No time for change?
No time for change?
We’ve been promoting the advantages of electronic payments on behalf of Visa Europe for several years. In some countries, such as Sweden, it is possible to go without handling any coins or notes now.
There are numerous benefits to consumers of using only cards, transfers, and mobile payments. For example, using contactless payments on London’s transport system saves huge amounts of time, as well as allowing consumers to better track how much they’re spending.
Stalwarts of the payments technology space such as Dave Birch have been arguing for years that we should view cash as a dirty inconvenience that serves to enable crime and tax evasion. For example, €500 notes constitute more a quarter of the value of all Euros in circulation despite being only 3% of the total number of Euro notes. The only plausible conclusion is that the majority of these notes are used to launder ill-gotten gains.
However, interest in the benefits of a cashless future has been gaining attention from influential figures outside of the technology and payments space, who have not only been arguing for greater use of digital payments, but the abolition of cash altogether.
Clearly, from the perspective of central banks, using only digital currency would be massively less costly than minting physical currency, which needs to be constantly replaced. Yet nervousness within the global markets about the ability of central banks to further stimulate the economy in the event of another downturn has propelled a further argument in favour of a cashless economy. Last year, Bank of England chief economist Andy Haldane called for the abolition of cash, arguing that this would enable central banks to break the zero lower bound of interest rates in the event of another recession. And more recently, an editorial in Bloomberg made much the same point.
Put simply: the standard argument against setting interest rates below zero (i.e. charging people to hold money electronically) is that it would simply encourage people to horde cash instead. Yet, if central banks charged banks for accepting cash, it would remove this incentive entirely thereby (hopefully) making investment in the real economy the most profitable course of action (despite low returns).
A digital-only currency would also help monetary policy in another way too: by allowing regulators a much more accurate picture of consumption and demand. The problems with GDP as a statistic are numerous, as demonstrated by Diane Coyle’s excellent book on the subject, and a better understanding of economic patterns might improve both fiscal and monetary policy.
However, what makes the debate about a cashless future so fascinating is that it exists at the intersection between technology, finance and economics. Firstly, how much of this argument is prompted out of a desire to calm today’s market jitters? While it may be tempting to think of digital currency as a silver bullet to stimulate growth for today and tomorrow, such a long-term and far-reaching decision surely needs a more significant justification.
Secondly, we need to ask whether there is a space for physical currency within a liberal democratic society. The recent arguments on the issue provided the little prompting necessary for libertarian finance blog Zero Hedge to rehash the familiar argument that such moves showed how central banks and governments want to coerce and monitor citizens, labelling such a society as “dystopian”.
Proponents of an entirely cashless economy must address these questions if they are to succeed. We tend to see free speech and a free press as important parts of a liberal society even if it sometimes means a small minority of people criticise the government or even call for revolution. Could the same arguments not also be made for cash? At the very least, in a cashless economy, there must be clear safeguards to protect the privacy of individuals as well as clear communications to establish and maintain faith among the public in these safeguards.
There is also an important question about legitimacy and inclusion. Huge numbers of people now use electronic payments on a regular basis, but there is a significant minority of people who, for whatever reason, still do not feel comfortable paying in anything other than cash. Any moves towards restricting the use of cash must be accompanied by a large scale effort to reach out to these groups.
Ultimately, cash, and indeed money more generally is about trust. There is an implicit trust between counterparties in the value of money, whether notes or electronic transfers, backed by the central bank. Similarly, much of our work over the years has focused on reinforcing and building consumer trust when they pay with their cards.
Many arguments in favour of the abolition of cash are because the government can’t trust people not to use it to evade tax or launder ill-gotten gains. Yet trust is a two-way process, and while a cashless economy could bring numerous benefits, the abolition of coins and notes must be accompanied by a clear determination to build trust in the alternatives among all in society.