Will banknotes and coins soon disappear? Modern technology and private convenience support this trend, but monetary policy and political coercion play a less innocuous role. A ‘war on cash’ is underway that aims at enforcing negative interest rates on private savings, expropriating savers for the sake of a demand-driven stimulus. Governments favour cashless transactions because their transparency makes it harder to evade taxes.
|Purple Slog @flckr|
This summer we have become used to televised scenes of Greek citizens lining up at ATM machines trying to get their maximum daily allotment of 60 euros, and pensioners desperate to receive their monthly livelihood – in cash.
What is it that makes cash or currency – banknotes and coins that each individual can hoard, hide and freely exchange for the goods and services of others – so valuable? Are there not much more modern and efficient electronic transfer methods?
In the Greek case, the answer is rather straightforward. People wanted to get as many euro banknotes in their pockets or under their mattresses before
- the Greek government confiscated wealth held in Greek banks;
- those banks officially declared insolvency, triggering a bail-in from account holder under new European Union rules, or
- their savings were turned into devalued drachma or government IOUs overnight.
Leaked reports on former Finance Minister Yanis Varoufakis’s plans to use a combination of all three techniques in a single stroke overnight show that the Greeks’ hunger for cash was not at all irrational.
Even leaving aside the special case of Greece, the preference for holding and using cash has spurred a serious debate in academic and political circles.
By law, in Germany and the rest of the eurozone, cash is still regarded as the only legal tender and indisputably accepted means of exchange.
Meanwhile, prominent economists and politicians in Europe and the United States have declared a ‘war on cash.’ Among the economists, the most influential critics of cash are former US Treasury Secretary Larry Summers, Citigroup chief economist Willem Buiter, former International Monetary Fund chief economist Kenneth Rogoff, and Peter Bofinger, a member of the economic advisory board to the German government. Among the politicians are Norbert Walter-Borjans, the finance minister of North Rhine Westphalia, and Sweden’s Finance Minister Magdalena Andersson.
This is not just an academic debate or political daydream. In some countries, the use of cash is already strictly limited. In Greece, cash payments above 500 euros are not allowed; in Italy, the limit is 1,000 euros; France will also introduce a 1,000 euro limit this year. At the European Central Bank, there are plans to stop issuing 500 euro banknotes. In Denmark, there is wide support for a law that would gradually ban all cash transactions, starting by allowing shops to go completely cash free.
There are three main arguments against the cash economy:
- using and holding cash is inconvenient;
- cash makes it easier to hide illegal transactions; and
- cash limits the ability of central banks to impose negative interest rates.
The first argument is innocent enough. Electronic money is convenient and its use in Europe now goes far beyond e-commerce transactions. In Stockholm, you can pay a busker with a credit card. In Copenhagen, people buy their espresso with smartphones. In Helsinki, many go grocery shopping without carrying their wallet.
The situation is very different in other countries, however. A recent study by the Bundesbank on payment behaviour in Germany shows that cash is still the number one means of payment at the point of sale, used for almost 80 per cent of all transactions and 53 per cent of their total value.
‘Consumers regard cash highly because they can keep a check on how much they are spending, it is easy to use, and they can remain anonymous,’ Carl-Ludwig Thiele, a member of the executive board of the Deutsche Bundesbank, said in response to the report. He concluded that cash will ‘continue to play an important role’ in the payment system and added that ‘the Bundesbank rejects any calls for restrictions on cash holdings.’
The anonymity of cash transactions is the reason why some economists and finance ministers want to limit or ban the use of cash. As Kenneth Rogoff points out, ‘this is a big difference from most forms of electronic money that, in principle, can be traced by the government.’
Since black markets, the shadow economy and tax avoidance are by their very nature difficult to trace statistically, the circulation of cash in relation to the value of legal transactions (or gross domestic product) is often taken as a proxy for illegal activity. This argument is quite tricky, however. That nearly 80 per cent of German transactions are made in cash compared with only 46 per cent in the US does not imply that Germans are almost twice as likely to break laws or evade taxes. It rather implies that German consumers are more eager to control their spending and that German shops and taxi drivers shun fees for credit card payments.
Germans attach a greater value to privacy than Scandinavians and abhor the idea that all their transactions are recorded in data files that could be examined by others. They also fear their money being cyber-attacked on some electronic grid by third parties. For many Germans and other freedom loving people, the ‘transparent citizen’ is not an ideal but a nightmare.
There are estimates that between 20 and 30 per cent of the cash held by Germans is hoarded as a safeguard against hard times. That sort of behaviour also explains why much foreign currency – US dollars, euros and Swiss francs - is held in cash in many places of the world where it is not the official legal tender. To hold cash in a stable foreign currency (or gold or silver) is a rational way to escape hyperinflation in the domestic currency and to hedge the risk of expropriation from corrupt and autocratic governments.
As the Russian novelist Fyodor Dostoyevsky said: ‘Money is coined liberty, and so it is ten times dearer to a man who is deprived of freedom. If money is jingling in his pocket, he is half consoled, even though he cannot spend it.’
Indirect ways of expropriation can also be the result of monetary policy. Historically, this was done by means of inflation – against which holding cash is the worst defence.
Today, expropriation of savers is the result of negative real interest rates, as can be observed in the euro zone or the US. To many economists, this quasi-taxation is not a problem but a necessity. The main obstacle is cash, which presents a natural barrier to central banks’ ability to push nominal interest rates much below zero.
‘If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial,’ writes Kenneth Rogoff. ‘But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 per cent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it.’
Keynesian economists and policy makers are getting desperate: both debt or tax financed public spending and conventional monetary policy have reached their limits in artificially stimulating growth. The best remaining way to revive the economy, they argue, is to discourage saving in favour of consumption or convert private savings into private investment demand.
From the narrow macroeconomic perspective, the argument is not absurd. Some economists maintain that the ‘natural rate of interest’ (a rather complex theoretical concept that calculates which rate would equalise private savings and investment) is in fact negative, since people save ‘too much’ and profitable investment opportunities are few.
But as long as people can hold cash, which carries a nominal return of at least zero, this cannot be reflected in negative nominal interest rates.
Another argument is that in a banking system based on fractional reserves, the abolition of cash would force households to hold all their balances with financial institutions, even when the solvency of those institutions is in doubt. It would no longer be possible for people to sidestep a banking crisis by withdrawing their money. Hence a ban on cash averts bank runs.
One might conclude that abolishing cash is the logical result of a monetary and financial system that can no longer be sustained – at least by conventional means. Another way of putting this is that the policy of near-zero interest rates has had dramatic, unintended consequences.
With zerointerest rates, the market economy loses its compass for allocating scarceresources to useful investments. As recent decades have shown, loose monetary policies trigger speculative boom and bust cycles. Interest-bearing savings, especially in pension funds, generate losses or very low returns, while at the same time asset price bubbles are created.
If income and wealth distribution is indeed becoming more unequal, it is at least partly due to a monetary policy that rewards speculation and discourages the traditional savings methods of lower income earners.
Will we enter a brave new world without cash? Most likely not in one big revolutionary coup. But gradually, the good old world of ‘coined liberty’ may disappear.
Published today in Geopolitical Information Service.