The Corner

Monetary Policy

Cash Caches Enjoying Their Moment (and Rightly So)

(Steve Marcus/Las Vegas Sun via Reuters)

One of the reasons behind the war against cash, at least for some, is the way that the existence of physical cash acts as a barrier to any efforts to push interest rates deep into negative territory.

Here’s a Financial Times report from 2015:

Having already decided to cast paper notes aside in favour of plastic, the Bank of England’s chief economist has proposed getting rid of cash altogether.

For many, the idea of abandoning a system that has been with us for centuries in favour of a government-backed digital currency will seem a step too far. But Andy Haldane, the radical thinker at the BoE, argues that such a move would give the bank new flexibility in the event of another downturn.

In a speech to the Northern Ireland chamber of commerce, he said it would help the bank to manage inflation by enabling it to bypass the current constraint against lowering rates below zero.

The assumption is that if a central bank introduced negative interest rates — a radical move that would effectively amount to a charge on holding money — people would convert deposits into cash. But abolishing cash would remove that option.

And now the FT from just the other day:

Cash use at the till has declined slightly during the pandemic, as consumers accelerate the shift to electronic payments. But just like the period before a natural disaster, there has been a spike in cash withdrawals in the US…

“[Cash is] the one asset that people are pretty confident isn’t going to lose value,” said Eric Rosengren, president of the Boston Fed, in March. “And so people are deciding they’d much rather hold more of their assets in cash.”

Mr Rosengren says that a small number of wealthy people withdrew large amounts of cash in his district early in the pandemic, as an unimpeachable hedge when markets for even safe financial assets, like Treasuries, were behaving strangely. Mostly, though, he believes that the withdrawals were just precautionary decisions by ordinary Americans.

Bill Maurer, an anthropologist at the University of California, Irvine, who studies payments, calls the decision to withdraw cash “contextually rational”. It’s not that people are worried about how the Fed distributes cash, he says. It’s that, as in any disaster, people are worried about everything else — the electrical grid, or the mobile network….

Holding on to a stack of bills, says Prof Maurer, is “the recognition that in a pinch I can use cash and it will work with anybody. I don’t need a point of sale terminal.

There are many arguments that can and should be deployed against that those who would get rid of cash, ranging from privacy concerns to the threat that significantly negative interest rates could represent, but perhaps the most important is this: Imagine a world where cash has gone digital and the lights have gone out.


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