he said the convenience and security afforded by going cashless are well worth the added cost. Gone is the age-old restaurateur’s fear of getting robbed, either by outsiders or his own employees. “No more armored trucks,” he says.

[From New York Restaurant Loses Its Appetite for Cash - WSJ.com]

is this an isolated case? A bit of marketing rather than a serious point? A tangent to the mainstream? No, it isn’t. Here’s a report from the Netherlands.

When I entered what I saw was perhaps the nicest selection and quality of food I had ever seen in the city of Amsterdam, excepting one organic open market (only open Saturdays.) I proceeded to do my shopping with great joy, looking forward to sampling the beautiful organic products on sale. Awaiting me at the counter however was a shock, cash is not accepted at this store.

[From OpEdNews - Article: Cashless Society, Coming Soon to a Store Near You!]

If this is a rare sight in the Netherlands now, it’s going to become considerably more common over the next five years.

Dutch supermarkets are hoping to phase out the use of cash by 2014, the Financieele Dagblad reports on Thursday, quoting the retail board CBL.

[From DutchNews.nl - 'Supermarkets set to refuse cash']

The Dutch are showing us the way. All sorts of fun things are going on there. They got rid of cheques very early on, half of their e-commerce is paid for using iDEAL (that is, directly from bank accounts), they have been trialling fingerprnt payments in Albert Heijn and they are installing a national contactless transit card (something like Octopus) and they have bank with its own mobile operator.

Reflecting on the Dutch example (in a recent podcast, I was told that their is a village in the Netherlands that is planning to be cashless in 2012), I was wondering what our perspective on cash will shift to. As cash is steadily expelled from private space, forced outside of gated communities, I wonder if it will acquire a new resonance in the public mind: perhaps it may come to be seen as the tool of the outcasts, the dispossesed. Something that the homeless use. This thought recurred when I saw an interesting photo in a presentation. It was painting of a homeless young man, with a thought-provoking slogan. It looked to me like it might be a Banksy (Banksy is the nom de plume of a British graffiti artist) and — knowing nothing about art — I set about googling for it.

It turns out that it’s not Banksy but an Australian artist. Anyway, I rather like it and I thought that it might be an appropriate image represent something (I’m not sure what!) in the Kashklash context.

These are Somali Shillings.

There are some countries that are a currency zone and nothing else: Somalia, for example. It’s not really a nation state in any sense that we would recognise and I imagine its geographical integrity to be fluid. But it has the Somali Shilling. No-one in their right mind would actually want any Somali Shillings for any purpose, so naturally the US Dollar is the preferred currency there, which is why container-loads of US Dollars are the ransom of choice for the Somali pirates.

Hormuud’s money transfer system works with U.S. dollars, rather than the Somali shilling, and users can transfer up to $3,000 a day throughout southern and central Somalia.

Businesses prefer transactions based on the dollar and other regional currencies such as the Kenyan shilling, UAE dirham and the Saudi riyal, to avoid the problems associated with an extremely weak Somali shilling.

[From Mobile transfers save money and lives in Somalia - News, Gadgets & Tech - The Independent]

There’s no moral to this story. I just wanted to make the point that the relationship between fiat currency and the nation state is not a law of nature, some kind of supersymmetry that cannot be broken without destroying space-time. It’s just the way things are and when we come to design the next version, we don’t need to stick with the convention.

So firstly, we should price dollars, euros, and yuan in energy rather than energy in dollars, euros and yuan; and secondly, we should unitize energy through the simple expedient of allowing producers to issue units which they will accept in payment for energy they supply - within a suitable legal framework of trust, or energy clearing union.

[From Asia Times Online :: Asian news and current affairs]

Now, I think there is a good logic to this, whether the specific idea is feasible or not. You could imagine units of carbon in some way becoming a universal tradable instrument and thus a mechanism for deferred payment on the (reasonable) assumption that energy demand will grow with the economy and thus ensure a future demand. Given that the price of oil has been much more stable when expressed in gold than in dollars, maybe energy could form a reserve currency?

There are some people who want to replace the dollar as the global reserve currency. Who knows, they may be right. But why replace a fiat currency with another fiat currency or basket of fiat currencies instead?

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

[From The demise of the dollar - Business News, Business - The Independent]

Why not just use gold? Or, for that matter, why not use oil? Set the price of a barrel of Brent Light Sweet Crude as 1. I suppose the argument against this is that we are past peak oil (I have no idea whether this is true or not, by the way) and so the price of a barrel of oil will not be stable but will steadily go up in terms of other resources.

“Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value,” said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China and India, Wolf argues, adding that the greenback’s loss of credibility as the dominant global reserve currency is part of this messy transition

[From Do we need a new reserve currency? ]

So we should replace one fiat currency with another? Why would the euro or the yuan be reserve currencies? Perhaps we’re not being innovative enough here.

While there are many reasons why we don’t have hundreds of reserve currencies — liquidity, simplicity, confidence, transparency, ease of transactions, etc. — it is not so clear that there must always and everywhere be only one.

[From There Can Be Only One (Reserve Currency)]

In the interlinked and distributed markets of the future, why should there be a single reserve currency at all? Surely the massed ranks of computers available to the average person are perfectly capable of managing a portfolio of currencies that try to maintain long term stability and reduce volatility. But perhaps Chris and others are right to suggest that a more effective reserve currency might be constructed from something for which the long term demand is likely to remain unchanged: energy. No matter how long I live, I’m going to need light, heat, transport and so on.

So firstly, we should price dollars, euros, and yuan in energy rather than energy in dollars, euros and yuan; and secondly, we should unitize energy through the simple expedient of allowing producers to issue units which they will accept in payment for energy they supply - within a suitable legal framework of trust, or energy clearing union.

[From Asia Times Online :: Asian news and current affairs]

Now, I think there is a good logic to this, whether the specific idea is feasible or not. You could imagine units of carbon in some way becoming a universal tradable instrument and thus a mechanism for deferred payment on the (reasonable) assumption that energy demand will grow with the economy and thus ensure a future demand. Given that the price of oil has been much more stable when expressed in gold than in dollars, maybe energy could form a reserve currency?

There are some people who want to replace the dollar as the global reserve currency. Who knows, they may be right. But why replace a fiat currency with another fiat currency or basket of fiat currencies instead?

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

[From The demise of the dollar - Business News, Business - The Independent]

Why not just use gold? Or, for that matter, why not use oil? Set the price of a barrel of Brent Light Sweet Crude as 1. I suppose the argument against this is that we are past peak oil (I have no idea whether this is true or not, by the way) and so the price of a barrel of oil will not be stable but will steadily go up in terms of other resources.

“Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value,” said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China and India, Wolf argues, adding that the greenback’s loss of credibility as the dominant global reserve currency is part of this messy transition

[From Do we need a new reserve currency? ]

Perhaps we’re not being innovative enough here, though. Surely a single reserve currency is a single point of failure: it may have made sense when international trade was done with paper bills of exchange but in a electronic and interconnected global marketplace, shouldn’t we be looking at a more distributed solution.

While there are many reasons why we don’t have hundreds of reserve currencies — liquidity, simplicity, confidence, transparency, ease of transactions, etc. — it is not so clear that there must always and everywhere be only one.

[From There Can Be Only One (Reserve Currency)]

One might envisage a stable situation where different reserve currencies are preferred in different sectors because they lead to stability within the sector — gold in the energy sector, World of Warcraft gold in the online sector and so on — or where a team of reserve currencies work together to (in effect) create a self-stabilising system for price stability.

the apparent ‘paradox of banknotes’ – the increasing value of notes in circulation alongside their gradually declining use as a means of payment.

[From More bank notes needed as we use cash less, and why £5 notes are tatty ]

What he meant was that as a share of nominal GDP, the value of notes in circulation declined from 6% in 1970 to a low point of 2.4% in the mid-1990s but has since actually increased, noticeably over the past two years. He explain this by saying that from a macroeconomic perspective, sustained low inflation has increased confidence in the real value of the currency since the mid-1990s, while more recently demand for banknotes has risen during the recession, particularly for £50 notes. Cash currently accounts for 60% of UK transaction volume but only 4% of transaction value.

Andrew suggests that rising demand for notes might reflect some loss of confidence in banks and very low interest rates, which reduce the opportunity cost of holding banknotes as a non-interest bearing asset. What he means by this is that when you have cash in the bank, it doesn’t earn very much interest, so you may as well keep it at home and reduce transportation and access costs whilst obtaining maximum liquidity.

Although I’m not an economist, I suspect this argument needs to be revisited, because I think in some cases holding cash reduces liquidity, because you can’t use it to buy what you want on eBay or Amazon. What’s more, when you hold cash, it is much more likely to be lost than if you leave it in the bank.

People who keep their savings in cash at home rather than in banks make themselves easier prey for criminals and are more likely to lose their money to fire, flood, or just neglect.

[From New underground economy - Washington Times]

Any sensible UK consumer would not hold a government-backed fiat banknote, but instead put the money in a government-owned bank (such as Northern Rock or RBS) where the money is 100% guaranteed against all circumstances (including the incompetence of bank management, outright fraud and so on) and receives interest.

A loss of confidence coupled with a sudden drop in IQs? Maybe. I think a more likely explanation is that taxes have been rising thus leading to a growth in the black economy (government tax revenues are down substantially this year) and during the recession (with bad unemployment) people are paying in cash to avoid VAT.

Shouldn’t the Bank of England be reducing M0, not increasing it? Providing more £50 notes does nothing for commerce and industry (since they can takes cards and, for the next few years, cheques) but merely makes tax avoidance easier while simultaneously reducing the overall efficiency of the payment system. A double whammy.

If some people are avoiding taxes, that makes the rest of us not only have to pay more than their fair share but also grow even more resentful about handing over money to the government. Thus, we work harder at avoiding tax or work less and avoid income (why work a few hours’ overtime if you’re going to keep less than half of it?), in both cases reducing government revenues even further.

Should we expect payment systems to act as tax collectors (and policemen) for the greater good? I’m not sure about this, but on the other hand there’s no reason to create payment systems that make matters worse.

From a competitive perspective, banks and traditional payment networks still have the upper hand. They are the established leaders, they have the physical infrastructure, and they control the vast majority of transactions at the point of sale, since most of the alternative tools work only for online purchases (with some notable forays into the mobile space).

[From Javelin Strategy and Research » New Opportunities for Banks in Alternative Payment Tools]

But in the developing world, things are different. There isn’t the infrastructure. And there’s no need to build it, because the mobile operators already have it. The natural results is that payments and banking begin to separate, and new providers of financial services (and forward-looking banks) come along to deliver “money related” services over non-bank networks. This is good and we should be enthusiastic about new opportunities here. Money is a field in which conservatism, preserving the status quo, is very definitely a bad thing. Caution is not the best course of action. Why? Because the current system is a bad system, a legacy of the pre-information age.

The cost of financial transactions in the developing world could be reduced by as much as 80% through a reform of inefficient payment and securities systems, according to the International Finance Corporation (IFC), a division of the World Bank.

[From Finextra: World Bank calls for financial services expansion in emerging markets]

Technology can, and will, change this. And by revolutionising the technology of money, primarily through the miracle of the mobile phone, technology will enable more innovations that will transform the lives of some of the world’s poorest people.

A Kenya community is working with Grundfos Lifelink and Safaricom to develop a solar-powered water vending system that allows consumers to pay with a credit-filled smart card. When the credit runs out, water-seekers can add more using the M-PESA mobile banking system.

[From Kenya's M-PESA System Lets Cell Phones Control Access to Water | Sustainability | Fast Company]

M-PESA isn’t a mobile banking system, it’s a mobile payments systems, but let’s be clear about the dynamic here. These new kinds of mobile phone-based payment schemes are not (as some, I hear, at SIBOS seemed to think) simply poor substitutes forced on desperate people as a stopgap until “proper” bank-based payments such as prepaid open scheme cards arrive on the scene. It is these mobile schemes that match requirements for most of the people, in most of the world, most of the time. They are their own new locus of innovation, distinct from the developed world’s structures, customs and assumptions.

Nokia, for one, has for several years seen most of its growth come from the developing world, so it was quick to notice when poor Kenyans started using their cell phones for banking as well as paying for things. “People aren’t saying, ‘Give me the Web-based version of this,’ ” says Jonathan Ledlie, the Nokia researcher developing Mosoko (mo for “mobile,” soko from the Swahili for “market”). “They’ve never used a Web version.”

[From How Innovations from Developing Nations Trickle-Up to the West | Fast Company]

What are the implications?

That there is an interplay between the technology and monetary policy is obvious. Look what is going on in Africa. People who aren’t allowed to hold dollar bank account hold dollar-denominated mobile top-up vouchers instead. Ugandans without an effective electronic payment system are using M-PESA to execute local transactions in Kenyan shillings. Congolese without access to any banking network use mobile money instead (and may never, ever, want or need a bank account as a result). In India and elsewhere the banks have managed put a regulatory finger in the dyke but the pressure is building and money is already leaking away from conventional institutions and networks into newer, mobile-centric, customer-facing organisations. The dam will, at some point, burst. How will governments be able to “manage” the money supply when it is being zipped across borders by mobile phones, global handset hyper-hawala.

At the very first Digital Money Forum, the late Professor Glyn Davies (author of the magnificent “A History of Money“) said that every technology revolution in money led to less centralised control. That’s a good thing, but it also explains why the conservative nature of governments and regulators comes to the fore in questions concerning money. If anyone anywhere in the world can transact in any currency, then the weak will go to the wall very, very quickly. Gresham’s Law on a global scale.

A small but growing number of cash-strapped communities are printing their own money. Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

[From Communities print their own currency to keep cash flowing - USATODAY.com]

Another such currency has just launched in London, the latest in a series of “transition town” movements.

Brixton in south London has launched its own currency in a bid to boost local trade during the recession. The Brixton pound comes in £1, £5, £10 and £20 notes, each featuring a famous local figure and printed on watermarked paper with holograms and serial numbers.

[From Finextra: Brixton gets own currency]

I don’t know whether the BrixtonPound is a good idea or not, but I am curious as to why in the 21st century, printed banknotes are seen as the way forward? Surely it would make more sense to use smart card, or mobile phones or the interweband such like. The banknotes will not be seen as a genuine currency but as souvenirs, local loyalty cards.

In a way, I think most of these “alternative” currencies like the Brixton Pound are less about making fundamental changes to money and more about a combination of PR and local loyalty schemes. If they were going to disrupt the financial system they would need to include an alternative means of saving and lending, not merely spending.

LETS schemes encourage people to spend money which has a short term benefit and for money to circulate more quickly which is also beneficial to increasing economic activity but and it is a big but, it does not encourage investment locally.

[From Oikonomics: a social life of money: Brixton Pound - does local money create social value?]

I wonder if it might be the combination of P2P currency and P2P lending that together delivers key elements of new kind of money. One factor nudging me toward this line of thinking is the demonstrable collapse in trust in banks. Many members of the public, whether through financial calculation or outrage at the activities of high street banksters, are now prepared to give genuine alternatives a try. In the UK, one such alternative (and beneficiary) is Zopa:

Zopa UK has found that the credit crunch increased their business. As banks were forced to tighten their lending criteria, customers actively sort alternative solutions to their credit needs, and Zopa came up trumps. In the July quarter, Zopa UK had an average of 3,700 borrowers join per month, compared to 2,500 per month in the previous quarter.

[From The Better Banking Blog: P2P Innovation & the credit crunch]

An unscientific survey of friends and co-workers revealed a mixture of reasons for trying Zopa but I think I could discern a couple of strange attractors. Firstly, lending money out through Zopa was simply less boring that putting it in the bank and some people enjoyed seeing where their money was going and what it was doing. Secondly, when interest rates are so low for conventional savings then people are more than willing to experiment with alternatives.

Incidentally, I was also told that the best loans go out on Monday mornings when the “dross” has been cleared out from the weekend’s bids. If I have anything left over after paying for the building work underway on my house, I will try this out for myself on the first available Monday.

In Asia, such ‘nanopayments’ have been making big money on social networks for years. In 2007, China’s Tencent raised $523million in revenue – that’s four times as much as Facebook, in a country where the average monthly wage is less than $20 – with operating profits of $224 million.

[From How nanopayments finally came of age | News | TechRadar UK]

Well, you might argue, that proves that a well-structured and desirable portal such as AOL might be able to generate significant income from, let’s say, advertising. That’s not the Tencent business model.

Yet only 13 per cent of revenue came from ads. Two-thirds came from internet services like games and digital goods: ‘gifts’ such as virtual flowers, background music for users’ profiles, virtual pets, fashion items to dress avatars in, and so on.

[From How nanopayments finally came of age | News | TechRadar UK]

I’m reluctant to call Tencent’s currency “virtual” at a time when we still call the $ “real”, but it’s been jolly successful. I’m not suggesting that printing your own money is the solution to all financial problems — to be honest, AOL has probably missed the boat on that one — but it does seem to me that money itself is one of the more interesting business models for the next phase of the online era.

Not everyone thinks that competition in money is an unalloyed good. The mention of Tencent about reminds me that the Chinese government, in particular, has been much exercised by virtual currency of late.

In a joint circular from the Ministry of Culture and the Ministry of Commerce, the government stated: “The virtual currency, which is converted into real money at a certain exchange rate, will only be allowed to trade in virtual goods and services provided by its issuer, not real goods and services.”

[From Finextra: China bans use of virtual cash for trade in the wider economy]

The Chinese have consistently worried that the widespread circulation of virtual money might destabilise their fiat currency.

fluctuations in China’s billion-dollar virtual goods market could eventually have a negative impact on the country’s real economy.

[From China Bans People From Buying Real Goods With Virtual Currency | paidContent]

I wonder if the Chinese focus on virtual currency has some local, cultural or socio-economic origin that is not clear to me or whether it adumbrates more general government concerns that might grow in parallel with the use of such currencies in other economies. Some might say, incidentally, that the capacity to destabilise fiat currency is one of the most promising characteristics of virtual money, as it will stimulate a new era of competition and result in new monetary arrangements (and new institutions) for a new age.

Here’s the question. I said something referring to the seigniorage income in developing countries (this was in my head because I happened to be reading — for other purposes — an old paper on the seigniorage income in Kenya and some other African countries). The journalist asked me what I meant, so I held up a ten pound note and said something offhand along the lines of “well, where’s the ten pounds” then.

“Well,” the journalist said, “there’s some gold in the Bank of England, isn’t there?”

Actually, there hasn’t been a gold reserve for the currency in Britain since 1931. If you go down to the Bank of England with a twenty and ask for payment, they’ll give you two tens. That’s it. I was surprised that the journalist, and educated and intelligent person, didn’t know this but later on I began to wonder if that means something. Perhaps the idea of gold as the ultimate store of value and mechanism for deferred payment is so deeply ingrained in us that we have to work hard to convince ourselves that our money isn’t actually based on anything, and most people aren’t prepared to put in the effort. Or perhaps gold is just seductive in some way.

Gold hasn’t lost any of its attraction over the centuries and continues to exert fascination in the context of money. I am always surprised by the continued focus on it in the digital age though. For example, I was very surprised to read about the German ATMs that dispense gold. I thought it was some kind of novelty or promotion, but it appears to be a serious business plan.

All you have to do to buy your gold is insert your euros in the slot and a prettily wrapped bar of the world’s favourite precious metal thuds into the dispenser. It’s very convenient — no waiting time — you just put in your cash and a minute later you are an investor in gold.

[From Now, an ATM for gold! | 18 June 2009 | www.commodityonline.com]

Not the most 21st-century idea I’ve seen recently. That’s not to say that there might not be some opportunities around gold. I did try and get a couple of our customers interested in launching a gold card, but they didn’t share my vision (!) of the past and the future working togethe rin harmony. Not this kind of gold card — as shown here by Alec Baldwin in 30Rock — but the kind of gold card I’ve blogged about before:

Given the desire to transact with the convenience of a card but in a non-interest bearing currency, it would seem to be a straightforward proposition to offer a gold card that is actually denominated in gold.

[From Digital Money Forum: Islamic e-payments]

I rather like the idea of having a payment card that sits on a commodity store — gold, platinum, orange juice or whatever — for use at point of sale. So you pay twenty quid in Tesco with your card and it shows up on your statement as deducting 0.5 grams of gold from your gold store. I would think that if this were offered to the public, a great many of them would choose gold (out of habit?). But it’s fun to speculate on what other commodities might work in this context. Mobile minutes? Bandwidth? Oil? When choosing whether to use up your gold or oil because as simple as selecting from a menu on your mobile phone, surely that must change our relationship to the commodities?

Annalee Newitz, writing in Conde Nast’s Portfolio, says that all of the elements are in place for mobile phones able to transact in “many different microcurrencies”. I think she’s probably right. She points out that

Futurist Douglas Rushkoff, famous for correctly predicting the rise of social media, is trying to convince Craigslist’s Craig Newmark to create “craigbucks.”

[From DIY Currencies - Dual Perspectives - Portfolio.com]

Since she wrote this piece, Facebook has entered the micropayments space as well. Although Annalee is wrong to call me a “leading financial pundit”, since I know virtually nothing about finance, and wrong to call M-PESA an “underground currency” since it’s not underground (it’s operated by Kenya’s largest mobile phone service provider) and it transacts in Kenyan shillings, she’s right to quote me pointing out the link between cash and trust. If people trust some fungible commodity, whether it’s gold or Vodafone minutes, then it will become money as soon as the technology allows it to be transferred from person to person. This has been true since time immemorial (remember the tally sticks!) and there’s no reason to suspect that things will change with new technology.

Abolish currency. This is easy and would have many other benefits. The main drawbacks would be the loss of seigniorage income to the central bank… Advanced industrial countries can move to electronic and bank-account-based means of payment and media of exchange without like problem. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

I agree with him that we could move to e-payments without a problem, because of technological advances made in the last couple of decades, and I’ll come back to this point later on as it is my focus here. But I think it is worth reflecting on a couple of other well-informed perspectives that Willem illuminates in his article, because he illustrates some characteristics of cash that may not be obvious to people who don’t spend their time thinking about the transition from physical to virtual money (ie, almost everyone). He notes, for example, the odd conspiracy between the Chancellor of the Exchequer (Scottish marxist and solicitor Alastair Darling, at the time of writing, previously the Scottish marxist journalist Gordon Brown), the Bank of England and organised crime.

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies. There is no economic justification for $50 and $100 bank notes, let alone for the €200 and €500 bank notes issued by the ECB. [From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

The euro example is particularly noteworthy. Two-thirds of the euros in “circulation” (they are not actually circulating, of course, they are stuffed under mattresses in Eastern Europe) are in the form of these 100, 200 and 500 euro notes that I am pretty sure I have never seen. ATMs only give you 20 and 50 euro notes and I would imagine that many retailers would be reluctant to accept 200 and 500 euro notes (as noted monetary scholar Andy Warhol once said, if you try to use a $100 in the supermarket, they call the manager). Those notes, as Ian Grigg pointed out on the Digital Money Blog, do however provide some form of competition.

For foreigners in developing countries and emerging markets with high-inflation-prone monetary systems, the disappearance of the US dollar notes and the euro notes could be a setback, as these provide welcome stores of value when domestic inflation rages. It has been estimated that as much as 70 percent of all US dollar bills (by value) are held outside the USA (not all by people wanting to hedge against hyperinflation at home, of course) and that up to 50 percent of all euro notes (by value) are held outside the Euro Area. To those people I would say, I feel your pain, but this is the time to replace exit with voice. Go and create a polity that will support a government that does not abuse the printing presses.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Easier said than done, but you can’t help feeling that if Zimbabwe’s ruling elite had had to keep their money in Zim Dollars rather than US Dollars, they may have made some different decisions on quantitative easing. Let’s imagine that Willem’s plan is adopted though. What would the retail payments landscape look like? Well, not entirely unfamiliar, because ee suggests not getting rid of all cash entirely.

As a concession to the poor, we could keep a limited number of 1$ and 5$ bills (1€ and 2€ coins and 5€ bills) in circulation… The carry costs (safe-keeping, insurance and storage) for large amounts of cash are likely to become prohibitive if you have to do it all in fivers.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

This doesn’t seem right to me. Cash isn’t a concession to the poor: it forces them to pay higher transaction costs than their better off neighbours. And if the amount of cash falls, then the cost of the whole infrastructure of ATMs and cash registers, armoured vans and night safes will fall on the poor, thus further raising their transaction costs. Personally, I think it might make more sense to simply switch off cash the way we are switching off analogue TV. Then, if the market decides that it what low-value currency in circulation, then the market can provide it (I’m reading George Selgin’s book The Button Makers which describes just how this happened in industrial age Britain) or, just as some governments subsidise digital TV boxes, so they could subsidise the issuing of pre-paid payment cards (or, far better in my opinion, pre-paid mobile money accounts rather like M-PESA). So Willem may be underestimating what technology can do here: replacing cash in this way isn’t a problem. Getting people to accept the idea might be though:

My good friend and colleague Charles Goodhart responded to an earlier proposal of mine that currency (negotiable bearer bonds with legal tender status) be abolished that this proposal was “appallingly illiberal”. I concur with him that anonymity/invisibility of the citizen vis-a-vis the state is often desirable, given the irrepressible tendency of the state to infringe on our fundamental rights and liberties and given the state’s ever-expanding capacity to do so.

[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Charles is right to raise this point, although I think that the public may be less attached to anonymity then he might think. Other than the privacy taleban, most people — other than, say, drug dealers or sex workers — don’t care and my experiences back in the days of Mondex and VisaCash (and Oyster, for that matter) suggest to me that people would rather register their cards or accounts so that they can get their money back if they lose the card than remain genuinely anonymous. I think Willem underestimates the ability of technology to deliver anonymity (or better still, well-managed pseudonymity) here, and I’ll also come back to this below when discussing the technological advances that we could use to deliver on Willem’s vision. Finally, Willem summarises thus:

Do we really want to retain cash just because it (1) allows us to hide some of our legitimate financial transactions from the government (as insurance against government abuse of the information), and (2) is a source of revenue to the central bank? These arguments pro are surely dominated by the two arguments against currency, (1) that, as currently construed [...] currency imposes a zero lower bound on nominal interest rates and (2) that it subsidises the grey and black economies and makes life easier for the global criminal and terrorist fraternity.[From FT.com | Willem Buiter's Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Do we really want to retain cash? I don’t.

WIllem is not the first economist to think about getting rid of cash. But he may be one of the first to think about getting rid of cash in a technological era that actually makes it entirely feasible. It wasn’t feasible when Hayek was thinking about it in 1970s, or when I was thinking about in the 1990s, but it is entirely feasible in the 2010s. Why? Well, there are two key technological developments that make Willem’s vision more than science fiction: in fact, some might say, make it more likely than not. These developments mean that we can overcome two key barriers to cashlessness — POS density and anonymity — in ways that can deliver more functionality than Willem might expect.

Let’s rehearse the key barriers pulled from the piece above (we are not going to look at the seigniorage revenue lost to government as a barrier). To make something “cash like” then you have to be able to use it pretty much everywhere (you need a high POS density) and you need to be able to make small transactions in private, without being tracked, traced and monitored. There are two ways in which the technological developments of the last two decades have addressed these key objections and now put us in a position to be able to take Willem’s ideas and implement them.

The first is the mobile phone. We are already seeing the launch of mobile phones that can replace payment cards (there are 40 million of them in Japan already) and provide prepaid “e-money” accounts (M-PESA in Kenya, provided by mobile operator Safaricom, has over six million users already). But the strategic impact of mobile phones in the payment space is yet to come. Yes, mobile phones can be payment cards and that’s great. But mobile phones can be also be payment terminals. Or to put it another way, you can use a chip and PIN card to pay, but you can use a mobile phone to both pay and get paid. Since we live in a country where, essentially, everyone has a mobile phone this means that it is absolutely feasible to eliminate cash altogether. In this coming world, if I want to pay you a pound, I will do it by text message or mobile Internet and you will know immediately that you have the cash.

The second objection is that losing the anonymity of cash would change the relationship between citizen and state (and bank) in an undesirable way. I used to think that this was true, but now I’m not so sure.

Thinking about anonymity again, my experience back in the day was that, for different reasons, neither the consumers, nor the banks, nor the retailers, nor anyone else actually valued anonymity at all. So if you put it in a tick-box, some people will tick it, but that’s because they haven’t really thought about it. Once they had though about it, their interest in anonymity plummeted.

[From Digital Money Forum: Nymity vs. anonymity]

However, as noted, advances in cryptography mean that the apparent paradox of security and privacy is easily resolved. We can use cryptographic blinding, virtual identities and so on to achieve the desired goals: it seems a paradox, but we can make secure e-payment systems that are mathematically incapable of revealing the identity of the user, systems that will mathematically disclose ownership in the event of misuse and a variety of other options. E-cash can do things that notes and coins can’t.

Whatever economists decide is the best way to handle cash, we already have the technology to deliver.