Most of us walk around with very little cash in our pockets. Credit cards seem to weigh down our wallets and paying on credit is certainly the name of the game in today’s economy. But what would happen if we were told by the banks that we could only pay with a plastic and that bills and coins were no longer legally acceptable as payment?
This seems to be the fear in several European countries. Noise about ‘going cashless” or “cash free” is intensifying throughout the continent and fears that cash will be abolished are accelerating. The European Central Bank (ECB) and the Swedish central bank, the Riksbank, have pushed their interest rates deep into negative territory as have Denmark and Switzerland while the Bank of Japan just became another major central bank to go below zero. Is abolishing cash the next step by these central banks?
...what would happen if we were told by the banks that we could only pay with a plastic and that bills and coins were no longer legally acceptable as payment?
The Bank of England's chief economist Andrew Haldane said back in September 2015, that abolishing cash would help the central bank to implement a negative interest rate policy more efficiently.
According to Haldane, "If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound (ZLB) on interest rates." Haldane and some other economists believe that the way to remove the ZLB would be to abolish paper money altogether, leaving consumers no alternative but to use their credit cards to pay for all needs.
Less Savings, More Spending?
By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).
Discussions of removing some notes have already been voiced. During a hearing in the European Parliament, European Central Bank President Mario Draghi stressed the fact that there was "increasing conviction in world public opinion" that the 500 euros banknote, the highest euro denomination, should be withdrawn, citing their extensive use in criminal activity.
Cashless transactions are certainly not a new development. We have been making purchases, paying bills and transferring funds all over the world without the use of paper or coins for years and this has made our lives much simpler. Cards need not even be swiped anymore but can be read or payments can be made by just keying in a four-digit pin number.
However, a cashless society begs of a “big brother” syndrome with banks and governments following our movements at all times, knowing where we are and what we are buying. In addition, in a system without cash, governments can impose a tax on savings in the form of negative interest rates as a part of an expansionary monetary policy from which there is no escape. Once cash is removed as an option, people have no control over their economic life.
By removing paper money, the government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. Anti-cashless advocates point to Greece which may have to leave the euro because it is unable or unwilling to adopt more austerity measures, a precondition for securing more euro loans and which will forced the central bank to print drachma bills to pay for its debts.
Going cashless would have also grave consequences for retirees, many of whom are incapable of transacting using plastic. They will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account. Same goes for poor people many of whom don’t have access to the banking system and will only become more dependent, in fact exclusively dependent, on government handouts.
Some analysts see a paperless economy as just the latest in a set of unprecedented economic policies which follow along these lines:
“A depression is coming? Let’s put rates at zero. The economy is still in trouble? Let’s have the central bank print trillions in new securities. The banks are not lending? Let’s change the accounting rules and offer government guarantees and funds. People are still not spending? Let’s have negative interest rates. The economy is still in the tank? Let’s ban cash transactions altogether!”
Furthermore, to be most effective banning cash would have to be coordinated between the US and the EU. Otherwise if only one of the two Western economic blocks were to do it, the citizens of that block might start using the paper currency of the other, thereby circumventing the restrictions of this policy. Can’t settle your purchase in paper euros? No problem, we’ll take US dollar bills.
Cashless Case Strengthening
But the case for a cashless society is strengthening across Europe and in the U.K. Proof that it is taking hold can be seen with Hasbro’s new version of Monopoly. The new Monopoly Ultimate Banking game has eliminated Monopoly’s colorful wads of cash. It has a regulated banking system that makes it harder for unscrupulous individuals to cheat. Instead of cash, players will scan personal credit cards using a small battery-operated ATM, which will automatically keep track of their cash on hand as well as all financial transactions. Could this be a form of indoctrination for the next generation?
Consumers in Europe are certainly concerned about a future cashless society and are not taking it sitting down. In the U.K., well known financial magazine MoneyWeek has even started a petition under the headline "Hands Off Our Cash", asking the government to guarantee that cash will not be abolished from use and that negative interest rates will not "undemocratically" be imposed on British savers.
The concept of a cashless economy is frightening to many and despite the reasons cited by central banks for its possible implementation, there are far more reasons to hold back from imposing it as a last ditch effort on consumers who don’t fully understand its ramifications or its negative consequences.