As such, the benefits of a cashless society outweigh rational fear in the developed world, for it eliminates a key monetary issue in a cashless society: the constraint of the effective lower bound (ELB) on interest rates. This prevents the Central Bank (CB) from lowering interest rates enough to stimulate demand in a recession or liquidity trap. Although unconventional monetary policy (MP) such as forward guidance and QE, as proposed by Krugman suggest alternatives, they have historically proved to be weaker alternatives to interest-rate policy.
The cashless economy claims to lower transaction frictions, increase payment efficiency and most importantly bypass the ELB by removing the escape route posed by cash. This essay will not only identify the consequences of a cashless society but evaluate the trade-off and critically challenge the perspective of fearing the systemic changes it makes globally. This idea of greater MP flexibility through negative interest rates will be explored as a strong tool for economic recovery and emergency stimulus–contradicting the threats created.
The salient sources of rational fear are privacy and security risk. The reduction in cash risk comes at a cost of greater vulnerability digitally where transactions rely on networks, databases and software systems. There will be an eradication in theft from smaller-scale, everyday crime which will benefit most people although other micro threats such as phishing scams, identity theft and payment fraud may surge. Hacking on whole payments systems or central infrastructure also carries greater vulnerability with the systemic risk, whereas cash is decentralised. With the rise of tail risk the economy is exposed to low probability, high-impact transactional failure.
Meanwhile, presenting data to the government for surveillance to track spending habits without consent, extends to exacerbating corporate power as firms collect behavioural data, maximising profit using personalised pricing and the sales of consumer information.
With an increasingly uneven wealth distribution, regional disparities and an ageing demographic (in the developed world), inequality is expected to be aggravated by digital methods of payment. This normative theory is backed by empirical evidence supporting a growing digital divide excluding certain regions, minorities or demographics with 1.2 million UK adults being digitally excluded as of 2024. Though the likes of Bolt claims cash is redundant, and undermines concerns about the elderly populations or low-income households having limited adaptability to newer technology, Buiter considers the caveat this is “except for the poorest members of society”, accounting for the regressive and disproportionate effect.
This is even applicable to less developed countries which may struggle going fully digital: potentially gradual or selective abolition in different regions may be optimal.
This digital exclusion and divide may be overcome by government intervention through policies that “promote digital literacy, subsidize digital access, and develop offline digital payment solutions”. Though new digital stores carry cybersecurity risks, as an air-gapped network, they are far less prone to incursion than digitalised global transaction systems the likes of SWIFT. Governments must ensure careful implementation where users are protected with vital regulation to keep institutions in line– allowing safe market functionality.
Cash is a bearer which facilitates anonymous transactions, concealing activity from the government that may be against laws and regulations, with over 50% of currency in transactions intended to be hidden. On one hand, greater digitalization can reduce these illegal transactions, enforcing necessary government rules that represent the welfare of society. Economically, this poses benefits such as a reduction of negative externalities; however, will lead to a reduction in demand for money as the underground economy shrinks.
Developing countries with predatory taxation systems – prone to corruption – are heavily reliant on the underground economy (e.g. accounting for 65% of GDP for Sierra Leone). This may instead lead to negative consequences with a collapse in demand for the currency and reduction in the circular flow, although this was initially supported by unjust transactions.
Consequently, this reduced demand results in a significant loss of seigniorage revenue, which the government makes through the issuing of notes. The Eurosystem earned as much as €86bn through seigniorage in 2008 and a shift to cashlessness will eradicate this inflow that supports government expenditure in areas such as education or healthcare, increasing the opportunity cost.
It must be considered that the digitalisation itself will have to be financed- and without this alternate revenue stream to support it. If financing becomes an issue in this economic transformation it may concern society how transaction methods will go forth.
The usual mechanism for the CB when output falls below full employment, is reducing real interest rates (r). This shifts the MP curve downwards- lowering borrowing costs and stimulating consumption since the IS-MP intersects at a higher output. When negative rates are necessary, cash becomes a substitute for bank accounts, so the MP curve is unable to be reduced to the sufficient level through reducing rates, thus CB may be unable to lower interest rates enough to return to productive capacity. From sustained low interest rates since the GFC, minimal headroom for cuts exists.
Removing this zero-interest alternative allows negative rates to restore complete monetary policy flexibility– something economies have struggled to achieve, giving a much better policy option than otherwise available. The cashless society should be seen as a cure rather than a curse.
The liquidity trap, as a manifestation of the ELB, has not emerged solely from Japan’s deflationary spiral but also because of the extensive rate cuts amidst the Great Recession (the global economic downturn following the collapse of major financial institutions) following the bursting of the US housing bubble, and global financial crisis (GFC). Many other developed countries encountered a similar problem: there was no more room for rate cuts and a familiar ELB constraint had resurfaced.
Taylor rule predictions support that “official policy rate in the US early in 2009 should have been as low as -5% or even -7.5%”, and financial frictions that are unaccounted for indicate further negative rates in reality. This highlights the inability of the CB to set rates remotely close to those that were necessary.
The tools used in the past substituting for rate cuts in times of crisis include QE and forward guidance; however these are limited, politically uncertain and less clean. Evidence supports that unconventional MP was ineffective in Japan with QE: despite enormous amounts of BOJ bond and asset purchases, it has still failed to generate significant inflation while expectations are still weak. There were limited effects, evidencing MP as an inferior substitute with unintended consequences rather than a clear replacement. Alternative policy options exist, but without complete success (e.g. QE leading to large debt and excessive inflation).
Instead, Rogoff’s criticisms carry greater weight that “moving to a completely cashless society remains too high a price to pay simply to expand the central bank toolkit.” Conversely, unconventional MP alternatives such as helicopter money have seen success. As CBs usually lack the authority to make direct fiscal transfers, this strategy is prone to political influence– mounting tension on their independence.
Krugman points out the purchasing of private assets (including private sector stocks and bonds) labelling it fiscal quantitative easing– because it is not a neutral monetary option, as it uses public support to fund particular private borrowers or sectors. This may be more effective than buying government debt but the CB may get drawn into the purpose of credit allocation– a political allocator of capital. This is particularly a concern in countries where the CB is not truly independent from political institutions, for example Turkey which followed Erdogan’s political line. Hence, this is less desirable than controlling money supply through purely interest rates and a cashless society enables this clear preference.
Even if argued that an obvious alternative is to bypass the ELB, raising the inflation target (for example, from 2% to 4% as proposed by Rogoff) can create headroom for rate cuts, this is only a short-mid term solution as during the great recession a 4% cut still would not have reached the natural rate that was required. Furthermore, changing the target causes disruption and reduces credibility of future targets.
Contrastingly, Agarwal argues if the ELB is circumvented an inflation target of 0% can be imposed. Inflation itself could be lower due to the lower target, reducing both erosion of disposable income and the distortions associated with persistent inflation – minimising efficiency losses. That said, disinflation causing currency appreciation can make exports less competitive for domestic firms and damage net trade. Thus, wider secondary impacts of negative interest rates are imperative to this argument of a cashless society.
Although risks are involved with physical withdrawal and storage- referred to as carry costs- the rational consumer will withdraw cash because these costs are minimal compared to the welfare gained from avoiding paying further interest. Cash is a powerful substitute: to bypass the ELB, cash would need to be abolished, but such a development rightly raises society’s fear from constrained consumer opportunity.
One leading alternative is the decoupling of the numéraire function, incorporating the duality of electronic and physical currency simultaneously– diverting the responsibility of the unit of account from cash. Creating an exchange rate prevents a sudden shift to cashlessness that can cause greater concerns. The way in which this development in the monetary system occurs is a key driver of fear and plays a vital role in the wider impact especially if the complete removal of cash is adopted. Yet, this gives the CB autonomy in deciding the cash-digital exchange rate, and if you trust the CB enough to float cash with respect to digital currency, why would you rationally fear abolishing physical cash as a whole?
Restoring effectiveness of interest rates policy by limiting consumption smoothing and prominence of Ricardian equivalence is more difficult to mitigate as it is not to be targeted directly by the cashless society. “Monetary policy will in fact be effective if the CB can credibly promise to be irresponsible, to seek higher future price levels”. Despite being counter-intuitive, by limiting the predictability of policy, effectiveness improves– enforcing behavioral changes as households are unable to accurately predict future outcomes and adapt to them alternatively.
The shift to CB unpredictable credibility is more difficult to force and hence the best economic option that is available is a cashless society– a systematic change that provides clear benefits. Forward guidance highlights the fragility of CB credibility, especially since they have numerous conditions on which they can circumvent their rate promise. Evaluating the two issues of whether society can firstly trust the institution's intentions and whether it can trust their future commitment creates a distinction.
Ultimately, if the social and ethical concerns can be limited by regulation and other measures then how is the main advantage through MP significant? While forward guidance reveals a specific limit to trust particularly when policy relies on future promises rather than current actions, a cashless society wouldn’t rely on the same credibility forward guidance does, avoiding this issue and proposing a stronger argument.
Hence, we should not fear the switch to a cashless economy since it gives more power to the CB but in more secure, risk-averse situations.
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