Paper money is a small percentage of total money, and a much smaller percentage in terms of actual transactions. Most of the money is already digital.
But my understanding (correct me if wrong) is that the total money running in the country at any momemnt is never more than what is printed.
With digital money the central bank can issue it without the cost to print. As per (1) it costs around Rs 10 to Rs 17 to print Rs 100 note and have to be reprinted once they get damaged.
(1) https://www.hindustantimes.com/business/will-digital-currenc...
For example, USA has ~$2T of physical cash printed (https://www.uscurrency.gov/life-cycle/data/circulation) ; the M1 money supply (effective cash in circulation, including account balances, etc) is ~$20T - https://tradingeconomics.com/united-states/money-supply-m1 .
It's all elastic, and central banks have sophisticated mechanisms to tighten or loosen that elastic band. The entire financial industry exists to think of novel ways to create leverage, stitching together assets and promises into towering edifices of economic power... all founded on the idea/hope/prayer that nobody will call in all the bets at once.
Honestly, you might not want to look behind the curtain on this one. It's one of those existential risks you can't effect as a single human. It's a collective suspension of disbelief that allows the modern world to function. If/when the correction happens... it will not be fun to live through.
If you're a glutton for punishment, here's some reading:
"Chapter 2 studies leverage in the nonfinancial private sector before and during the COVID-19 crisis, pointing out that policymakers face a trade-off between boosting growth in the short term by facilitating an easing of financial conditions and containing future downside risks. This trade-off may be amplified by the existing high and rapidly building leverage, increasing downside risks to future growth. " https://www.imf.org/en/Publications/GFSR
https://research.macrosynergy.com/the-global-leverage-proble...
https://www.imf.org/en/Blogs/Articles/2021/03/29/confronting...
https://en.wikipedia.org/wiki/Fractional-reserve_banking
https://en.wikipedia.org/wiki/Money_multiplier
That's important, because central banks are considering negative interest rate policy, which would mean your bank account would drop by a percentage each month. This would drive people to spend or invest their money, supporting consumption and inflating asset prices.
The reason they can't do that right now is because many people would withdraw their funds and hold cash. That option needs to be removed for negative interest rate policy to be broadly implemented.
(There are a few places, like Europe, where interest rates already went negative, but only slightly and it only applied to institutions like banks).
For example from the Fed: "The Case for Unencumbering Interest Rate Policy at the Zero Bound", https://www.kansascityfed.org/documents/7033/GoodfriendPaper...
> With these advantages in mind, the final portion of the paper describes in detail three methods by which the zero bound on interest rate policy can be unencumbered completely. The three methods in turn would: 1) abolish paper currency, 2) introduce a market-determined flexible deposit price of paper currency, and 3) provide electronic currency (to pay or charge interest) at par with deposits.
Or the Bank of Canada's paper, "Is a Cashless Society Problematic?", https://www.bankofcanada.ca/2018/10/staff-discussion-paper-2...
> a cashless society could open the door to the prospect of negative interest rates to a greater extent than is currently possible. Most central banks are obligated by law to supply cash to the general public. To the extent that the economy becomes cashless, a central bank could request a change in its governing legislation to remove the obligation to supply cash to the public on demand (which is a significant step). In that case, in the absence of cash and of an obligation to supply it, a central bank would be able to lower interest rates to a more negative level than is currently possible to achieve stabilization or price stability goals.
Yeah, that’s putting it mildly! Isn’t this basically a wealth tax on the middle and working classes?
I don't know, maybe it won't happen. But the signs are all pointing in that direction, so I'm kind of resigned to it going that way eventually. Probably it will start by restrictions on large cash transactions, and on owning or carrying large amounts of cash. Then fees for withdrawing paper cash from bank accounts. Perhaps retailers will be allowed to add fees for cash transactions, too. The last step would be deprecating cash altogether, allowing banknotes to be deposited but not withdrawn (withdrawals will be as a CBDC).
Just my guess on how it will go.
People who work for their wage are utterly dependent on the benevolence of the rich who withhold their money from the market. Withholding money from being spent or saved is how you get unemployment and inequality. If anything people who work for money will appreciate that they are being paid and the people they pay will also appreciate it. The only people who won't appreciate are those who already have so much money they don't know what to do with it.
Cash would allow you to escape this, which is why it would be removed as an option.
Imagine the horror of having to pay a parking fee instead. Truly horrifying. How are we supposed to pretend that it is ours anymore and extort payments from other people by blocking all the free parking lots?
>This would drive people to spend or invest their money, supporting consumption and inflating asset prices.
You know, in neo classical economics the idea of not spending your money on consumption or investment or saving your money isn't even considered to be something that even happens (by that I mean in neo classics all saving happens at the bank anyway) So if you are against that then you leave central banks no choice other than to create exponentially growing quantities of money and use inflation to devalue all assets instead of only shrinking the type of balance you have the least of. The poor store most of their value in their body and need to trade their body for money that they spend quickly, only the rich who can block their withheld money from being available and thereby extort interest payments from the rest of the economy.
It is like you are arguing that the current system of exponential debt is somehow the height of morality.
The problem, of course, is that when the money is just a number on a screen, it's very difficult to ensure that the humans running the database don't magically decide they have a bigger number than they aught to. This is an unsolved problem.