Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank… Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter’s Maverecon | Negative interest rates: when are they coming to a central bank near you?]
I discussed Willem’s article in more detail over at Kashklash, but suffice to say that it seems a plausible strategy. And now I read in The Times that
Japan may start mulling the most radical monetary policy of all — the abolition of cash… Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible.[From To fight deflation, abolish cash.]
I agree with both sets of commentators that new technology means that we could move whollly to e-payments without a problem, because of technological advances made in the last couple of decades. I’ve written before about the situation in Japan, where the introduction of contactless payments and phones had led to a decline in the use of coins, but it’s also important to point out that cash use in Japan remains high. Nevertheless…
A significant milestone in the penetration of electronic cash within Japanese society has been reached, with this survey conducted by goo Research and reported on by japan.internet.com into electronic cash showing that now over half the population (of internet users) carry some form of credit-card form-factor electronic cash.[From e-money » 世論 What Japan Thinks]
Let’s imagine that Willem’s version of the future of money is adopted. What would the retail payments landscape look like? Well, not entirely unfamiliar, because he suggests not getting rid of all cash entirely.
As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation.[From FT.com | Willem Buiter’s Maverecon | Negative interest rates: when are they coming to a central bank near you?]
I don’t think I agree with him here, as cash isn’t a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Surely it makes more sense to simply switch off cash. Willem summarises thus:
Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed […] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter’s Maverecon | Negative interest rates: when are they coming to a central bank near you?]
Do we really want to retain cash?