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Cash without future? Future without cash? A wider view

Author(s): Christian Beer, Urs W Birchler, Ernest Gnan

Date published: Dec 2015

SUERF Policy Note, Issue No 3
by Christian Beer, OeNB
Urs W. Birchler, University of Zurich and SUERF
Ernest Gnan, OeNB and SUERF

JEL-codes: E02, E58, E41, E26.
Keywords: Cash, demand for cash, electronic money, costs of payment instruments, shadow economy, monetary policy, zero lower bound, privacy.

Recently, proposals to abolish cash or to restrict its use have been put forward by economists and policymakers. There are three main lines of argument brought forward against cash: first, it is costly, inefficient and outdated. Second, it facilitates criminal activity, money laundering and tax evasion. Thus, cash generates negative externalities. Third, it limits the leeway for monetary policy to drive nominal interest rates deeply into negative territory to fight recessions and deflation. Are these arguments valid?

In this note, we evaluate and confront the charges against cash with a number of counterarguments: Cash is still the preferred means of payment of many people in many countries. It is fast and easy to use, and facilitates the monitoring of expenses; thus it is particularly important for young, old, less educated and lower income groups. It preserves privacy and anonymity both vis-à-vis the state and against transaction partners. It limits states’ powers over individuals, which may be particularly urgent in unlawful states and in countries with hyperinflation. Thus, world currencies available in cash generate positive externalities. Cash prevents central banks from implementing excessively low interest rates, which erode pension savings and lead to resource misallocation as well as asset price bubbles. It generates seigniorage for states, rather than for private payment service firms.

We argue for a research and evidence-based evaluation of this issue. Costs and risks of both cash and non-cash payment systems must be estimated far more carefully than has been done so far. Uneven effects on different parts of society as well as important economic and non-economic externalities across the world need to be considered. The role of cash should be view beyond the narrow focus of economics or efficiency: the existence of cash, in the sense of an anonymous and untraceable means of payment is seen as a tool of crime by some, and as a pillar of individual liberty by others.

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