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Let’s not get rid of our wallets just yet

The idea of purely electronic money, without notes and coins as hand-to-hand currency, has received attention not just for its potential convenience, but also for its potential to extend the range of central bank control in monetary policy, which some people consider a good idea.

I see three drawbacks. First, are we so confident in our computer systems, including the electric power that they run on, that we don’t want any backup? Imagine the recent north Indian power blackout, or the U.S. mid-Atlantic blackout, lasting for a month. Unlikely, but not so unlikely that it needs no emergency plan.

Second, a forced switch to an all-electronic currency means a forced reduction in financial privacy. Maybe, as Oracle Computer founder Larry Ellison has said in a broader context, “The privacy you’re concerned about it largely an illusion.” If so, it is an illusion I wish to try to preserve a while longer.

Finally, it ignores consumers. If people want purely electronic money, the costs of provision are low, and there are no legal obstacles to purely electronic money, that’s what they will get. If people continue to hold notes and coins, it means that hand-to-hand currency provides services for which purely electronic money is not a perfect subsitute.

(Hand-to-hand currency is disproportionately used in illegal activities. It is an argument for another time to what extent switching to purely electronic money would reduce illegal activities. Payment for illegal activities can still occur outside the formal financial system without cash.)