Money is the root of all evil? Not necessarily – but apparently, cash is. The argument goes like this: What does organised crime deal in? Cash. What do people use to buy drugs? Cash. What are bribes paid in? Cash. How do people avoid taxes? Cash. What is the principal tool of money laundering? Cash. How is terrorism funded? Cash. You get the picture.

Also, it’s claimed operating in cash costs a country 0.5% of GDP each year. So the abolition of cash looks like a no-brainer. Anyway, people are using cash less and less. It’s more convenient to tap a screen with your card than scrabble about counting cash. So, what’s next, a crypto-revolution?

In crypto circles, there’s great optimism that the state’s monopoly on money creation is almost over. One scenario envisions worsening inflation leading to a flight from state money into cryptocurrency. Finally, the great liberation, the shackles of state control broken.

For sure, change is coming, and inflation will be the catalyst. However, the change will not be an emancipation. As I write, the Bank of England has just decided not to raise interest rates. This surprised the markets: inflation was higher than the Bank’s forecast, and in late October its governor, Andrew Bailey, told us: “monetary policy will have to act [by which he meant an increase in interest rates] if there is a risk of inflation.”

However, the Bank’s decision not to raise interest rates was not so surprising. We might have higher inflation than forecast, but we also have an economy emerging from the pandemic. A rate increase would make borrowing more expensive and could stifle recovery. And it would increase the burden on the huge amount of debt which isn’t on a fixed rate.

Interest rates will rise, but the mayhem that would follow a significant increase makes it all but impossible for interest rate policy to be at the forefront of fighting inflation any time soon.

With interest rate policy neutered, what’s left in the authorities’ armoury? A traditional anti-inflation device has been prices and incomes policies; the government sets limits on price and wage increases. Sadly, these sorts of policies don’t work. They lead to shortages, black market activity, and widespread industrial unrest. You want another Winter of Discontent in the style of 1978/79? Easy: introduce an incomes policy.

So what else is there? Another option is to cut government spending; sort of QE in reverse. This would be profoundly unpopular, almost certainly leading to social unrest, with implications at the ballot box.

All of these anti-inflation tools are painful and each has its own particular brand of unfairness. Is there anything left? Yes, a recalibration of the currency. By that, I mean the abolition of the existing legal tender and the introduction of a replacement.

Inflation will be the final nail in the coffin of cash

Sounds a bit radical doesn’t it? But actually, there are many historical precedents. In response to inflation, it was done in Germany, Hungary, Yugoslavia, and Zimbabwe to name just four. How does replacing a country’s legal tender help to fight inflation? It works in two ways: first, it takes advantage of money illusion. Typically, a few zeros will be knocked off the price of everything, making it feel as if inflation has been conquered. This undermines inflationary expectations – the fuel on the fire of inflation. Secondly, it instils confidence in the government and the currency.

The currency replacement option has historically been a policy of last resort in countries facing catastrophic hyperinflation: a desperate measure when all else has failed. However, with the cashless economy very much the zeitgeist, it provides the authorities with an attractive option of circumventing the pain of traditional anti-inflation policies. For this reason, the current inflation will be the final nail in the coffin of cash. But conventional currency will not be pushed aside by crypto; it will be replaced by Central Bank Digital Currencies, CBDC.

But let’s take a step back. Would the abolition (or near abolition) of cash really act as a magic wand and, at a stroke end crime, terrorism, drug addiction, corruption, and tax evasion? The greatest strategic mistake one can make is to assume there will be no strategic response to one’s own strategic move.

The idea that all of these nasties would vanish is simply preposterous. It’s quite extraordinary how often policymakers are shocked when the private sector innovates its way around policy changes, but it always does, and it always will. And what is the usual response to a regulation that has failed? Stronger regulation.

And therein lies the danger. Most people I’ve discussed CBDCs with either aren’t aware of or haven’t grasped the significance of “programmability”. Digital currencies will be smart: they can have all sorts of intricate features such as inbuilt smart contracts and various inbuilt contingencies. However, programmability can be used to control the way you spend your money. This would be easy to present as a tool of paternalistic benevolence: got a gambling problem? Not anymore, your money will be programmed to prevent you from gambling. Buying too much junk food? No problem, from now on, you’re going to eat healthily. Getting into debt? We can help you.

But of course, programmability could be used to stop you spending money at all. Quite an effective weapon; you cross the authorities, and – at the flick of a switch – they make you penniless. The very real danger in digital currencies is that far from achieving the libertarian dream of the crypto enthusiasts, they provide a mechanism for state control far beyond the wildest dystopian nightmares of Orwell or Huxley.

Peter Lawlor is a trustee of the John Hicks Foundation in Oxford. He was formerly the Principal Economic Advisor to the German Stock Exchange (Deutsche Börse), and continues to act as an adviser to senior Wall St figures and political leaders. These are his own views and should not be imputed to any organisations with which he is, or has been, affiliated

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    Davor Buklijaš
    28 November 2021 1:31 PM

    Great article. Coming from former Yugoslavia I’ve seen first hand how this absolute state control of economy works and it ain’t funny. Sad to see parts of the western society supporting such measures. The idea that giving the state bureaucracy absolute control over money and economy would somehow make things better or fairer is an idea that only people that never lived in such a system can believe in. Society is in itself a complex system with as many ideas of “fair” as there is people in it so trying to make decisions for everyone by even the most benevolent centralised bureaucracy ends up in violence and society that is less and less nice to live in. And usually where there is power the less benevolent tend to step in, history is full of grave examples. But well, grass always seem greener on the other side


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