Abolish Cash? It's Not Such A Crazy Idea

This week the Riksbank, Sweden's central bank, cut its key interest rate from 0% to -0.1%, a record low.  This measure, along with a programme of quantitative easing, aims to boost the economy and increase inflation from its current -0.3% annual rate.  You might wonder why the Swedish central bank has been so tentative in cutting interest rates in the face of deflation, an economic scourge that all central banks vigorously try to avoid.  Indeed, interest rates in the USA, UK and Eurozone have all clustered around zero, not falling any further, despite economic contraction and stagnation in all three.  The reason for this is the so-called 'zero lower bound', which means that, in practice, nominal (not adjusted for inflation) interest rates cannot be reduced below zero.  This lower bound occurs because cash effectively has an interest rate of 0%.  So, when interest rates go below zero for depositors, they would rather hold cash than leave it in the bank to wither away at negative interest rates.  Consequently, central banks become impotent when faced with a need to stimulate the economy while interest rates are already very low; rates cannot be pushed further down.

However, this is only the case in a world of hard cash and paper money.  If Sweden, or indeed any country, were to abolish paper money and go completely electronic, then this problem would disappear.  Sweden, and countries like the USA or UK, would not have had to endure the lengthy and painful recessions that have occurred following the 2008 financial crisis.  In a fully electronic world, interest rates can always be pushed lower to stimulate the economy without fear of a mass conversion of deposits into hard cash, which would no longer be an option.  There would never be a repeat of the Great Depression, or Great Recession, in a cashless world either, as monetary policy can always become looser and more expansionary.  This radical idea would have seemed crazy even a decade ago, but with the irresistible and astonishing rise of the internet and digital forms of payment and money, it doesn't seem so insane now.  Technology - debit cards, online and contactless payment - has rendered cash useless.

Eliminating cash would have myriad other side-benefits.  Forgery of cash would become impossible.  Organised crime would become far harder to conduct, as cash could no longer be used to fly under the radar; all movements of money would be digital and accessible by the authorities.  Tax evasion would fall as businesses that currently use cash as a way to under-declare income would no longer have this option.

In light of the forceful economic arguments in favour of abolishing cash, in addition to the large side-benefits in terms of reductions in tax evasion, crime and forgery, it is clear that it is time for the abolition of paper money.  The Economic View hopes that, long into the future, economic historians will back and chuckle at the relic of paper money and wonder why we persisted with such a system for so long.