We mustn’t lose the War on Cash
14 November 2019
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Government and Institutions
12 November 2019
Podcast
14 November 2019
Tax and Fiscal Policy
19 November 2024
The last few years have witnessed ongoing controversy over proposals to abolish cash.
The War on Cash is being promoted by an alliance of big digital payments firms, control ideologues and central banks.
The payments firms promote it for commercial reasons: they wish to eliminate a competitor, so they can increase the fees they charge on digital transactions. They argue that cash is inefficient, but such arguments ignore the benefits of cash that cannot be replicated by digital money. Cash is very efficient for small transactions. Cash transactions are immediate, flexible and anonymous. Cash does not need a password and can’t be hacked. The usefulness of cash is not dependent on technology that might break down – and sometimes does, creating huge problems.
In September 2017, for example, Puerto Rico was devastated by Hurricane Maria. The storm knocked out the electricity supply, ATMs and card verification stopped working, and people were unable to buy food or other necessities with anything but cash. The Federal Reserve had to fly a jet loaded with an undisclosed amount of cash to the island, to meet payrolls and avert disaster as cash holdings ran out. As one observer put it, “In a cashless world, you’d better pray the power never goes out”.
In any case, if cash really were inefficient, then there would be no need to abolish it, because it would disappear spontaneously. That cash continues to be widely used – a recent estimate is that cash was used in 85% of global transactions – indicates that it still serves a useful role.
The second group promoting an end to cash do so as part of an agenda of increasing state control. They argue that cash should be abolished because “bad guys” – money launderers, drug smugglers and terrorists – use it. Yes, bad guys do use cash, but so do the rest of us. Should we all lose the benefits of cash to inconvenience the bad guys, who would doubtless switch to some other payment medium? Perhaps not. Consider also the implications of this argument: if we should abolish cash because bad guys use it, then the same argument applies to everything else they use including digital money, which is more widely used for criminal activities than cash itself.
Anyway, cash isn’t all that convenient for illicit transactions. The ideal medium for illicit drug commerce these days is – believe it or not – Amazon gift tokens, which have the virtue of anonymity. “If I was a lower-level criminal, I would be paying for everything through gift cards”, as Garry Clement, former national director of the Royal Canadian Mounted Police’s Proceeds of Crime Program, has put it – there is no paper trail.
Cash also has the disadvantage for criminals of being small-scale. For large amounts of illicit transactions, you need to go digital. Consider the recent Danske Bank money laundering case, the largest such scandal ever. This case involves nearly a quarter of a trillion dollars of very suspicious money from Russia and the former Soviet Union that was funnelled into the western banking system right under the noses of major banks and regulators in the United States and Europe, who either facilitated it or turned a blind eye.
For today’s modern high-tech criminal, then, cash is passé. So what is the point of abolishing cash while leaving the more important channels of illicit transactions wide open?
The third group promoting the War on Cash are central bankers. As interest rates have fallen, central banks have seen their ability further to reduce interest rates become severely squeezed. Abolishing cash would enable them to overcome this constraint and allow them to push interest rates deep into negative territory in their efforts to stimulate the economy. The point here is that if central banks were to attempt to implement negative rate policies without first abolishing cash, then people would switch large-scale into cash to thwart their efforts. Thus cash would need to be abolished to force people into negative-rate assets.
There are many problems with negative interest rate policies (NIRP). Why would anyone wish to lend at a negative interest rate? Why is this a justification for the War on Cash? Do we really want to give central bankers even more scope for potentially ruinous monetary experimentation?
Suppose that NIRP could be implemented at some selected negative rate. We would then have bank deposits being taxed at that rate every year, so money supply would be falling at about the same rate. Thus, NIRP would involve a tax on deposits and a falling money supply, and a tax is never stimulative. The danger, then, is that saving and capital accumulation would first stop and then go into reverse, and the economy would go into a death spiral.
Whatever the merits of digital money, the use of cash confers important benefits that digital money does not. That the War on Cash would deprive us of those benefits is the least of its problems, however.
It also threatens to undermine our privacy by allowing all our spending to be tracked. It may have the effect of expropriating large amounts of private wealth, and expose us all to the risks of fallible digital systems. In the worst case it may enable central banks to wreck the economy and destroy our civil liberties. We should fight back and keep spending cash.
A fuller version of the argument appears in the current issue of Economic Affairs.
The War on Cash is being promoted by an alliance of big digital payments firms, control ideologues and central banks.
The payments firms promote it for commercial reasons: they wish to eliminate a competitor, so they can increase the fees they charge on digital transactions. They argue that cash is inefficient, but such arguments ignore the benefits of cash that cannot be replicated by digital money. Cash is very efficient for small transactions. Cash transactions are immediate, flexible and anonymous. Cash does not need a password and can’t be hacked. The usefulness of cash is not dependent on technology that might break down – and sometimes does, creating huge problems.
In September 2017, for example, Puerto Rico was devastated by Hurricane Maria. The storm knocked out the electricity supply, ATMs and card verification stopped working, and people were unable to buy food or other necessities with anything but cash. The Federal Reserve had to fly a jet loaded with an undisclosed amount of cash to the island, to meet payrolls and avert disaster as cash holdings ran out. As one observer put it, “In a cashless world, you’d better pray the power never goes out”.
In any case, if cash really were inefficient, then there would be no need to abolish it, because it would disappear spontaneously. That cash continues to be widely used – a recent estimate is that cash was used in 85% of global transactions – indicates that it still serves a useful role.
The second group promoting an end to cash do so as part of an agenda of increasing state control. They argue that cash should be abolished because “bad guys” – money launderers, drug smugglers and terrorists – use it. Yes, bad guys do use cash, but so do the rest of us. Should we all lose the benefits of cash to inconvenience the bad guys, who would doubtless switch to some other payment medium? Perhaps not. Consider also the implications of this argument: if we should abolish cash because bad guys use it, then the same argument applies to everything else they use including digital money, which is more widely used for criminal activities than cash itself.
Anyway, cash isn’t all that convenient for illicit transactions. The ideal medium for illicit drug commerce these days is – believe it or not – Amazon gift tokens, which have the virtue of anonymity. “If I was a lower-level criminal, I would be paying for everything through gift cards”, as Garry Clement, former national director of the Royal Canadian Mounted Police’s Proceeds of Crime Program, has put it – there is no paper trail.
Cash also has the disadvantage for criminals of being small-scale. For large amounts of illicit transactions, you need to go digital. Consider the recent Danske Bank money laundering case, the largest such scandal ever. This case involves nearly a quarter of a trillion dollars of very suspicious money from Russia and the former Soviet Union that was funnelled into the western banking system right under the noses of major banks and regulators in the United States and Europe, who either facilitated it or turned a blind eye.
For today’s modern high-tech criminal, then, cash is passé. So what is the point of abolishing cash while leaving the more important channels of illicit transactions wide open?
The third group promoting the War on Cash are central bankers. As interest rates have fallen, central banks have seen their ability further to reduce interest rates become severely squeezed. Abolishing cash would enable them to overcome this constraint and allow them to push interest rates deep into negative territory in their efforts to stimulate the economy. The point here is that if central banks were to attempt to implement negative rate policies without first abolishing cash, then people would switch large-scale into cash to thwart their efforts. Thus cash would need to be abolished to force people into negative-rate assets.
There are many problems with negative interest rate policies (NIRP). Why would anyone wish to lend at a negative interest rate? Why is this a justification for the War on Cash? Do we really want to give central bankers even more scope for potentially ruinous monetary experimentation?
Suppose that NIRP could be implemented at some selected negative rate. We would then have bank deposits being taxed at that rate every year, so money supply would be falling at about the same rate. Thus, NIRP would involve a tax on deposits and a falling money supply, and a tax is never stimulative. The danger, then, is that saving and capital accumulation would first stop and then go into reverse, and the economy would go into a death spiral.
Whatever the merits of digital money, the use of cash confers important benefits that digital money does not. That the War on Cash would deprive us of those benefits is the least of its problems, however.
It also threatens to undermine our privacy by allowing all our spending to be tracked. It may have the effect of expropriating large amounts of private wealth, and expose us all to the risks of fallible digital systems. In the worst case it may enable central banks to wreck the economy and destroy our civil liberties. We should fight back and keep spending cash.
A fuller version of the argument appears in the current issue of Economic Affairs.
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