 "Cashing out")
THE CURSE OF CASH
Author: Kenneth S Rogoff
Translator: Bela Shayevich
Publisher: Princeton University Press
Price: Rs 1,769
Pages: 272
Not long ago, venturing beyond the zero interest rate barrier was uncharted territory for central banks. But with fiscal policy reaching its limits, at least its political limits, in developed countries, central bankers in countries such as Denmark, Switzerland and Sweden have ventured, rather hesitantly, into the unknown, hoping to prop up growth.
In fact, even Ben Bernanke, former chairman of the US Federal Reserve, recently argued that if the choice is between negative interest rates and higher inflation targets, both of which can be viewed as alternatives for pushing real interest rates below zero, negative rates may be preferable in some instances.
But there are limits to the effectiveness of this rather unconventional monetary policy tool in propping up growth.
Theoretically, lowering interest rates below the zero constraint penalises savers by forcing them to pay banks for holding cash. Under such conditions, people would ideally prefer to spend the money rather than keep it in the bank, where its real value would erode. As such, the increase in consumption would boost growth, achieving the central banks' objective.
In practice, though, how this policy plays out is difficult to predict, largely because savers have the option of withdrawing cash from banks and keeping it at home. The hesitant moves by central bankers in some countries stem from the fear that beyond a point, negative interest rates would be an ineffective tool as they would trigger a flight from bank accounts to cash. (There are other unintended consequences. In Switzerland, for example, where the Swiss National Bank imposed sub-zero interest rates in early 2015, there has been a sharp increase in insurance policies designed to protect cash piles from theft or damage.)
But what if there was a way around this predicament? What if central banks could push interest rates as low as they wished?
One way to do this is to simply do away with cash. Well, not all cash, just the higher-denomination notes in circulation. Theoretically, this would make withdrawing cash from banks to stash it away an expensive proposition. Savers would, thus, prefer to spend the money rather than incur a charge for storing it at the bank. This, in a nutshell, is the argument at the centre of Kenneth Rogoff's new book, The Curse of Cash.
At first glance, the very idea of doing away with cash might seem outrageous. But Rogoff, who is currently a professor at Harvard University and former chief economist at the International Monetary Fund, makes a persuasive case for it. The benefits, he argues, from such a shift are twofold.
First, transitioning to a relatively cashless regime would improve the efficacy of monetary policy. With developed countries grappling with this issue, any proposal, no matter how absurd, merits attention.
Interestingly, the author points out, "The idea that negative interest rates might sometimes be good policy and that paper currency stands in the way is hardly new." During the Great Depression, economists Irving Fisher and John Maynard Keynes had theorised that if there was "some way for governments to pay a negative return on cash, monetary expansion just might be able to push the world out of depression".
The situation back then mirrors the current predicament of the developed world - "with short term policy interest rates already at zero, monetary policy was stuck in a liquidity trap with nothing more to do". Shifting to an almost cashless society could, at least in theory, help central bankers prop up the economy during periods of acute recession.
The other advantage that is likely to arise stems from the author's view that eliminating high-denomination notes could have a dampening effect on illegal activities.
He estimates that, at the end of 2015, $1.34 trillion worth of US currency was held outside banks. That translates to roughly $4,200 floating around for every man, woman and child in the US. The point to note is that a significant portion of this is in high-denomination notes, almost 80 per cent is in $100 bills. But these aren't the notes that most people carry with them. Moreover, the US is not an outlier, as a similar scenario exists in most advanced economies.
Rogoff's premise is that much of this is used in a "broad range of criminal activities including drug trafficking, racketeering, extortion, corruption of public officials, human trafficking and money laundering". Thus, eliminating high-denomination notes could have a dampening effect on these activities. Think of the inconvenience of lugging $1 million in $10 notes, rather than in $100 notes.
It's a logical argument, and Rogoff makes a compelling case.
Although the benefits for monetary policy from transitioning to such a regime are easier to defend, the effect on illegal activities is not. The author appears to be underestimating the ingenuity of those who carry out illegal activities. The costs of shifting to alternative, untraceable forms of payments, such as diamonds, may be a small price that many are willing to pay.
Further, efforts to clamp down on illegal activity by eliminating higher denomination notes may well be countered if the use of digital currencies, like Bitcoin, becomes more widespread. Currently, the volatility in prices prevents its widespread adoption; once kinks in the system are ironed out, it could well serve as an alternative medium of exchange.
From a logistics perspective, shifting to a cashless regime could be relatively painless in the developed world, especially for those with nothing to conceal. But given frequent power blackouts, absence of electronic touch points, especially in particular geographies, it could pose an inconvenience for some.
Governments would also have to address the issue that the shift will undoubtedly hurt the poor and the financially excluded the most. As the author acknowledges - "any plan to drastically scale back the use of cash needs to provide heavily subsidized, basic debit card accounts for low income individuals and perhaps eventually basic smart phones." In developing countries, especially those with a huge informal economy such as India, it's another story altogether. Africa, however, has demonstrated that large-scale digital subsidy transfers are possible.
Other concerns centre on arguments that such a shift could virtually end the anonymity people enjoy in transactions today. But is there really any anonymity left in today's world?
