Estonian Economist Suggests Abandoning Cash

J-Georg writes "Raul Eamets, professor of macroeconomics at the University of Tartu, proposed today during his TEDx talk that Estonia should stop using cash at all when adopting the Euro as the national currency (Estonian original). He also pointed out that abandoning cash would not be only important for the Estonian economy as a whole but also is a real challenge for both IT and banking sectors and would also improve Estonia's image as an IT-tiger."

Comments

Might I suggest an alternative currency

[Anonymous Coward]

Leaves might be a better choice. Given the country's forests every citizen would become quite wealthy overnight and it wouldn't require any additional infrastructure. I believe the next US Congress will be considering adopting leaves in the next session as the new US currency since leaves are worth more than the dollar.

Re:Might I suggest an alternative currency

[ChatHuant]

In fact the value of currency is psychological.

In fact it's not. Or more precisely, not only.

If one dollar buys one candy bar, why should that change if there are more dollars? Nothing has really changed in terms of the candy bar's production costs.

The price of an item is a function of its scarcity and of the effort required to create it. If everybody had lots of money, nobody would be willing to work to create more candy (why bother making candy for a buck a piece, when you can just shake the money tree in the backyard, and get more bucks with less effort?). So candy becomes a scarce resource, and everybody competes for the same limited amount of candy. The only way to get the sweet luxury is to pay more. The price of candy goes up, and will continue growing until either people give up on candy, or the price becomes high enough that making candy becomes profitable again.

Re:Might I suggest an alternative currency

[JesseMcDonald]

The important point that you're missing is that currency behaves just like any other good. The shopkeeper's revenues must compete with all the other dollars in existence for the goods and services the shopkeeper requires (personal and business), just as those goods and services must in turn compete with all other goods and services for the higher-order goods (like raw resources and labor) required to produce them.

If the shopkeeper were to decide not to raise his prices despite the existence of more dollars in circulation, then he would receive the same revenues per candy bar sold and thus be limited to bidding for new ones at the same prices as he used to pay. However, other shopkeepers who did raise their prices can now outbid him, which means he won't be able to get enough new candy bars to replace his old stock; the same amount of dollars won't buy as many as it used to. If all the candy-bar retailers banded together and chose not to raise any of their prices then the same problem would still exist regarding the higher-order goods required to produce the candy bars in the first place. Some of these goods, such as labor, are common to all production, which means that all products compete with one another to some extent—and that injecting money anywhere will affect all prices eventually.

Essentially, in order to prevent a general rise in prices you would have to convince every single holder of dollars, including those who hold the newly-created ones, to act as though the supply hadn't changed. Good luck with that. :)

no thanks

[Trepidity]

So I won't be able to give $20 to a friend without: 1) being tracked; and 2) giving a cut to some payment processor like PayPal? I'd rather use cash.

Re:no thanks

[0123456]

So I won't be able to give $20 to a friend without: 1) being tracked; and 2) giving a cut to some payment processor like PayPal? I'd rather use cash.

But that's the whole reason for governments wanting to eliminate cash: it means every transaction will be taxed and no transaction will be possible without their permission.

Well, except that everyone will start using US dollars or whatever for their free market transactions.

Re:no thanks

[jc42]

So I won't be able to give $20 to a friend without: 1) being tracked; ...

Yup; and this is exactly why it won't be implemented, not in Estonia, not in the US, not in any other country.

A more illustrative example would be: You want to give $20,000 to your favorite local politician, in exchange for "consideration" during part of the law-making process. This only works well if your "gift" can't be tracked and be made known to the voters (and to legal authorities).

The recent election in the US is a good example. Political gift-giving used to be mostly public information. But recently, our Supreme Court changed the rules, making it legal for anyone to give money to politicians and keep the source of the money a secret. So before this election, political contributions went up roughly an order of magnitude over what they had been in previous elections. Mostly to the Republicans, but the Democrats got a large increase, too.

This would be very difficult with an all-electronic money system. The political system relies on the non-tracability of most of the "gifts". So we can trust that the politicians who got elected won't pass laws that eliminate the money that put them in power.

All the recent news of financial systems being "hacked" and their information made available to the wrong people is all the proof our politicians need that electronic money can't be trusted to keep a secret. So they won't allow it to happen while they're in office.

Re:no thanks

[khchung]

Please don't use the broken banking system in the US as your reference.

I have no problem doing instant electronic bank transfer of 20 bucks into my friend's bank account at no extra cost to either of us. In fact, we often settle the our lunch bills this way.

Only in America's broken system would you run the risk of losing money by just giving people your account number.

Yes, it made it possible for the govt to find out these records. But you have to fear being taxed only because of America's broken income tax system. Other people in sane countries don't have that problem at all.

Re:no thanks

[guyminuslife]

They might use a physical currency. They would not use dollars. The dollar was used historically because is stable, it has a wide international reach, and there wasn't any European currency that could compete with it on scale. Sure, you had British pounds and French francs and German marks, but the dollar was the big boy in town.

Nowadays, that's no longer true. The Euro is a completely viable alternative to the dollar on a broad international scale. It's even used as the official currency in countries outside of the EU: see, for instance, Kosovo. The physical Euro has some nice advantages for Estonians: you can drive to the country next door and actually spend themat any retailer, as opposed to trading them as a "black market" currency. And as the summary notes, it's already going to be the official currency of Estonia, even if not in physical form, which reduces barriers to depositing physical Euros into, say, a bank account. You don't even have to do a currency exchange!

Without cash...

[arunce]

No way. Economies can't work without thieves or corrupt politicians. Even if something emerge to fill the gap, like gold, drugs, diamonds, name it, the neighbor country with real cash would get the benefits. At the bottom, cash on your pocket grants some privacy... and security.

Re:On the subject of economics and money...

[Orgasmatron]

Steve Keen knows his stuff. I highly recommend his blog to anyone interested in economics, even though I disagree with several of his conclusions and proposals.

He was recently able to give the full (long) version of his standard presentation in Michigan. Go watch it. http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/

Re:Abandon all your cash

[naz404]

While we're at it, I propose the removal of the artificial rounding off of citizens' bank accounts to 2 digits after the decimal point.

It is an outdated model stuck on physical money and a scam run by institutions pocketing the fractions (think salami slicing).

The rise of "paperless" money, rapid currency exchange fluctuations + digital microtransactions at consumer level have made this very feasible.

I want my bank account to be able to say ".0238538327" after the whole numbers' place. If I make games, I want to be able to sell virtual goods at $0.00056 per transaction if I want to. When your audience is the entire internet, small amounts like that can rack up to substantial numbers. I want institutions to be able to do that for me affordably, and I want to see that number reflect in my account instead of being thrown away.

I mean in this age of digital, how much does it cost to actually make/record/monitor a transaction when everything's already digital?

Any takers? Maybe this is an opportunity to create a new startup. Maybe this is a niche that can challenge Paypal. Take it. Run away with the idea. I don't care who implements it, as long as it gets implemented.

Sounds great...

[Beelzebud]

...Until the power goes out.

Re:Abandon all your cash

[Gerzel]

Oh sure. Like most any man on the street he happens to have the time, income to support himself, money to start the project, PHDs in encryption, economics, programming and good expieriance at international diplomacy to implement this himself and not be a lazy ass.

Better yet: stop using debt as money

[Anonymous Coward]

Few people realize that we use debt as money in our monetary system. All those dollar bills and Euro notes? Those are actually IOUs that have to be repaid with interest to central banks. All those dollars in your bank account? They too are just debt markers that have to be repaid with interest. The problem is that in order to repay the interest, new money has to be created; but the only source of new money is new debt, with more interest, that requires more money with more interest ad infinitum.

The net result is that: 1) if all debts in society were repaid there would be no money and commerce would sieze up; 2) all debts can never be repaid because the principle + interest always exceeds the money supply; 3) the amount of debt is always increasing until there is a crash.

Everyone (except bankers) would be better off if we used debt-free money issued by your government, rather than debt issued from privately controlled central banks.
http://www.youtube.com/watch?v=vVkFb26u9g8

Re:Abandon all your cash

[Ethanol-fueled]

While we're at it, I propose the removal of the artificial limitations of citizens' double precision data to 16 digits with a floating decimal point.

It is an outdated model stuck on cheap hardware and a scam run by institutions paid by institutions pocketing the fractions (think salami slicing).

I want my bank account to be able to say ".0287863987569328746598137649582736985555726938475629835576459837" after the whole numbers' place. If I make games, I want to be able to sell virtual goods at $0.000000000000000000000000056 per transaction if I want to. When your audience is the entire internet and even very poor bushmen from Africa are on it, small amounts like that can rack up to pay for my six-pack. I want computer manufacturers to be able to do that for me affordably, and I want to see that number reflect in my account instead of being thrown away.

Re:What about tipping peopel like bellhops / skyca

[FatLittleMonkey]

In many countries, wait staff are paid a decent working wage so they don't need to rely on tips to survive. The listed price is the price you pay. (In fact, tipping is banned in some industries, such as casinos.)

Re:Abandon all your cash

[badboy_tw2002]

Yeah, it should be pretty quick and easy to get a decent bank replacement system up and running. A few hours may be a bit short, but lets give the coder 2 days assuming he's using rails and a transactionless NoSQL solution to get the job done in time. We may need to test it a bit, so leave time for unit testing. After all, this is people's money, so you can't be too careful.