Some other system of currency not backed by the US government would take the place of the cash dollar. This could be foreign currency like the euro, or if you make foreign currency illegal (like the Communist Bloc countries used to), key goods.
The problem of theft or black market trading doesn’t disappear when you eliminate government-backed currency, it just gets harder to regulate and control. Imagine Bernie Madoff issuing paper coupons good for $1 worth of services at Madoff Enterprises. These coupons are essentially a private currency, and as long as people trust Bernie Madoff those coupons can be traded and used as a form of money. It works great until Madoff goes to jail and all those coupons are now worthless.
And so private currencies work fairly well for a system of exchange, but not as a unit of account or a store of value, you’re always worried that your coupons will become worthless when the issuer folds up shop, and so you trade them as fast as you can.
How you go about making “I’ll trade you this coupons for a can of soup” illegal, and enforcing it without totalitarian measures I don’t know. Even in the Soviet Union people used to buy whatever goods were for sale at the government run stores, and then try to barter those goods for the goods they really wanted. But barter is a pretty inefficient system. Money makes things easier. And so if the government doesn’t create usable money, people will create their own.
Of course you can say the same thing about taxation, because this would be a tax. And there is a pretty significant difference between supporting taxes imposed through the democratic processes and supporting taxes imposed by an appointed, rather than elected body. Unless you are suggesting every move by the Fed should be subject to a Senate vote?
The Fed raising the interests rate can cause inflation, which for all intents and purposes has the same effect as taking money away from somebody’s bank account. What’s the real difference between explicitly deducting money from a bank account, and deliberately causing that money to be worth less than it was before in order to achieve a broader economic aim? At the end of the day, the individual can’t buy as many loaves of bread (or whatever) as he could before.
So just to be clear, you believe the Fed should have the power to implement a wealth tax, without any form of democratic approval?
Your alternative isn’t the same thing.
You say raising interest rates may cause inflation, though in most cases increased interest rates is seen as a brake on inflation.
Negative interests rates in a cashless economy will result in a confiscation of wealth. I have no problem with the government taxing people, but I want it to be done in a democratic manner.
We have courts, don’t we? We can vote, can’t we? On what legal basis would the government of the United States of America, the Land of the Free and the Home of the Brave, prevent people from marching?
I propose they should be able to do a de facto “tax” on the hoarding of cash assets, in extreme economic circumstances which are clearly defined according to law and only for a temporary period, also to be clearly defined by law. But that doesn’t include assets like real estate, stocks, and bonds. This will provide a fairly strong “nudge” for people to either spends their money on something or to invest it, in preference to hoarding it which contributes to the lack of aggregate demand and keeps the economy depressed.
Depending on what your criteria for “hoarding” would be, couldn’t this be a “penalty” on the people who are saving money (say $50k for example) for a down payment on a house?
As others have said, the black market would use some type of good as a substitute for cash (cigarettes, gold coin, canned tuna, etc.) Illegal activities won’t just fold up and disappear.
It wouldn’t really be a punitive measure anymore than a policy resulting in a lower interest rate or in a significant inflation.
I’d be more concerned with privacy issues.
As someone else mentioned, criminals might turn to commodities or foreign currency as their chosen medium of exchange. We could see drug sales in New York being priced in Canadian Dollars, and long lines at the Federal exchange desk… Unless we get every nation to join in, what prevents criminals from stealing Canadian Dollars or Japanese Yen and exchanging them at their United States Treasury Department Service Center for money on their card?
What happened in prisons when cash was forbidden? In many cases, cigarettes became currency, and you could bet 10 packs on a fight or buy some pruno for 3 packs.
Or people would start other forms of currency like the liberty dollar. Sure it would be illegal but so are black market items. So in effect increasing criminal activity. Plus I assume small fake businesses starting up everyere to funnel elcetronic currancy and launder it.
A problem I see is that at the end of the day, someone (ie a bank or the government) has to have the funds available to permit the electronic exchange of goods.
If there was another economic downturn and your bank/government went bust, would it be possible to purchase anything in a cashless society?
At least under the current system, if you lack faith in banks/governments you can run your finances on cash.
As for drug dealers, I believe if one country went cashless (eg the US), drug transactions would operate on a foreign currency (eg the Euro).
The definition of “the government went bust” is “your cash isn’t worth anything”. Because if paper cash was still worth something, the government could just print up a bunch of new paper money and spend that. Of course, they do that a few times and the value of the paper money falls through the floor. This is called hyperinflation. It’s easy to think inflation means that prices for everything are rising, but it’s easier to understand as the value of money is falling.
Econ 101: If you would “run your finances on cash” then by definition you have faith in the government. They are just pieces of green paper. The only reason they have value is that they are backed by the full faith and credit of the government.
If people start thinking that the US is going belly up, then those bills are worthless, except maybe for starting fires..
To clarify my previous statement, if a bank were to collapse or have a liquidity issue and your government would not provide a guarantee to the bank, would it still be possible to purchase goods in a cashless society?
In some cases (eg Soviet Russia) people have used hard foreign currency for purchasing items that may not be attainable under the “state” currency.
What does it mean for a bank to “go bust”, though? You already have FDIC insurance for your deposits, even if your bank goes, you know, bankrupt, your checking and savings accounts are insured. So what typically happens when a bank goes bankrupt is that another bank buys the first bank, and changes the signs on the windows, and nothing changes. You can keep banking at your old bank that’s now a different bank, or you can withdraw your money and deposit it at a new bank.
It is already the case that cash is a very small component of money. You checking account is safe even if your bank isn’t. Of course, the government could renege on the FDIC insurance for your account, but if that is happening your dollar is probably already worthless. Much more likely is for the government to honor the FDIC commitment, but inflation will have killed the value of the dollars it compensates you with. Rather than default on the commitment it honors the full face value of the commitment. Except when the bank collapsed and took your account, one dollar could buy a loaf of bread and now it takes $100 to buy a loaf of bread, so it’s easy for the government to hand out thousands of worthless dollars.