Kenneth Rogoff has an article in the FT this morning in which he argues that the time ash come to get rid of paper money. He has two logics for asking for this. First of all he says that ending the ability to hold cash will stop people bailing out of bank accounts if interest rates become negative, and as such negative interest rates will be possible. I think that interesting, but not the focus of my attention here. More of concern to me is the idea that ending paper money will make tax evasion much harder.
As Rogoff notes "in both the eurozone and the US there is roughly $4,000 in circulation for every man, woman and child, and it is not easy to find. In Japan the figure is almost double that."
That's an astonishing amount of cash and much is held in very high denomination notes like US$100 bills, which are rarely seen in practice, rather like the €500 note, which has no practical use. As Rogoff admits, much of this cash might circulate outside its home territory, but that's actually the point: it is used for crime in a great many cases, and money laundering in many more. In the UK the problem is slightly smaller. We only have about £1,000 of cash per person but I know no one who holds that sort of sum, and I guarantee it is not needed as the cash floats in tills or banks either. Building societies do, according to the Bank, hold only £500 million or so between them, for example.
So what if we did get rid of physical money or, at least, paper money? Would it matter? Most young people hardly seem to carry any cash now anyway. And if we had a £5 and £10 coin that would be more than enough to cover most people's liquid needs - and the need to take cash at the church fete and charity event - and be near impossible, because of weight issues, to be used for laundering and crime. Getting rid of all cooper and requiring tills to round to the nearest 5p would solve a great many other issues too, not least being the fact that these coins are no longer economic to mint and most end up not being used.
It''s an idea whose time has, I think, come because the ability to control the cash economy that this would create would be of enormous value.
I'd be interested in comments.
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An interesting thought. However, I think you under estimate how much cash is out there and is used. I used to repair cash machines. Most cash machines have four cash drawers, each of which is capable of holding around £125K of £20 notes. It is not uncommon for busy machines (in city centres) to be loaded to the maximum at weekends, especially bank holidays. Even rural machines often loaded with six figures to limit the number of trips to refill them (time consuming and costly).
There are over 64,000 cash machines in the uk. In 2011, over £191 Billion was withdrawn from cash machines, and the average amount withdrawn each time was £67.
Cash is King, as they say. I very much doubt it will disappear any time soon.
But £67 could be delivered in coins….
No, maybe not, you’re saying because physically that just would not be possible?
But that ignores the behavioural impact of withdrawing notes….it happened with £1 after all
Yes, it happened with £1 notes in the UK, mainly due to inflation. Similarly, it will happen with £5 notes probably in the next ten years. I mean, when the £1 note disappeared, it would just about buy a pint of lager. These days a pint of lager is around £4.
As I mentioned above, £191 billion is a heck of a lot of £10 coins. The amounts of cash being withdrawn over the years is actually increasing, not decreasing. The main reasons being an increase in cash machines due to closure of bank branches, and a lack of trust in the banks’ IT ability.
Contactless payments are fine, provided they are limited in amount, and provided they do not debit your bank account. If they debit a credit card account, you can settle your bill monthly. If it is direct to your bank account, reconciliation becomes problematical if you forget to deduct payments from your balance. This can cause you to overdraw, which is what the banks want.
Most people don’t reconcile bank accounts
99% don’t, I am sure based on professional experience
With new technology the new card form Barclays, for instance. Will remove the need to handle cash for items like coffee and the daily lunch.
http://www.barclays.co.uk/Helpsupport/Barclayscontactlessdebitcards/P1242561764200
I regularly cater an event at a scout camp in summer. Each year I take about £6-7,000 for food and drink; entrance is usually paid in advance, but there’s normally another £1,000 or so on the door.
£8,000 in pound coins weighs rather more than I do. Completely impractical to handle, especially as the banks are shut after Saturday lunchtime so I couldn’t even bank it in small doses. As I’m in a field electronics aren’t reliable, even if I had a merchant account to let me take cards.
The average spend at that event seems to be about £30-£40 per person, though I think the median is rather higher (many people self-cater). In £2 coins that’s about half a pound, which would require some significant strengthening of trouser pockets.
Cash floats in tills aren’t normally very high, but that’s because most of the notes are taken out as the day progresses. Any given till could easily have a four-figure sum flowing through it in a day, even if it never contains more than £100 of float. Banking the takings of a corner shop would be rather tricky if it’s all in cupro-nickel.
I’ve occasionally needed four figure sums in cash for private purchases – I seem to remember having to sort out a deposit and the initial rent on a flat years ago, when the agent’s card machine wasn’t working and they wouldn’t take a cheque (I think they wanted to know it was paid then and there).
And only a couple of weeks ago, trying to get some Euros at the post office they couldn’t take my card so I had to nip round to the bank next door, withdraw some cash, and immediately swap it for Euros. It was only a few yards so I could have managed to stagger round with a bag weighing a good few pounds, but a wad of notes was much more convenient – not to mention much easier to count.
One may only need small amounts of cash most days, but there are enough cases when it’s needed that getting rid of it would make life inordinately complicated. Large businesses could probably cope, but small ones, voluntary organisations and private individuals would struggle.
Note I was suggesting higher denomination coins – at least to £10
And I do know they can be counterfeited
But also note a few years ago you would not have imagined how little cash you use now
No, I use about as much cash now as I did then. BACS and Paypal has replaced most cheques, but cash is pretty much static.
Not amongst the young – ask them
That’s a bit of a bait and switch! 🙂
However, my anecdata (from knowing a large number of 20-somethings socially) is that they tend to use cash almost (if not quite) as much as I do. Their trousers are near enough to falling off as it is, without you weighing their pockets down with coinage!
OK
Not my experience
Natwest is open in major towns and cities on Saturday afternoon.
“Their trousers are near enough to falling off as it is, without you weighing their pockets down with coinage!” I really like that.
How is one supposed to pay off the drug dealer??? Do you take Amex is not something they say to each other. Poor Rev Flower would be in a crises.
But that’s the point
I am not so sure we need to follow Italys lead on this one.
http://www.news.com.au/finance/economy/italy-to-include-drug-and-prostitution-money-in-gdp-calculations/story-e6frflo9-1226928776821
Do away with large denomination notes for a starter. I have no need for £50 notes and even £20s can cause problems in small shops. I do prefer cash for small purchases, and so do small shops who don’t want to pay a fee for a small transaction. Although as contactless terminals become more common, I’m sure my habits will change.
I think that contactless point is the real issue here – as people get used to that even a cash Luddite like me (and I do use the stuff) may change patterns – and I know I am
I think people in London, who use the Oyster card regularly will be more forthcoming with changes from cash to card.
Indeed
In this sense I am a Londoner
What exactly does it mean for poor people? Already they have been forced to accept wages and benefits being paid into a bank. Without the option of cash, negative interest will be the same as bank charges: which are defensible when there is a cash option but was also the reason that in the past most poor people did not have a bank account at all. This proposal seems to put us back to that position but without any protection for the poor at all. If you think that small accounts will be perpetually exempt then dream on. Nor is that effectively offset because sometimes interest will be positive: interest credited on not much is not all that significant: interest charged on not much is very significant indeed.
Nor am I tempted by the prospect of lack of anonymity it implies. Already we are bombarded with advertising and cold calling etc, some of which is generated from the selling of information about purchasing etc. That would presumably increase and who does that benefit?
Cash is a protection and it is probably true that on the large scale that anonymity facilitates tax avoidance and evasion; and some criminality. But are there not other ways to deal with that? The problem is not inability: it is lack of political will. So once again freedoms are to be curtailed and not for the reasons outlined on the tin. Or so it seems to me.
The dystopian novel, The Handmaid’s Tale, sets out the dangers of such a move quite graphically if taken to extremes. The tranfer of such power has real dangers I think, if I understand the proposal properly
I oppose this for now unless a far better case for it is made
Noted!
And aprpeciated
There are plenty of legal reasons why people might want to make anonymous transactions. For privacy, you might not want to have bondage gear or a bong show up on your bank records, especially now we know the extent of government surveillance. Plus, there are transactions which are illegal but not necessarily immoral.
I really don’t take those objections seriously
Apart from its usefulness in certain transactions, cash is the only money for which the government gets seniorage, according to James Robertson and Positive Money.
Seniorage is a sort of upfront tax on the privilege of creating money through the central bank, they say. (Because it is sold at face value to banks, but costs less to produce). I would not like to say exactly the value in billions to the treasury, but giving up this privilege would be like a tax loss in kind.
I believe that it would mean that all money 100% – would then be created as a debt by banks.
Any responese welcome – I am still a keen student of the money supply and tax system!
I am suggesting the retention of coins
Mr Murphy: is it your contention that the majority of tax avoidance/evasion is done with cash? That was not my understanding because it seems to me that the use of tax havens does not entail large corporations hopping onto planes with bags of cash. I rather thought it was done through legal means: spurious loan interest, and the like. Those are as electronic as you like, surely: again I suggest that the problem of dealing with such matters is not down to the form but rather to the lack of political will.
There are supposed to be good controls on money laundering which should deal with cash from large scale criminal behaviour: but as we have seen it does not. That is not because the sums are cash: it because the controls are not adequate and are not enforced. I completely fail to see why abolishing cash would ensure improvement, because where there is a will there is always a corrupt banker to provide a way.
Nor do I see how retaining coins meets the objection re seignorage: that has already been subverted by the fact that the banks have taken the right to create money and that is a large part of the problem, IMO. I far prefer that right to be returned to the sovereign in toto. Yet this move would take us in the opposite direction, as I see it, as Sandra Crawford suggests.
I do not believe the justifications put forward for this suggestion: as ever they are a complicated answer to problems which are not as presented. Given the source that can come as no surprise. Not that the source is in itself important but it is wise to think harder about proposals which come from those who have already been demonstrated to be, at best, incompetent in their analysis: and who found on theories which have already been shown to be false when tested in the real world.
There is £47bn of tax evasion in the UK trading shadow economy, in my opinion
That massively outweighs the loss to offshore: I suspect we may be talking by a factor of 10
And compared to seignorage that loss is vastly greater and anyway, seignorage can be dealt with by other taxes
I think we need focus on the priorities here
Richard, Whilst I see the rationale behind the argument you have presented, I think you have missed the psychology of cash. I am completely against this for the following reason (for which I admit I have no empirical data myself, but I am sure someone, somewhere has shown a correlation): Since we have increasingly used debit & credit cards for transactions, we have had an escalation in personal indebtedness. Psychologically one is much more aware of a purchase and the spending of money when the trasaction involves either cash or the writing of a cheque stating the value in words. My major concern is that by doing away with cash we would completely sever the immediate link between purchasers appreciation of their ability to pay and therefore inadvertantly encourage the running up of yet more debt. I am absolutely sure this would be one of the unintended consequences. It is also one of the reasons I am against banks making cheques obsolete.
Interesting
I agree with this and also have no empirical evidence. But I will say that people of my acquaintance who work in money advice for the poor at CAB often tell me that the best advice they give to the newly unemployed, for example, is “go back to cash”. That is for the reasons Windsorlass gives. The poor already operate on cash and that is not an accident.
I understand that in the UK 97% of our money is electronically generated by the banks, the remaining 3% is coins and notes. In 2008 we were close to finding all the cash machines closed following the financial upheavals and can we now trust the banks to operate fairly and in our interest at all times?
It is most important that we maintain the alternative of paying by cash. The other systems depend on electricity supplies and internet/telephone connections and these are not guaranteed. Last winter here in mid Devon in floods and storms the system quickly fell apart.
Young people blindly accept that the system is stable and have not yet seen what happens when total failures occur – though many shops and bars will not accept card transactions under £10.
We could change to resilient light coinage instead, Richard, as you suggest, but in my view this is a freedom we should not hand over to the banks.
Thanks
The conclusion is we seem to need low value cash – but not high value notes
How will that solve the problem of the UK trading tax loss you refer to above? How many people pay their plumber in £500 notes? I really do not see any advantage in this suggestion and I suspect the introduction of criminality serves to hide the real reasons for this. Presumably solving the alleged problems of “zero lower bound” interest rates is at the heart of it: and that is an attempt to pretend that all is broadly well so there is no need for a root and branch change to the nonsense that is macroeconomics.
they use £50 and £20 notes
I would get rid of them
I pay my plumber with a credit card. Okay now we are in a good relationship, he emails me an invoice, I pay by BACS.
If you were an evil dictator a cashless society would be a very powerful tool because you would be able to monitor all of the financial and therefore most of all activities of any dissidents. In particular, as payment systems become ever more secure, with biometric security etc. anyone without access to a bank account – for whatever reason – would simply not be able to transact and would rely on the charity of others at best. If we apply this scenario to historical examples it becomes apparent that such a system had it been available would have been abused countless times, increasing the misery of persecuted groups.
I have not suggested abolishing all cash
But I have noted all that has been said
One of the big changes next in our lives are the use of paypal types of payment systems. Banks have a small part of our lives. However with new and expanding technology we will be seeing other ways of paying people. This might even go with crowd funding for business.
Its going to be hard for some people o understand and handle the change. However many activities that require cash, only need person 1 to pay person 2. A bank doesn’t need to do that. Not even a card, a phone or even a figure print on the machine at Asda.
Money being printed was only introduced at a time when 1 it was need and 2) its all they had. Would they print so much now, with credit cards, possibly not. It might be sad, by I suspect that in 50 years time we wont have as much money in our pockets.
Less than 50 years I am sure
In fact cashlessness will happen soon whether we like it or not
Since the abolishment of the Truck Acts when we lost the right to be paid fully in the coin of the realm working people have been driven into the arms of the banks. In your piece on abolishing paper money this would in effect build the hold banks have over mainly poor working class families. Sequestration of money would be easier by a range of bodies including HMRC. I think you underestimate the use of paper money amongst the majority of those on limited incomes.
I think there is some mileage in getting rid of high denomination notes as most of us never really get them but in general paper money is alive and kicking in rural North Yorkshire.
A cash wage packet, often weekly was a money management system that regulated peoples spending, admittedly before pay day lenders but nevertheless it was a guide to spending and saving. The absence of paper money has encouraged people to spend what they have not got and pay interest on top of that.
Bank accounts used to be free but the trend is moving towards charging for the privelidge of them having your money on deposit. So, whilst not advocating a return to weekly pay packets there is a case for having the right to be paid in cash.
I don’t estimate the power of cash
I realise that it also can be immensely destructive in terms of tax not paid
Alernatives to GBP cash could be other fiat currencies or non fiat coins of value or similar,digital coins etc or anonymous tokens or vouchers stamps, art etc.
Other valuable lightweight consumer products could be used.
With our current banking setup and political class it could be an open invitation to extract further productive value from labour. Particularly if they decided to negative interest rates for starters, then maybe worse.We could then move to ration cards.
Would this also allow the banks to increase the ratio of ‘assets’ up and keep leverage levels up and be another back door subsidy.
On the otherhand it could spur the creation & use of competing, non-government controlled cash money, perhaps even an improved digital offering. It might be interesting to find out.