Monday, 21 September 2015

The War on Cash

Three days ago, Andrew Haldane of the Bank of England gave a speech where he said, concerning the Zero Lower Bound, or the interest rate at which everyone decides that their money is better off as cash:

A third option is to set an explicit exchange rate between paper currency and electronic (or bank) money. Having paper currency steadily depreciate relative to digital money effectively generates a negative interest rate on currency, provided electronic money is accepted by the public as the unit of account rather than currency.

We had a recent discussion about just such a two tier currency system, the C18th/19th private money issued by employers which could only be spent at the company store and its corresponding lack of value compared to coin of the realm. It just goes to show, you can't keep a really bad idea down; the Speenhamland system, the poll tax, two tier currencies, sooner or later someone will think, why don't we try this one again, this time it will be different, this time it will work.


Random said...

Scary stuff. These people are insane and hate the poor.
Just leave rates at zero and use fiscal policy, aka MMT.
And of course lowering interest rates only "boosts" the economy under Homeownerism, and lowers interest income going in reducing NET financial assets.

"When the central bank puts interest rates up there is a short term boost to the economy - increasing demand.

This is caused by savers getting more money from borrowers and increasing spending, whereas fixed rate borrowers don't change anything and variable rate borrowers fail to cut back as quickly (often taking eighteen months or so to scale back).

And all this appears to be linked to the 'saving/borrowing' ratio. Where there is a lot of domestic saving the perverse effect can last for a lot longer."

Mark Wadsworth said...

Agreed. Administratively unworkable, which gives you a clue it's a bad idea

Derek said...

Absolutely. This a REALLY bad idea because it will make it even more difficult for people to pay down their debt.

DBC Reed said...

Perhaps it is a neoGesellian idea for speeding up the velocity of cash

DBC Reed said...

NB Over one half of Gesell's theory was concerned with stopping his monetary reforms putting up the price of land.Keynes, who plagiarised Gesell, unmercifully, although acknowledging his inspiration,chucked out the "Land part" believing it showed the influence of Henry George and was therefore of little interest.

Lola said...

If TPTB try that on with cash, the 'market' will just re-invent it.

DBC Reed said...

PS Check out JS Keynes about Silvio Gesell on Net for relevant section from General Theory of E.M and I. The plagiarism accusation also comes up under this search heading.
Keynes says "The part which derives from Henry of altogether secondary interest "if you can find it amidst Keynes' endless self congratulation. That is the problem with plagiarists and derivative writers: they miss out the vital bits; don't plagiarise anywhere near enough.

Derek said...

DBC, stamp money (or Haldane's equivalent, negative interest rates on cash) is excellent as a means of stopping the price of land rising and dissuading people from hoarding money. If all you care about is the velocity of monetary circulation, then, great! If we were implementing a new currency it might be worth thinking about.

Unfortunately that is not where we are. Globally, we currently have several trillion dollars of outstanding bank debt in existing currencies and if either idea was implemented right now on the major currencies, it would make it even more difficult to pay off that debt. We are already far too close to deflation. Haldane's "third option" would tip us over the edge.

DBC Reed said...

@D Its many years since I read Gesell but I am sure he proposed some drastic measures to stop money going out of the production/consumption loop into land in addition to stamp money/demurrage.I seem to remember he thought you could soften the land hoarders up with swingeing LVT so that they would flee out of land holding in such a panic that you could nationalise their land in return for small amounts of compensation.
Pleased that you too see the equivalence of Haldane's ideas and
Gesell's: its easy to suspect yourself of being a crank when the whole Economic discourse anathematises unfashionable ideas.I once wrote an article about money for a mainstream-ish magazine 30 yrs ago
and although they printed it, they billed it as economic heresy.It led off by saying banks create money: the BoE only fessed up to this last year.(Question is: why did they suddenly tell the truth?)

Derek said...

Cheers, DBC. I have a great deal of respect for Gesell. He was a pretty clear thinker and is an easy read compared to most. Very like Adam Smith and Henry George in that regard.

Derek said...

And of course I see the equivalence. Perhaps we are cranks, but that doesn't mean we aren't right!

DBC Reed said...

Even Keynes came round to seeing that Gesell was not a crank.We're not cranks either!The Gesellian basics that land and money retain their value while in disuse while labour's condition rapidly deteriorates hence the need for proportionate taxes on money and land
to make them deteriorate in value too, remain as they were.

Bayard said...

"Perhaps it is a neoGesellian idea for speeding up the velocity of cash"

Well it does seem to work, at least on a small scale: . However, that doesn't mean it would work on the scale of a whole country.

"proportionate taxes on money and land"

Yes, I've always thought that there should be taxes on rent on money (interest) as well as on rent on land.