Why There’s A War On Cash In Europe
The debate on cash is heating up right now.
European governments and central banks have stepped up capital controls in the last few years, cash has become a major hurdle for conventional monetary policy. As a result, many economists and high-ranking government officials have routinely argued in favor of abolishing cash.
Although most European citizens do not approve further restrictions on cash, the outcome of the political debate remains uncertain.
The Use of Cash in Europe
The political reasoning for a ‘European’ war on cash is based on an ideological mindset that is identical to what is heard across the Atlantic. The difference, however, is the popularity of the use of cash, which also differs from country to country within Europe.
While the Scandinavians have largely become a cashless society, other countries still prefer notes and coins. Recent surveys show that over 70% of the German population opposes further restrictions on cash. Switzerland’s National Bank has announced that it will not follow other countries’ example of phasing out what is the world’s highest denominated bill (in terms of exchange rate value), the 1,000 Swiss franc note.
People’s attitude towards cash appears to depend on culture and history. Germans, for example, have faced at least four monetary reforms in the last 100 years. The great hyperinflation in the 1920s may have an enduring presence in the German public consciousness.
The Swiss, however, have never experienced the same kind of monetary instability as the Germans. A generally suspicious attitude toward government power has led the Swiss to take a conservative stance towards cash.
On the other hand, Denmark and Sweden have passed legislation to gradually discontinue the use of cash. The largest Scandinavian banks have recently stopped allowing cash withdrawals in most branches. Moreover, the Scandinavian financial industry has actively encouraged regulation limiting cash use in daily transactions in the name of fighting crime and protecting the environment. Danish law also allows individual providers of goods and services to turn away customers who cannot pay electronically.
If falling rates exceed the costs of holding cash at home or in a safe deposit box, people will withdraw en masse.
In the post-9/11 world, restrictions on cash have increased exponentially. While legislation to disrupt terrorist financial network may be well intentioned, the measures have had and undeniably negative effect on the ability of people to use cash.
EU finance ministers have called on the EU Commission “to explore the need for appropriate restrictions on cash payments exceeding certain thresholds” throughout the Union. The European Central Bank announced its willingness to “examine the consequences of phasing out” the 500 Euro banknote in February of this year. Either way, most believe that the production of 500 Euro banknotes will cease after 2018.
Several Eurozone countries have already implemented strict anti-cash measures on their own. In the wake of the November 2015 terrorist attack, the French government intensified monitoring of high-value withdrawals and limited cash payments to 1,000 Euros. The Italian government returned to its former limit of 3,000 Euros. Payments exceeding these amounts must be executed through a licensed bank.
The Government’s Need for Cashless Finance and Its Fallacy
The fiat money system has reached a point at which even unorthodox monetary measures like ‘quantitative easing’ and ‘helicopter drops’ have failed to stimulate the economy. Newly printed money has inflated asset prices far more than it has gone into real capital production. Rather than investing in new products and services, many businesses have recapitalized on better terms, performed buybacks or paid out dividends to their shareholders.
This is a good thing for banks because they are relieved from servicing “toxic assets;” however, such a monetary policy cannot sustainably boost an economy. This is why cash is problematic. It limits the central bank’s ability to reduce short-term (nominal) interest rates below zero.
If interest rates go negative, bank account holders are encouraged to withdraw their savings and keep them as cash. Given that cash does not pay any interest, it is still better to hoard cash under a mattress than to leave it in the bank where it is charged negative interest or a fee. If falling rates exceed the costs of holding cash at home or in a safe deposit box, people will withdraw en masse.
If cash were abolished, any fiscal or monetary policy would be enforceable, at least in the short run.
Banning cash would destroy confidence in the current system, as recent data on growing cash circulation in the Eurozone, Switzerland and the UK indicate. The US dollar may be able to bear a small amount of tapering, however such actions in the European Union could provoke the exit of a member country and endanger the ability of certain countries to refinance their debts at the expense of the public.
If cash were abolished, any fiscal or monetary policy would be enforceable, at least in the short run. Increasingly negative interest rates would force bank account holders to spend their money or to invest it in riskier assets like stocks and bonds. Despite the disastrous effects on the economy resulting from this malinvestment, outright confiscation of wealth would hit account holders even harder. In a system in which all money is electronic, bail-ins, capital levies, and seizures could be imposed on bank customers without their consent. Such a policy would destroy the ability of currency to act as a store of value.
Proponents of anti-cash policies too often forget the non-coercive character of money. Describing its emergence, the great Austrian economist Carl Menger points to the fact that “[c]ertain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state” (Principles of Economics, 1871, Auburn , 262).
In other words, banning physical cash would simply lead to the emergence of alternative means of payment that would outcompete official tender. A lot of people would start using near-money substitutes, such as gold or silver, or whatever commodity facilitates the exchange of goods and services instead. That mainstream economists ignore this facts shows us how little they understand the origin of money and the consequences of their anti-cash policies. In other words, you cannot ban cash.
The abolition of cash would represent the logical next step in a series of detrimental government interventions.
Another publicly advocated fallacy is the notion that cash is mainly used for covering up illicit activities. Experts, among them professor Friedrich Schneider from the University of Linz in Austria, have shown that money laundering actions are overwhelmingly conducted cashless through shell corporations that are located in different jurisdictions.
Cash from the Perspective of the Individual Person
Actually, there are plenty of good reasons to oppose fiat currencies. Their flaws stem from a lack of competition. However, the physical manifestation of fiat money, i.e. cash, can truly imply a degree of freedom from the destructive effects of bad monetary policy.
Let’s look at recent examples in Europe. The Greeks experienced far-reaching restrictions on cash withdrawals during their recent debt crisis that continues to this day. Bank customers’ deposits in Cyprus were bailed in up to 50 percent in March 2013, and Italian and Portuguese bondholders have been forced to acquire stocks of