I wrote here a few months ago about one of the most worrying things about the possibility of a ban on using cash: we spend much more when we spend with debit and credit cards than when we spend with cash (see here for that piece and here for why our central bankers are desperate to ban cash in the first place).
The New York Times has just reported on one study on this I hadn’t noticed before. It isn’t new – it was done in 2001 by Duncan Simester, a professor of marketing at MIT. You can read the full paper here, but the method and the findings were simple. Simester and a colleague held auctions of tickets to popular local sports games for MBA students. Some were cash only. Others were credit card only. The result? When they had to pay with credit cards, the MBA students bid roughly twice as much as they did when only cash was an option.
You could say that this is down purely to the fact that they didn’t have enough cash to hand to bid as they wanted – the result is just a “liquidity effect”. But Simester reckons the effect is just too large for that. His conclusion – and the reason he titled his report “Always leave home without it” – was this: “willingness to pay can be increased where customers are instructed to use a credit card rather than cash”.
What about if they are forced to use a credit card or a debit card rather than cash? We are told that banning cash would make it much easier for central bankers to control the economy – they could make us spend more by charging us negative interest and less by giving us interest without the distorting influence of cash getting in the way. But if these studies on the way we spend with cards are correct (as they seem to be), banning cash would also naturally bias us away from saving and towards spending.
That would have all sorts of interesting effects – on both personal debt levels (up) and on interest rates (a higher rate would be required to make us rein in our spending than before). This isn’t as simple as central bankers like to think.
• This article was first published in March 2016