Questioning the Prudent Practice of Keeping Some Cash at Hand

If you believe we're headed for some sort of financial crisis, you've likely thought it might be a good idea to squirrel away some cash just in case. If you remember 2007-2008, fear was palpable. Thoughts of the Great Depression colored our thinking. The word "collapse" - whatever that might have meant - kept popping up as U.S. bank stock prices fell into the single digits. While Bear Stearns and Lehman Brothers really did collapse, people wondered whether they were just the first of many dominoes that would fall. Would social unrest erupt?

As it turned out, things didn't get as bad as some predicted. But those of us who had a little cash socked away (among other items) did derive some comfort knowing that, even if the ATM went offline, we could at least buy food for our families. (Yes, it really did get that scary at times, even if you've already forgotten.)

But now it turns out that keeping a stash of cash, once thought of as a prudent measure in the face of crises of various sorts, may not be such a wise thing to do. The latest central bank calling into question the status of cash as legal tender, the Bank of England, appears to be taking a liking to "digital currency" according to Andrew Haldane, a member of their policy board:

Mr. Haldane says central banks need to find “a technological means either of levying a negative interest rate on currency, or of breaking the constraint physical currency imposes on setting such a rate.” In lay terms, he means diminishing at command the value of the cash people use every day. He mentions several options, from a stamp tax on cash to issuing digital currencies such as bitcoins instead of paper money and then depreciating the “exchange rate” between cash and the government’s electronic money.

They're not the first to explore this area. If central banks pursue this, it's understandable. While they've been able to almost totally gut the value of paper money over the last hundred years, a digital currency's value would put money completely in their immediate control. No need to print anything. Just press a button and, voila, your money's worth whatever they say it is.

It seems academic monetary economists agree with this idea:

Harvard’s Kenneth Rogoff has also questioned whether paper money is still fit for a modern economy. Mr. Haldane says economists at the Bank of England are researching how a central bank could issue a digital currency.

Well, rather than join the discussion and debate over the usefulness or appropriateness of digital currency, never mind whether its adoption would be accompanied by an outright ban on paper currency, let's ask ourselves whether it's wise to put this new tool in the hands of those same people who destroyed the value of that now seemingly "old fashioned" paper money. Look at it this way: It took the central bank of the U.S., the Federal Reserve, about a century to reduce the value of their paper currency, the U.S. dollar, by 97%. That's one hundred years of printing slips of paper that eventually lost virtually all their original purchasing power. With a digital currency in hand, how long might you imagine it would take them?