How easily can we eliminate paper currency?

Ken Rogoff says we should do it, Miles Kimball has written extensively on the topic, Willem Buiter too.

But how to do it, assuming that we wanted to?  (Here is the piece by Miles which covers the transition most specifically.)  Let’s say you allow people to turn in their currency for tickets to heaven and the currency is then never replaced.  In the short run that will increase the demand for currency in precisely such a way that advocates of a currency-less economy worry about.

Alternatively, we could tax people caught holding paper currency, either explicitly or implicitly.  Imagine for instance random lotteries, based on serial numbers, which make some dollar bills suddenly worthless.  People then will try to spend their currency and velocity will increase.  But currency doesn’t go away.  The policymaker could try to drive up velocity so much so that currency had a value of zero.  This either drives up prices a lot, or alternatively currency acquires a price separate from demand deposits and other forms of inside money.  The former option seems undesirable, whereas the latter leads to a good outcome.  But note this: once currency has a separate price, you don’t need to get rid of it on any macroeconomic grounds.  Pricing currency is better and easier than getting rid of it.

Yet another scenario, as Kroszner and I had outlined a long time ago, is for currency to evolve out of existence, as it is slowly displaced by assets of higher return and greater convenience, such as electronic payment media.  This does not involve transition problems, but it takes a long time.  In recent times currency if anything has been a growing part of the U.S. money supply.

Rogoff suggests eliminating large-denomination notes as a way to start.  I don’t object to that suggestion but of course it doesn’t get rid of currency.  It even runs the danger that a truly small and squirrely asset — small notes of currency — starts ruling the roost, a’la Keynes’s chapter seventeen.

Once you have currency, it is hard to get rid of in an efficacious way.  It is harder yet if you think that currency “rules the roost” in some kind of disadvantageous manner.  Getting rid of currency is a discrete event of some kind, and thus it would bring discrete changes to…the roost.


It seems obvious that small countries will find it easier to do, so we should let the small advanced countries do it first and iron out the kinks. Then copy what they did.

Isn't the answer just making the alternative technologies easier & more reliable? On average, doesn't an American today carry far less cash in his wallet than 50 years ago (inflation adjusted)?

If technology keeps evolving won't paper money keep reducing in importance gradually? One barrier might be the effective market dominance of Visa / MasterCard. Especially on large transactions the overheads / commission needs to fall more rapidly.

A small country that takes the lead in "eliminating" cash, it seems to me, will just see a huge segment of its economy shift to using dollar or euro banknotes. Those can easily fill the domestic demand for a cash-like medium of exchange, and a small country will need some reasonably efficient way of dealing with them on account of foreign trade and tourism still using the more traditional sorts of money and not being willing to bend over backwards to deal with Creditopia's hip new all-electronic fiscal infrastructure.

Or the technophile new new thing wankers could just leave the rest of us alone and not interfere with the printing and distribution of paper currency.

+1,000 for this comment,

Really, you don't have to be a dyed in the wool hard money conservative to think that this is just the silliest idea ever. It is the best example ever of using a sledgehammer to crack the very small nut of a zero lower bound that is obsessing the nuttier NK economists. If any country ever really reaches this point (and we have never seen it even in Japan) there is the much easier method of currency printing to solve this issue,

If the issue is really tax evasion, how about simplifying the absurdly complex tax system instead?

to the point - eliminating paper currency is way of increasing control of the central banking system and the power of the tax system

this might be worse than the problems which are in theory being addressed - and risks causing fiat currency to be replaced by other informal currencies (recent examples include cases of soda. food stamps, and of course drugs)

what is more, in the coming era, web/electronic crime will swamp theft of paper currency, and the keeping of paper currency may be a last defense against some kinds of crime

Denmark is very slowly starting this by making it legal for shops to not accept cash. (link in Danish)

In the US, shops are free to not accept cash before a debt is incurred. However, they must accept cash as legal tender for debts already incurred, which as I understand it covers restaurants that serve food first and accept payment afterwards.

The UK is interesting, because of Scottish (and Northern Ireland, Channel Island) notes that are promissory notes not legal tender but still widely accepted. (Indeed, as near as I can tell even Bank of England notes are not legal tender in Scotland.)

Not requiring businesses to accept cash seems like an obvious step.

So we have another example here of "first, start don't ng nothing a long time ago."

Couldn't one just subsidize one or more non currency payment mechanisms and let the transition take a long time. If this is combined with a higher inflation target to avoid ZLB problems (assuming that it will continue to ast as if ZLB IS a problem) in the next recession until currency became a very small proportion of M1 a long transition is not a big problem it just delays the "ability" of the Fed to have a lower inflation target.

Bruce Krasting wrote about 'Red Money' 4 years ago here:

It would do all the heavy lifting by accelerating the velocity of paper money in the system to its max.

I was reading the article and then the comments, all the time thinking of the article I wrote years ago. And sure enough, you remembered too. Made my day -tks Derek.

Make it illegal for people to deposit (and therefore earn interest) on currency, then raise the inflation rate to the point where holding onto currency is unpleasant and people prefer to switch it for the electronic replacement?

At that point, I would seriously consider stockpiling scarce metals, ammo and canned goods as the medium of exchange. I can't imagine that digits subject to the whims of a centralized elite would be more liquid. Maybe that centralized elite could rely on a high degree of trust but I doubt it.

Perhaps I'm an ignorant but the "Why" question is not answered strongly by Mr. Rogoff. 1) Interests rates are set near to zero and people take cash out of banks. 2) Tax evasion & illegal activity. It makes some sense getting rid of big notes because of money laundering etc. But, small notes and coins? For some transactions electronic money is way more efficient, but for small business the use of electronic money may be more expensive.

As a way to avoid people getting cash out of the bank, it seems misguided. The guy you're trying to convince to stop holding cash and invest it does not have a 5K USD savings account to buy a new car.

Sure, I can see selling that one politically -- let's eliminate paper currency so we can have negative interest on deposits and so that the government can track every financial transaction however small and informal (down to your 10-year-old's allowance and paying the baby sitter). In the U.S. it's not even politically possible to eliminate the penny or replace the dollar bill with a coin, so it's certainly not going to happen here first. So suppose the EU leads the way and eliminates the paper Euro. Wouldn't that only cement the dollar's position as the world's reserve currency, increase US seigniorage profits while eliminating the EU's, and leave paper dollars as the medium of exchange in the informal market worldwide? And, in the end, if paper currency were eliminated worldwide and governments also stamped out private anonymous currencies like Bitcoin -- what, exactly, would stop black markets from switching to gold? At this point, it's not even more cumbersome to transport (a $50 bill weighs a gram while the gram of gold at current prices is over $40).

Funny that you mention the weight of gold but want to eliminate the dollar bill in favor of a coin.

One thing I dislike about traveling in Europe - besides the fact that drinks are sized for a toddler - is having to walk around with a pocket full of effing .1, .2, .5, 1, and 2 Euro coins.

Gold is lighter, is the point I think.

Never go to Australia. Their 50 cent coin is the size of a dinner plate.

The Australian 50 cent coin is only the size of a small dinner plate. Funny thing is, it helped replace coins that were even larger.

"Funny that you mention the weight of gold but want to eliminate the dollar bill in favor of a coin."

Oh, no, *I* don't want to do that -- I'd much rather carry paper dollars than coins. But the U.S. government, at various times, has introduced new dollar coins with the intention of getting rid of the $1 bills, but has never been able to carry it off politically. The point is that if the US can't even manage that baby step, there's no way physical currency is going to disappear.

I second, er, third that motion.

Let's get rid of the penny first, then work up.

"In 2010, the total money supply (M4) measure in the UK was £2.2 trillion while the actual notes and coins in circulation was only £47 billion, 2.1% of the actual money supply". Why we are still discussing getting rid of Paper & coins? its actually started. But for me, I can see its not good. First we let out gold standard, now getting rid of paper printed. Then? Everybody will be rich in hyperinflation :)

U.K. population is 63 million -- 47 billion pounds in circulation works out to about 750 pounds in notes and coins for every man, woman and child. I wouldn't describe that as anywhere close to eliminating paper and coins. I don't have the data in front of me but I suspect the reason notes and coins in circulation are only 2.1% of M4 is that the non-cash part of M4 has grown -- not that cash in circulation has decreased considerably.

Seems like a great way to move the ultimate police state one step closer to reality.

+1. When you can't spend money without being tracked, there is no money anymore. We're going back to barter, but worse, because 2nd class citizens simply won't be able to exist.

The privacy issue isn't as complex as it sounds. My bus card stores value directly on the hardware, and the bus company has no idea who i am. Sure you'd have to worry about people hacking their cards and adding value, but you could put a cap on the value of these.

So I could go to the bank and ask for 10 $500 stored value cards. From that point, no one knows who i am when i buy stuff.

For a proto-cashless economy, check out Hong Kong. The Octopus card can be used to pay for public transport, taxis, restaurants, convenience stores, utility bills, etc etc. It seems like absolutely everyone has one, but cash still hasn't disappeared

Small error: you can't actually pay for taxis with Octopus, but it seems obvious that you should be able to. I also wish I could put more on it.

We in the US already have eliminated large-denomination notes; $100s aren't worth much, and $500s or more have been gone for decades. (I believe they were officially taken out of circulation in the 70s, and it's been longer than that since they were actually printed.)

I don't know what the situation is with €500s: do people really use them? Are they out there?

Last time I checked, Benjamins were worth $100.


One thing Americans might not realize is that $100 bills are quite useful and important outside the U.S. If you travel internationally and in places where the ATM network is not so great, you can always find someone to change $100s at a good exchange rate.

Has anyone ever looked at the economics of the company town? In another age, the company town had its own currency that was of little use outside the town. Maybe the scale makes it worthless for study, but it seems like the model our rulers are using. I recall a story somewhere about Tata Steel building towns in India, modeled on the Western concept.

If someone knows of a good book on the topic, I'd like to know it.

The most recent collection of scholarship is probably this:

Having only electronic money enables the government to know the details of every purchase made by every consumer. I don't trust the government to not try to gather this information and use it against dissenters.

The most popular electronic currencies today have reasonably good privacy. If you don't care about privacy you can be tracked, but if you know what you're doing you can operate anonymously. Much like everything on the internet.

There's an ongoing effort to make this kind of anonymity easier for the average person.

Until the state decides otherwise. This has always been the best argument against Bitcoin, from a libertarian perspective. For the currency to be accepted, as is true of all currency, it must be validated. Digital currency must carry with it the chain of custody to be self-validating or rely on a third party to approve each transaction. Since the monopoly of force rests with the state, they will have access to either model on demand.

I would be absolutely delighted if this is the best libertarian argument against Bitcoin. :-)

1. An auditable chain of custody is not strictly required. For example the Zerocoin proposal uses zero-knowledge proofs to verify a coin without knowing whose it is or trusting anyone.

2. While there is still a chain of custody, one can simply pass through anonymously-operated coin "mixing" services that shuffle your coins around with other people's coins.

Even a monopoly on force doesn't grant infinite force - if powerful lobbyists can't prevent the illegal sharing of movies, they'll have an equally difficult time preventing the illegal sharing of digital signatures.

Tyler, can you explain what you mean by "rule the roost"?

You could just increase the price that you charge to print/deliver new currency.

For example, the Fed prints $100 bills, but charges $101 to banks to deliver them. Banks will pass this cost on to their customers through fees on cash or lower rates. Some banks will go "cashless" to attract customers. Customers will eventually migrate to these new cashless banks, and paper currency will die out as the existing paper deteriorates.

Ah yes, the dream of the technocrats. To have the serfs completely at their mercy....

Do any of these theorists at all discuss how eliminating paper money would affect the quarter or so of the poorer class that don't even have banking accounts and rely almost exclusively on cash?

That's in Tyler's forthcoming book, "Beantopia is Over: Turning the Poor into Food"

soylent green spritzed with pepper spray is beaner!

A modest proposal indeed

Presumably they will keep doing what they are doing.

People seem to ignore the huge costs of cash transaction. sure there is no transaction fee but there are a lot of other costs. if there was no cash there would be no armored trucks to rob. In Sweden for example you are no longer allowed to use cash on buses since bus drivers in less good neighborhoods were being robbed. And think of all the cash road tolls in the US that wouldn't need to waste laborers anymore. There are also companies like Venmo that try to facilitate small transactions.

Systems like the Illinois Tollway have all-but eliminated cash by making it more costly than the electronic ipass (a deck-of-cards-size transponder on your dash, linked to your account) in a number of ways:

1. If you have an ipass, you can zoom through the "open tolling" plazas at 70mph while the cash people take a separate little lane, stop, wait in line, pay cash, and resume.

2. Cash tolls are 2x or 3x more expensive than electronic tolls.

3. Even if you lose/forget/kill your ipass, the open-lane tolling will take a picture of your license plate. You can log on within three days and pay the toll at face value (e.g. $0.50) or they mail you a fine plus the toll ($35.50).

Consider a supermarket that accepted credit cards at 19 lanes and cash at 1 lane. You CAN pay cash, but you have to wait in a much longer line. Then make that lane in a less desirable part of the store. Then make you wait for them to call a manager to process your transaction. Then only accept cash at certain hours.

I buy all of the reasons for electronic currency for the same reason I prefer fiat money to gold.

But given all of the data vulnerabilities we've seen lately and the plausibility of some systemwide electronic failure, shouldn't we be extremely worried about giving up paper money completely?

A little utopianism is fun to engage in now and then, but envisioning how we get rid of paper money is like communists trying to explain exactly how the class revolution is going to happen.

>Getting rid of currency is a discrete event of some kind, and thus it would bring discrete changes to…the roost.

Say a 1918 style pandemic occurs. Everyone who can is told to work from home. Schools are closed and Khan academy becomes an initially temperory replacement. Supermarkets are closed and all groceries are delivered by van and a box is dropped off at your door. All government payment s are made directly to your bank account. Many ailments are dealt with not in deadly doctors offices but over skype. The pharmacy is emailed your prescription which is also delivered without you meeting anyone. All cinemas and bars are closed. Nearly all payments in this pandemic scenerio are non cash.

Three months later the pandemic is declared over. How much returns to normal and how much moves into the new environment with its low basic reproduction number and little cash?

Well it will probably help that the entire underclass is now dead. But short of your epidemic or sending everyone without a bank account and a fixed address to a camp I don't see how you get there.

If we killed every left handed baby at birth, we could easily solve the economic waste of lefty scissors.

Well I don't think reducing cash would be the aim just a natural consequence of such a pandemic. One that afaik is fairly likely at some point. People working jobs that cannot be telecommuted would probably be have to be put on some sort of guaranteed basic income for the duration of the pandemic.

If people don't already have an address or a bank account during the initial panic stages of a pandemic would not seem like the ideal time to get them one.What would happen to these people?

Prostitution is another issue. Its an industry that involves a lot of person to person contact.You cant stop it but really want to in this case. It is also very cash centric "She dont take major credit cards I doubt she gives receipts". The price would rise due to added risk reducing demand. How could you further reduce demand? Government sponsored porn?

I'd vote for everything in your platform minus the pandemic part.

That's exactly what all this is: Amazon, Khan Academy, internet streaming, telecommute, driverless cars delivering your remotely-prescribed meds to your door. White people are withdrawing from diverse public spaces which they find increasingly alien and unpleasant.

It's a very old instinct. But it's hilarious how unconscious they are of it.

A totalitarian wet dream. Even in a supposedly free society, prosecutors etc. usually have the power to block your accounts pending investigation. Boom, suddenly you can't buy even anything to eat, without even as much as a hint of due process. Already the odds are quite stacked against the defendant - why not add some more, right?

Maybe a first step would be for the Fed to stop processing paper checks and start processing electronic payments. This would eliminate the limit on credit card purchases.

I would feel more comfortable with this discusssion if someone could demonstrate that there is price determinancy in a model where the monetary base is absolutely zero.

Currency would disappear. Banks hold excess reserves at zero interest to meet cash drains; there would be no need for such reserves after currency is gone.

Of course, there can be required reserves. It would be like Fama's spaceship metaphor about banking.

Banks would hold reserves if competitive interest were paid. Does an economy where the entire monetary base is bank reserves with competitive interest have a determinate price level? We are entereing Fischer Black territory here. Please think about these issues before we destroy currency.

As for the brave new currency-less world, I suggest we all have unique bar codes tattooed on our foreheads. (It would be the Mark of the Beast.) It would be so much more efficient than an internal passport, and it could be used for all purchases and financial transactions. Just a swipe of a laser scanner and we are done. It would also be easier for the government to keep track of where we are, preventing us from being anti-social. A currency-less economy is the economic equivalent of having Orwell's telescreens in every room of our homes.

I think Miles Kimball is pretty straightforward about how the transition would be possible: just announce a crawling peg between paper currency and electronic money. People could (and presumably would) still hold paper currency, but it would depreciate over time relative to e-money, so it would no longer be a good store of value, and people would limit their holdings to liquidity needs. Then interest rates on e-money could go substantially negative, bounded below only by the depreciation rate of paper money. The trick, though, is to make sure people use e-money, not paper money, to set prices. If prices are set in paper money terms, then we haven't eliminated the zero lower bound but just effectively said that e-money will normally pay interest (in the form of appreciation relative to paper money). Miles seems pretty confident that e-money would be the unit of account, but I don't think you can be certain how people will behave.

Interesting. I think that would work quite well. It's basically a deliberate harnessing of Gresham's Law.

The privacy issue isn't as complex as it sounds. My bus card stores value directly on the hardware, and the bus company has no idea who i am. Sure you'd have to worry about people hacking their cards and adding value, but you could put a cap on the value of these.

So I could go to the bank and ask for 10 $500 stored value cards. From that point, no one knows who i am when i buy stuff.

For a proto-cashless economy, check out Hong Kong. The Octopus card can be used to pay for public transport, taxis, restaurants, convenience stores, utility bills, etc etc. It seems like absolutely everyone has one, but cash still hasn't disappeared

It's funny that this argument is being proposed at this time.

In the past, I used to be opposed to the digitization of currency in the name of discrimination against the poor, who often don't have bank accounts and credit/debit cards, and rely on cash.

Then, I learned that the costs of providing aid to the poor could be reduced by increasing access to electronic financial accounts. Food stamps, medical reimbursements, and even Social Security checks could be made automatically, without requiring the mailing of paper checks, waiting in line, or distributing cash that could be stolen.

At this moment, however, I happen to be playing Watch Dogs, and I'm very worried about hackers/private companies/the government having access to accounts and transactions, as my character successfully steals account values from random people on the street.

In the end, I still lean towards moving to an all-digital currency, as long as there are both security mechanisms and issue resolution processes in place. Having had my PayPal account hacked in the past, it was very easy to resolve, so I'm not completely suspicious of electronic accounts. As much as I'll continue to have minor reservations of going all electronic, whether rational or emotional, I really have very little cash in my possession at any given time.

Also: whither tipping?

We all know that if servers properly and accurately reported tip income, our budget deficit would be wiped clean. Like a table.

I'll leave a box of 9mm ammo for a big meal, and a can of tuna for a drink.

I'm not much of a fan of this idea, but one way to accomplish it might be this:

Sell "tax payment certificates" good for paying $100 of taxes for $99 in currency, which is then retired. The certificates would expire in a year, say, so they wouldn't work well as a substitute currency. You could do this through banks, say, paying some commission on sales.

Smaller notes would probably stay in circulation until it became really convenient to pay electronically, but big ones would slowly disappear.

Eliminating cash would be as politically popular as eliminating alcohol or guns.

The whole premise here assumes that we would want to have far away strangers making these sorts of decisions for us, and controlling money in every aspect. Is there some reason we should want this? Is there an empirical economics argument for this?

This raises a related issue. I've been puzzled by why economists so often start with an assumption of state control of money, fiat currency, central banking, etc. I understand this is the context we have to work within in the near term, but we don't have to when we're thinking big, like eliminating paper.

Has anyone modeled long term free banking scenarios? For example, do economists know whether GDP would be higher or lower today, starting from 1913 or so, if we had free banking, no fed, etc. The government wouldn't be able to tinker with demand during recessions, but what's the long term play?

If central banking doesn't perform markedly better than free banking in terms of GDP growth, why would we want it? If we'd be better off with free banking, why don't economists say so, and stop talking about central banking like it's something we shouldn't be phasing out?

Next year is an economist going to say "we" should eliminate paper books, and then TC will outline different ways to force everyone to go to eReaders? Maybe randomly select books and page numbers for the fire department to tear out.

"I’ve been puzzled by why economists so often start with an assumption of state control of money, fiat currency, central banking, etc."

Economists like Charles Kindleberger didn't start with these assumptions: rather they made the case for why these are desirable using a mix of economic theory and history.

I see Tyler has never lived through a hurricane. Paper/coins in hand beats electrons you can't access every time.

Right, hurricanes, earthquakes or simply snafus at the local power plant make exclusive dependence on computerized systems for everything foolish.

Central bank offers an eMoney account (eWallet) which pays 0% interest but is 100% safe, 100% collateralised and 100% real state money. You can move your bank deposits there today (at some capped rate to avoid runs) and it will be magically laundered from bank-created paper money into true state eMoney.

A date is announced after which taxes will have to be paid in true state money, from these eWallets. Bank money will not be accepted.

Deposit insurance is reduced to zero ($250,000 today in the US; £50,000 in the UK) in stages over a couple of years, but with great fanfare: banks’ reserve ratios are made very, very public and banks are cast in all public rhetoric as risk businesses.

In response, banks limit withdrawal rates to avoid runs, and raise shareholder equity to collateralise their outstanding loans (while also cleaning up and shrinking their loan books). Over time, the public moves their current/checking account money into the central bank account, and lends or invests any substantial savings via their bank, a fund manager, a p2p website etc. Companies update their systems to pay wages into eWallets. Retailers update their systems to accept electronic payment (cost: approximately the price of buying an iPad).

If money velocity falls during this transition - which is likely, as loan repayments to banks destroy bank money - the central bank does ‘QE-direct’ to all the eWallets. Although (intentionally) inflationary (or rather counter-deflationary) this looks like a free bonus to the man in the street, and further encourages moving money out of banks into the eWallet. (This QE-direct would be committee-controlled - rather than by algorithm - because paper-money data aren’t easily visible in a public ledger. It’s done manually, and maybe weekly or quarterly depending on data availability.)

Ultimately, retail banking becomes fee-for-service, with the lowest-cost entry-level service being a unified view onto your eWallet and P2P holdings. Their legacy brands give them some advantage over startups, but a competitive market helps keep costs very low. Banks mostly revise their business models to become fund managers, P2P lending intermediaries, credit rating agencies.

Government workers are among the first to be paid in eMoney, and after some pre-announced date, taxes *must* be paid in it.

(The black market economy - including the middle-class paying plumbers - will still use foreign cash. Not much we can do about this.)

Because all transactions are now captured, state revenue is larger and collection costs have fallen. Taxes may be therefore be cut (or revenue redeployed).

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