Paper currency has been part of human civilization for a very long time. Although transaction technology has advanced, most countries still circulate a sizable amount of paper cash. Electronic transactions technology proven unexpectedly resilient despite significant and ongoing technological advancements, even though its primary applications appear to be hidden in the global black market and criminal economy.
What is Phasing Out Paper Currency?
There are growing numbers of compelling arguments in favor of looking into how it might be phased out of use as many central banks are currently close to or at the zero interest rate bound. True, there are numerous justifications for maintaining the status quo, from the value of seigniorage income to reasons based on civil liberties. Given the unrelenting pace of technology advancement, we might already in the last stages of the era of paper money, which is reflected in everything from mobile banking to cryptocurrencies.
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Why it’s difficult to Switch to Modern Money?
The public’s perception of government and country is strongly influenced by paper currency. Thus, any attempt to alter long-standing monetary standards presents several challenging questions. However, it is crucial to consider if paper money outlived its utility. Credit and debit cards increasingly used daily, even for modest purchases. And although today’s cryptocurrencies are a long way from being real money – their prices, for instance, are just too unstable – the underlying technologies may ultimately improve the range of available electronic payment methods.
Benefits of Phasing Out Paper Currency
1. Ease of Negative Policy Interest Rates
Two highly significant characteristics of paper currency support the welcoming of a cashless society. First, a limitation that seems to have grown more significant throughout this century is that the existence of paper money makes it challenging for central banks to lower policy interest rates very much below 0.
Paying an adverse interest on reserves would be easy if all central bank liabilities computerized. However, it suddenly becomes challenging to drive interest rates below zero consistently. As long as central banks prepared to convert electronic deposits to zero interest paper money in unlimited volumes. Cash hoarding may be annoying and dangerous, but it will pay off if rates drop too low.
2. Make Transactions Transparent
Paper currency makes it easier to make transactions private and hide them from the authorities, enabling spies to avoid breaking the rules and paying taxes. It stands out significantly from most electronic payment methods, which the government may theoretically track. There is substantial evidence that most countries employ a sizable portion of their currency to conceal transactions.
The first argument for moving away from cash is that making regular, substantial, and anonymous payments would be more complex, deterring tax evasion and other criminal activity.
Secondly, it is conceivably the most straightforward approach to assist central banks in implementing negative interest rate policies—a weapon that would have been extremely helpful during the 2008 financial crisis.
However, considering the cost, we will have some solid points in favor of paper cash. As it costs cheaper to produce paper notes or coins than to mint them, governments profit from the issuance of currency. Any gains made in this regard are, however, overshadowed by the expenses associated with the illicit activities that cash allows.