By Don Quijones of Spain, the UK, and Mexico, editor at Wolf Street. Originally published at Wolf Street
The proposed EU-wide cash restrictions could come into effect as early as this year. But defenders of physical cash have an unexpected ally in their struggle: Yves Mersch, a member of the European Central Bank’s executive board. In a speech hosted by the Bundesbank last week, the Luxembourgian central banker exalted cash’s value as legal tender and heaped scorn on the oft-heard argument that its anonymity only helps criminals.
“Protection of privacy matters to all of us. Privacy protects people from the risk of a surveillance state and thought police,” he told his audience. “No particular link can be established statistically between cash and criminal activities. The focus must be on the fight against crime. Cash must not be made the scapegoat.”
One of the world’s biggest issuers of notes and coins, the Bundesbank was a fitting location for a speech on the virtues of physical money. In total, €592 billion of the €1.1 trillion of banknotes in circulation at the end of 2016 were issued by the Bundesbank.
Judging by recent statements, the Bundesbank wants to preserve this arrangement. Bundesbank president Jens Weidmann, who is hotly tipped to replace Mario Draghi as ECB president in 2019, has warned that it would be “disastrous” if people started to believe cash would be abolished — an oblique reference to the risk of negative interest rates and the escalating war on cash triggering a run on cash.
That didn’t stop five national governments — Cyprus, Bulgaria, Belgium, Portugal and Denmark — from approaching the ECB last year to consult on measures to limit the use of cash, according to Mersch. Meanwhile, Sweden is widely regarded as the most cashless society on the planet. “No cash accepted” signs are a common sight in shops and eateries as payments go digital and mobile, Bloomberg reports. A full 36% of the population never use cash, or just pay with it once or twice a year.
But the pace at which cash is vanishing is beginning to worry Swedish authorities. If it disappears too quickly, it could be difficult to maintain the infrastructure for handling cash, one Swedish official warned. Most of the country’s bank branches have stopped handling cash altogether and many shops and restaurants now only accept plastic or mobile payments. As a result, many people who struggle to navigate the digital system, in particular the elderly, are finding themselves increasingly locked out of the country’s payment system.
This dystopian trend underscores one of the oft-ignored benefits of physical cash: its universality. “The easy accessibility to cash, especially for the elderly, the socially vulnerable or minors, allows people to participate in society and, for example, allows children to learn how to handle money,” said Mersch. “In particular, when socially vulnerable people use cash, they face none of the barriers involved in applying for a credit card or, despite all their efforts, opening a current account.”
Mersch’s speech at the Bundesbank was not the first time he had publicly defended physical money. In an April 2017 article for Project Syndicate titled “Why Europe Still Needs Cash” he lambasted advocates of a cashless society, which he divided into three main camps:
The first camp, the alchemists, wants to overcome the restrictions that the zero lower bound (ZLB) imposes on monetary policy. The second, the law and order camp, wants to cancel the primary means of payment for illicit activities. And the third camp, the fintech (financial technology) alliance, anticipates major business opportunities arising from the elimination of the high storage, issuance, and handling costs of cash that the financial industry currently faces.
But most of the arguments for going cashless wilt under scrutiny, Mersch says. Negative interest rates, which “should be understood as a specific non-standard monetary-policy instrument” (i.e. a short-term emergency measure), have worked without triggering a massive flight to cash, he says. Meanwhile, harming the decent majority of people who continue to use cash in order to punish a misbehaving minority would be like “cracking a nut with a sledgehammer – and breaking the table it is on in the process.”
Ultimately the most pertinent argument against imposing a cashless society in Europe is that most people don’t want it. In the summer of 2017, 95% of respondents to a European Commission survey said they were opposed to a cash ceiling at EU level. Less than 1% of the more than 30,000 people consulted were able to think of a single benefit of the EU unleashing cross-regional cash limits.
There are plenty of reasons to worry about living in a cashless (or “less cash”) society, including the vastly increased power it would grant to political and monetary authorities as well as the near-impossibility of ever escaping from the clutches of the banking system or central banks’ monetary experiments.
If anything, recent efforts to make it harder to use cash in Europe are having the opposite effect. According to data cited by Mersch, growth in overall demand for cash is outpacing nominal GDP growth.
In the last five years, the average annual growth rate of euro banknotes was 4.9% by value and 6.2% by piece. This rise includes denominations that are predominantly used for transactions, rather than for savings.
In other words, despite the preponderance of digital alternatives, most Europeans do not seem ready to give up notes and coins just yet. According to Mersch, they have nothing to worry about: printed euro banknotes “will retain their place and their role in society as legal tender for a very long time to come. There is no alternative to euro cash.”
It sure would be nice if he’s right. But many very important people, institutions, and companies — especially those that process electronic payments and take their cut on each transaction — think differently. By Don Quijones.
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