to prevent the central bank going into negative rate territory.
To be fair, he does not actually say that he wants negative rates or that he wants to abolish cash. Instead, he gives a technocratic perspective in which he regards these as options that should be considered along with more conventional options such as, e.g., raising the inflation target. But to me, what is alarming is that he is willing even to put these options on the table as if NIRP and banning cash were merely technical exercises that did not entail a raft of major economic, social and other problems. It is those problems on which I focus in my report.
Why NIRP Is Mistaken
Let me first offer some comments on NIRP. One problem is that it seeks to double down on unconventional monetary policy – low interest-rate policies (LIRP) and zero interest-rate policies (ZIRP) in particular. Yet we have had nearly a decade of such policies and the results have been dismal. Faced with such a record, I would suggest that the natural conclusion is that policies that attempt to achieve stimulus through ever lower interest rates have been tested to destruction and should be written off as failures.
However, the more extreme Keynesians – Haldane included – have managed to convince themselves that the problem is not that their interest rate policies are unsound, but that they haven’t been tried on a sufficiently ambitious scale: first they confidently assured us that we needed LIRP. When that failed, they assured us that we needed ZIRP, and now that ZIRP has failed, they confidently assure us that we should seriously consider NIRP.