A Cashless Society Can’t Fix Our Money Worries

Recent technological advancements point to a looming cashless society.

Leading this global trend towards a cash-free society are the Scandinavian countries where, less than 6 per cent of all payments, are made by cash. Denmark has recently proposed allowing most stores not to accept notes and coins, which basically means that cash will lose its widespread legal tender use. In Norway, banks are dropping access to cash in their branch offices. In Sweden, which became the first European nation to issue banknotes in 1661, even homeless street vendors take electronic donations now.

There is much to welcome in this brave new world: ubiquitous electronic payments have the potential to be less cumbersome than handling (or losing) physical cash, reduce opportunity costs of having to find the nearest ATM and even reducing the propensity to suffer from violent purloins. However, there are still some valid privacy and cybersecurity concerns.

A good thing about cash payments is anonymity. You can spend your dollar bills without leaving any traces behind. On the other hand, in a society where all financial transactions are recorded, all of your payment and credit history becomes an easy target for cyber-theft and improper snooping by government agencies.

Ironically, the secret portability of cash is at the same time its greatest strength and its biggest weakness. For a long time, criminal activities benefited from the traceless use of cash, where a suitcase filled of €500 notes (also known as ‘Bin Laden’ notes) can weigh just over two kilos and be worth more than a million euros. A cashless society, goes the argument, will make it harder for criminals to remain anonymous; yet one must recognise that the rise of the dark net and crypto-currencies are living proof of the ingenuity of wrongdoers.

In any case, the coming of the cashless society is as certain as driverless cars or improved automated work tasks. These trends are all pushed by technological advancements, and with proper checks and balances, it has the potential to improve our general living standards. More worryingly, though, is that recent calls to expedite the cashless transition are being motivated by the wrong reasons, i.e. the need to remove the natural bounds of central banking’s negative rate floor.

The thinking goes like this: In order to stimulate investment and consumption, central banks reduce the economy’s cash rate; yet there is a limit to how low the rate can go, as people could always withdraw cash from the bank system and hoard it under the mattress. Therefore, if physical cash is no longer a policy hurdle, the sky is the (negative) limit to set the cash rate.

Not long ago, a zero-lower bound was the classic textbook rule. Nonetheless, lately, central banks in important markets — including Japan, the euro Area and Switzerland — are starting to explore negative territory for deposit rates, although knowing that a negative lower bound threshold is unknown but certain to exist.

So will a precipitous cashless conversion combined with negative interest rates solve the ailing global economy?

Not quite. Instead it would certainly generate pernicious disincentives for efficient allocation of capital, with artificial asset price inflation as an unwanted side-effect. Besides, a fledging market for electronic money platforms (such as Bitcoin) might establish itself as a safe haven against government’s misuses of monetary policy.

If we are serious about reversing global deflationary forces, much can be done through sensible structural reforms towards free trade, flexible markets and strengthening the rule of law. Monetary policy cannot compensate for political pusillanimity. As the current President of the European Commission and former Prime Minister of Luxembourg, Jean-Claude Juncker once quipped, “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

Indeed. We should welcome a cashless economy in due course, but not rush it in for the wrong top-down motives.

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