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SALARIES / APR. 24, 2015
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Citi Economist Wants to Abolish Cash

Cashless Economy
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The concept of a cashless society has been predicted for decades. As of late, however, it appears the idea is gaining traction once again. From paying with plastic to paying with smartphones and crypto currencies, it seems cash is on the cusp of extinction. How often do you use cash now anyway?

See Also: Have We Returned to the Dot-Com Bubble Era?

Cashless Economy

A simple search on Google will show thousands of articles, blog posts and research studies discussing the demise of cash and in its place a system of digits, mobile payment devices and even wearables. For fans of futuristic novels, society in the near future could proceed without cash.

One United States economist is proposing an economy without cash, a complete abolition of paper money. But his idea is turning some heads because of its controversial nature.

Citi’s Willem Buiter published an article last week in which he suggested the U.S. abolish cash, tax currency and eliminate the fixed exchange rate between currency, central bank reserves and deposits.

Bankrupt Banks

The reason for this is because interest rates have been so low for so long and consumers aren’t putting their money in banks. Since the Federal Reserve is unable to continue printing vast sums of money, the U.S. would have no other choice but to eviscerate cash and tax currency so financial institutions can lend money out to businesses.

Simply put: consumers aren’t saving and banks can’t lend out cash.

Otherwise known as the effective lower bound (ELB), Bloomberg News writes that it only exists because of the existence of cash that pays essentially zero nominal rates. "Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction?  Cash therefore gives people an easy and effective way of avoiding negative nominal rates.”

Although libertarians and critics of the U.S. central bank would scoff at the notion that the Fed hasn’t printed enough money since the financial crisis a few years ago, Buiter believes the amount of credit creation isn’t enough.

The banking economist listed the disadvantages of such a system, but he dismissed them entirely by opining that "we therefore conclude that the arguments against abolishing currency seem rather weak." What are some of the disadvantages listed?

  • Abolishing currency would institute change and change is sometimes resisted. 
  • Currency use is still relatively high among low-income consumers. 
  • Governments and central banks would experience a loss of “seigniorage revenue.” 
  • Eliminating currency would violate privacy and lead to government intrusion. 
  • Converting to an electronic payment system would cause massive security risks. 

Interesting But Unlikely

The business newspaper conceded that this kind of system is unlikely ever to come to fruition, at least not for another century. It added that no U.S. presidential candidate would insert this into their campaigns in the coming election cycles.  

With that being said, many Keynesian financial minds have come with questionable concepts before.

A few years ago, Keynesian economist Paul Krugman said an alien space invasion would produce economic prosperity. Establishment economists put forward a proposed $1 trillion coin to help solve the debt ceiling crisis. Of course, we cannot omit the age-old concept of deficit-spending assists in growing an economy. Now a Keynesian economist wants a tax on currency. Yikes!

See Also: Show me the Money! Capitalism

The correct path to a prosperous and stable economy is to allow the market to dictate interest rates, give consumers a sound currency backed by a stable currency and to prevent the government from interfering in the market with dubious stimulus measures. But that’s just an opinion from the Austrian theorists like Murray N. Rothbard and Ludwig von Mises.

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