In India, there is relentless attempt at moving commercial transactions to the electronic mode with less use of currency. Interestingly, worldwide, there is a move for the same and the book The Curse of Cash by Kenneth Rogoff, who is known better as the author of This Time is Different, makes good reading.
Rogoff argues that cash can be dispensed with by conscious policies of the government and central banks, that this has been successfully done in Sweden and that there are several developed nations considering the same.
There are two reasons why the author has strong views against cash. First, excess currency helps to grow the black economy and second, having more cash comes in the way of effective monetary policy especially when there is recession, low inflation and the shadow of a financial crisis all at once.
Rogoff is not against cash per se, but only those of higher denomination. His aurgument is that households do not hold high value notes even for emergency purposes. Typically, the amount in the wallet is of smaller denominations and hence anything above 100 in the local currency can be discouraged. Several countries have put restrictions on the amount of cash that can be used for buying goods — €1,500 in Greece, €3,000 in Belgium and €1,000 in Italy. The European Central Bank (ECB) has decided to discontinue printing of €500 notes. The caveat, however, is that in order to protect the lower income groups, there must be universal financial inclusion to ensure access to free debit cards.
An argument put forward is that some companies use cash for making payments to illegal immigrant labour, which is against the law. And a more frivolous reason apparently is that this also spreads bacteria and poses a health concern for society at large!
But a more serious reason why we should have less cash lies in the realm of monetary economics. Rogoff cites the phenomenon of the financial crisis where central banks tried to lower interest rates to spur their economies. Ideally, they would have liked to go in for negative rates to ensure that no money was saved. But by doing so, there would have been a major demand for currency which would have created instability. Hence, central banks stuck to zero rates or only marginally negative rates. His point is that we should be targeting a higher inflation rate of 4 per cent instead of 2 per cent so as to have elbow room to lower policy rates well below zero.
Quite curiously, Rogoff also tells us that by doing so, central banks and hence governments will be losers because of lower seigniorage earned. The US government earned 0.4 per cent of GDP per year printing notes as it costs 12.3 cents to produce a $100 bill. Hong Kong and Russia earn above 1 per cent of GDP while Sweden which has almost switched over to electronic transactions has negative seigniorage.
How can we then dissuade the use of cash? Stamping currency notes or using magnetic strips are options to tax the ‘note’. Having expiry dates is another way out. A two currency system looks practical where electronic money can be tracked and can go at negative interest rates while a new currency would be declared and old one scrapped. There would be an exchange rate on a daily basis for this new currency which is linked with the electronic money!
Would this hold for all countries? Here Rogoff contends that the ‘black economy’ arguments hold for all countries though the support for monetary policy is more a developed nation’s syndrome. Emerging markets are trying to lower inflation rather than raise it and hence they would not come under this ambit. By phasing out cash in the developed countries, it will be easier for central banks to invoke negative interest rates when inflation is stuck at low levels in the face of a recession.
A point not touched by the author is the holding of say dollars by other nations given that it is an anchor currency and is normally held in larger denominations. Banning such notes would have practical issues. The book is nevertheless interesting and the RBI could borrow some ideas.
Guest Author
Sabnavis is chief economist, CARE Ratinigs and author, more recently of Economics of India: How to Fool all People for all Times
