The proposal to abolish cash has a certain superficial appeal, but—even before we get to the myriad practical problems—it could turn out to smuggle in a dangerous agenda of stealth privatisation. Kenneth Rogoff’s argument that we can simply abolish physical cash and switch to using electronic money, completely misses one crucial difference between the two—the institutions that create them.
“Electronic money”—that is, the numbers in your bank account, which change every time you spend on a debit card—are not fully equivalent to physical cash. They’re actually IOUs, or deposits created by banks when they issue loans. As the Bank of England recently confirmed: “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.”
If physical cash, in the form of notes and coins can be considered “public” money in the particular sense that it is created by a public institution, bank deposits can be thought of as “private” money, again in the specific sense of who creates them—namely, the banks. The Bank and the Royal Mint, which respectively create notes and coins, have clear rules of transparency and lines of accountability concerning the volume and distribution of the money created. In contrast, the deposits created by commercial banks do not have the same clear lines of accountability. The private sector can effectively, at least in the upswing of the business cycle, create as much as they want.
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October 2016
 
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