Recent technological advancements point to a looming cashless society, with a recent survey indicating that most Australians expect to break free from paper-notes and coins by 2022. Soon paying for your daily coffee with a digital wallet in your phone — or for that matter in a myriad of electronic gadgets — will be the norm, and not just a geeky fad to impress your new date.
Leading this global trend towards a cash-free society are the Scandinavian countries — where less than 6% of all payments are made by cash. Denmark has recently proposed to allow most stores to not accept currency notes and coins, which basically means 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 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. One can spend their 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 prey for cyber-theft and improper snoop by government agencies.
Ironically, the secret portability of cash is at the same time its greatest strength and its biggest Achilles heel. For long, criminal activities benefited from the traceless use of cash, where a suitcase filled of 500 euro notes (also known as ‘Bin Laden’ notes for its use by terrorists and other crooks) can weigh just over two kilos and be worth more than a million euros. A cashless society, goes the argument, will make harder for criminals to remain anonymous; yet one must recognise that the rise of the dark net and cryptocurrencies are living proof of the ingenuity of wrongdoers.
In any case, an upcoming cashless society is as certain as driverless cars or improved automated work tasks. These trends are pushed by technological advancements, and with proper checks and balances, it has the potential to ameliorate our general living standards. More worryingly though is that recent calls to expedite the cashless transition are moved by the wrong reasons, i.e. the need to remove the natural bounds of central banking’s negative rate floor.
Here goes the thinking: 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, 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 cumulated 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.
Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies