The cashless society; that dream of economists and nightmare of libertarians, might almost be here. Recent developments indicate that central banks, the financial industry and technologists are pushing hard to create a world in which cash is as obsolete as a horse and buggy.
The most dramatic development occurred in India; where Prime Minister Narenda Modi arbitrarily withdrew the nation’s two highest denomination on November 8. The Prime Minister went on TV at 8:00 p.m. to surprise voters with the news that the 500 and 1,000 rupee notes would lose all value at midnight. Modi’s move effectively wiped out the value of 84% of the cash in the country.
Modi’s goal is to force India’s growing middle class to adopt modern electronic or digital banking. Most middle-class people in India conduct most or all of their business in cash; including big-ticket purchases like cars and real estate. They also do most of their investing at the jewelry store in form of gold.
Mr. Modi is hoping to end that and force the middle class to put its money in the bank where it can be tracked and taxed. Putting all that money in the bank would also give a massive boost to India’s financial markets, and make it easier for the Reserve Bank of India to manipulate the economy.
The move is an ambitious and dramatic one, and perhaps the most radical financial reform a major power has undertaken; since Richard Nixon took America off the gold standard in 1971. Nixon’s move created a totally new international monetary system and Modi’s action might achieve similar results.
Toward a Cashless Monetary System
Modi is taking a major step towards the cashless monetary system suggested by former International Monetary Fund Chief Economist Kenneth S. Rogoff in his book The Curse of Cash.
Rogoff’s argument is that paper money facilitates crime, tax evasion and illegal immigration so it should be abolished. He envisions a slow withdrawal of paper money from circulation starting with large denomination bills, which sounds like what Modi is attempting. Eventually society would move to a mostly electronic medium of exchange with just a few coins circulating for smaller transactions.
Nor are Modi and Rogoff the only people thinking that way. The European Central Bank announced it would stop printing its largest bill the €500 Euro note earlier this year. The pretext given was similar to what Modi used to justify his actions, that large notes facilitate criminal activity.
Central Bankers Envision Digital Currency
Some central bankers want to go even further than Rogoff and switch to a digital currency similar to Bitcoin.
The Monetary Agency of Singapore; the city-state’s central bank, is planning to test a blockchain-based digital currency for interbank payments, Bloomberg reported. The digital currency would be backed by cash that banks deposit and can be redeemed for cash much like banknotes were originally redeemable for gold or silver.
The idea is probably to force private currencies like bitcoin out of the market and create a medium that will Singapore a major financial market. A digital currency backed by a Central Bank would certainly be more secure; and more valuable than one created in a cloud. It might also be a source of money for the bank which would sell it.
The Bank of England has conducted research into the possibility of a Central Bank Issued Digital Currency. Two of its economists; Michael Kumhoff and John Barrdear, published a staff working paper on that subject in July 2016. Their proposed currency would be interest bearing.
The old lady of Threadneedle Street has also launched a FinTech Accelerator to create such products. One probable use for such a Britcoin would be to replace the Pound Sterling which has been heavily battered by Brexit.
Last Generation Currency
Central banks should take the lead in the development of digital currencies, People’s Bank of China (PBOC) Vice Governor Fan Yifei wrote in a September 1, Bloomberg Voices op ed. Fan wants the PBOC to create a currency that would be distributed through private banks much as paper currency now is.
His suggestion is a digital legal tender in other words an official bitcoin issued by the Central Bank. Such a currency would make it easier for the bank to expand or tighten the money supply but it might take some time to implement.
The PBOC is apparently moving ahead with Fan’s plan it is hiring encryption and block-chain experts to design such a currency, Cryptocoin News reported. The experts will be part of a digital currency team that will develop a replacement for paper money.
Paper money is a last generation currency that will have to be replaced, PBOC Governor Zhou Xlaochuan told Caixin Weekly. Zhou views replacement of paper with digital currencies a “necessary evolution of the monetary system.”
One reason why the PBOC interested in digital currencies is that a large amount of money is flowing out of the People’s Republic in the form of bitcoin, even though the practice is illegal. This makes the central bank’s currency controls redundant and limits its control. The PBOC probably believes that some influence over a digital currency would be better than no influence which is what has now.
Will Paper Money Die?
Even though the death of paper money seems like science fiction there is historical precedent for it. Paper money is a modern creation that has only existed for around 150 years.
There was a time when fiat currency; central banks, and the modern monetary system were new-fangled ideas that were inconceivable to the average person. The precedent of government or a central bank adopting a private currency is nothing new.
Both paper money and small denomination coins were first created by private banks and companies. Almost all the banknotes in circulation in the United States before the Civil War (1861-1865) were printed and issued by private banks. Low-value coins were minted by private companies in the United Kingdom for several decades, until the Royal Mint took over the job in the early 19th century.
History seems to be repeating itself as Central Banks move to adopt the blockchain technology being pioneered by private entrepreneurs. The next logical step will be to combine digital currencies with payment solutions like Apple Pay.
Once that occurs paper money’s days might be numbered as governments and central banks quietly scrap cash. Smaller nations will pioneer the process as a cost-cutting measure.
The big question to ask here is will there will be a public reaction? If actions like Modi’s prompt a political backlash the paradigm shift will be delayed. If Modi is successful, other large countries like the United States will jump on the bandwagon. So far the U.S. Federal Reserve has been quiet on the issue, but that will have to change.
That means the cashless society will soon be here whether we are ready for it or not. One has to wonder if flying cars are next.