The War on Cash

Kevin Dowd, one of the early proponents of using futures markets in monetary policy, has a new paper on the (global) war on cash:

One of the most significant but least noticed developments in recent years has been a gradually escalating government war against cash: in fact, this war has already escalated to the point where the abolition of cash is now a very real possibility. At first sight, one might think that there is nothing too much to worry about: we are merely talking about technocratic issues related to payments technologies and the implementation of monetary policy, and cashless payments systems are already both commonplace and spreading. The reality is rather different: the issues at stake are of the most profound importance. The abolition of cash threatens to destroy what is left of our privacy and our freedom: we wouldn’t be able to buy a stick of gum without the government knowing about it. Besides making us all entirely dependent on the whim of the state, it would also undermine economic prosperity and literally devastate the extreme poor. Quite simply, the government’s war against cash is the state’s war against us.

The proposal to abolish cash has been supported by a number of prominent economists, including Harvard economist Ken Rogoff, Citi chief economist Willem Buiter, Paul Krugman, and Peter Bofinger, a member of the German Council of Economic Experts. Then, on September 18th, in a speech to the Portadown Chamber of Commerce in Northern Ireland, another prominent economist – Andy Haldane, the chief economist of the Bank of England – announced that he too was in favour of abolishing cash.

I don’t agree with all of Kevin’s views on monetary policy, but the second half of the paper (which criticized proposals to abolish cash) is excellent.  Unfortunately, I expect that we will lose this battle.  We are moving toward a “1984” type society, and it’s very clear that the public (on both the left and the right) is willing to trade in our freedom for the illusion of protection against all those scary “terrorists” in our midst.  The good news is that I won’t live long enough to see currency abolished—it’s still several decades away in the US.

On other topics, we saw another strong jobs report today.  I wonder if I am reading the linked document correctly.  It seems to suggest that we saw a huge upsurge in the number of people holding two jobs in 2015.  Is that correct?  With powerful growth in jobs during Q4, and anemic growth in output, expect more horrible productivity numbers ahead.  The Great Stagnation continues, and it’s not a demand-side phenomenon.

Let me also address some comments I have received about China.  I’m certainly no expert on the Chinese economy, but from the outside it seems like they have an excessively tight money policy and an excessively easy credit policy.  And indeed these two failures are related.  To ease monetary policy they’d have to let the yuan depreciate significantly (although not the 30% figure you see tossed around.)  But they are not (yet) willing to do this.  So instead they’ve run an expansionary credit policy, piling up debt.  I think they’d be better off with a tight credit policy and an easier monetary policy–say 7% NGDP growth for 2016.  Under current policy, there may well be a debt crisis at some point during the next decade.




43 Responses to “The War on Cash”

  1. Gravatar of Jean Jean
    8. January 2016 at 09:23

    Scott – I don’t think it will take a decade. The eurozone had been the most important market for Chinese exports, and the Europeans still haven’t realized that the eurozone’s most pressing problem is an overly tight monetary policy. The periphery of the eurozone went into recession in Q2 in 2007, and we’re now in Q1 of 2016 – do you think the Europeans are suddenly going to realize their mistake?

  2. Gravatar of Gary Anderson Gary Anderson
    8. January 2016 at 09:27

    I fear this cashless society. Travelers and poor could be out on a limb, and that article was awesome by Dowd. That is why I came looking for solutions from the MM boys since they don’t want elimination of cash either. But more toxic loans are not the answer. Some MM boys are for that, not saying Scott is. So far I am discouraged.

  3. Gravatar of Numawan Numawan
    8. January 2016 at 09:46

    Regarding China: a looser monetary policy and a tighter credit policy? Sounds right to me but also sounds contradictory. How do you achieve that?

  4. Gravatar of ssumner ssumner
    8. January 2016 at 09:51

    Numawan, Easy. Devalue the yuan and tighten bank lending regs.

  5. Gravatar of Numawan Numawan
    8. January 2016 at 10:04

    They tried that in the Euro Area. The result is an impairment of the monetary transmission mechanism and thus a reduction of the velocity of money.

  6. Gravatar of Christian List Christian List
    8. January 2016 at 10:14

    I’m willing to trade a lot of my so-called “freedom” for the protection against terrorism. In my opinion this is a phony argument anyhow because in a lot of cases there’s not really a tradeoff between freedom and security – at least if you are doing it right.

    I give you an example: In the European Union we have basically an open border policy right now. Greece for example is supposed to control the external border to Turkey but they aren’t really doing it. The simple control of the external borders of the European Union has no relevant impact on my freedom.

    Scott already mentioned the other good example of the range: Abolishing cash has nothing to do wit the efficient fight of terrorism. So again there’s no tradeoff.

    Now to the War on Cash. I don’t see how cash could be abolished in the near future. I hear that Americans love their credit cards and use them often. This is not the case Europe. Cash is really important here. I know a lot of people that don’t use credit cards at all. I never used a credit card in my life. I don’t even have a credit card. I think similar stories are true in Japan and China for example.

    The War on Cash is so unsuccessful that politicians can’t even get rid of those nasty pennies and all those 1 cent and 2 cent euro coins. Who needs those small denominations? The smallest denomination I might need is 10 cent. Smaller coins are just garbage to me.

    I read that the €0.01, €0.02, and €0.05 coins account for approximately 80% of the costs of all new coins minted in the eurozone. This seems to be quite a waste.

  7. Gravatar of Tom Brown Tom Brown
    8. January 2016 at 10:31

    “We are moving toward a “1984” type society…”

    Scott, somebody on NPR the other day made an astute comment: George Orwell, if he were alive today, would not be surprised a bit at the level of surveillance citizens are subjected to. What he *would* be surprised at is that we gladly purchase the cameras ourselves.

  8. Gravatar of Gary Anderson Gary Anderson
    8. January 2016 at 10:33

    Hope you are right, List, about the Europeans wanting cash and the resistance to a cashless society that exists there. But I could remind you that Sweden and Denmark are closer to you than to us. And they want to eliminate cash in a serious manner.

  9. Gravatar of Tom Brown Tom Brown
    8. January 2016 at 10:45

    Scott, it’s not always the case that freedom and security must be traded. The Republicans can easily demonstrate this by leading by example: Next Republican debate, they should refuse Secret Service protection, and let the audience/press/candidates bring their own loaded assault weapons. This would maximize both freedom and security and it would save the taxpayer money too. It’s a win-win-win! ;D

  10. Gravatar of Kevin R Kevin R
    8. January 2016 at 10:54


    Do you think close substitutes would develop in the absence of cash? Wal-Mart gift cards? Certainly the government can raise the cost of non-electronic exchange of claims on real resources, but they won’t be able to eliminate it.

  11. Gravatar of Gary Anderson Gary Anderson
    8. January 2016 at 10:59

    I wrote about Dowd’s negative vortex by stating this in August of 2015: “Or if you want Main Street to engage in bubbles, and Summers says they are necessary to growth, you have to allow negative interest rates in times of bust. Of course, at the point at which the negative interest rate is at minus 100 percent, you will just give your money to the banks and never see it again.” That is the ultimate negative vortex, that negative interest rates reach 100 percent. Dowd says that the money supply would decrease with each negative 1 percent lower. So I thought eventually you could have no money supply and 100 percent negative interest. Unlike Dowd, I am not sure that people would hoard if interest rates stayed above negative 10 percent. But people could try to save even more and hoard money even more. It would be like pushing a rock up a hill. Then at some point they probably would give up and hoard other things.

  12. Gravatar of jknarr jknarr
    8. January 2016 at 11:43

    1) Pass laws that make it illegal for law-abiding citizens to withdraw- and spend- cash freely.

    2) Complain that only criminals use cash.

    3) Repeat

    Nice rhetorical trick, no? People don’t mind the fences and barbed wire going up around them *to keep them safe*

    …until they can’t walk out the front gate.

    Scott, less pessimism please. Don’t encourage them, discourage them.

  13. Gravatar of ssumner ssumner
    8. January 2016 at 12:28

    Numawan, The euro area had far too contractionary a monetary policy. Take a look at the eurozone’s NGDP growth rate since 2007.

    Christian, You said:

    “I’m willing to trade a lot of my so-called “freedom” for the protection against terrorism.”

    Why are you so frightened of terrorism?

    I agree that pennies should be abolished.

    Kevin, There would obviously be substitutes, but I don’t see them as being very close.

    jknarr, I’m just an old reactionary.

  14. Gravatar of Christian List Christian List
    8. January 2016 at 14:10

    “Why are you so frightened of terrorism?”

    I think this is a very common misconception. Are people like me who support strong security measures really afraid? I’m not afraid of terrorism at all. I just don’t buy into this freedom-security-tradeoff-story. I think you can have both at the same time. As I said: In a lot of cases I don’t really see a serious tradeoff between freedom and security. It’s often quite the opposite: Only in a save environment you can be really free.

    For example a lot of Germans are very worried about surveillance by agencies like CIA and NSA. I don’t really care about this stuff to be honest. Security programs from the US can scan my private life anytime. I have nothing to hide from them, why would I even care? And much more important: Why would they even care about my private life?

    The probability of dying because of a terrorist attack is very low, I know that. But to be honest I have some issues with statistics. I think a lot of people don’t get statistics and probabilities right. Death is not a statistic. Real people died in NY, Madrid, London and Paris. Thousands of people. This means tremendous suffering for their relatives. I’m not afraid of terrorism and I’m not afraid of death. If I die in a terrorist attack, why would I even care? I don’t care about that. I care about the suffering of those victims that are not me. And for them I’m willing to support a lot of efforts that are designed to prevent terrorist attacks as long as they are serious, honest and reasonable in their design.

    Of course “serious”, “honest” and “reasonable” are relative terms. But I think the US for example is doing a pretty good job regarding the prevention of terrorism on their own soil. Also countries like Japan or Australia. Is the EU doing a good job? I don’t think so.

  15. Gravatar of collin collin
    8. January 2016 at 14:30

    I don’t see the “War On Cash” as a major government endeavor here but 95% of private citizens and businesses making decisions to carry less cash. I bet a lot businesses like the improved credit card process versus cash or check and I enjoy carrying less money about. Also, I still think the drop in crime the last 25 years is partially because with less ‘cash’ crime is less profitable.

    The Great Stagnation continues, and it’s not a demand-side phenomenon. How about Modeled Behavior tweet that the two biggest problems today are Housing Supply and low population growth?

  16. Gravatar of BC BC
    8. January 2016 at 14:33

    @Christian List, I’m curious about your never having used a credit card in your life. Have you ever made a purchase online and, if so, how did you do it? Debit cards and electronic transfers from a checking account would still count as cashless. If you were to stay at a hotel, would you pay cash in advance?

  17. Gravatar of TravisV TravisV
    8. January 2016 at 15:34

    “The most brilliant China analyst in the world says the government has a ‘new playbook'”

  18. Gravatar of Benjamin Cole Benjamin Cole
    8. January 2016 at 17:45

    Looking at excess capacity globally in almost every industry and plenty of labour supply: how can Scott Sumner say the global economy, in part, is not a demand-side problem?

    Is Europe bursting at the seams? Are the oil fields maxed out? China steel factories can’t produce any more steel? The auto factories? Not enough I-phones? Garment factories raising prices? The construction industry cannot put up any more houses than it is?

    As I suspected, with (mildly) more labor demand in the US, we are seeing higher LPRs. The same is happening in Japan.

    Labor forces are very mutable. Women can work or not work, retirees can take a part time job or not. Kids can go to college or drop out as the job market is hot. Immigration. In the US people can take unemployment or a job.

    With the exception of artificial scarcity in housing, I know of no industry that is characterized by demand-pull inflation.

    The short story is still the story of the last many years: the world’s major central banks are suffocating economic output.

    Print more money, build more houses.

    PS Outlawing cash is a horrible idea. So, in addition to every phone call and email being monitored, now every transaction will be monitored. I am sure that none of these extreme powers would ever be misused.

    We must have been lucky to get through the real Cold War when we faced a bona-fide military adversary, who had a full fledged intelligence operation the KGB. Somehow we survive boarding airplanes with nothing more than a name, making phone calls that were untapped and paying for things in cash.

    Now we cower in front of few punk terrorists?

  19. Gravatar of E. Harding E. Harding
    8. January 2016 at 19:04

    @Ben, did you read Sumner’s post on Brazil? Russia has a similar issue. So does Belarus. None of the Great Stagnation is exceptional to countries with tight monetary policy.

  20. Gravatar of Ray Lopez Ray Lopez
    8. January 2016 at 19:06

    Germans like List value security over all else. They live orderly. That’s why they outlawed Uber-style taxi services (too chaotic) and that’s why they started two World Wars (quest for security, either asserting their imperialistic aims via an expanding navy as in WWI or ‘living space’ and fears of communism in WWII).

    Sumner’s war on cash is very real, but the good thing about it is that with a cashless society we can move towards “narrow banking” (Google this).

    Orwell was in real life a policeman who once informed the state that he suspected another person was a communist threat. So in practice he was not against some of the totalitarian positions in “1984”.

  21. Gravatar of E. Harding E. Harding
    8. January 2016 at 19:13

    Deutchland’s immigration policy does not suggest a primary focus on security.

  22. Gravatar of Ray Lopez Ray Lopez
    8. January 2016 at 21:26

    OT – substitute “rising” or “positive” instead of “falling” or “negative” interest rates below, and you get the gist of what’s wrong with Sumner’s hare-brained NGDPLT proposal – RL

    Haldane Cashes Out on Cash – By Kevin Dowd * To spell the argument out: suppose the Bank manages to impose interest rates of minus 1 percent, and suppose – as seems likely for reasons just explained – that that policy does not produce the increased stimulus that the Bank had hoped for. Presumably, the Bank would then be calling for interest rates to be reduced to minus 2 percent, but what happens when minus 2 percent also fails to produce the desired stimulus? Does the Bank keep reducing interest rates indefinitely? The temptation will be to imagine that the policy has failed not because it cannot work, but because it hasn’t been tried vigorously enough. This might seem familiar: this is rather like the Inquisition insisting that the reason why we still haven’t solved the witchcraft problem is because we haven’t burned enough witches. But if the Bank the continued to insist that NIRP is fundamentally sound, and if I am right that it cannot work, then it is hard to see how the Bank would respond to the repeated failures of ever lower interest rates to stimulate the economy other than by lowering interest rates ever further. We then get caught in a spiral of falling interest rates and escalating deflation, i.e., in the end, everyone gets burned as a witch. So, Andy, as regards negative interest rates, how low can you go? Would you allow interest rates to fall all the way to minus 99.99 percent, and if not, why not? How would you know where to stop?

  23. Gravatar of Andrew_M_Garland Andrew_M_Garland
    8. January 2016 at 23:09

    A summmary of how the surveilance state can affect you.

    The argument about terrorism vs surveilance concerns how effective is mass surveilance for preventing terrorism. It is not effective at prevention by my observation, and seems somewhat effective after the fact for catching associates. After the fact policing can be done through warrants for information that is not routinely collected.

    People are being watched now according to their public postings on facebook and such. Hardcore terrorists are not communicating in public, and they will always be able to use encryption and websites to communicate in private. They will build the encryption they need, if necessary.

    “I have nothing to hide” is a weak hope. Everyone does many things which are against some law or another, or can be painted as bad when prosecuting for some minor infraction to get large penalties. A person may just to respond anonymously against an injustice made by government or a business. You can’t in a surveilance state.

    Maybe your wife, brother, child, or friend does have something to hide. The government can use that information to pressure you on some other matter. Few people could escape that control.

  24. Gravatar of James Alexander James Alexander
    9. January 2016 at 00:41

    China’s new war on FX trading and general monpol confusion

  25. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    9. January 2016 at 05:22

    off topic
    Prof. Sumner, it has been a while i haven’t read something you wrote about european countries, I saw this article and wonder if you have something to say … Thanks

  26. Gravatar of bill bill
    9. January 2016 at 07:14

    While I’m against the increased security, I thought Christian List’s reply at 14:10 was intelligent and good food for thought. Thank you Christian.

  27. Gravatar of Benny Lava Benny Lava
    9. January 2016 at 08:17

    “The Great Stagnation continues, and it’s not a demand-side phenomenon.”

    Is this a typo?

  28. Gravatar of TravisV TravisV
    9. January 2016 at 08:27

    Lorenzo From Oz: “Against Austrian business cycle theory”

  29. Gravatar of TravisV TravisV
    9. January 2016 at 08:32

    Noah Smith: “How the left talks about race”

  30. Gravatar of TravisV TravisV
    9. January 2016 at 08:33

    Chinese Investors Dump Stocks to Buy Bonds and Properties

  31. Gravatar of Negation of Ideology Negation of Ideology
    9. January 2016 at 14:04

    Scott – First, I finished the book. It was excellent, easy to understand, and had a lot of information that I hadn’t read before – even on this blog.

    On this post, I have one minor point that I hope won’t be considered too nit-picky. I think you should refrain from putting quotes around the word “terrorists”. There really are scary terrorists in our midst, they are not some made up bogeyman to scare us. I understand that you believe that the response is either ineffective or disproportionate but the problem is still real.

    As for cash, and the zero-bound “problem” (you see what I did there?), I’ve always thought cash was the answer to the zero bound. In your book you mentioned FDR was authorized to issue $3 Billion in US Notes, but chose not to. In my view any time rates fall to zero and the monetary base still needs to be increased to hit the target, Congress should simply issue greenbacks directly in amounts large enough to hit the target.

  32. Gravatar of ssumner ssumner
    9. January 2016 at 16:49

    Christian, You said:

    “But I think the US for example is doing a pretty good job regarding the prevention of terrorism on their own soil.”

    Sorry, but I can’t agree with this. Our response to terrorism is every bit as insane as our response to Pearl Harbor, albeit in a different direction. (At least we aren’t rounding up all Muslims.) Recall that all the Middle Eastern wars we’ve recently engaged in are a part of our response. So is the TSA. So is the NSA spying. I can’t walk into a local court house without going through metal detectors.

    Ben, There is a demand-side problem, but I don’t see it as the cause of the Great Stagnation.

    Andrew, You said:

    “I have nothing to hide” is a weak hope.”

    I agree. When people say that I don’t even argue with them.

    Benny, No typo, I’ve consistently said it’s a supply-side phenomenon. The Great Recession was demand-side, but it’s over.

    Jose, I don’t have a comment on that. The real difference is in unemployment, where the UK is doing much better.

    Negation. Sure there are individual terrorists. But terrorism is a threat only because we let it influence our behavior. If we stopped being terrorized, then terrorism would stop being a major threat. The harm from terrorism is mostly self-inflicted.

    Regarding cash, that’s just QE if there is no IOR. And if there is IOR, then the Fed can’t control the supply of cash, as distinct from the support of base money.

  33. Gravatar of Christian List Christian List
    9. January 2016 at 19:04

    That’s why I said on American soil. I also don’t think that the mess in the Middle East is the fault of the US. At least not alone. I also don’t get what’s so bad about metal detectors. You can’t be serious.

    “If we stopped being terrorized, then terrorism would stop being a major threat.”

    When people are being slaughtered you are terrorized. That’s a normal and reasonable human reaction. It would be quite strange (even psychopathic) not to be terrorized by such events.

    Thank you.

    Your stereotype thinking is wrong. I’m pro Uber-style taxis. Uber proves my point. In the US and in Europe freedom is not really threatened by the war on terrorism but by so many other rules and regulations. Those regulations are far more serious.

    I’m not against cashless at all. It’s not an ideology thing, I’m just a creature of habit. I do online purchases now and then but I don’t need a credit card there. It’s totally without a card, it’s called ‘Bankeinzug’ in German. I type in my bank account data and then the online seller can get the money from my account. I don’t use hotels often, I think I would use cash there. I get a credit card from my bank automatically every 5 years or so. I think it’s VISA. I put it in a ring binder and there it rest unused until the next credit card arrives. I got a debit card to get cash from ATMs of course.

  34. Gravatar of Scott Sumner Says The Globe Needs More Supply; Summers Says Demand | Historinhas Scott Sumner Says The Globe Needs More Supply; Summers Says Demand | Historinhas
    10. January 2016 at 05:08

    […] Sumner recently declared the global economic go-slow is mostly defined by limited supply. This is scarcely credible, as […]

  35. Gravatar of ssumner ssumner
    10. January 2016 at 12:49

    Christian, No, when 180,000 people in America have been killed by drunk drivers since 2001, and 100s by lightening, and less than 20 by terrorists, it’s not rational to obsess about terrorism as some sort of big threat. We need to focus our attention elsewhere. I have a recent piece in the Washington Post, explaining how organ transplant markets could save 5000 to 10000 lives a year. The opponents of those markets are the more serious enemies of human life.

    You may be right about metal detectors, but that doesn’t justify the TSA.

    I certainly do agree with you that the problems in the Middle East are not caused by America, they are quite capable of creating problems on their own (as we saw in Syria and Libya, and even in Iraq during the 1980s and 1990s.)

  36. Gravatar of Postkey Postkey
    10. January 2016 at 15:27

    “I certainly do agree with you that the problems in the Middle East are not caused by America” . . . ”

    Of course, they are not all “caused by America”.

    “The Syrian opposition seemed like an ideal candidate for such assistance, especially since Assad had been in the U.S. crosshairs for some time. (The country’s first and only democratically elected government was overthrown by a CIA-instigated coup in 1949 at the behest of American oil interests irked at Syria’s request for better terms on a pipeline deal.) In December 2006, William Roebuck, the political counselor at the American Embassy in Damascus, sent a classified cable to Washington, later released by WikiLeaks, proposing “actions, statements, and signals” that could help destabilize Assad’s regime. Among other recommended initiatives was a campaign, coordinated with the Egyptian and Saudi governments, to pump up existing alarm among Syrian Sunnis about Iranian influence in the country.”

  37. Gravatar of derivs derivs
    11. January 2016 at 03:10

    “So, Andy, as regards negative interest rates, how low can you go? Would you allow interest rates to fall all the way to minus 99.99 percent, and if not, why not? How would you know where to stop?”

    No brainer. If you combined that with a cashless society, at some point money would cease to be accepted as a means of exchange.

  38. Gravatar of Derivs Derivs
    11. January 2016 at 05:01

    ““I certainly do agree with you that the problems in the Middle East are not caused by America”

    Of course not, it’s been game of thrones over in that part of the world since way before there was an America.

    …and my prediction… if Trump is nominated he will win. Every “incident”, particularly those against women or resulting in deaths, in the months leading to election, here or in Europe, will give him boost after boost… and unfortunately there will be “incidents”

  39. Gravatar of ssumner ssumner
    11. January 2016 at 08:01

    Postkey, Oh, so that’s what caused the civil war. I wonder why they didn’t cause one in Iran?

    Derivs, Don’t be silly.

  40. Gravatar of Postkey Postkey
    11. January 2016 at 11:09

    “Postkey, Oh, so that’s what caused the civil war. I wonder why they didn’t cause one in Iran?”

    Did I say ’cause’? Don’t be silly.

  41. Gravatar of Derivs Derivs
    12. January 2016 at 03:01

    As per my response above “No brainer, money would cease to be accepted as a method of exchange”

    I would guess that by -5% the proverbial excrement would completely hit the fan… definitely before -10%.

    Let me work and get paid in something that will be taken away from me so that at -99% I get to provide my services for nothing. NO THANKS!! Pay me in beans or wheat instead.

  42. Gravatar of Ten million missing US workers due to monetary policy not demographics | Historinhas Ten million missing US workers due to monetary policy not demographics | Historinhas
    12. January 2016 at 11:29

    […] often hear from both the right  and the left that the relative lack of growth in the US is mostly due to supply issues, in […]

  43. Gravatar of Ten Million Missing US Workers Due To Monetary Policy Not Demographics | The Corner Ten Million Missing US Workers Due To Monetary Policy Not Demographics | The Corner
    15. January 2016 at 10:00

    […] Alexander via Historinhas | We often hear from both the right  and the left that the relative lack of growth in the US is mostly due to supply issues, in […]

Leave a Reply