The Abolition of Cash

National Review, April 11, 2016

Government gathers power sometimes in great swoops, sometimes by stealth, and sometimes in slow, sly increments, foreshadowed by position papers, op-eds, and regulatory tweaks designed to address an “issue” that a careless citizenry has overlooked.

It’s this slower, slyer approach that is now in motion as Big Brother’s smaller brethren take aim at cash. An advance guard of regulation has paved the way. Deposit more than $10,000 in cash into a bank and the feds have to be told. Bring that amount into the U.S. and Customs has to be told. Get stopped by the police with “too much” cash (a conveniently elastic concept) and you risk watching it disappear into the swamp known as civil forfeiture. Meanwhile, the country’s Croesus bills have long since vanished — $10,000, $5,000, $1,000, even the $500 that bore the face of poor murdered McKinley. Under the circumstances, they might have let him keep his mountain. 

The cull has further to go. Writing in the Washington Post earlier this year, former treasury secretary Lawrence Summers called for a “global agreement to stop issuing notes worth more than say $50 or $100.” He praised a Harvard paper by Peter Sands, the former CEO of the Standard Chartered bank, in which Sands claimed that the arguments for eliminating notes with a denomination above the equivalent of $50 “could well be compelling at an even lower threshold.” An even lower threshold: The ratchet turns in only one direction.

Naturally, there are good reasons for this latest government grab. There always are. The anonymity of cash makes it the criminal’s friend, and there are (just to start with) the wars on drugs and terror to think of and, of course, tax evasion. 

In Europe, authoritarian creep creeps more quickly. Italy introduced a maximum limit of €1,000 for cash transactions in 2010 (the current prime minister has proposed raising it to €3,000). By taking aim at widespread tax-dodging, this was intended to bolster Italy’s finances during one of the euro zone’s uglier spasms. It was also designed to discourage Italians from withdrawing euros from banks in a period when there were legitimate concerns about banks’ stability and the possibility that money deposited with them would be converted overnight from euros into rapidly depreciating “new lire.” “Forcing” Italians away from cash would make it more difficult for them to reduce their exposure to those dangers. This was about more than tax evasion: It was about keeping Italians locked within a crumbling system.

The ratchet keeps turning. Germany has proposed a €5,000 limit on cash transactions. Mario Draghi, the president of the European Central Bank, has called for the scrapping of the €500 bill.

Meanwhile, in Scandinavia, a part of the world where governments are trusted and technology is advanced, digital payments are squeezing out cash. In Sweden, cash is now used in only about 5 percent of retail sales. Progress is progress: If people prefer to make payments electronically, that’s up to them, and if that entails a loss of privacy, that’s their choice.

But choice may well be followed by compulsion. Forget about doing away with the Benjamins; the technology now exists to kill off cash altogether. The will has been there for a while. Now there’s a way. The Danish government would like to abandon paper money altogether by 2030. Norway’s largest bank, the partly state-owned DNB, has called for cash to be phased out, moaning that 60 percent of the kroner in circulation are “outside of any [official] control.” The horror!

Excuse me while I adjust the tinfoil, but this is not (and will not be) just a Scandinavian thing: We live in an era when central banks have driven interest rates down to levels that bear little connection to economic reality. Certain key rates are now below zero in the euro zone, Sweden, Denmark, Switzerland, and Japan. This is a terrible idea, and its time has come. The question is not only how far negative interest rates will spread, but how low they will go.

In a speech last September, Andrew Haldane, the Bank of England’s chief economist, grumbled about the “constraint physical currency imposes” on setting negative interest rates. After considering various ways of dealing with this nuisance, he concluded that an “interesting solution” would be to “maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form.” This “would allow negative interest rates to be levied on currency easily and speedily.” Translation: Make people hold their cash in electronic form (and thus in banks); they will then have no means of escaping the levy on savings that negative interest rates effectively represent. 

Before dismissing this as a form of madness that only Europeans could embrace, check out what Harvard’s Kenneth Rogoff has been saying. Writing in the Financial Times in May 2014, he argued that replacing paper money with an electronic alternative “would kill two birds with one stone.” It would strike a blow against crime, and it would free central banks from a bind that has “handcuffed” them since the financial crisis. “At present, if central banks try setting rates too far below zero, people will start bailing out into cash.” Indeed, they will: To its credit, the central bank of Switzerland, one of the countries now burdened with negative interest rates, has made it clear that it has no plans to junk its thousand-franc bills. It accepts that these are used as a store of value, something that Rogoff, no friend of the saver, might regard as reprehensible but the sensible Swiss do not. There has been a 17 percent increase in the number of these bills in circulation in the last year. 

“Hoarding cash may be inconvenient and risky,” wrote Rogoff in a related paper, “but if rates become too negative, it becomes worth it.” He would clearly prefer to see that emergency exit locked and the key thrown away, leaving savers helpless in the face of whatever central bankers (and not only central bankers) might dream up.  

An open-minded sort, Rogoff did concede that there might be a problem or two with such a set-up, including the fact that “society may want to preserve the right for individuals to make anonymous payments in certain activities,” a telling choice of words. It’s not the rights of the individual that count, but what “society” (defined by whom?) “may want.”

Another Alpine nation, Austria, is aware of the menace to privacy that a cashless society could be. Its deputy economy minister, Harald Mahrer, has vowed to fight rules curtailing the use of cash: “We don’t want someone to be able to track digitally what we buy, eat, and drink, what books we read and what movies we watch.”

And this is more than a matter of books, movies, and meals. It’s worth noting that the German proposals to restrict cash transactions ran into opposition across the political spectrum, from the leftist Greens to the populist-right party Alternative for Germany on through to the classical liberals of the Free Democratic party. After Hitler and Honecker, Germans understand how totalitarianism works, and they know too that the slippery slope is all too real.

The abolition of cash is a notion that we should reject out of hand. It puts too much faith in technology, and it puts too much trust in the state. It eliminates privacy to a degree that ought to be unacceptable to any free society, and it leaves people dangerously exposed to having their savings confiscated by negative interest rates or, more traditionally, confiscated by government, by way of a savage wealth tax perhaps. It  leaves them with nowhere to hide.

To those making the case against cash or high-denomination bills, that, of course, is the whole point, but it is a point they are pushing too far. Their tightly controlled, fully tax-compliant society could easily, given a sufficiently malign government, be as dysfunctional as one where the “shadow economy” (not to be confused with the “criminal economy”) is flourishing. The ability to dodge the system acts as a brake on overreach by the system. For example, there’s no sense in pushing taxes so high that people decide it’s worth the risk of not paying them. Tax evasion should not be endorsed (I write, nervously aware of the IRS), but the potential, if somewhat paradoxical, benefit to society from the threat of tax evasion can be. Make tax impossible (or close to impossible) to dodge and there’s far less to hold back the demands of a greedy state.

And yes, there is cash’s role as crime’s discreet accomplice. Well, as I alluded to before, government already has a wide range of powers to combat that. To ask for much more seems excessive. To borrow a famous comment a wise man once made: “Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.”

That wise man? He is on the $100 bill.