Would abolishing cash help cure AD problems?

Miles asks about this on Twitter.  Earlier in the year, Matt wrote:

Stop for a moment and ask yourself why the interest rate can’t be reduced much below 1 percent. The trouble is cash. At any given time, relatively little paper currency circulates in the United States. Instead, most of the American money supply consists of bank accounts and other electronic stores of value. People prefer to keep money in bank accounts because it’s convenient and because you get interest on it. If the rates were driven below zero—in effect a tax on holding cash in the bank—people would just withdraw money and store it in shoeboxes instead. But what if you couldn’t withdraw cash? What if all transactions were electronic, so the only way to avoid keeping money in a negative-rate account was to go out and buy something with the money? Well, then, we would have solved our depression problem. Too much unemployment? Lower interest rates below zero, Americans will start spending and investing again, the economic will grow, and unemployment will go back down to its “natural rate.”

Ryan Avent comments.  A few points from me:

1. Even pure cash can be taxed, if we are willing to go the goofy route.  A stochastic declaration of “counterfeit,” based on serial numbers and scans, is one way to go.

2. Technologically speaking, it is possible to run virtually all transactions without cash, or it will be quite soon.  That said, for this to work as stated, you would need to run all transactions without cash or the option of cash.  How many millions of Americans do not even have bank accounts much less smart phones?  This is more likely to work in Singapore or Denmark, at least for the foreseeable future.

3. You could have currency or some currency equivalent continue to exist in the black market economy, with penalties for ordinary citizens caught holding currency.  (Which would probably not be popular on Fox News, and furthermore in Tennessee imagine all that talk of Book of Revelation, “Mark of the Beast,” etc.)  Even so, you still end up with a currency-bonds margin and most likely with lower nominal interest rates in that equilibrium; if the law taxes currency holdings there is less need for equilibrium to require a high nominal interest rate.  I am not sure why this should be so desirable for monetary policy.

Furthermore, under some views, this proposal would in essence put monetary policy in the hands of the drug trade.  Cracking down on drug lords, or easing up on them, would become major monetary policy instruments, at least if you take the Fama-Sumner view that currency has special potency over the price level.

4. I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours.  That means this proposal doesn’t get at the heart of the AD problem, which is closely linked to credit creation.  But if you disagree with me on this one, you end up back at #3.

5. What do we really know about money demand anyway?  Cooley and Leroy (1981) is still worth reading.  Under one plausible view, you get sustainable increases in velocity, aggregate demand and investment when people feel safer and wealthier, not when you tax them more.  It’s fine to say “we don’t know,” but I get nervous when macro stabilization policy is relying so directly and so relentlessly on money demand effects.

6. I don’t see how this proposal could work unless it is applied globally, which seems implausible.  If your dollars are being taxed some extra amount, just put them in a foreign bank to earn zero or do some kind of funny quasi-repurchase agreement, with a foreign bank, to avoid having formal ownership of the dollars on the days of the tax.

On net, it is an interesting idea, but I wouldn’t actually do it.

Addendum: Scott Sumner comments (I don’t myself think the monetary base is so special, and if pre-2008 wasn’t a problem, that is why).


About 25 percent are unbanked (and growing), about 40 percent with smartphones. Also, where is the evidence people are sitting on money? The AD issue is too little money, not too much. Also, how would this compare to Argentina's ban on dollars?

On net, I'd say this is a stupid idea.

I'm confused. These logistics are only difficult for a sub zero *nominal* rate. Higher inflation resulting in negative *real* interest rates penalizes holding cash no matter where you stuff it.


You went from no currency to special currency taxes and then began to talk about that.

Quit redeeming currency for deposit and quit accepting currency for deposit.

All of the send currency overseas and then bring it back assume that you can deposit the currency when you bring it back.

Anyway, I think that making the hand-to-hand currency private takes care of these problems.

If issuing currency becomes costly, banks don't do it. If the outstanding currency is too much of a problem, make it callable. Deposit it now or never.

If you don't think negative nominal interest rates are sufficient to get people to spend now rather than try to spend later, I think you need to explain why rather than talk about currency taxes.


> How many millions of Americans do not even have bank accounts

Is this even possible in modern world? Who's paid in cash other than drug dealers?

Anyway, I doubt it would change much. Price, wage, and debt stickiness would be just the same.

"Is this even possible in modern world? Who’s paid in cash other than drug dealers?"

This is why check-cashing services exist.

Also why the poor people that have to use them own photo IDs, and nevertheless get used as an example of how oppressive voter ID legislation is.

Then why do 10% of registered voters not have them? And why can I vote by mail and never need to produce an ID?

"10% of registered voters not have them" Bullshit.

Have you actually paid $20 to cash a check and had to show a photo ID?

The check cashing services serve customers who can't cash checks in banks, partly by putting store where banks don't, but also cashing checks banks won't.

They rely on other better means of fighting check fraud of all sorts.

i tip only with cash; isn't that part of total compensation?
winco stores only take a debit card. i pay in cash

I pay in cash whenever I can - it's generally faster - especially restaurants where I like to leave a cash tip. The wait staff appreciates it and they do remember.

Perhaps I misunderstood this, but wouldn't it still be possible to buy goods or gold instead of having your wealth in money? I think a black market for trusted savings might be the result.

Reminds me of "red money"...


"[this] would probably not be popular on Fox News"

What we are talking about here is giving the government broad new coercive power over the economic activity of all individuals. Would opposition to this really be a non-mainstream position? The individual mandate was unpopular on Fox News. But this would be a mandate that ALL economic activity must be directed through a government-approved set of banking institutions, so that the government would have unlimited ability to use monetary policy as a backdoor method of wealth redistribution.

This could succeed as a California proposition. I should check, maybe it already is.

Instead of abolishing cash, making savings negative, etc. perhaps we should look at where the cash is first, and target a response to the segment that can afford it, and not the pensioner living on SS and a small savings in Fla. Maybe you can target your program:

This problem is only a problem for the top 1% which have about 40% of the wealth.

From the NYT: "The Times had estimated the threshold for being in the top 1 percent in household income at about $380,000, 7.5 times median household income, using census data from 2008 through 2010. But for net worth, the 1 percent threshold for net worth in the Fed data was nearly $8.4 million, or 69 times the median household’s net holdings of $121,000." And also: "About three-quarters of the wealthy said they spent less than they earned in the previous year, compared with about 44 percent of everybody else. This is also a category that will be fascinating to track in the post-recession data"

They are the ones that have the high marginal propensity to save, and can and do save. A person making $35k isn't the person who has much idle cash, and if he/she gets it will likely spend it.

Inheritance taxes, anyone, to reduce income taxes? Taxing wealth also and not just income?

Another, similar approach, would be for the fed to pay for a sales tax holiday...whatever you purchased during a period would be at reduced sales taxes, with the federal government footing the bill. For states with no or low sales taxes, a federal income tax credit.

"the top 1% which have about 40% of the wealth."

Another Lib/Prog that believes the NPV of accrued social security and medicare benefits is $0? You realize that assumption is necessary to get to your statistic. You say you never read the meta-data? Typical Lib/Prog.

Jay, I am reporting from CBO, Fed Reserve and IRS data. Social security is a tax, and later an expenditure; medicare is a tax, and later an expenditure. Take up double entry book keeping and read less of blogs, more of CBO, Fed Reserve, and IRS stats.

Another Tea partier who doesn't understand the difference between an asset that can be bought and sold and a contingent future obligation.

"Taxing wealth"

That already occurs. It is called inflation. Every year $100 buys you less goods and services.

Tyler's proposal of negative rates is taxing wealth, so think about how that disproportionately affects those at different income levels.

... and the bitcoin folks start popping champagne...

At everyone being given a free smart phone?

Tennessee resents being portrayed as a being inhabited by redneck religious extremists. You're probably only portraying us that way because you're a demon spawn of Satan from the big city.

I'm from TN too. I love the south, but it does come with being the butt of redneck stereotype jokes.

What about the part where you evilly coerce people to buy stuff and they just drive up the prices of raw materials, not even to spite you?

Why do economists hate the tooth fairy??? Kids Lemonade stands??? Homeless people???

Are you going to stuff credit cards into a dancers bra and g-string???

I already hate, hate, hate gift cards and now I won't be able to give someone a cash present?

I am not sure that guy from Home Depot who I hire to unload my lumber takes credit cards.

I am pretty sure that the kid I pay to pick up dog poop cannot legally take credit cards

What about that old guy at the park who brings around firewood? Oh and the pay showers that make life liveable for my wife when we camp?

The fact that economists even discuss this kind of nonsense is deeply disturbing...

Another in a long line of schemes that could be summed up as "lets make everyone poorer so that everyone gets richer".

"The fact that economists even discuss this kind of nonsense is deeply disturbing…" There's some serious irony in this conclusion given your previous examples. Of course, economists should be thinking about this topic...a cash-less economy going to happen. In the transition period we can investigate or at least ponder the pros and cons of cash versus electronic transfers. It could matter for monetary policy as well as for fiscal policy. As one example, I did some work with co-authors on the 2008 tax rebate and we were able to examine whether it mattered that the stimulus was distributed as a paper check or as electronic fund transfer. We and another research team who used different data did not see an effect from check versus electronic transfer, but soon all stimulus to households will be electronic and we won't be able to test for such effects.

When will you test for the impact of electronic transfers only, on those with and those without bank accounts?

Peter Tufano (and coauthors) has done some interesting work on low income households and paper vs electronic payment. One example with tax refunds (PDF) http://www.nber.org/chapters/c0068.pdf There's still a lot of open questions about how much, when and why the method of disbursement matters.

what about anonymous transactions? is that worth anything anymore?

Let's just shoot people who save. Evil hoarders.

Saving, hoarding, not the same thing... except maybe right now.

Since we are talking about a wealth tax here, and if you gotta tax, this is the best kind of tax, I got over my original "ah, they're gonna seal off the exits" reaction.

Plus, you don't really need negative nominal rates for this, unless you can't crank out enough inflation to generate the tax you want. Higher inflation is the time-tested tool here, and the optics are better than negative nominal rates. Hardly a peep over negative real rates over the past four years.

Because, God knows, human beings won't act counter to progressives designs.

"(I don’t myself think the monetary base is so special, and if pre-2008 wasn’t a problem, that is why)"

I need help understanding that sentence.

Here's a quick translation: I disagree with Sumner's response.

A more thorough unpacking of this gem of sentence: "I don't think the monetary base is so special,..." A clear reference to Sumner's reply in which he pooh poohs the importance of credit and sets money in its unit of account role a fundamental driver of the economy. "... and if pre-2008 wasn't a problem, that is why." I will admit I am not sure about that clause, but the idea around here seems to be that pre-2008 *was* a problem...behavior based on 'wealthier than we thought' thinking and easy credit in a housing bubble. (Personally I think the easy credit reflected more than the monetary stance and also was regulatory and about expectations.) And yet the folks who worry about NGDP weren't all that concerned about misses pre-2008 (right?) money was fine pre-2008 then but ex-post we see the economy was not. So money can't be primary driver. I could be totally off base, but that's what I took from it.

Abolishing cash would only result in people fleeing to "cash-like" assets. Stocks, bitcoins, gold.


yep. Without cash you would be trading barrels of wheat for slags of iron.

I am surprised, though, that Tyler did not discuss the same result by reducing costs on disavings, ie, consumption. Today, we have sales taxes--a tax on consumption. Reduce the tax on consumption, and there will be more consumption. But, this does not play so well for the wealthy--they consume less, and save more. (Or, you could reduce taxes on marginal employment, ie, reduce payroll taxes on new employees, but since there is a shortage of aggregate demand, I don't know what that gets you. So, I keep coming back to not taxing savings so much as reducing taxes on consumption. You could even be more targeted on reducing consumption taxes. Today, if I purchase a color TV, it is likely made in Korea, or China. Can we find taxes on consumption that would correlate with domestic production, either goods or services.


Ahead of his time.
Illinois Secretary of State Paul Powell.

Paul Powell: The Illinois Democrat Who Died With $800,000 In His Shoebox

Paul Powell: The Illinois Democrat Who Died With $800,000 In His Shoebox

OK, OK, there was really more than just one shoebox. I'll let Seth explain:

Paul Powell was born in Vienna, Illinois on January 21, 1902. He was a big wheel in the Illinois Democratic Party since WWII. Eventually, he became Illinois Secretary of State during the same year I was born, 1965. In 1966, his office was investigated for corruption; he was exonerated, but his chief investigator was indicted for theft of state funds. He was still in office when he died in Rochester, Minnesota on October 10, 1970. Shortly thereafter, a shoebox full of money was found in his room at the St. Nicholas Hotel here in Springfield—the infamous cache.

The famous Paul Powell shoebox was actually more than one box, and not all were shoeboxes. There were also metal boxes, briefcases, and envelopes. This treasure trove—roughly $800,000 in cash—was discovered two days after he died, when Powell's staff and his estate executor gathered his belongings from the hotel room and storage area. The other, less famous findings included 49 cases of whiskey, 14 transistor radios, and two cases of creamed corn. This guy was prepared; for what, I don't know.

Outrage? Hardly. An excerpt from The Southern Illinoisan:

"We just assume politics is corrupt and a little bit of corruption is the cost of doing business," said Kent Redfield, a political scientist at the University of Illinois at Springfield. That was certainly the attitude toward former Secretary of State Paul Powell, owner of the mysterious cash-stuffed shoeboxes.

"Paul did a lot of good things for southern Illinois, including helping to build the university I work at," said Mike Lawrence, the director of the Paul Simon Public Policy Institute at Southern Illinois University in Carbondale.

So when those shoeboxes were found in Powell's home when he died in 1970, it raised some eyebrows but not much ire. "People were surprised about the amount of money," Lawrence said of the cache that neither Powell nor anyone else ever explained. "But there was sort of a sense if he gave us our share, what's wrong with him getting his share."

Paul Powell of Illinois: A Lifelong Democrat

Robert E. Hartley has written a book on this caricature of Illinois politics, published by the Southern Illinois University Press:

Powell never earned a state salary of more than $30,000 per year, yet in the last year of his life, his federal income tax return showed an income of more than $200,000. At his death his estate totaled $3.2 million, and, when settled in 1978, was worth $4.6 million, including nearly $1 million in racetrack stock.

My hometown of Belvidere, Illinois was heavily Republican (the newspaper was named the Belvidere Daily Republican) yet a number of folks would vote every election for Paul Powell for Illinois Secretary of State. They knew he was corrupt and wanted him in office when he was finally found out (obviously, he never was). I got my first drivers license in 1970 and I still remember my father making out the check to . . . well, let me make this a quiz:

Illinois Drivers License Bureau

Illinois Secretary of State's Office

Illinois Secretary of State Paul Powell

Paul Powell

That's right: "Paul Powell". Now are you surprised he ended up with $800,000 in those shoeboxes?

12/01/2005 in Crime, Favorites, History | Permalink

Yes, politics is the art of fleecing the public by creating public goods problems and prisoners dilemmas where none existed before. Its not new.

Well, let's wait until the end of the week. If the power goes out in the NE, we'll see the fatal flaw in abolishing cash. Namely, it requires a fully operational system. No disruptions to power or communications can be tolerated. No asynchronous transactions permitted.

As long as you are willing to grind the economy to a halt when electricity or communications networks are disrupted this is a grand plan. Just ignore the fundamental flaw and your golden.

Wouldn't work. Cash in the bank is not cash - it is a contract with the bank to provide you with cash or cover your debts and spending under certain conditions. Taking cash out of the bank is just one way I can take my money out. I could equally well buy silver, or wood, or limestone blocks, or salted fish, keeping them as a store of value, intending to sell them when I need money for other things. There are so many cash-equivalents possible. One of them would surely take the place of cash, if there was no more paper currency or coinage but a sudden demand for non-electronic cash. There would still be a run on the bank if interest rates dropped far enough below zero.

If the aim is to make people spend rather than holding cash then you don't need negative interest rates to do that - just introduce a subsidy on final sales like Russ Abbott recommends (it becomes a tax when you want to reduce AD).

I thought the point about the zero bound was that not enough people were borrowing? If you lent at negative rates however wouldn't everyone go for that ? No matter what the inflation rate surely its a good deal to borrow money and pay less later - kind of like free money ?

Reading this blog I come to the conclusion that there is no such thing as a libertarian economist, because all economists seem hell-bent on imposing their schemes on everyone else. Some guy wants to use currency for his mattress stuffing, and pull it out when he wants to buy something? Leave him alone! Good grief!

Why is this mattress stuffer dependent upon the Treasury printing bills? He can get his own paper money on the free market.

If the proposal is to abolish the use of currency, that would include private-market currency. This would, as others have pointed out, force every human being to participate in electronic transactions, presumably through banking or government institutions, for every economic move they make. It's absurd on its face, and the emergence of an enormous currency black-market would be certain. I suspect that the economic arguments are window-dressing for a totalitarian impulse: You will do as we say, and we must be able to track electronically every move you make.

"If the proposal is to abolish the use of currency, that would include private-market currency."

Private currency doesn't prevent the Fed from setting a negative interest rate, only the Fed's own currency does (technically, when reserves are convertible into currency). So a libertarian framing of the proposal is that it's a proposal to privatize currency issue.

Tyler, you're making this way too complicated. Eliminating currency just means ending the convertibility of bank reserves into FRNs. That's it. People can still transact with U.S. notes, it's just that those notes would be bearer bonds rather than currency.

No authoritarian measures are needed and hand to hand transactions can continue, albeit with slightly less convenience since paper notes could be worth more than face value (but never less since you can always redeem paper notes for electronic money at face value).

Finally, the point is not that interest rates need to be lower. It's more subtle than that. If the Fed *could* lower interest rates, it's likely that it would need to raise them. The problem is that the Fed's gun is out of bullets. But if it had bullets, then it wouldn't need to fire, just wave the gun around.

I don't think cash is much of a problem. Yes a person can keep hundreds of thousands, even millions of dollars, as cash stuffed in a shoebox or safe. That doesn't alter the fact that cash is a minority in the population of the money supply. More importantly in terms of 'negative interest rates', keeping cash in your shoebox does entail some serious risks in terms of fire and theft. Think it costs nothing? See what happens when you try to tell your insurance company that you're keeping vaste hoards of cash in your home which you want them to insure. If you really insist on it, you're going to start paying a higher rate.

More importantly, for large businesses, mass storage of cash is going to end up being very expensive. If negative interest rates are not very negative, it probably makes more sense to just pay the bank 0.5% or even 1% to store millions or billions than it is to build a system of safes and checks to secure them as cash.

I'd say that you could go under 1% (even to 0% or very marginally below) because storing and handling large amounts of cash is inconvenient, potentially dangerous, and not necessarily free (e.g. the cost of renting a safety deposit box).

Also, one way to partially abolish cash by printing only small bills. $100 bills are already gone -- what if that process was extended and no bills bigger than $5 were available? Of course, any such moves would be extremely unpopular, so not even the most dedicated Keynesian poss would actually propose anything of the sort (although it might be politically possible to get rid of $50 bills using an 'anti-drug kingpin' pretext).


"You could have currency or some currency equivalent continue to exist in the black market economy, with penalties for ordinary citizens caught holding currency."

??? What prevents rates going negative is that the Fed will supply currency in *unlimited* quantities. The existence of currency alone (or the holding of it) in no way prevents negative rates, just like the existence of coupon bonds in no way prevents rates at levels other than the coupon (the bonds just trade off-par). The reference to penalties sounds like some kind of shrill libertarian dog whistle. There are no penalties! Just not going to oblige unlimited demand for perpetual zero coupon bonds.

"Cracking down on drug lords, or easing up on them, would become major monetary policy instruments,"

"I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours."

I think you are really missing the point if you think this is about money demand. This is about *rates*. You can't bring rates below zero if you supply unlimited quantities of perpetual zero coupon bonds on demand. It's a basic rate arbitrage problem. If you believe that rates policy works above zero, then why would it not work below? There's nothing special about nominal zero. If we could get rates significantly negative there would never have been *any* demand shortfall even in '08/'09. Excess leverage depressing spending? How fast do you think you can deleverage with rates at -10%? Also, we'd never have to worry about aggressive inflation fighting, since we could always drop rates negative if we find we've over done it.

"If your dollars are being taxed some extra amount, just put them in a foreign bank to earn zero..."

How is a foreign bank going to pay zero? They are getting negative nominal returns on their assets! If there's no currency around, you can't just get nominal zero. If the bank offers a zero deposit rate, people will borrow at negative rates and deposit in that bank in unlimited quantities until they go broke.

The comments here are really shrill by the way. Apparently your basic Austrian/libertarian feels entitled to *government guaranteed* unlimited *nominal* zero returns. What a bunch of whiners. Real men hold real assets.

'What a bunch of whiners. Real men hold real assets.'

Attaboy! Everybody into the pool- the risk pool.

You too granny!

This is not just about 'money'. This is about historic risk being borne by currency-denominated assets of all stripes. It's why Buffett (is he real man enough for you?) said "Bonds should come with a warning label right now" this year.

Brian Donohue,

"Attaboy! Everybody into the pool- the risk pool."

Here's how the macroeconomy is regulated: Whenever the Fed cuts rates, it's telling Granny that she should think about investing some more. There's nothing special or different about nominal zero. Zero *nominal* is a meaningless fixation. What if there's deflation? Or hyper-inflation? What matters is *real* return of the risk-free asset vs productive capital assets. It's the Fed's job to manage that tradeoff and they can't do that job effectively so long as they are required to supply unlimited perpetual zero coupon bonds at par.

The government doesn't owe Granny dollars, present or future. If she doesn't like the terms on t-bills, she is *free* to buy real return bonds at whatever terms she can negotiate in the private market. If she can't find a market for that, it's because the real rate is *too high* and the economy can't *afford* to pay what she wants. If government decides to provide unlimited savings opportunities at above market clearing rates, then people aren't going to invest in capital assets and the economy is going to fail. So the government needs to stop nannying savers, and set the real rate at a level that clears savings supply with investment demand.

And yes, that might hurt right Granny right now. But lets not mix up monetary policy and welfare. If Granny's poor, maybe we should give her a hand. If she's rich, she could always try investing! Also, if it wasn't for the ZLB, we never would have got here in the first place. The short rate might have dropped to -5% in '08 but that would have been more than enough to bring us back to potential by the end of '09 and the short rate could have gone right back to 5%. Long bond yields would barely have budged.

Here we see again the inference to deviate and pervert the purpose of taxation.

The purpose of taxation is to effectuate the functions of governments.

Of course, those "functions" vary by cultures and historic experience.

But, here we see a concept of taxation to effect economic manipulation or "social engineering," - basically establishing that "function for the government which posses the powers of taxation.

One cannot cavil with giving adequate consideration of the effects of taxation, imposed for the fundamental purpose, upon the economic activities taxed; and that optimum taxation should have the least deleterious series of effects as possible ("kill no goose before its time").

This kind of concept is nothing more than another mode of central planning through additions to the functions of governments.

Besides, what is the assurance that something else will not evolve as a medium of exchange?

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