Respected economist Kenneth Rogoff has called for the abolition of cash to aid central bank policymaking in a world of record low interest rates – and make life more difficult for criminals.
Writing in the Financial Times, the advisor to the New York Federal Reserve and professor of public policy and economics at Harvard said there were two main benefits from getting rid of a physical currency.
First, abolishing it would help eliminate the so-called "zero bound" on interest rates. This is the backstop role that cash plays in the event central banks introduce negative interest rates and people bail of electronically-held wealth for physical cash.
Second, citing a recent case in which a Mexican drug cartel was found with $200 million in cash, Professor Rogoff said curbing the ability of cash to facilitate tax evasion and criminal activity would be of substantial benefit.
He wrote that there were also good arguments to keep the status quo. Central Banks now make money out the printing of money – something known as "seigniorage revenue".
"Even though central bank profits are turned over to national treasuries, the ability to skim off expenses without having to beg can help insulate central banks from political pressures," said Professor Rogoff.
The other good reason to keep the status quo is the rights of individuals to make anonymous payments.
Even so, Professor Rogoff said tax evasion and crime were sufficiently compelling reasons to advocate a move away from cash, and any loss in seigniorage revenue would be more than offset by gains in tax revenue.
Cash is mostly kept in high denominations and it is thought there is $US4000 cash in circulation for every man, woman and child in the US. The cash economy makes up an estimated 7 to 8 per cent of US gross domestic product.
This has long been seen as a problem by central banks, treasuries and supranational bodies such as the IMF and OECD.
'A very impractical idea'
The future of cash has been the subject of increased discussion in some circles of economists as the use of electronic funds becomes more widespread. But a mainstream economist advocating the abolition of cash is rare.
Professor of Institutional Economics at Melbourne's RMIT, Sinclair Davidson, said professor Rogoff's argument misunderstood the role of cash.
"This is a very impractical idea by a theorist," he said.
"Cash has evolved in almost every society – people fixate on something and use it as a means of exchange. Not only that, it minimises the costs of doing business. Are we really going to throw all that away because there are some criminals out there?"
Professor Davidson said professor Rogoff's argument boiled down to what made life easy for US regulators, rather than for people. The issue was one of practicality, he said.
"Money facilitates trade, and yes, some may be illegal," he said. "But a liquid economy is going to be wealthier and more prosperous than one that isn't."