How to end boom and bust: make cash illegal

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Gordon Brown promised to 'end boom and bust' but a cashless world would have given him far more chance to achieve it, academics suggest.

    

A proposed new law in Denmark could be the first step towards an economic revolution that sees physical currencies and normal bank accounts abolished and gives governments futuristic new tools to fight the cycle of "boom and bust".

The Danish proposal sounds innocuous enough on the surface - it would simply allow shops to refuse payments in cash and insist that customers use contactless debit cards or some other means of electronic payment.

Officially, the aim is to ease "administrative and financial burdens", such as the cost of hiring a security service to send cash to the bank, and is part of a programme of reforms aimed at boosting growth - there is evidence that high cash usage in an economy acts as a drag.

But the move could be a key moment in the advent of "cashless societies". And once all money exists only in bank accounts - monitored, or even directly controlled by the government - the authorities will be able to encourage us to spend more when the economy slows, or spend less when it is overheating.

This may all sound far-fetched, but the idea has been developed in some detail by a Norwegian academic, Trond Andresen.

In this futuristic world, all payments are made by contactless card, mobile phone apps or other electronic means, while notes and coins are abolished. Your current account will no longer be held with a bank, but with the government or the central bank. Banks still exist, and still lend money, but they get their funds from the central bank, not from depositors.

Having everyone's account at a single, central institution allows the authorities to either encourage or discourage people to spend. To boost spending, the bank imposes a negative interest rate on the money in everyone's account - in effect, a tax on saving.

Faced with seeing their money slowly confiscated, people are more likely to spend it on goods and services. When this change in behaviour takes place across the country, the economy gets a significant fillip.

The recipient of cash responds in the same way, and also spends. Money circulates more quickly - or, as economists say, the "velocity of money" increases.

What about the opposite situation - when the economy is overheating? The central bank or government will certainly drop any negative interest on credit balances, but it could go further and impose a tax on transactions.

So whenever you use the money in your account to buy something, you pay a small penalty. That makes people less inclined to spend and more inclined to save, so reducing economic activity.

Such an approach would be a far more effective way to damp an overheated economy than today's blunt tool of a rise in the central bank's official interest rate.

If this sounds rather fanciful, negative interest rates already exist in Denmark, where the central bank charges depositors 0.75pc a year, and in Switzerland.

At the moment it's easy for individuals to avoid seeing their money eroded this way - they can simply hold banknotes, stored either in a safe or under the proverbial mattress.

But if notes and coins were abolished and the only way to hold money was through a government-controlled bank, there would be no escape.

Apart from the control over the economy, there would be many other advantages of a cashless society. Such a system is much cheaper to run than one based on banknotes and coins. Forgery is impossible, as are robberies.

Electronic money is an inclusive and convenient system, giving poor and rural sectors of an economy - where cash machines and bank branches may be few and far between and not all people have accounts - a tool for easy participation in the economy.

Finally, the "black economy" will be hugely diminished, and tax evasion made all but impossible.