Paper Currency Is The New Gold

I have a deal with my colleague Jay. About 2 or 3 times per week, he picks up breakfast for me on his way into the office. In exchange, I pay for his breakfast on those days.

When he hands me breakfast (usually a platter of eggs, bacon, and sausage) he tells me how much I owe him. I find this annoying, because I have to fish out cash from my wallet. Often we don't have the exact amount, or I just don't have any cash on me at all.

It would be really great if Jay were on Venmo, the excellent app made for easy, small-denomination friend-to-friend payments. It's perfect for settling up checks, and other shared purchases.

Every day, a situation that requires the use of physical cash, feels more and more like an anachronism. It's like having to listen to music on a CD.

John Maynard Keynes famously referred to gold (well, the gold standard specifically) as a "barbarous relic."

Well the new barbarous relic is physical cash.

Like gold, cash is physical money.

Like gold, cash is still fetishized.

And like gold, cash is a costly drain on the economy.

First, there's the simple cost of handling cash .

A study done at Tufts in 2013 estimated that cash costs the economy $200 billion. Their study included the nugget that consumers spend, on average, 28 minutes per month just traveling to the point where they obtain cash (ATM, etc.).

But this is just first-order problem with cash.

The real problem, which economists are starting to recognize, is that paper cash is an impediment to effective monetary policy, and therefore economic growth.

This Spring, the economist Kenneth Rogoff published a paper titled: "Costs and Benefits to Phasing Out Paper Currency."

The key argument is this: In our world of ultra-low inflation, it may be necessary for central banks to cut rates to below zero. However if that happens, consumers can always take physical cash out of the banking system to avoid paying negative rates. In a world of purely digital money, the central bank could set interest rates wherever was appropriate.

Here's Rogoff (emphasis ours):

Paper currency has two very distinct properties that should draw our attention. First, it is precisely the existence of paper currency that makes it difficult for central banks to take policy interest rates much below zero, a limitation that seems to have become increasingly relevant during this century. As Blanchard et al. (2010) point out, today's environment of low and stable inflation rates has drastically pushed down the general level of interest rates.

The low overall level, combined with the zero bound, means that central banks cannot cut interest rates nearly as much as they might like in response to large deflationary shocks. If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial. But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 percent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it.

Rogoff isn't the first to go down these lines. University of Michigan Economist Miles Kimball has been writing for awhile about how the zero-lower bound could be eliminated by going to an all digital money system.

So not only is cash cumbersome like gold (time consuming, physically costly) it's an increasingly problematic component of the monetary system. Like gold, it's a form of hard money that's growth-constraining and deflationary.

So yes, cash is pretty to look at, and everyone would love to one day have a gigantic pile of it. But it's time to ditch this barbarous relic and have a monetary system fit for the 21st century.