My new book The Curse of Cash has provoked a vigorous debate of transitioning to a “less-cash” albeit not a cashless society. Freakanomics recently did a terrific job of explaining the issues, while an excellent new piece by the New Yorker’s Nathan Heller Imagining a Cashless World explains that the Scandinavian countries are already far along this path. The book has been well received by many reviewers in the mainstream media (for example here, here, here, here, and here). True, there is strong pushback from some quarters, for example American Thinker piece is entitled “Washington’s Endgame: First Your Guns Then Your Cash.” I can only say I am not too sympathetic.
In this Medium post, however, I discuss an emotional review by Jim Grant in the Wall Street Journal, which is long on ad hominem and short on logic, and contains both simple errors as well as profound misconceptions. Grant, who was Representative Ron Paul’s choice for Fed chairman in his unsuccessful 2012 Presidential campaign, has little patience for modern central banking, and would rather see the world return to a gold standard. Never mind that putting a gold straight jacket on monetary policy is about as good an idea as having the US, Japan, and UK irrevocably join the euro.
Grant’s review displays scant interest in the main part of the book. There, in addition to providing history, facts and context, I point out that large notes such as the US $100 dominate the advanced countries currency supplies, and do far more to facilitate tax evasion and crime than legal transactions. Grant dismisses the whole idea by asking why not just legalize narcotics and simplify taxes, as if that would be enough. He goes on to say that “Mr. Rogoff considers neither policy option.” A curiously strong statement, as in fact I do discuss legalizing marijuana. Anyway, as the book details, cash facilitates plenty of other illegal activities including racketeering, money laundering, human trafficking, extortion, corruption, you name it. Simplifying taxes is a great idea for many reasons but it is naïve to think that any realistic plan would end evasion,
Grant saves his main ire for the concept of negative interest rates: “You rub your eyes. You can recall no precedent. There has never been one in 5,000 years of banking.” This statement is at best profoundly misleading. Before paper currency, governments routinely paid negative interest rates on metallic currencies by calling in coins and shaving them (as my book discusses at some length in chapter 2). If your debt is repaid in physically debased pence that have much less silver than the ones you lent, it is a negative interest rate in any meaningful sense.
In modern times, the existence of paper currency prevents any significant negative rate on government debt because central banks fear a chaotic flight into cash, which pays zero interest. So the fact that significant negative rates have not been seen in the modern period is hardly a profound insight, Keynes wrote about it in his General Theory. But anyway this ignores the countless episodes of massive negative real interest rates on government bonds, when the nominal (face value) interest rate was not nearly enough to keep up with inflation. Remember the 1970s? And of course, real rates are what financially literate savers should care about.
By the way, my plan excludes small savers. Moreover, If the Fed could engage in effective monetary policy in a deep recession, most savers will gain far more than they will lose. It would bring back jobs more quickly, restore house and stock prices faster, and it would actually raise nominal rates on long-term bonds through restoring expected inflation to target. Negative rate policy would not just lower short-term rates, it would tilt long term rates up by raising inflation to target, a problem that has paralyzed Japan. The suggestion that negative rates are just a ploy to rob savers is empty polemic. Importantly, they are device to call on in a deep recession or financial crisis, not as a routine matter.
Arguing for a return to the gold standard may have entertainment value, but it would be catastrophic if adopted in today’s world (again as my book discusses.) First and foremost, a credible return to the gold standard is virtually impossible today because people would know that governments have always abandoned any such scheme in the past. Any quixotic attempt to return to gold would surely end as disastrously as the interwar gold standard that helped spread the Great Depression of the 1930s. Even the halcyon days of the gold standard (roughly 1870 until World War I) were hardly a period of financial tranquility, as readers of my 2009 book This Time is Different: Eight Centuries of Financial Folly (joint with Carmen Reinhart) would well know. (By the way, in his blanket dismal of all academic economists for not anticipating the 2008 financial crisis, Grant might have forgotten about chapter 13 of our book which had been extremely widely circulated and read long before the crisis.)
On CNBC Squawkbox in 2012, during Ron Paul’s presidential campaign, Grant compared Fed chair Ben Bernanke to the head of Zimbabwe’s central bank, because he was just sure that all the “money printing” Bernanke was doing would lead to high inflation. Aside from being a spectacular wrong call, this statement represents a profound misunderstanding of the difference between money and bonds at the zero bound. In fact, what Bernanke was doing was not so much printing money as exchanging short-term central bank reserves for long-term government debt, as a reader of chapter 9 would understand. (And critically, the government fully owns the central bank.) Readers of chapter 8 will know that I am not a big believer in the wonders of quantitative easing, but will also understand why confident predictions of catastrophe got it wrong. By the way, Grant not only hates negative rates, he does not seem to be much of a fan of zero rates either. Back then, he urged the Fed to promptly raise them. Many other central banks, including the European Central Bank, followed such advice; the results were disastrous.
Lastly, it is worth mentioning that by and large the financial industry has lobbied heavily against negative rates. Some of their arguments about existing frictions are completely legitimate, which is why my book views open-ended negative rates as mainly something for the future, after manifold preparations, which include not just phasing out large bills but dealing with tax, legal and market frictions. Ultimately, banks make money off the difference between the rates they pay to borrow and the rates they charge to lend. Once adequate preparations are made, they will not have cause to complain.
In the end, if global real interest rates stay low for the next decade, there will likely be occasional periods of negative rates during recessions in most advanced economies, whether we like it or not. Part II of the book explains how to make negative rate policy better and more effective. Anyone who wants to understand it should read The Curse of Cash.
