How would you respond if the authorities here in Britain abolished cash from use in the UK economy?

Would you be angry? Upset? Concerned about your savings?

If so – you’re not alone.

In fact, after a recent speech by the Bank of England’s chief economist Andrew Haldane, in which he explained why he’d like to abolish cash entirely in this country… thousands of people have been writing in to us to express their dismay at his plans.

So we’ve decided to take action.

Let me explain…

Haldane’s word carries a lot of weight with the authorities. And last month he let the cat out of the bag: he’s coming for your cash!

Haldane gave a speech a couple of weeks ago where he explained that central banks have a problem. He calls it the ‘zero lower bound’, or ZLB. In simple terms, the ZLB is the lowest point central banks can push interest rates to without people pulling their money out of the bank and stuffing it in their mattress.

Think of it as the point where people say: “enough”.

This is a problem for people like Haldane. He sees the ZLB as a constraint on policy – it stops the Bank of England pushing interest rates into negative territory.

He thinks that would be a good idea. I mean it sounds like a great plan, doesn’t it? The bank can then incentivise (read: force) people to go out and spend their money instead of saving it for the future. All that spending helps the economy grow. The bank’s genius economists save the day!

The problem is, he sees the ZLB as an obstacle to his grand plans.

From Haldane’s speech (emphasis mine):

A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency.

As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

A third option is to set an explicit exchange rate between paper currency and electronic (or bank) money. Having paper currency steadily depreciate relative to digital money effectively generates a negative interest rate on currency, provided electronic money is accepted by the public as the unit of account rather than currency.

All of these options could, in principle, solve the ZLB problem. In practice, each of them faces a significant behavioural constraint. Government-backed currency is a social convention, certainly as the unit of account and to lesser extent as a medium of exchange. These social conventions are not easily shifted, whether by taxing, switching or abolishing them.

One interesting solution, then, would be to maintain the principle of a government-backed currency,but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets.

But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.