Banning cash would be devastating for the economy

Banning cash would be devastating for the economy

Earlier this month, our government petition against banning cash managed to achieve the 10,000-signature mark needed to get a response from the government.

The petition is closed now. We've been waiting for a response, but I reckon it could be a while longer – there are 20 awaiting an answer, and the longest has been on the list for 198 days.

But I'm glad we did it. Because the mood music is growing ever more welcoming towards 'radical' monetary solutions.

The argument for banning cash goes mainstream

Recently, Oliver Kamm wrote in The Times that we should be looking to ban cash. Kamm's piece was fairly short. You'll probably be familiar with the argument.

Summing it up: get rid of cash. It's inconvenient, dirty, and it makes life easier for criminals. But more to the point, banning cash enables central banks to impose negative interest rates (at the moment, if they make them too negative, then people will just hold loads of cash under their mattress at 0% annual interest instead of negative 4%). That means they can kickstart the economy and fight deflation more easily.

This argument is one that's been discussed many times in "wonk" circles and the financial media. But it was the first time I've seen it in a "mainstream" newspaper. And also stated rather baldly.

I'm sure the piece was designed to provoke – but it lacked much of a nod to the obvious concerns. Beyond a sentence or two on personal liberty, it was seen as self-evidently a good idea.

"Yes, there will be initial consumer resistance, as there was when the Payments Council proposed and then abandoned a scheme to end universal cheque clearing (and so in effect, abolish cheques) by 2018. Yet this is where we'll end up." So that's that.

This is rather too glib. Banning cash is not a good idea, and even if it was desirable, it would be impractical. Let's talk it through.

Let me make something clear first. I am not attached to physical cash. I don't usually carry much of it about with me.

I have what some of my colleagues would probably see as an unreasonably high level of faith (though it's more a somewhat cavalier approach to forward planning) that I'll be able to find an electronic payment point or a cash register nearby when I need one, even when abroad.

I have wholeheartedly embraced the new "swipe" systems at coffee shops and newsagents. I wave my debit card like a wand, and they give me a newspaper or a milky coffee in return – I feel like a caveman encountering fire for the first time.

My point is, I'm not a luddite or a hold-out or someone who opposes electronic payments. Anything that makes life that bit more convenient is fine by me.

But banning cash – as opposed to offering people more desirable alternatives that eventually lead to its decline and near-extinction, as has happened with cheques – is an unequivocally stupid idea.

The psychological impact of banning cash would be incredibly destructive

Our economy is made up of people interacting with each other. Economic policies ultimately succeed or fail due to their impact on human behaviour. So it's astounding just how little attention economists actually pay to the psychological impact of their proposals.

I remember when I first started writing regularly about monetary policy, the most interesting country of all was, of course, Japan.

Almost every popular assumption in economics could be countered with the phrase: "Well, except Japan."

It's impossible for a modern developed democracy to tolerate persistent deflation. "Well, except Japan." A determined central bank can always spark inflation. "Well, except Japan." In the absence of communism, stocks always go up in the long run. "Well, except Japan."

I started to think: what if Japan's problems are caused by low interest rates?

What if it's not just demographics? What if savers feel so oppressed by their inability to make a decent return on their savings that they simply decide to save even more, rather than consume? What if, by removing their sense of security and stability, you just create a bunker mentality?

That might explain a few things. Why is the fabled Japanese housewife such a keen currency trader? And why are they currently all punting their money in the small-cap "mothers" index (as reported in the FT)?

A population that feels it's hopeless to make enough money via "normal" means might well retreat to a slightly unhinged "barbell" strategy – hold most of your money in government bonds, and then punt 10% on lottery tickets.

This is all speculation on my part (though I will be looking to see if I can find data that backs these hunches up).

But the idea that low rates are causing problems rather than solving them is becoming increasingly common. At a presentation I attended this week, fund manager Terry Smith made a similar point. And my colleague Merryn Somerset Webb has written about it a lot.

And if it's the case that low interest rates are at least partly the cause of our current problems, think how much worse the impact of banning cash would be.

If you force people to stop using one of the few tangible representations of their wealth, then that bunker mentality is going to get far worse.

It's funny. Some of the same people who argue that Brexit would be disastrous for confidence and "uncertainty" will cheerily dismiss the impact of something far more significant like banning cash.

Yet banning cash in itself – regardless of the accompanying justifications – would be seen as so dramatic and draconian that it would almost certainly have a significant impact on people's ability to make big buying or selling decisions.

And equally importantly, people would find ways to get around it. Big companies are already thinking about it. They are actively looking for financial products that would enable them to simulate holding cash without all the hassle of setting up vaults themselves.

As for individuals, there are plenty of ways to hold cash at 0% interest – Amazon vouchers, Starbucks cards, paying your energy and tax bills annually in advance – that the impact on the financial system would be dramatic.

So I suspect that banning cash is utterly impractical.

But that doesn't mean they won't try.

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