The UK could easily be the first nation to make the transition to electronic money. Such a dramatic move would be easier to push through in a parliamentary system of government, with a powerful Chancellor of the Exchequer, than in the American system of government, replete with checks, balances, and gridlock. As Joe Weisenthal writes, the Bank of England has a creative incoming Governor in Mark Carney—who is now Governor of the Bank of Canada—and a Chancellor of the Exchequer willing to go outside the monetary policy box far enough to appoint a Canadian.[From Quartz]
This seems like an astonishing forecast, specially since the use of cash in retail transactions went up last year and M0 (the notes and coins in circulation in the UK went up about 5% from October 2011 to October 2012, the most recent figures available from the Bank of England). So what is its origin? Most of the time the we are discussing the transition to a cashless economy on this blog and in related contexts, we are talking about cash as a medium of exchange and confine our forecasting to related social functions. These include, for example, the transaction fees associated with the mechanism of exchange and its anonymity or otherwise. But cash has another role in the economy and it is a role that is not generally taken into consideration. This is the role of cash in relation to monetary policy and the control of the economy. Here, in a nutshell, is the point from a serious economist’s point of view:
As I’ve been saying for a while, humanity could rid itself of the pesky zero bound problem by eliminating physical currency and creating a situation where nominal interest rates can go negative.[From Willem Buiter digital currency.]
So long as people can hold cash, interest rates cannot go negative. I can remove a small amount from your bank account every year. That’s not just anyone saying that, by the way.
The noted economist Willem Buiter was a member of the Bank of England’s Monetary Policy Committee from June 1997-May 2000. He joined the London School of Economics as a chair in the European Institute in September 2005… In this podcast, he discusses some reasons for getting rid of cash.[From Digital Money: Willem Buiter, LSE]
There’s another way to achieve the same goal, which is that rather than abolish cash or drive it out of the formal economy, we could change the relationship between the circulating medium of exchange and the unit of account. This is far from hypothetical, as it is the kind of solution that is being discussed in some circles with reference to the specific case of Greece. It is entirely possible to imagine Greece leaving the euro in order to adopt an e-drachma that never exists as a physical currency. The circulating medium of exchange may well be dollars or euros, but wages and taxes would be set in e-drachma.
Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars.[From How paper currency is holding the US recovery back – Quartz]
But why stop there? Why choose the unit of account that is national or supranational? Why not choose other units of account that might more effectively facilitate trade by providing less volatile relationships between countries or other currency blocks. The idea of synthetic units of account is very appealing and there are existing candidates: the Special Drawing Rights, for example, or the Wocu. Once again, we find ourselves back at John Major’s “hard edu” an idea whose time might well come again. As a company that does plenty of business with other European enterprises and institutions, we would happily see contracts denominated in a unit of account that does not correspond to any national fiat currency provided it was stable.
P.S. The joke is on me here because just as I’d finished writing this, I discovered that it looks as if the Bank of England is going Canadian in a big way.
The Bank of England has made contingency plans for a changeover to plastic bank notes, Sky News has confirmed. Tender documents for a new contract to print money have included a clause allowing for the polymer-based currency.[From Bank Eyes Plastic Money To Replace Notes]
Given this turn of events, I’ve submitted a petition for full Canadian style currency reform on Her Majesty’s Governments e-petition site and I would invite all UK citizens to sign it! My four point plan, put forward in the petition, is as follows:
- Stop producing 1p and 2p coins. Allow them to remain legal tender in small amounts (as they are now) for another five years.
- Abolish the fiver. The £1 and £2 coins are adequate for small purchases. As an aside, Simon Heffer (Daily Mail, 18th December 2012) points out that when the fiver was introduced it was worth close to what £500 is worth today – it was not used in retail transactions any more than a €500 is today (i.e., not at all).
- Stop producing £20 and £50 notes and allow them to remain legal tender for one year only, thus immediately raising the cost of crime, corruption and tax evasion. The department responsible for processing Suspicious Transaction Reports (STRs) might have to take on a few temporary staff as shedloads of black market cash find their way into bank branches, but the cost should be manageable.
- Start making £10 notes from recycled plastic, thus increasing their longevity and reducing the cost of the means of exchange. I didn’t say this in the petition but I thought that the idea of having only a single banknote ought to reduce the cost of ATMs and other vending machines and also make life easier for blind and partially-sighted.
If you’re wondering why we should be thinking about switching to plastic pounds, it’s because of cost. If we abolish the high value notes and the fiver (the fiver is now worth not much more than the one pound note was worth when it was scrapped in 1984), we’ve still got to have the £10, so we may as well make it cost effective.
Polymer notes cost about twice a much to produce as paper ones, but they could stay in circulation longer. A study requested by the Bank of Canada estimated that the new bills would last two and a half times as long as paper notes. Securency says they last four times as long.[From Here Comes the Plastic Money]
Given that most £50 notes are stuffed under mattresses rather than used in retail transactions, I wouldn’t have though that the plastic tenners will have much slack to take up, but we may as well go plastic and cut the costs as much as possible. The establishment may resist my plans because the note issuing department of the Bank of England is without a doubt the most profitable nationalised industry in British history and it has to remit its profits to the Treasury. They are, in essence, living off the immoral earnings of M0. I trust I can count on your support.
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers