The hidden costs of a cash-free society

febbraio 15, 2016

Pubblicato In: Articoli Correlati

To proponents of a cash-free society, the survival of the $100 bill is at best an anachronism, at worst a gift to organised crime. Peter Sands, the former chief executive of UK-based Standard Chartered bank, last week called for the note to be consigned to history, alongside other high-value banknotes beloved of drug barons and kleptocrats. They play little part in the legitimate economy, he argues, but a crucial role in the underground economy.

This may well be the case with extreme examples such as the €500 note, under investigation by the EU Commission for links to terrorism. Many are also suspicious of the SFr1,000 notes stashed in Swiss safe deposit boxes. However, Mr Sands goes further, calling for concerted action by major issuers to phase out any note worth more than about $50.

In doing so, he overstates the likely effect on criminal activity. He also underplays the many legitimate reasons for using higher value notes in emerging markets and in some of the world’s most developed societies.

It is true that it becomes harder to stuff an envelope with cash, or to smuggle a briefcase through customs, if forced to make the bundles of banknotes more bulky. Using bitcoin, diamonds or other means of laundering money might be more costly. But these are not insuperable obstacles. As for tax evasion, it may be easier to pay a builder cash in hand using £50 notes but £20 notes would surely serve the purpose. Many businesses that avoid value added tax by under-reporting income are dealing with smaller retail transactions.

If criminals find high-value notes useful, so do plenty of other people. In Japan, still very much a cash-based society, the Y10,000 note represents more than 90 per cent of cash outstanding. Sweden, where people even pay children’s pocket money in electronic form, is at the other extreme. But it is no coincidence that people are swiftest to adopt digital payment methods in countries where they have high levels of trust in their institutions.

Hard currency remains popular as a safe store of value in countries with unstable exchange rates, repressive governments, capital controls or a history of banking collapses. These hoarders prefer big banknotes. In much of Africa and Asia, a $100 note trades at a premium to smaller denominations. The Bank of England says overseas currency wholesalers are the main buyers of £50 notes, which account for a fifth of cash in circulation.

Of course, this does not mean that central banks should print high-value notes for the benefit of savers in emerging markets. But it should serve as a reminder that the apparent convenience of a cash-free world comes at a cost to personal freedom. People like cash because it is simple, secure and anonymous. Not all governments are benevolent; and electronic payments can be tracked and hacked.

These arguments matter because the whole concept of cash is increasingly under attack by those who deem it an inconvenient obstacle to public policy — most recently, to central banks’ adoption of negative interest rates.

If policymakers try to stimulate the economy by charging interest on money left idle in the bank, the logic goes, people will switch to cash and keep it under the bed.

There is little sign of this happening yet and, in any case, it is possible to devise ways of charging people to hold cash.

There may well be grounds to ban the “Bin Laden”, as the €500 note has become known. But the worst way to win people around to the merits of digital currencies would be coercion.

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