By Bernard Hickey
It's easier than it ever has been to imagine a New Zealand without notes and coins, and not just for the convenience factor.
A cashless society could help us combat crime and tax avoidance by making it much harder to trade illegally and in an untraced way. It would also avoid the problem of cash hoarding if interest rates were ever cut to 0%, or even negative rates. It would make it much easier to have negative interest rates that gave the Reserve Bank the power to stimulate the economy by charging savers to look after their money. A move to a digital currency could also allow us to do without banks for transactions and save an awful lot of money in processing and conversion fees.
So why don't we do it? Now that most people have smart phones and almost all retailers are connected to a payments network, it would seem a simple step to remove cash from the system. After all, many of us use EFTPOS and contactless Visa and Master cards to pay for things. Why not switch completely and remove all the cost and danger of storing, transporting and handling cash?
Yet it's proving much harder than many thought, and it's not just a New Zealand problem. Despite all the gadgets and terminals, there is actually much more cash in circulation than there's ever been. The Reserve Bank reports there was NZ$4.96 billion worth of notes ands coin sitting in wallets and vaults and under mattresses as at March of last year. That's up 61.6% from the NZ$3.07 billion in circulation just 10 years earlier.
A lot of money was withdrawn from ATMs by worried savers during the Global Financial Crisis and has never been re-deposited. Almost NZ$200 million was also distributed in Christchurch in the aftermath of the earthquakes to help Cantabrians get by when their shops couldn't connect or use their regular payment systems. But even with these special events, the amount of cash in the economy has been growing at surprisingly strong rates and faster than the economy as a whole.
To be fair, New Zealanders hold and use less cash than people in most other countries. The cash we have in circulation is worth just over 2% of GDP and we hold an average of around NZ$1,000 each. Australians hold three times as much as us per person, while Americans hold four times as much and Japan's cash holdings are a startling 18% of GDP.
A large part of the rise is due to STDs -- sex, tax and drugs. The secret economy loves cash and it's no surprise IRD is having to launch regular crackdowns on cash jobs to ensure everyone is paying their GST, PAYE and company tax.
But there's something else going on too, and not just here. Extremely low inflation and not so much faith in banks, particularly in the Northern Hemisphere, has encouraged people to hold their savings in cash because the real value of that cash is not being eroded much.
Only Sweden has managed to avoid this growth of cash under mattresses and in tinny houses. The home of Spotify and Candy Crush is also the home of an app called 'Swish'. It is an app set up by Sweden's banks that allows easy and cheap payments between banks. It avoids the Visa/Mastercard or EFTPOS systems we are used to. ANZ's goMoney does something similar, but New Zealand hasn't yet found an easy smart-phone based system that mimics EFTPOS and can be used by everyone cheaply. Our banks could do it, but seem determined not to invent a more modern version of EFTPOS and allow Visa and Mastercard to take over our payments system by stealth.
The holy grail would be a type of bitcoin system that allows people to pay each other without having to use the banking and credit card systems and avoid all the transaction fees and conversion fees that clip the ticket on the (legitimate) economy's every transaction.
One idea suggested by the Bank of England last year was the creation of a digital currency by the central bank itself. It would use the 'blockchain' technology at the centre of the bitcoin system, but that would be reliable and backed by the state. Everyone would have a central bank account and simply transfer money between each other without having to pay fees.
Such a system would allow much cheaper transactions and allow the central bank to impose negative interest rates, once it had also gotten rid of cash. It would be much easier to police crime and reduce the ability to avoid tax.
It all sounds like a radical idea, but it's one that central banks and policy-makers are considering in other countries as they try to encourage spending, investment and efficiency in a world of deflation, crime and tax avoidance.
New Zealand is some way off the negative interest rates now set by Europe, Sweden, Switzerland and Japan, but it has been a financial policy pioneer in the past and matches Sweden in having a relatively low amount of cash stashed under mattresses.
It may be time to stash the cash back in the central bank and start using our phones to do all our business.
A version of this article first appeared in the Herald on Sunday. It is here with permission.