Once upon a time, a monetary system’s unit of account was trusted to value goods, assets, and liabilities because said unit was tied to or backed by something finite and intrinsically valuable.
After Bretton Woods, the American dollar is backed by nothing. It is its own standard of valuation, allowed to exist as such because the people who say so work and live in big buildings guarded by men with guns.
In the electronic age, however, American dollars—the green, rectangular strips of paper with dead presidents on them—have amusingly and ironically come to be a new sort of intrinsically valuable item. Not everyone accepts the swipe of a debit or credit card, but everyone accepts those green rectangular strips of paper, from L.A. to Moscow. And these strips of paper are not only intrinsically valuable but they are, in some sense, in finite supply. American dollars can thus be understood—and often are understood by the public—as a new (debased) form of gold; electronic transactions are representative currency, each debit card swipe or electronic deposit representing some number of green papers with dead presidents on them.
Inevitable, then, that the electronic age would necessitate the removal of cash from the world monetary system, just as the removal of gold was necessary in 1973. The total politicization of money—which is necessary for infinite neoliberal growth—cannot suffer any unit of account in finite supply.
Thus the neoliberals are already musing that one outcome of negative interest rates may be a punitive tax on cash or, at some point, an inability to convert “dollars” into green slips of paper at all, just as today it is impossible to convert dollars into gold.
But what really matters is what the public wants to do. JP Koning nicely explains the “hot potato effect” of pushing central bank reserve rates below zero: banks will bid down rates on other assets in the financial system as they try to swap reserves for cash. Ultimately, they will be forced to lower rates on deposits below zero as well, so that customers will have to pay to keep their money on deposit. This is where the liquidity trap is really supposed to snap shut: will there not be a run for cash as depositors refuse to pay banks to hold their money?
But consider two things. First, it is not as if depositors as a class actually have a legal right to convert all their money to cash as it is. You cannot present a debit card at the Bank of England and demand cash. Indeed, even your own bank limits how much cash you can withdraw, as Frances Coppola has pointed out. Just read the fine print of your account terms of service.
And how could private banks honour mass withdrawals of cash even if they wanted to? No law provides for the central bank to swap client deposits for cash; only central bank reserves. And despite the huge growth of reserves in recent years, these still amount to only a fraction (about one-fifth in the UK) of bank deposits. So, to honour customers’ demands, banks would have to borrow more reserves from the central bank, which could impose terms as onerous as it wished.
Of course, those who think that the only real money is the green paper in your wallet (or better, shiny yellow metal) will no doubt claim that refusal to allow deposits to be converted into physical cash is a denial of fundamental property rights. But the legal position on this is opaque to say the least. Is paying for a meal in a restaurant with a bank card “less good” than paying for it with physical cash? On the face of it, there is no difference: the nominal amount is the same in each case. If the restaurateur has to pay a fee for accepting a card payment, then cash is more valuable to him – though if accepting cards means he gets more business, electronic money may still be worth his while. But if the restaurateur can accept bank debit card payments for nothing but has to pay a fee to deposit cash into a bank account, then electronic money is worth more. Anyway, the convenience of electronic payments directly into his account may still make this form of money more valuable to him than cash, which has to be physically taken to the bank during the working day: time is money for a busy restaurateur. And the convenience of making payments with a bank card rather than carrying around wads of cash may be attractive to the restaurateur’s customers. The supremacy of physical cash is by no means clear.
In fact because of its prevalence in the modern monetary system, it would be dangerously destabilizing to regard electronic money as somehow “inferior” to physical cash. Five dollars in e-money must be equal to five dollar bills. Anything less would undermine the electronic money that is used for the vast majority of transactions and makes up almost all liquid savings. So provided that the bank still permits money to be withdrawn in electronic form, refusing to allow physical cash withdrawal cannot break the law.
This could have far-reaching consequences. The monetary policy of the last few years has been hampered by the supposed existence of the “zero lower bound”, at which (it is assumed) everyone would opt for physical cash instead of bank deposits and bonds. We already know that the lower bound (if it exists) is actually slightly below zero, since it is the point at which the cost of negative rates on deposits and bonds starts to exceed the cost of holding physical cash (vaulting charges, theft risk and so on). But if investors simply cannot obtain large amounts of physical cash because banks won’t issue it to them, the slightly-below-zero lower bound cannot bind. In which case negative rates could be very negative indeed and no-one would be able to do much about it. There would be no need to abolish or tax cash, as Citi’s Willem Buiter suggests. It could simply be ignored. Welcome to the negative-rate universe.
The “dollars” in your bank account mean something, we feel, because they are convertible into a finite, intrinsically valuable resource: gold once upon a time, and now, green slips of paper that will allow you to buy commodities in every country on the planet. But there are clearly forces and individuals at work that would like you not to be able to convert dollars into anything—they would like to see “dollars” existing only invisibly on a bank’s server, not circulating materially, freely, and thus less susceptible to any unwanted market feedback.