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  • The Case for Cash

    Posted on by Azrael 1 Comment

    The Case for Cash

    A dozen countries out of the 28 European Union (EU) members had legal limits on cash transactions in place at the end of 2015. Portugal, the country leading with these limits, had an EUR 1,000 legal limit on all cash transactions. Additionally, the discussion about introducing more of these limits is ongoing in almost all EU member states and recently, a new European Commission initiative seeking to introduce a compulsory EU-wide limit appeared.

    The European Central Bank even phased out the production of the 500 euro note and Australia started seriously considering putting an end to the 100 dollar note in November 2016. There are also many rumors that Sweden is getting ready to abandon cash altogether.

    The Risks 



    Being cashless is modern and progressive. You need an empty wallet to go with your Tesla, iPhone and neon handmade socks! An impression of a “race” is created. But looking closer, the reasons to hold on to cash have nothing to do with backwardness. Cash helps to mitigate risks, which will not disappear in a postmodern society:

    Control. Transferring your whole financial life into a bank means parting with your own control over one aspect of life. Locking your accounts takes seconds. It doesn’t matter how rich you are or how big financial cushion you created. A simple bureaucratic mistake, a typo or a confusion of identification numbers by a bank, or a debt collector (not so unusual in Slovakia due to chaotic debt collection rules) can send you into deep financial problems overnight.

    Middleman risks. Cash transfer is an immediate transfer of value between two parties. Electronic payments (with the exception of some cryptocurrencies) always involve a middleman and create a new layer of risk. The middleman has the power to override the payment in some cases and you cannot be sure if the transaction just conducted will really materialize.

    Cushion against financial crises. You never really “deposit” money to your bank – you lend it. Without cash, you do not have the option to exit the financial system and its risk at least with some part of your financial assets. Rows of desperate people in front of ATMs in Bulgaria, Greece and Cyprus during the recent years proved that a collapse of a single bank, or a whole banking system, is still an option even in developed countries. In Greece, having a stack of cash in company’s safe often decided about the survival of business. A complete banking collapse is not the only danger to consider. Even a collapse of a single bank can inhibit a value transfer between two solvent business partners.   

    Privacy. Paying with a card is like showing your ID. Your bank account statement is like your diary – it shows how and when do you commute, what hobbies your kids have and what cosmetics your wife uses. Dubious government handling of private data on a large scale is a serious topic even in Western democracies.

    In countries behind the Iron Curtain, the history of spying on its own citizens is long and rich. Even today, it is not that unusual for the ruling politicians to pull any kind of private data collected by state agencies to discredit their political rival. Of course, privacy issues do not include the government exclusively. Private subjects have troubles handling data from time to time as well. Let’s just name the Ashley Madison data breach, to make this text cheesier. In a cashless society you have the right not to purchase, or all purchases can and will be used against you!

    Monetary experiments. There won’t be any safe haven to hide in from monetary experiments. Millions in Venezuela use US dollars to protect themselves against the plight of hyperinflation. But we do not need to rely on the notorious examples of Venezuela, or Zimbabwe. The majority of central banks around the world engaged in unconventional monetary tools since the crisis – negative nominal interest rates for example. In cash societies, (non-institutional) depositors have the ultimate backstop against this policy: withdrawing their money from bank accounts and hiding them in their mattress. In a cashless society there is no escape. Do you want to spend or save? That won’t be up to you anymore.

    Social, cultural and psychological impacts. Money in form of cash has been an integral part of human society for several millennia in a fashion comparable to religion or art. One cannot expect to erase one part of the social puzzle and get easily predictable results. Cash helps some people to better plan their financial life and discourages debt.

    Handling small sums of coins and notes develops initial mathematical skills in children. Money is an important social bridge and one of the key steps in social inclusion. Imagine the millions of Syrian and Iraqi refugees, often without any formal identity, not to mention a bank account, coming to a cashless Europe. Hidden rolls of euros and dollars are often their only source of power and influence over their own fate. Without cash, their ability to make any economic decisions would be reduced to zero. Even the dreaded shadow economy often serves as a last economic resort for minorities and marginal groups (like the Roma in Slovakia).

    Basket of Eggs

    Any form of value bears a certain amount of risks, including cash. “Don’t put all your eggs in one basket” is the best investment advice one can get in life.

    In many, or even most, everyday situations electronic money is safer, more comfortable and a much faster solution than cash. It is a vibrant world with revolutionary innovations unfolding in front of our eyes. However, cash is one of the best ways to manage your privacy, economic strategy, and the risks in your financial life.

    Using cash is cumbersome and carries an irrefutable cost. But these costs should be compared to the benefits and we should look also on the tails of the risk curve. Financial collapse, dictatorship, war – that’s when the benefits of cash become obvious. A forced expulsion of cash from our society means a transfer of a whole dimension of life to the third party – financial systems and political authorities.

    Such a decision requires a large amount of trust and should not be accepted with ovations, but with a thorough criticism and public discussion.


    Martin Vlachynsky

    Martin Vlachynsky is a professor at the Institute of Economic and Social Studies in Bratislava, Slovakia.

    This article was originally published on FEE.org. Read the original article.


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  • The War against Cash, Part II

    Posted on by Azrael Comment
    By DANIEL J. MITCHELL

    I wrote yesterday that governments want to eliminate cash in order to make it easier to squeeze more money from taxpayers.

    But that’s not the only reason why politicians are interested in banning paper money and coins.

    They also are worried that paper money inhibits the government’s ability to “stimulate” the economy with artificially low interest rates. Simply stated, they’ve already pushed interest rates close to zero and haven’t gotten the desired effect of more growth, so the thinking in official circles is that if you could implement negative interest rates, people could be pushed to be good little Keynesians because any money they have in their accounts would be losing value.

    I’m not joking.

    Here’s some of what Kenneth Rogoff, a professor at Harvard and a former economist at the International Monetary Fund, wrote for the U.K.-based Financial Times.

    Getting rid of physical currency and replacing it with electronic money would…eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash.

    And here are some passages from an editorial that also was published in the FT.

    …authorities would do well to consider the arguments for phasing out their use as another “barbarous relic”…even a little physical currency can cause a lot of distortion to the economic system. The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy.

    Meanwhile, Bloomberg reports that the Willem Buiter of Citi (the same guy who endorsed military attacks on low-tax jurisdictions) supports the elimination of cash.

    Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. …the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. …Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether.

    So are they right? Should cash be abolished so central bankers and governments have more power to manipulate the economy?

    There’s a lot of opposition from very sensible people, particularly in the United Kingdom where the idea of banning cash is viewed as a more serious threat.

    Allister Heath of the U.K.-based Telegraph worries that governments would engage in more mischief if a nation got rid of cash.

    Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates… Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. …all spending would become subject to the surveillance state, dramatically eroding individual liberty. …Money is already too loose – turning on the taps would merely further fuel bubbles at home and abroad.

    Also writing for the Telegraph, Matthew Lynn expresses reservations about this trend.

    As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy? …a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash. More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether…we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.

    Merryn Somerset Webb, a business writer from the U.K., is properly concerned about the economic implications of a society with no cash.

    …at the beginning of the financial crisis, there was much talk about financial repression — the ways in which policymakers would seek to control the use of our money to deal with out-of-control public debt. …We’ve seen capital controls in the periphery of the eurozone… Interest rates everywhere have been at or below inflation for seven years — and negative interest rates are now snaking their nasty way around Europe… This makes debt interest cheap for governments…and it and forces once-prudent savers to move their money into the kind of risky assets that are supposed to drive growth (and tax receipts).

    Amen. She’s right that low interest rates are good news for governments and not very good news for people in the productive sector.

    Last but not least, Chris Giles wrote a column for the FT and made one final point that is very much worth sharing.

    Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest.

    Especially since the central bankers are probably undermining long-run economic prosperity with short-run tinkering.

    Moreover, the option to engage in Keynesian monetary policy also gives politicians an excuse to avoid the reforms that actually would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory policy.

    Let’s conclude by noting that maybe the right approach isn’t to give politicians and central bankers more control over money, but rather to reduce government’s control over money. That’s one of the arguments I made in this video I narrated for the Center for Freedom and Prosperity.

    Source: The War against Cash, Part II


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