Andy Haldane wants to get rid of physical cash
Wednesday 23 September 2015
The Bank of England’s chief economist doesn’t like coins and notes, which upsets me for several reasons.
The name Andy Haldane won’t be familiar to most readers, unless they have an unusual fascination with the Bank of England’s interest rate decisions. He’s the BoE’s chief economist, which means he has some significant degree of influence over what happens to the UK’s money supply. So when he expresses his desire to scrap physical cash - coins and notes - and replace them with a system not dissimilar to bitcoin, I take notice. And I don’t like what I see.
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Whilst blockchain technology has much to offer the financial services industry in terms of transparency, speed and lower costs, in this instance I’m not even close to sold. The reason is that Haldane is suggesting the BoE takes physical cash out of the equation in order to make it easier to charge customers for using money.
It comes down to inflation. Inflation has remained stubbornly low, to the point where even the record-low interest rates of 0.5% aren’t enough to nudge it upwards into properly positive territory. Not long ago, the discussion centred around when would be the right time to start raising interest rates, now that the economy was picking up. That’s changed in the last few weeks, since higher interest rates would send inflation tumbling lower - into negative territory or deflation, which could have catastrophic effects on any economic recovery. The problem is, the Bank of England can’t cut interest rates much lower. Unless...
Haldane’s solution is to abolish cash, forcing customers to transact entirely through the banking system. That way, the Bank of England could charge them to keep their own money. This would act as negative interest, and customers would of course decide to spend money than keep it in a savings account, gradually being eroded in value by the charges imposed. (Scrapping cash is a necessary action in these circumstances, because otherwise people could simply get around the problem by keeping a stack of notes under their mattresses.)
And therein lies one of the many problems with the idea. Money is supposed to be a store of value, as well as a unit of account and a medium of exchange. Forcing every transaction through the banking system means that people are incentivised to use it to buy goods and services, not to hold value. Money serves a different purpose for the end user than it does for the Bank.
That’s just one of the issues. There’s also the question of centralising the money supply even further, giving the BoE even greater power over it. At least physical cash is truly peer-to-peer. Whatever blockchain system they would use, they would have some control over balances, one way or another. It allows money to be used more and more as a means of surveillance, an infringement of civil liberties. And it would, inevitably, lead to alternatives springing up - doubtless including bitcoin - which would then have to be banned, just like physical cash, in order to ensure that revenue-generating bank accounts were used instead.
That is something I suspect the BoE has little appetite for, since it’s politically untenable. But it’s concerning that such a senior economist would even give voice to such an idea.
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