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Pocketmags Digital Magazines
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Cashing out

Paper currency helps criminals and constrains central banks— so why do we still use it?

Has the time come for developed nations to start phasing out paper currency? A large number of economic, financial, philosophical and even moral issues are buried in this arresting question. But on balance, I believe that the answer is yes.

When I first wrote about the idea 20 years ago, it was pure fantasy. But after the explosion of payment methods, with services like Google Wallet and apps like Venmo joining credit and debit cards, it is no longer unthinkable. Even today, many practical objections can admittedly be raised to the idea of getting rid of cash. But my proposal involves leaving small notes in circulation for a long time (perhaps indefinitely), to cover most concerns about everyday payments, security, privacy and emergencies.

I have two main arguments for abolishing cash. First, it would make it more difficult to engage in recurrent, large and anonymous payments and thus it would discourage tax evasion and other crime. Second, it is arguably the easiest way to help central banks invoke negative interest rate policies—a tool that would have been of great use during the 2008 financial crisis.

Governments make profits from issuing currency because the cost of minting coins or printing paper notes is less than the market value of the money. But any profits reaped this way are dwarfed by the costs of the illegal activity that cash facilitates.

Tax evasion is a massive problem. It violates what economists call “horizontal equity,” the principle that those with the same income or assets should pay the same amount in taxes. When some people don’t pay the taxes owed on their true incomes, others have to pay more. If some companies use bribes to get around anti-pollution regulations, they gain an unfair competitive advantage and degrade the environment. When businesses go off the books to pay workers less than the minimum wage, they disadvantage competitors that abide by the law.

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About Prospect Magazine

In Prospect’s October issue: Nobel-winning economist Joseph Stiglitz tells our new Editor Tom Clark why globalisation has made him more radical. Rachel Holmes asks whether more women leaders really help women. Five hundred years on, what does Thomas More’s “Utopia” tells us about political idealism. And Tristram Hunt on why Labour needs another Clement Attlee. Also in this issue: David Runciman on why more members isn’t always a good thing for a political party. Will Self on why we’re all turning into robots. Your handy graphic guide to Brexit. Plus: David Willetts on what Theresa May’s industrial strategy should look like. And Kenneth S Rogoff argues we should abolish cash.