The Corner

The War on Cash (Continued)

Writing in Bloomberg News, Narayana Kocherlakota (late of the Federal Reserve Bank of Minneapolis, and now a  professor of economics at the University of Rochester) adds his voice to the war on cash. Echoing, amongst others, Bank of England economist Andy Haldane, he’s concerned that the existence of physical cash limits the extent to which central banks can push interest rates into negative territory, thereby hindering the fight against deflation:

[T]wo government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won’t buy safe assets that yield even less. The second is the central bank’s promise to keep the inflation rate low and stable — at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).

His solution?

The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required. Some groups of people, particularly retirees and soon-to-be-retirees, might react with horror to such an idea. That’s to be expected. After all, consumers in poorer countries respond similarly to removing distortionary price ceilings from bread and milk. That doesn’t make price controls desirable. If a government wants to redistribute resources to the elderly or the poor, it’s much better off just giving them money.

If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.) Second, currency does provide a service beyond being a store of value and a medium of exchange: It’s anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.

There’s lot to say about this, not least the fact that money is not just a commodity. The idea of a currency that—as an attack on ‘hoarding’— is deliberately engineered to depreciate is not new (Google Schwundgeld, Freigeld and/or Silvio Gesell), but there are good reasons that it is has not caught on.  A society where the national currency is not, at least in principle (there is that whole inflation thing), a store of value is a society that is beginning to become unmoored (I would say something similar—if not so dramatic— about negative interest rates, but that’s a discussion for another time).

And then there’s the whole question of privacy, something which must include a reasonable degree of privacy from government. That’s not something that the state can be trusted to guarantee. Abolish physical cash, and what’s left of individual liberty would fray very quickly.

Meanwhile, the Wall Street Journal reports:

HAMBURG—German savers are leaving the security of savings banks for what many now consider an even safer place to park their cash: home safes. For years, Germans kept socking money away in savings accounts despite plunging interest rates. Savers deemed the accounts secure, and they still offered easy cash access. But recently, many have lost faith. “It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout. Interest rates’ plunge into negative territory is now accelerating demand for impregnable metal boxes. Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”…

“Safe manufacturers are operating near their limits,” said Thies Hartmann, managing director of Hamburger Stahltresor GmbH, a family-owned safe retailer in Hamburg, which he says has grown 25% since 2014. He said deliveries take longer from safe makers, some of which are running three production shifts.Germans point to the European Central Bank, which since 2014 has tried to reignite eurozone inflation by pushing interest rates below zero. Savers now face the prospect of being charged fees on their deposits. Some companies and large private depositors already incur charges. The latest such sign that penalty rates are creeping in comes from a small cooperative bank in the Bavarian town of Gmund on the Tegernsee lake. As of Sept. 1, the bank, Raiffeisenbank Gmund, will charge its customers 0.4% on deposits above €100,000. Some 140 customers with total deposits worth €40 million are affected, said management board member Josef Paul….

I doubt this ends well.


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