Abolishing cash or building social housing? Which is best to boost the economy?

Posted on September 19 2015

Bank of England chief economist Andy Haldane's speech in Northern Ireland yesterday was a bit of a revelation.

Let's summarise his thinking (as I see it).

First, we're in for tough times.

Second, there is no case for increasing interest rates now.

Third, conventional QE has run out of road.

Fourth, any alternative to conventional QE has to be monetary policy.

Fifth, this means potentially relaxing the inflation target to 4%

Sixth, even this, to allow sufficient headroom for monetary policy, will require that we have negative interest rates.

And, seventh, that might require the abolition of cash in the economy so that people will be forced to hold money in banks and see its value deteriorate.

I am sure you could pull out variations on the above, but I think it is fair. Now let's stand back and think about this.

First, credit where it's due. Andy Haldane has shown political and economic courage in saying these.

Second, as an aside, it is interesting to think what Haldane's suggestion of abolishing cash would do for the shadow economy and the tax gap: I will leave that idea floating for now.

Let me instead look at why Andy Haldane has been forced into such an extreme position that he is suggesting the abolition of cash. There are several clues as to this in the article of which the first is this:

Reputation, in all walks of life, is hard-earned and easily lost. Inflationary reputation is unlikely to be any different. So consciously de-anchoring the boat, with a promise to re-anchor some distance north, runs the risk of a voyage into the monetary unknown. Once un-moored and de-anchored, the course of inflation expectations is much harder to fathom. That navigational uncertainty is likely to be damaging to macro-economic stability.

In other words, although it would make complete sense to increase the inflation target there is real doubt about the ability to do so. The BoE has become constrained by its own myths. What is right cannot be done because macroeconomists believe the stories they have told rather than the evidence of the facts.

And the second might be this:

[E]xecuting QE on a larger-scale or putting it on a more permanent footing would risk blurring the boundary, however subtly, between monetary and fiscal policy.

If a central bank executes QE by buying government debt, this is likely to have an impact on the cost of servicing that debt — indeed, that is one of the channels through which QE is supposed to work. If that purchase is permanent, it also has implications for the quantity of debt the government needs to issue, for a given fiscal stance. Either way, there are direct consequences for the government's budget constraint

That would corrode another hard-won monetary prize over recent decades — namely, central bank independence. In short, as QE becomes permanent, monetary policy credibility heads down the most slippery of slopes.

So let's put that another way: another macroeconomic myth - that of Central Bank Independence - must be preserved.

Worse, the fact that the BoE can only do monetary policy (by law) means that it must have priority over fiscal policy, even if it is obvious that the latter might be more effective in the situation that Andy Haldane clearly thinks we are going to face (as do I).

I venture to suggest that the wrong questions are being asked if a solution as extreme as negative interest rates enforced by abolishing cash is the answer.

Is the right question, instead, to ask whether monetary policy has any role in the face of the likely coming crisis?

And is it also to ask what fiscal policy might support that?

And is it instead to ask what is best for the country rather than what is best for the BoE, or even monetary policy?

And could it also be right to ask how the BoE should be supporting fiscal policy (which is its legal duty) rather than seeking to preserve a monetary policy that clearly cannot work?

To put it another way, rather than such desperate measures wouldn't it be better to say now is the time to build social housing and invest in the economy and get real people at work rather than  to crush the life out of certain parts of the UK and at the same time seek to promote the most horrendous consumer boom when it is investment and not (overall) increases in consumption that we really need?

I reiterate, I admire Andy Haldane. But if there is a choice on how to tackle a downturn I really do think I might have a better plan.

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23 Responses

  1. James says:
    September 19 2015 at 10:50 am

    Tell me: when the Big 4 bank computers have been trained to say “no” to large numbers of potential account holders, how is the abolition of cash supposed to work?

    And how long before the building trade collapses for lack of cash-in-hand labour?

    What kind of cloud cuckoo land does this fool Haldane live in?

  2. Katy says:
    September 19 2015 at 11:54 am

    Richard can you just elaborate on how a cashless economy works to achieve the desired effects?

    • Richard Murphy says:
      September 19 2015 at 1:35 pm

      It’s debit card world

      So no one would ever pay in physical currency

      Everything would be solely electronic

      BUT that means you have not choice but hold money in a bank and so be charged for it

      • Cliff says:
        September 19 2015 at 3:03 pm

        Exatly; and how remarkable that it is at this time when electronic payment has been rolled for all that a really top banker suggests that a main cure for our ills would be for us all to surrender to them.
        Much more and I will begin to believe the conspiracy theorists may have some credability.

      • Cliff says:
        September 19 2015 at 3:14 pm

        Exactly; and how remarkable that it is at this time when electronic payment has been rolled for all that a really top banker suggests that a main cure for our ills would be for us all to surrender to them.
        Much more and I will begin to believe the conspiracy theorists may have some credability.

  3. Demetrius says:
    September 19 2015 at 1:35 pm

    Back in the 1940’s when cash was very short ordinary people reverted to other means of exchange. Grandfather had a nice line in eggs. Uncle who worked in the cold stores had meat alleged to be bad but better than in the butcher’s. In my father’s factory there was a good supply of knock off cigarette lighters. Of course, cigarettes became an effective currency. In the British Army of the Rhine I did well out of my cigarette ration. So abolish cash what would become the 21st Century means of exchange?

  4. Matt Usselmann says:
    September 19 2015 at 2:27 pm

    “And could it also be right to ask how the BoE should be supporting fiscal policy (which is its legal duty) rather than seeking to preserve a monetary policy that clearly cannot work?”

    You could also make the argument the other way around. By introducing negative interest rates, the BoE would introduce a monetary policy which is very much like a fiscal policy. The government could always introduce a tax on deposits, which would have the same effect.

    Now, arguably it is really the job of government to decide how to tax deposits, rather than letting the BoE and individual banks decide which negative rate they will charge on deposits. It is a form of wealth tax, and governments, rather than central banks should decide that.

    To abolish cash is the logical conclusion of Haldane’s argument, but politically completely unacceptable. Whereas PQE will indeed find more and more supporters.

  5. AliB says:
    September 19 2015 at 3:25 pm

    So, according to Andy Haldane I am to relinquish control of my life to the banks and pay them for the pleasure of doing so.
    What I think of that is too rude to write, and I imagine is how a good percentage of the rest of the population feel.

    There was a thriller series on the TV some time ago when a single card gave you access to everything in life ; money,transport, buildings etc etc. You could not even sell your possessions , everything had to go via your card. When you fell foul of government, they cancelled the card and you were an outlaw with no ability to live.

    1984 here we come. Have the population been given enough SOMA to possibly accept this?

  6. Ysaac says:
    September 19 2015 at 5:00 pm

    Richard, you dont understand. THERE IS NO ALTERNATIVE(to monetary policy)!! 😛

    Haldane’s not a crazy guy from what I have read about him in the past. Maybe he is playing at something. I am almost tempted to believe that he’s using himself to show others outside of the BOE, how it really thinks.

    Anyway, you mention towards the end that “when it is investment and not (overall) increases in consumption that we really need?” Doesn’t capitalism work on people consuming the results of the investment? If so, in that case, wouldn’t it be better to use the phrase “investment consumption” in your sentence to highlight that fact?

  7. Ysaac says:
    September 19 2015 at 5:15 pm

    Also here’s philip mirowski giving a brief talk on the history of central bank indepedence and that it actually comes out of a dislike of democracy – http://www.nybooks.com/blogs/gallery/2015/mar/29/whats-wrong-with-the-economy/ (4th video)

  8. Simon says:
    September 19 2015 at 9:08 pm

    Richard-in your earlier blog on this subject you implied that Haldane was using a sort of reverse psychology here to advocate for PQE, by illuminating the absurd corner monetarism has painted itself -do you still believe that to be the case?

  9. MayP says:
    September 20 2015 at 10:40 am

    Abolishing cash is a really crazy line.
    In quite a few towns there are local currencies that are widely accepted – the Bristol Pound comes to mind. If the BoE won’t issue cash they have copetition and somebody else is already doing it. So if the means of exchange will not now be cigarettes we could all be trading in Bristols in future!
    If, as seems to be the consensus here, Haldane is intelligent, then he must surely just be pointing out the futility of the current policies. Perhaps his position doesn’t allow him to advocate alternatives outside the current straightjacket?